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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 1998
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 1731 76-0542208
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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515 POST OAK BOULEVARD
SUITE 450
HOUSTON, TEXAS 77027
(713) 860-1500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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JOHN F. WOMBWELL
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
515 POST OAK BLVD., SUITE 450
HOUSTON, TEXAS 77027
(713) 860-1500
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
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If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED SHARE(1) PRICE(1) REGISTRATION FEE
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Common stock, par value $0.01 per
share........................... 15,000,000(2) $19.09 $286,350,000 $84,474
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based on the average of the high and low prices as
reported on the New York Stock Exchange on March 9, 1998.
(2) The prospectus contained in this Registration Statement includes an
additional 6,000,000 shares of Common Stock registered in the Company's
registration statement No. 333-45479. A filing fee of $25,444 was previously
paid with respect to such shares. The number of shares of Common Stock
registered herein is subject to adjustment to prevent dilution resulting
from stock splits, stock dividends or similar transactions.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THIS REGISTRATION STATEMENT CONTAINS A COMBINED PROSPECTUS PURSUANT TO RULE
429 UNDER THE SECURITIES ACT, WHICH RELATES TO THE COMPANY'S EARLIER
REGISTRATION STATEMENT NO. 333-45479.
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EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one (the
"Acquisition Prospectus") to be used in connection with the acquisition of the
assets or the securities of businesses by the Company and one (the "Selling
Stockholder Prospectus") to be used by persons or entities who have received
stock of the Company in exchange for the assets or the securities of a business
and who wish to sell such stock. The Acquisition Prospectus and the Selling
Stockholder Prospectus are identical except that they contain different front
and back cover pages and different descriptions of the plan of distribution. The
form of Acquisition Prospectus is included herein and is followed by those pages
to be used in the Selling Stockholder Prospectus which differ from those used in
the Acquisition Prospectus. Each of the pages for the Selling Stockholder
Prospectus included herein is labeled "Alternate Page for Selling Stockholder
Prospectus."
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
PROSPECTUS
SUBJECT TO COMPLETION, DATED APRIL 14, 1998
21,000,000 SHARES
[IES LOGO]
COMMON STOCK
This Prospectus covers 21,000,000 shares of Common Stock of Integrated
Electrical Services, Inc. ("IES" or the "Company") which may be offered and
issued from time to time by the Company in connection with its acquisition of
the securities and assets of other businesses. It is expected that the terms of
acquisitions involving the issuance and sale by the Company of Common Stock
covered by this Prospectus will be determined by direct negotiations with the
owners or controlling persons of the businesses whose securities or assets are
acquired. The Company expects that the shares of Common Stock issued in exchange
for securities or assets in business combination transactions will be valued at
prices reasonably related to market prices of the Common Stock either at the
time the terms of an acquisition are agreed upon or at or about the time of
delivery of such shares of Common Stock.
The Common Stock trades on The New York Stock Exchange (the "NYSE") under
the symbol "IEE." Application will be made to list the shares of Common Stock
offered hereby on the NYSE. The last reported sale price of the Common Stock on
the NYSE on April 13, 1998 was $19 9/16 per share.
All expenses of this offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of Common
Stock, although finders fees may be paid with respect to specific acquisitions.
Any person receiving a finder's fee may be deemed to be an Underwriter within
the meaning of the Securities Act of 1933, as amended (the "Securities Act").
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THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
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PROSPECTUS SUMMARY
Concurrently with the closing of its initial public offering on January 30,
1998 (the "Offering"), Integrated Electrical Services, Inc. acquired, in
separate transactions (collectively, the "Acquisitions"), for consideration
including cash and shares of Common Stock (the "Acquisitions Consideration"),
the following 16 companies engaged in all facets of electrical contracting and
maintenance services: Houston-Stafford Electric, Inc. and Stark Investments,
Inc., a related electrical supply company (such two companies, collectively,
"Houston-Stafford"), Mills Electrical Contractors, Inc. ("Mills"), BW
Consolidated, Inc., including Bexar Electric Company, Ltd., and Calhoun Electric
Company, Ltd. (collectively, "Bexar-Calhoun"), Pollock Electric Inc.
("Pollock"), Muth Electric, Inc. ("Muth"), Daniel Electrical Contractors, Inc.
and Daniel Electrical of Treasure Coast Inc. (collectively, "Daniel"), Amber
Electric, Inc. ("Amber"), Charles P. Bagby, Co., Inc. and General Partner, Inc.
(collectively, "Haymaker"), Summit Electric of Texas, Incorporated ("Summit"),
Thurman & O'Connell Corporation ("Thurman & O'Connell"), Rodgers Electric
Company, Inc. ("Rodgers"), Hatfield Electric, Inc. ("Hatfield"), Ace Electric,
Inc. ("Ace"), Reynolds Electric Corp. ("Reynolds") and Thomas Popp & Company
("Popp") (the foregoing companies referred to herein as the "Founding
Companies"). Unless otherwise indicated, references herein to "IES" mean
Integrated Electrical Services, Inc., and references to the "Company" mean IES
and the Founding Companies collectively.
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this Prospectus.
Unless otherwise indicated, the information, share and per share data in this
Prospectus give effect to a 2,329.6-for-one stock split of the Common Stock
effected in October 1997.
THE COMPANY
IES was founded in June 1997 to create a leading national provider of
electrical contracting and maintenance services to the commercial, industrial
and residential markets. Concurrently with the closing of the Offering, IES
acquired 15 electrical contracting and maintenance service companies and a
related supply company with pro forma combined revenues of $312.7 million for
the year ended September 30, 1997, making the Company one of the largest
providers of electrical contracting and maintenance services in the United
States. Of such pro forma revenues, approximately 63% was derived from
commercial and industrial contracting, approximately 25% was derived from
residential contracting and approximately 12% was derived from electrical
maintenance work. Combined revenues of the Founding Companies, which have been
in business an average of 18 years, increased at an average compound annual
growth rate of approximately 23% from fiscal 1994 through 1996.
The Company offers a broad range of electrical contracting services,
including design and installation for both new and renovation projects in the
commercial, industrial and residential markets. The Company also offers
long-term and per call maintenance services, which generally provide recurring
revenues that are relatively independent of levels of construction activity.
Typically, the Founding Companies specialize in either commercial and industrial
or residential work, although a few of the Founding Companies have both
commercial and industrial and residential operations.
In certain markets the Company offers design-and-build expertise and
specialized services, which typically require specific skills and equipment and
provide higher margins than general electrical contracting and maintenance
services. In a design-and-build project, the electrical contractor applies
in-house electrical engineering expertise to design the most cost-effective
electrical system for a given structure and purpose, taking into account local
code requirements. Specialized services offered by the Company include
installations of wiring or cabling for the following: data cabling for computer
networks; fiber optic cable systems; telecommunications systems; energy
management systems which control the amount of power used in facilities; fire
alarm and security systems; cellular phone transmission sites; "smart houses"
that integrate computer, energy management, security, safety, comfort and
telecommunication systems; lightning protection systems; clean rooms for
fabrication of microprocessors and similar devices; computer rooms; back-up
electrical systems and uninterruptible power supplies; high voltage distribution
and traffic signal systems.
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INDUSTRY OVERVIEW
General. Virtually all construction and renovation in the United States
generates demand for electrical contracting services. Depending upon the exact
scope of work, electrical work generally accounts for approximately 8% to 12% of
the total construction cost of the Company's commercial and industrial projects
and 5% to 10% of the total construction cost of the Company's residential
projects. In recent years, the Founding Companies have experienced a growing
demand for electrical contracting services per project due to increased
electrical code requirements, demand for additional electrical capacity,
including increased capacity for computer systems, additional data cabling
requirements and the construction of smart houses with integrated systems.
The overall electrical contracting industry, including commercial,
industrial and residential markets, was estimated by the U.S. Census to have
generated annual revenues in excess of $40 billion in 1992, the most recent
available U.S. Census data. These Census data indicate that the electrical
contracting industry is highly fragmented with more than 54,000 companies, most
of which are small, owner-operated businesses, performing various types of
electrical work. The Company believes there are significant opportunities for a
well-capitalized national company to provide comprehensive electrical
contracting and maintenance services and that the fragmented nature of the
electrical contracting industry will provide significant opportunities to
consolidate commercial and industrial and residential electrical contracting and
maintenance businesses.
Commercial and Industrial Market. Commercial and industrial consumers of
electrical contracting and maintenance services include general contractors;
developers; consulting engineers; architects; owners and managers of large
retail establishments, office buildings, high-rise apartments and condominiums;
theaters and restaurants; hotels and casinos; manufacturing and processing
facilities; arenas and convention centers; hospitals; school districts; military
and other government agencies; airports; prisons and car lots. The Company
provides electrical contracting and maintenance services to the full range of
commercial and industrial customers.
From fiscal 1994 through 1996, the Founding Companies' revenues from
electrical contracting for commercial and industrial customers have grown at an
average compound annual rate of approximately 23% per year. The Company believes
that growth in the commercial and industrial market reflects a number of
factors, including (i) levels of construction and renovation activity; (ii)
regulations imposed by electric codes, which establish minimum power and wiring
requirements; (iii) safety codes mandating additional installation of smoke
detectors and the use of ground fault circuit protection devices in more
locations; (iv) revised national energy standards that dictate the use of more
energy-efficient lighting fixtures and other equipment; (v) continuing demand to
build out lease spaces in office buildings and to reconfigure space for new
tenants; (vi) increases in use of electrical power, creating needs for increased
capacity and outlets, as well as data cabling and fiber optics and (vii)
requirements of building owners and developers to facilitate marketing their
properties to tenants and buyers by installing electrical capacity in excess of
minimum code requirements.
Residential Market. Contracting work for the residential market consists
primarily of electrical installations in new single family and low-rise
multifamily residence construction for customers such as large homebuilders and
apartment developers. The Company also provides maintenance services to these
customers as well as to individual property owners in some locations. The
residential market is primarily dependent on the number of single family and
multifamily home starts, which are in turn affected by interest rates, tax
considerations and general economic conditions. Competitive factors particularly
important in the residential market include a contractor's ability to build
relationships with customers by providing services in diverse geographic markets
as construction activity shifts to new locations. The Founding Companies'
residential electrical contracting revenues have grown at an average compound
annual rate of approximately 22% from fiscal 1994 through 1996.
STRATEGY
The Company believes that its size, geographical diversity of operations,
industry relationships, expertise in specialized markets, number of licensed
electricians and access to design technology give the Company significant
competitive advantages in the electrical contracting and maintenance services
industry. Through
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increased size, the Company believes it has greater ability to compete for
larger jobs that require greater technical expertise, personnel availability and
bonding capacity, to more effectively allocate and share resources in serving
customers in each of its markets, and to attract, train and retain qualified
electricians. The Company also believes that increased size provides increased
efficiency in materials purchasing, computer system development, employee
benefits, bonding, insurance and financing. The Company believes that the
diversity of its operations diminishes the effects of regional and market
downturns, offers opportunities to pursue growth in its existing markets and
creates a base of expertise to expand into new markets and serve new customers.
The Company plans to leverage its experienced management and extensive
relationships within the electrical contracting industry to increase its
revenues and reduce its cost infrastructure through internal growth as well as
the acquisition of additional electrical contracting businesses. The Company's
management includes a Chief Executive Officer and two Chief Operating Officers,
each with 25 years or more of experience in the electrical contracting industry.
The Company has extensive business relationships within the industry, in part
through Founding Companies that are members of the Independent Electrical
Contractors Association ("IEC"). The IEC is the second largest electrical trade
organization in the U.S. and has nearly 3,000 contracting firms as members. The
Company's Chief Executive Officer is a past president of the IEC, and two
founders are members of the executive committee of the IEC. The IEC sponsors
forum groups, which are discussion groups of members of the IEC that foster the
sharing of best business practices. The Founding Companies are members of the
IEC and other trade organizations, and the Company intends to expand the
practice of sharing best practices among the Founding Companies and with future
acquisitions.
The Company's goal is to become a leading national provider of electrical
services by improving its operations, expanding its business and markets through
internal growth and pursuing an aggressive acquisition strategy.
Operating Strategy. The Company believes there are significant
opportunities to increase revenues and profitability of the Founding Companies
and subsequently acquired businesses. The key elements of the Company's
operating strategy are:
Share Information, Technical Capabilities and Best Practices. The
Company believes it will be able to expand the services it offers in its
local markets by leveraging the specialized technical and marketing
strengths of individual Founding Companies. The Company will identify and
share best practices that can be successfully implemented throughout its
operations. The Company intends to use the computer-aided-design technology
and expertise of certain of the Founding Companies to bid for more
design-and-build projects and to assist customers in value engineering and
creating project documents. The Company believes that its increased size,
capital and workforce will permit it to pursue projects that require
greater design and performance capabilities and the ability to meet
accelerated timetables.
Expand Scope of Maintenance and Specialized Services. The Company
intends to further develop its long-term and per-call maintenance service
operations, which generally realize higher gross margins and provide
recurring revenues that are relatively independent of levels of
construction activity. The Company also believes that certain specialized
businesses currently offered by only a few of the Founding Companies can be
expanded throughout the Company and in some cases can provide higher
margins. Through sharing of expertise and specialized licenses and the
ability to demonstrate a safety record in specialized markets served by the
Founding Companies, the Company intends to expand its presence and
profitability in markets where it previously relied on subcontractors.
Establish National Market Coverage. The Company believes that the
growth of many of the Founding Companies has been restricted due to the
geographic limitations of existing operations and that the Company's broad
geographic coverage will increase internal growth opportunities. The
Company intends to leverage its geographic diversity to bid for additional
business from existing customers that operate on a regional and national
basis, such as developers, contractors, homebuilders and owners of national
chains. The Company believes that significant demand exists from such
companies to utilize the services of a single electrical contracting and
maintenance service provider and that existing local and regional
relationships can be expanded as the Company develops a nationwide network.
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Operate on Decentralized Basis. The Company believes that, while
maintaining strong operating and financial controls, a decentralized
operating structure will retain the entrepreneurial spirit present in each
of the Founding Companies. The Company also will be structured to allow it
to capitalize on the considerable local and regional market knowledge and
customer relationships possessed by each Founding Company, as well as
companies that may be acquired in the future. By maintaining a local and
regional focus in each of its markets, the Company believes it will be able
to build relationships with general contractors and other customers,
address design preferences and code requirements, respond quickly to
customer demands for higher-margin renovation and upgrade projects and
adjust to local conditions.
Attract and Retain Quality Employees. The Company believes that the
ability to attract and retain qualified electricians is a critical
competitive factor and that the Acquisitions and the Offerings will provide
competitive advantages in this regard. The Company intends to attract and
develop skilled employees by extending active recruiting and training
programs, offering stock-based compensation for key employees, and offering
expanded career paths and more stable income through the larger public
company. The Company believes that this ability will allow it to increase
efficiency and pursue additional customer relationships.
Achieve Operating Efficiencies. Certain administrative functions will
be centralized following the Offerings. In addition, by combining
overlapping operations of certain of the Founding Companies, the Company
expects to realize savings in overhead and other expenses. The Company
intends to use its increased purchasing power to gain volume discounts in
areas such as electrical materials, vehicles, advertising, bonding,
employee benefits and insurance. The Company will seek to realize cost
savings and other benefits by the sharing of purchasing, pricing, bidding
and other business practices and the sharing of licenses. The Company
intends to further develop and extend the use of computer systems to
facilitate communication among the Founding Companies. At some locations,
the larger combined workforce will provide additional staffing flexibility.
Acquisition Strategy. The Company believes that, due to the highly
fragmented nature of the electrical contracting and maintenance services
industry, it has significant opportunities to pursue its acquisition strategy.
The Company intends to focus on acquiring companies with management philosophies
based on an entrepreneurial attitude as well as a willingness to learn and share
improved business practices through open communications. The Company believes
that many electrical contracting and maintenance service businesses that lack
the capital necessary to expand operations will become acquisition candidates.
For these acquisition candidates, the Company will provide (i) information on
best practices, (ii) expertise to expand in specialized markets, (iii) the
opportunity to focus on customers rather than administration, (iv) national name
recognition, (v) increased liquidity and (vi) the opportunity for a continued
role in management. The Founding Companies participate in professional
associations such as the IEC and Associated Builders and Contractors, and the
Company intends to continue these relationships, in part to assist in
identifying attractive acquisition candidates. Other key elements of the
Company's acquisition strategy are:
Enter New Geographic Markets. The Company will pursue acquisitions
that are located in new geographic markets, are financially stable and have
the customer base necessary to integrate with or complement its existing
business. The Company also expects that increasing its geographic diversity
will allow it to better serve an increasingly nationwide base of customers
and further reduce the impact on the Company of local and regional economic
cycles, as well as weather-related or seasonal variations in business.
Expand Within Existing Markets. Once the Company has entered a market,
it will seek to acquire other well-established electrical contracting and
maintenance businesses operating within that region, including "tuck-in"
acquisitions of smaller companies. The Company believes that tuck-in
acquisitions afford the opportunity to improve its overall cost structure
through the integration of such acquisitions into existing operations as
well as to increase revenues through access to additional specialized
markets, such as heavy industrial markets. Despite the integration
opportunities afforded by such tuck-in acquisitions, the Company intends to
maintain existing business names and identities to retain goodwill for
marketing purposes.
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SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
IES acquired the Founding Companies simultaneously with the consummation of
the Offering. For financial statement presentation purposes, Houston-Stafford
has been identified as the "accounting acquirer." The following summary
unaudited pro forma combined financial data present certain data for the
Company, as adjusted for (i) the effects of the Acquisitions, (ii) the effects
of certain other pro forma adjustments to the historical financial statements
and (iii) the consummation of the Offering (including the underwriters exercise
of the overallotment option) and the application of the net proceeds therefrom.
The unaudited pro forma combined income statement data include the results of
Houston-Stafford combined with IES and the other founding companies as if the
Acquisitions, the Offering and related transactions were closed on at the
beginning of the periods presented and are not necessarily indicative of the
results that the Company would have obtained had these events actually occurred
at that date or indicative of the Company's future results. During the periods
presented below, the Founding Companies were not under common control or
management and, therefore, the data presented may not be comparable to or
indicative of future performance. The unaudited pro forma combined income
statement data are based on preliminary estimates, available information and
certain assumptions that Company management deems appropriate. The unaudited pro
forma combined financial data should be read in conjunction with the other
financial information included elsewhere in this Prospectus. See "Selected
Financial Data," the Unaudited Pro Forma Combined Financial Statements and notes
thereto, and the historical financial statements for certain of the Founding
Companies and the notes thereto, all included elsewhere in this Prospectus.
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PRO FORMA
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THREE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1997
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(UNAUDITED)
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INCOME STATEMENT DATA:
Revenues.................................................. $ 312,747 $ 86,342
Cost of services (including depreciation)................. 247,772 67,140
----------- -----------
Gross profit.............................................. 64,975 19,202
Selling, general and administrative expenses(a)........... 35,938 10,671
Goodwill amortization(b).................................. 3,848 962
----------- -----------
Income from operations.................................... 25,189 7,569
Interest and other income (expense), net(c)............... (528) (246)
----------- -----------
Income before income taxes................................ 24,661 7,323
Provision for income taxes................................ 10,865 3,231
----------- -----------
Net income(d)............................................. $ 13,796 $ 4,092
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Net income per share...................................... $ .56 .17
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Shares used in computing pro forma net income per
share(e)............................................... 24,535,336 24,535,336
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PRO FORMA(f)(g)
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AS OF DECEMBER 31, 1997
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COMBINED AS ADJUSTED(h)
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BALANCE SHEET DATA:
Working capital........................................... $(26,494)(i) $ 46,548
Total assets.............................................. 249,432 259,057
Long-term debt, net of current maturities................. 25,175 6,703
Total stockholders' equity................................ 112,601 204,115
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(a) The unaudited pro forma combined income statement data reflect certain
reductions in salary, bonus and benefits of the owners of the Founding
Companies to which they have agreed prospectively, and the effect of
revisions of certain lease agreements between the Founding Companies and
certain stockholders of the Founding Companies. Additionally, excludes the
$13.6 million non-recurring, non-cash compensation charge recognized by IES
related to the issuance of Common Stock to management. See "Certain
Transactions."
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(b) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period and computed on the basis described in
the notes to the Unaudited Pro Forma Combined Financial Statements.
(c) Reflects the reduction of interest expense attributable to $8.1 million of
historical debt which was repaid with proceeds from the Offering or
distributed prior to the Acquisitions, net of additional interest expense
related to the debt discussed in (g) below. Additionally, reflects
elimination of interest income, and a $316,000 reduction in minority
interest expense.
(d) Assumes all pretax income before non-deductible goodwill and other permanent
items is subject to a 38% overall tax rate.
(e) Includes (i) 12,313,025 shares issued to the owners of the Founding
Companies, (ii) 1,396,602 shares issued to the management of IES, (iii)
2,655,709 shares of Restricted Common Stock issued to the founder and
Chairman of the Board of IES and trusts for the benefit of his children and
(iv) the 8,050,000 shares sold in the Offering (including the underwriters
exercise of the overallotment option for 1,050,000 shares). Also, includes
120,000 shares computed under the treasury stock method related to 300,000
options outstanding at September 30, 1997, but excludes any effects from
options to purchase 2,461,547 shares granted at the initial public offering
price. See "Description of Capital Stock."
(f) Reflects the Acquisitions and related transactions as if they had occurred
on December 31, 1997 as described in the notes to the Unaudited Pro Forma
Combined Financial Statements. The unaudited pro forma combined balance
sheet data are based upon preliminary estimates, available information and
certain assumptions that management deems appropriate and should be read in
conjunction with the other financial information and historical financial
statements, and notes thereto, included elsewhere in this Prospectus.
(g) Reflects $28.3 million of previously undistributed earnings and nonoperating
assets and liabilities transferred in connection with the Acquisitions to
the owners of the Founding Companies. This amount was funded through
transfers of nonoperating assets, net of liabilities, cash and the issuance
of notes payable to certain owners of the Founding Companies (collectively,
the "Owner Amounts"). See "Certain Transactions."
(h) Reflects the closing of the Offering (including the underwriters exercise of
the overallotment option for 1,050,000 shares) and the Company's application
of the net proceeds therefrom to fund the cash portion of the Acquisitions
Consideration and to repay certain indebtedness of the Founding Companies.
See "Use of Proceeds" and "Certain Transactions."
(i) Includes the $53.4 million of notes payable to owners of the Founding
Companies, representing the cash portion of the Acquisitions Consideration
paid from a portion of the net proceeds from the Offering. See "Pro
Forma -- As Adjusted" amounts.
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RISK FACTORS
Prospective investors should carefully consider the following factors as
well as the other information contained in this Prospectus. This Prospectus
contains forward-looking statements. Actual results could differ materially from
those projected in the forward-looking statements as a result of a number of
factors, including the risk factors set forth below and elsewhere in this
Prospectus.
ABSENCE OF COMBINED OPERATING HISTORY
Prior to January 30, 1998, the Founding Companies have been operating and
will continue to operate as separate independent entities, and there can be no
assurance that the Company will be able to integrate these businesses on an
economic basis. In addition, there can be no assurance that the recently
assembled management group will be able to oversee the combined entity and
effectively implement the Company's operating or growth strategies. The pro
forma combined financial results of the Founding Companies cover periods during
which the Founding Companies and IES were not under common control or management
and, therefore, may not be indicative of the Company's future financial or
operating results. The success of the Company will depend on management's
ability to integrate the Founding Companies and other future acquisitions into
one organization in a profitable manner. The inability of the Company to
successfully integrate the Founding Companies and to coordinate and integrate
certain administrative, banking, insurance and accounting functions and computer
systems would have a material adverse effect on the Company's financial
condition and results of operations and would make it unlikely that the
Company's acquisition program will be successful.
EXPOSURE TO DOWNTURNS IN COMMERCIAL CONSTRUCTION OR HOUSING STARTS
A substantial portion of the Company's business involves installation of
electrical systems in newly constructed and renovated commercial buildings,
plants and residences. The extent to which the Company is able to maintain or
increase revenues from new installation services will depend on the levels of
new construction starts from time to time in the geographic markets in which it
operates and likely will reflect the cyclical nature of the construction
industry. The level of new commercial installation services is affected by
fluctuations in the level of new construction of commercial buildings in the
markets in which the Company operates, due to local economic conditions, changes
in interest rates and other related factors. The housing industry is similarly
affected by changes in general and local economic conditions, such as employment
and income levels, the availability and cost of financing for home buyers
(including the continued deductibility of mortgage-linked interest expenses in
determining federal income tax), consumer confidence and housing demand.
Downturns in levels of commercial construction or housing starts would have a
material adverse effect on the Company's business, financial condition and
results of operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Seasonality and Quarterly Fluctuations."
RELIANCE ON ACQUISITIONS
One of the Company's principal growth strategies is to increase its
revenues, geographic diversity and the scope of services offered and to
diversify its business mix through the acquisition of electrical contracting
companies. There can be no assurance that the Company will be able to acquire
additional businesses or to integrate and manage such additional businesses
successfully. Acquisitions may involve a number of risks, including: adverse
short-term effects on the Company's reported operating results; diversion of
management's attention; dependence on retention, hiring and training of key
personnel; risks associated with unanticipated problems or legal liabilities and
amortization of acquired intangible assets. Some or all of these risks could
have a material adverse effect on the Company's financial condition or results
of operations. In addition, to the extent that consolidation becomes more
prevalent in the industry, the prices for attractive acquisition candidates may
increase and the number of attractive acquisition candidates may decrease. The
Company believes that the electrical contracting industry may experience
consolidation on both a national and a regional level by other companies that
have acquisition objectives similar to the Company's objectives. Other
consolidators may have greater financial resources than the Company to finance
acquisition and internal
7
<PAGE> 11
growth opportunities and might be willing to pay higher prices than the Company
for the same acquisition opportunities. If such acquisitions can be made, there
can be no assurance that the businesses acquired will achieve sales and
profitability that justify the investment therein. See "Business -- Strategy."
MANAGEMENT OF GROWTH
The Company expects to grow internally and through acquisitions. Management
expects to expend significant time and effort in evaluating, completing and
integrating acquisitions and opening new facilities. There can be no assurance
that the Company's systems, procedures and controls will be adequate to support
the Company's operations as they expand. Any future growth also will impose
significant added responsibilities on members of senior management, including
the need to identify, recruit and integrate new senior level managers and
executives. There can be no assurance that such additional management will be
identified and retained by the Company. If the Company is unable to manage its
growth efficiently and effectively, or is unable to attract and retain
additional qualified management, there could be a material adverse effect on the
Company's financial condition and results of operations. See
"Business -- Strategy."
AVAILABILITY OF ELECTRICIANS
The Company's ability to provide high-quality electrical services on a
timely basis is dependent upon an adequate supply of skilled electricians.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain skilled
electricians necessary to meet the Company's requirements. Many companies in the
electrical contracting and maintenance service industry are currently
experiencing shortages of qualified electricians, and there can be no assurance
that the Company will be able to maintain an adequate skilled labor force
necessary to operate efficiently, that the Company's labor expenses will not
increase as a result of a shortage in the supply of skilled technicians or that
the Company will not have to curtail its planned internal growth as a result of
labor shortages. See "Business -- Company Operations -- Employee Screening,
Training and Development."
COMPETITION
The electrical contracting industry is highly competitive and is served by
small, owner-operated private companies, public companies and several large
regional companies. Additionally, the Company could face competition in the
future from other competitors entering the market, including public utilities.
Certain of the Company's larger competitors offer a greater range of services,
such as mechanical construction, plumbing and heating, ventilation and air
conditioning services. In certain geographic regions, the Company may not be
eligible to compete for certain contracts because its employees are not subject
to collective bargaining arrangements. See "Business -- Industry Overview."
Competition in the electrical contracting industry depends on a number of
factors, including price. Certain of the Company's competitors may have lower
overhead cost structures and may, therefore, be able to provide their services
at lower rates than the Company. See "Business -- Competition."
ACQUISITION FINANCING
The Company intends to use its Common Stock for a portion of the
consideration for future acquisitions. If the Common Stock does not maintain a
sufficient valuation or potential acquisition candidates are unwilling to accept
Common Stock as part of the consideration for the sale of their businesses, the
Company may be required to utilize more of its cash resources, if available, in
order to pursue its acquisition program. If the Company does not have sufficient
cash resources, its growth could be limited unless it is able to obtain
additional capital through future debt or equity financings.
The Company has a bank line of credit for $70 million for working capital,
capital expenditures, other corporate purposes and acquisitions. The line of
credit is subject to customary drawing conditions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Combined
Liquidity and Capital Resources."
8
<PAGE> 12
SEASONALITY; FLUCTUATION OF QUARTERLY OPERATING RESULTS
The electrical contracting service business can be subject to seasonal
variations in operations and demand that affect the construction business,
particularly in residential construction, which is affected by weather
conditions. Quarterly results may also be materially affected by the timing of
acquisitions, the timing and magnitude of acquisition assimilation costs and
regional economic conditions. Accordingly, the Company's performance in any
particular quarter may not be indicative of the results which can be expected
for any other quarter or for the entire year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality and
Quarterly Fluctuations."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
The Company's executive officers, directors and affiliates beneficially own
approximately 41% of the total outstanding shares of Common Stock and Restricted
Common Stock. These persons, if acting in concert, will be able to continue to
exercise control over the Company's affairs, to elect the entire Board of
Directors and to control the disposition of any matter submitted to a vote of
stockholders. See "Principal Stockholders."
NO PRIOR MARKET, POSSIBLE VOLATILITY OF STOCK
The Common Stock is traded on the NYSE, but no assurance can be given that
an active trading market for the Common Stock will continue. The market price of
the Common Stock may be subject to significant fluctuations from time to time in
response to numerous factors, including variations in the reported financial
results of the Company and changing conditions in the economy in general or in
the electrical contracting and maintenance service industry in particular. In
addition, the stock markets experience significant price and volume volatility
from time to time which may affect the market price of the Common Stock for
reasons unrelated to the Company's performance.
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of its
executive officers and senior management of the Founding Companies. Furthermore,
the Company will be dependent on the senior management of companies that may be
acquired in the future. Although the Company entered into an employment
agreement with each of the Company's executive officers, there can be no
assurance that any individual will continue in such capacity for any particular
period of time. The loss of key personnel, or the inability to hire and retain
qualified employees could have an adverse effect on the Company's business,
financial condition and results of operations. The Company does not maintain key
man life insurance. See "Management."
SHARES ELIGIBLE FOR FUTURE SALE
As of April 14, 1998, 20,709,627 shares of Common Stock and 2,655,709
shares of Restricted Common Stock were issued and outstanding. Simultaneously
with the closing of the Offering, the owners of the Founding Companies received,
in the aggregate, 12,313,025 shares of Common Stock as a portion of the
Acquisitions Consideration. Additionally, the Company issued prior to the
Offering, 1,396,602 shares of Common Stock and 2,655,709 shares of Restricted
Common Stock. None of these 16,365,336 shares was or will be issued in a
transaction registered under the Securities Act, and, accordingly, such shares
may not be sold except in transactions registered under the Securities Act or
pursuant to an exemption from registration, including the exemptions contained
in Rules 144 and 701 under the Securities Act. In addition, the current
stockholders of the Company and the owners of the Founding Companies have agreed
with the Company not to sell, contract to sell or otherwise dispose of any
shares of Common Stock owned as of the consummation of the Acquisitions,
including shares received as consideration in the Acquisitions, for a period of
two years following receipt thereof without the Company's consent. When these
shares become saleable, the market price of the Common Stock could be adversely
affected by the sale of substantial amounts of the shares in the public market.
The current stockholders of the Company and the stockholders of the Founding
Companies
9
<PAGE> 13
have certain piggy-back registration rights with respect to their shares of
Common Stock, which may be exercised during the two-year period referred to
above.
As of the closing of the Offering, the Company had outstanding options to
purchase up to a total of (i) approximately 2,746,000 shares of Common Stock
issued pursuant to the Company's 1997 Stock Plan, and (ii) 15,000 shares of
Common Stock issued pursuant to the Company's 1997 Directors Stock Plan. The
greater of (i) 3,500,000 shares or (ii) 15% of the number of shares of Common
Stock outstanding on the date of the grant will be issuable pursuant to the 1997
Stock Plan, and a total of 250,000 shares are issuable pursuant to the 1997
Directors Stock Plan. The Company has filed a registration statement covering
all such shares under the Securities Act. See "Management -- 1997 Stock Plan."
There can be no assurance that the resale or the availability for sale of
the shares of Common Stock eligible for future sale will not have an adverse
effect on the prevailing market price of the Common Stock.
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation, Bylaws,
employment agreements and employee benefit plans contain provisions which may
have the effect of delaying, deferring or preventing a change in control of the
Company. For example, the Company's Amended and Restated Certificate of
Incorporation and Bylaws provide for, among other things, a classified Board of
Directors, the prohibition of stockholder action by written consent and the
affirmative vote of at least 66 2/3% of all outstanding shares of Common Stock
to approve the removal of directors from office. The Company's Board of
Directors has the authority to issue shares of preferred stock in one or more
series and to fix the rights and preferences of the shares of any such series
without stockholder approval. Any series of preferred stock is likely to be
senior to the Common Stock with respect to dividends, liquidation rights and,
possibly, voting. In addition, the Board of Directors may issue certain rights
pursuant to the rights plan authorized by the Amended and Restated Certificate
of Incorporation. The ability to issue preferred stock or rights could have the
effect of discouraging unsolicited acquisition proposals. The Company's 1997
Stock Plan contains provisions that allow for, among other things, the
acceleration of vesting or payment of awards granted under such plan in the
event of a "change of control," as defined in such plan. In addition, the
Company has entered into employment agreements with certain executive officers
and key employees allowing for cash payments under certain circumstances
following a change in control, which is generally defined to occur upon (i) the
acquisition by any person of 20% or more of the total voting power of the
outstanding securities of the Company, (ii) the first purchase pursuant to a
tender or exchange offer for Common Stock, (iii) the approval of certain
mergers, sale of substantially all the assets, or dissolution of the Company or
(iv) a change in a majority of the members of the Company's Board of Directors.
10
<PAGE> 14
THE COMPANY
IES was founded in June 1997 to create a leading national provider of
electrical contracting and maintenance services. Concurrently with the closing
of the Offering, IES acquired the 16 Founding Companies. The Founding Companies,
which have been in business for an average of 18 years, had pro forma combined
year ended September 30, 1997, and the three months ended December 31, 1997,
revenues of approximately $312.7 million and $86.3 million, respectively. The
Acquisitions Consideration paid by the Company consisted of approximately $53.4
million in cash and 12,313,025 shares of Common Stock. A brief description of
each of the Founding Companies is set forth below.
HOUSTON-STAFFORD. Houston-Stafford was founded in 1973 and is headquartered
in Stafford, Texas, near Houston. Houston-Stafford operates primarily in Texas,
with other significant operations in Georgia, Virginia, Tennessee and Maryland.
Houston-Stafford had revenues of approximately $81.6 million and $23.9 million
for the year ended September 30, 1997, and the three months ended December 31,
1997, respectively, primarily from residential contracting and, to a lesser
extent, from commercial and industrial contracting. Because Houston-Stafford has
developed ongoing relationships with developers and homebuilders that have
regional and national operations, Houston-Stafford has experience in
establishing business operations in different locations to meet the demands of
its national clientele for electrical contracting in various regions. Houston-
Stafford has approximately 1,000 employees. In April 1997, Houston-Stafford
financed the acquisition of an electrical supply company located in Houston.
MILLS. Mills was founded in 1972 and conducts most of its business in the
greater Dallas-Fort Worth, Texas area. Mills had revenues of approximately $74.4
million for the year ended September 30, 1997, primarily from commercial and
industrial contracting and, to a lesser extent, from maintenance services. Mills
has specialized expertise in data cabling, fire alarm systems and
computer-aided-design for electrical contracting; and a significant portion of
its revenues for the year ended September 30, 1997 was attributable to
design-and-build projects. Mills has approximately 570 employees.
BEXAR-CALHOUN. The predecessor entity of Bexar was founded in 1962 and
operates primarily in the areas around the cities of San Antonio, New Braunfels
and Laredo, Texas. The predecessor entity of Calhoun was founded in 1958 and
operates in the counties around San Antonio. On a consolidated basis,
Bexar-Calhoun had revenues of approximately $32.2 million for the year ended
September 30, 1997, relatively balanced between commercial and industrial
contracting, residential contracting and maintenance services. Bexar-Calhoun has
approximately 450 employees.
POLLOCK. Pollock was founded in 1983 and is headquartered in Houston,
Texas. Pollock had revenues of approximately $20.3 million for the year ended
September 30, 1997, primarily from commercial and industrial contracting. For
projects located outside of Houston, Pollock generally works with another
electrical service contractor based near the project. Pollock has specialized
design-and-build and computer-aided-design expertise, and, on certain projects,
Pollock prefabricates materials to reduce costs and time required at the work
site. Pollock has approximately 230 employees.
MUTH. The predecessor entity of Muth was founded in 1970 and has seven
offices located in South Dakota, including its headquarters in Mitchell. Muth
also operates from time to time in Wyoming, Montana, Nebraska and Minnesota.
Muth had revenues of approximately $18.8 million for the year ended September
30, 1997, primarily from commercial and industrial contracting and, to a lesser
extent, from residential contracting and maintenance services. Muth has
expertise in design-and-build projects, computer-aided-design technology and
prefabrication of electrical components. Muth has approximately 180 employees.
DANIEL. Daniel Electrical Contractors, Inc. was founded in 1986, is
headquartered in Miami, Florida and operates primarily in South Florida. Daniel
Electrical of Treasure Coast Inc. was founded in 1995 and is headquartered in
Vero Beach, Florida. Daniel had combined revenues of approximately $18.4 million
for the year ended September 30, 1997, primarily from commercial and industrial
contracting (including high-rise condominiums). Because developers generally
presell a certain percentage of condominiums prior to commencing construction,
Daniel has experience in meeting the accelerated contracting schedules that are
11
<PAGE> 15
often required to meet mandated closing periods for condominium sales. Daniel
has approximately 240 employees.
AMBER. Amber was founded in 1979 and operates from its base near Orlando,
Florida. Amber had revenues of approximately $16.4 million for the year ended
September 30, 1997, primarily from commercial and industrial contracting. Amber
has approximately 230 employees.
HAYMAKER. The predecessor entity of Haymaker was founded in 1978. Haymaker
is headquartered in Birmingham, Alabama, and operates in Alabama, northwest
Florida and North Carolina. Haymaker had revenues of approximately $11.8 million
for the year ended September 30, 1997, primarily from commercial and industrial
contracting. Haymaker has expertise in design-and-build projects, lightning
protection and fire alarms, and its largest existing contracts involve new
construction of high-rise office buildings. Haymaker has approximately 110
employees.
SUMMIT. Summit was founded in 1987 and is located in Houston, Texas. Summit
had revenues of approximately $11.0 million for the year ended September 30,
1997, primarily from commercial and industrial contracting and, to a lesser
extent, from maintenance services. Summit has specialized expertise in data
cable design and installation and lighting design. Summit has approximately 150
employees.
THURMAN & O'CONNELL. Thurman & O'Connell was founded in 1988. It is
headquartered in Louisville, Kentucky, and operates primarily in Louisville and
the surrounding areas. Thurman & O'Connell had revenues of approximately $4.0
million for the year ended September 30, 1997, primarily from commercial and
industrial contracting. Thurman & O'Connell bids primarily on larger projects
and out-of-budget projects to which it can apply in-house value engineering,
lowering costs to its customers and typically increasing its margins. Thurman &
O'Connell has approximately 70 employees.
RODGERS. Rodgers was founded in 1977, is headquartered in Everett,
Washington and operates in Everett and the north Puget Sound area. Rodgers had
revenues of approximately $3.3 million for the year ended September 30, 1997,
primarily from electrical maintenance and service work and commercial and
industrial contracting. Rodgers has specialized expertise in
computer-aided-design technology and focuses on design-and-build projects
undertaken on negotiated rather than bid terms. Rodgers has approximately 32
employees.
HATFIELD. The predecessor entity of Hatfield was founded in 1984 and
operates in the greater Phoenix, Arizona area from its offices in Scottsdale,
Arizona. Hatfield had revenues of approximately $6.0 million for the year ended
September 30, 1997, primarily from commercial and industrial contracting and, to
a lesser extent, from commercial and industrial maintenance services. Hatfield
has specialized expertise in electrical contracting for cellular telephone sites
and maintains the necessary state licenses to perform such services in Arizona
and four adjacent states. Hatfield has approximately 80 employees.
ACE. Ace was founded in 1975 in Valdosta, Georgia. Ace had revenues of
approximately $6.3 million for the year ended September 30, 1997, primarily from
commercial and industrial contracting and, to a lesser extent, from commercial
and industrial maintenance services. Ace has specialized expertise in
prefabrication of electrical components, which it uses to accelerate the
completion time for its construction projects. Ace has approximately 70
employees.
REYNOLDS. The predecessor entity of Reynolds was founded in 1973 in
Phoenix, Arizona. Reynolds had revenues of approximately $6.4 million for the
year ended September 30, 1997, primarily from commercial and industrial
contracting. Reynolds has specialized expertise in value engineering for
design-and-build projects. Reynolds has approximately 90 employees.
POPP. Popp was founded in 1984 in Cincinnati, Ohio, and operates in Ohio
and northern Kentucky. Popp had revenues of approximately $3.5 million for the
year ended September 30, 1997, primarily from commercial and industrial
contracting. Design-and-build projects accounted for a significant portion of
revenues for the year ended September 30, 1997. Popp uses computer-aided-design
technology and has also developed software enhancements for its design-and-build
projects. Popp has approximately 50 employees.
Integrated Electrical Services, Inc. was incorporated in Delaware in June
1997. Its executive offices are located at 515 Post Oak Boulevard, Suite 450,
Houston, Texas 77027, and its telephone number is (713) 860-1500.
12
<PAGE> 16
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that may be offered and
issued by the Company from time to time in connection with the acquisitions of
the securities and assets of other businesses. Other than the securities and
assets acquired, there will be no proceeds to the Company from these offerings.
As of the date of this Prospectus, the Company did not have any probable
material acquisitions.
DIVIDEND POLICY
The Company's Common Stock has traded on the NYSE since January 27, 1998,
the effective date of the Company's initial public offering. The high and low
sale prices for the Common Stock for the period from January 27, 1998 through
April 13, 1998 were $13 and $21 3/8, respectively. At January 30, 1998, there
were approximately 65 stockholders of record of the Company's Common Stock. On
April 13, 1998, the last reported sale of the Common Stock on the NYSE was
$19 9/16 per share.
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, the Company's revolving credit
facility includes, and any additional lines of credit established in the future
may include, restrictions on the ability of the Company to pay dividends without
the consent of the lender.
13
<PAGE> 17
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
IES acquired the Founding Companies simultaneously with the consummation of
the Offering. For financial statement presentation purposes, however,
Houston-Stafford has been designated as the "accounting acquirer." The following
selected historical financial data for Houston-Stafford as of December 31, 1995
and 1996, and September 30, 1997, and for the years ended December 31, 1994,
1995 and 1996, and the year ended September 30, 1997, have been derived from
audited financial statements of Houston-Stafford included elsewhere in this
Prospectus and reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such data. The selected
historical financial data for the nine months ended September 30, 1996 and 1997,
and as of December 31, 1992, 1993, 1994 and 1997 for the years ended December
31, 1992 and 1993, and for the three months ended December 31, 1996 and 1997,
have been derived from the unaudited financial statements of Houston-Stafford,
which have been prepared on the same basis as the audited financial statements
and, in the opinion of Company management, reflect all adjustments consisting of
normal recurring adjustments, necessary for a fair presentation of such data.
The results of operations for the interim periods presented should not be
regarded as indicative of the results that may be expected for a full year.
The summary unaudited pro forma combined financial data below present
certain data including Houston-Stafford combined with IES and the other Founding
companies, as adjusted for (i) the effects of the Acquisitions, (ii) the effects
of certain other pro forma adjustments to the historical financial statements
and (iii) the consummation of the Offering and the application of the net
proceeds therefrom. The unaudited pro forma combined income statement data
assume that the Acquisitions, the Offering and related transactions were closed
on October 1, 1996, and are not necessarily indicative of the results that the
Company would have obtained had these events actually occurred at that date or
indicative of the Company's future results. During the periods presented below,
the Founding Companies were not under common control or management and,
therefore, the data presented may not be comparable to or indicative of
post-combination results to be achieved by the Company. The unaudited pro forma
combined income statement data are based on preliminary estimates, available
information and certain assumptions that Company management deems appropriate.
The unaudited pro forma combined financial data should be read in conjunction
with the other financial information included elsewhere in this Prospectus. See
the Unaudited Pro Forma Combined Financial Statements and the notes thereto,
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED
----------------------------------------------- ----------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1996 1997 1997
------- ------- ------- ------- ------- ------- ------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL INCOME STATEMENT
DATA (HOUSTON-STAFFORD):
Revenues............................... $28,939 $32,363 $48,001 $54,082 $70,493 $53,062 $64,144 $81,575
Cost of services (including
depreciation)........................ 25,781 29,307 42,163 46,712 57,662 44,485 51,654 64,831
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........................... 3,158 3,056 5,838 7,370 12,831 8,577 12,490 16,744
Selling, general and administrative
expenses............................. 2,892 2,720 5,319 6,027 7,810 4,404 8,068 11,474
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations.......... 266 336 519 1,343 5,021 4,173 4,422 5,270
Interest and other income (expense),
net.................................. (66) (83) (71) (196) (40) (41) 237 238
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) before income taxes...... 200 253 448 1,147 4,981 4,132 4,659 5,508
Provision for income taxes............. 14 56 186 416 1,934 1,544 1,802 2,192
------- ------- ------- ------- ------- ------- ------- -------
Net income (loss)...................... $ 186 $ 197 $ 262 $ 731 $ 3,047 $ 2,588 $ 2,857 $ 3,316
======= ======= ======= ======= ======= ======= ======= =======
<CAPTION>
THREE MONTHS
ENDED
DECEMBER 31,
-----------------
1996 1997
------- -------
(UNAUDITED)
<S> <C> <C>
HISTORICAL INCOME STATEMENT
DATA (HOUSTON-STAFFORD):
Revenues............................... $17,431 $23,851
Cost of services (including
depreciation)........................ 13,177 18,691
------- -------
Gross profit........................... 4,254 5,160
Selling, general and administrative
expenses............................. 3,406 7,124
------- -------
Income (loss) from operations.......... 848 (1,964)
Interest and other income (expense),
net.................................. 1 (18)
------- -------
Income (loss) before income taxes...... 849 (1,982)
Provision for income taxes............. 390 (820)
------- -------
Net income (loss)...................... $ 459 $(1,162)
======= =======
</TABLE>
14
<PAGE> 18
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1997 DECEMBER 31, 1997
------------------ -----------------
(UNAUDITED)
<S> <C> <C>
PRO FORMA COMBINED:
Revenues.................................................. $ 312,747 $ 86,342
Cost of services (including depreciation)................. 247,772 67,140
---------- ----------
Gross profit.............................................. 64,975 19,202
Selling, general and administrative expenses(a)........... 35,938 10,671
Goodwill amortization(b).................................. 3,848 962
---------- ----------
Income from operations.................................... 25,189 7,569
Interest and other income (expense), net(c)............... (528) (246)
---------- ----------
Income before income taxes................................ 24,661 7,323
Provision for income taxes................................ 10,865 3,231
---------- ----------
Net income(d)............................................. $ 13,796 $ 4,092
========== ==========
Net income per share...................................... $ .56 $ .17
========== ==========
Shares used in computing pro forma net income per
share(e)................................................ 24,535,336 24,535,336
========== ==========
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL(F) PRO FORMA
-------------------------------------------------------------------------- -------------------------
AS OF DECEMBER 31,
AS OF DECEMBER 31, AS OF AS OF 1997(G)(H)
------------------------------------------- SEPTEMBER 30, DECEMBER 31, -------------------------
1992 1993 1994 1995 1996 1997 1997 COMBINED AS ADJUSTED(I)
------ ------ ------ ------ ------- ------------- ------------ -------- --------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.... $1,845 $2,001 $2,134 $2,675 $ 4,671 $ 5,414 $ 4,538 $(26,494)(j) $ 46,548
Total assets....... 5,570 6,582 8,809 9,357 13,226 24,470 21,196 249,432 259,057
Long-term debt, net
of current
maturities....... 719 505 927 634 1,295 968 687 25,175 6,703
Total stockholders'
equity........... 2,224 2,325 1,952 3,104 5,351 8,208 6,158 112,601 204,115
</TABLE>
- ---------------
(a) The unaudited pro forma combined income statement data reflect certain
reductions in salary, bonus and benefits of the owners of the Founding
Companies to which they have agreed prospectively, and the effect of
revisions of certain lease agreements between the Founding Companies and
certain stockholders of the Founding Companies. Additionally, excludes the
$13.6 million non-recurring, non-cash compensation charge recognized by IES
related to the issuance of Common Stock to management. See "Certain
Transactions."
(b) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period and computed on the basis described in
the notes to the Unaudited Pro Forma Combined Financial Statements.
(c) Reflects the reduction of interest expense attributable to $8.1 million of
historical debt which was repaid with proceeds from the Offering or
distributed prior to the Acquisitions, net of additional interest expense
related to the debt discussed in (h) below. Additionally, reflects
elimination of interest income, and a $316,000 reduction in minority
interest expense.
(d) Assumes all pretax income before non-deductible goodwill and other permanent
items is subject to a 38% overall tax rate.
(e) Includes (i) 12,313,025 shares issued to the owners of the Founding
Companies, (ii) 1,396,602 shares issued to the management of IES, (iii)
2,655,709 shares of Restricted Common Stock issued to the founder and
Chairman of the Board of IES and trusts for the benefit of his children and
(iv) the 8,050,000 shares sold in the Offering (including the underwriters
exercise of the overallotment option for 1,050,000 shares). Also, includes
120,000 shares computed under the treasury stock method related to 300,000
options outstanding at September 30, 1997, but excludes any effects from
options to purchase 2,461,547 shares granted at the initial public offering
price. See "Description of Capital Stock."
15
<PAGE> 19
(f) Historical balance sheet data are for Houston-Stafford as of the applicable
periods.
(g) Reflects the Acquisitions and related transactions as if they had occurred
on December 31, 1997 as described in the notes to the Unaudited Pro Forma
Combined Financial Statements. The unaudited pro forma combined balance
sheet data are based upon preliminary estimates, available information and
certain assumptions that management deems appropriate and should be read in
conjunction with the other financial information and historical financial
statements, and notes thereto, included elsewhere in this Prospectus.
(h) Reflects $28.3 million of Owner Amounts that were transferred in
connection with the Acquisitions to the owners of the Founding Companies.
This amount was funded through transfers of nonoperating assets, net of
liabilities, cash and the issuance of notes payable to certain owners of
the Founding Companies. See "Certain Transactions."
(i) Reflects the closing of the Offering (including the underwriters exercise
of the overallotment option for 1,050,000 shares) and the Company's
application of the net proceeds therefrom to fund the cash portion of the
Acquisitions Consideration and to repay certain indebtedness of the
Founding Companies. See "Use of Proceeds" and "Certain Transactions."
(j) Includes the $53.4 million in notes payable to owners of the Founding
Companies, representing the cash portion of the Acquisitions Consideration
paid from a portion of the net proceeds from the Offering. See "Pro
Forma -- As Adjusted" amounts.
16
<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Founding
Companies' Financial Statements, and related notes thereto, and "Selected
Financial Data" appearing elsewhere in this Prospectus.
The Company's revenues are derived primarily from electrical construction
and maintenance services provided to commercial, industrial and residential
customers. Of the Company's pro forma combined year ended September 30, 1997
revenues of $312.7 million, approximately 63% was derived from commercial and
industrial contracting, approximately 25% was derived from residential
contracting and approximately 12% was derived from electrical maintenance work.
Revenues from fixed-price construction and renovation contracts are generally
accounted for on a percentage-of-completion basis, using the cost-to-cost
method. The cost-to-cost method measures the percentage completion of a contract
based on total costs incurred to date compared to total estimated costs at
completion. Maintenance and other service revenues are recognized as the
services are performed.
Cost of services consists primarily of salaries and benefits of employees,
subcontracted services, materials, parts and supplies, depreciation, fuel and
other vehicle expenses and equipment rentals. The Company's gross margin, which
is gross profit expressed as a percentage of revenues, depends on the relative
proportions of costs related to labor and materials. On jobs in which a higher
percentage of the cost of services consists of labor costs, the Company
typically achieves higher gross margins than on jobs where materials represent
more of the cost of services. Materials costs can be calculated with relatively
greater accuracy than labor costs, and the Company seeks to maintain higher
margins on its labor-intensive projects to compensate for the potential
variability of labor costs for these projects. Selling, general and
administrative expenses consist primarily of compensation and related benefits
for owners, administrative salaries and benefits, advertising, office rent and
utilities, communications and professional fees. Certain owners and certain key
employees of the Founding Companies have agreed to reductions in their
compensation and related benefits in connection with the Acquisitions. Such
reductions in salaries, bonuses and benefits have been reflected as a pro forma
adjustment in the Unaudited Pro Forma Combined Statement of Operations and are
reflected in the terms of employment agreements with the Company.
The Company believes that it will realize savings from (i) consolidation of
insurance and bonding programs; (ii) reduction in other general and
administrative expenses, such as training and advertising; (iii) the Company's
ability to borrow at lower interest rates than the Founding Companies; (iv)
consolidation of operations in certain locations and (v) greater volume
discounts from suppliers of materials, parts and supplies. Offsetting these
savings will be costs related to the Company's new corporate management, costs
of being a public company and costs of integrating the companies acquired in the
Acquisitions.
The Company has sold an aggregate of 1,396,602 shares of Common Stock to
its management and has recorded (for financial statement presentation purposes)
a non-recurring, non-cash compensation charge of $13.6 million relating to such
sale. This non-recurring compensation charge has been excluded from the total
pro forma combined amounts in the Unaudited Pro Forma Combined Financial
Statements.
As a result of the Acquisitions, the excess of the consideration paid over
the fair value of the net assets acquired, was recorded as goodwill on the
Company's balance sheet. Goodwill will be amortized as a non-cash charge to the
income statement over a 40-year period. The pro forma impact of this
amortization expense, which is non-deductible for tax purposes, is $3.8 million
per year.
SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF THE FOUNDING
COMPANIES
The following supplemental unaudited pro forma combined financial
information for the periods presented do not purport to present those of the
combined Founding Companies in accordance with generally accepted accounting
principles, but represent merely a summation of the revenues, cost of services
(including depreciation), gross profit, selling, general and administrative
expenses and income from operations of the
17
<PAGE> 21
individual Founding Companies on a historical basis and excludes the effects of
the pro forma adjustments that are included in the Unaudited Pro Forma Combined
Statements appearing elsewhere in this Prospectus. Selling, general and
administrative expenses for periods prior to the Acquisitions reflect the
effects of historical salary and bonus distributions to the owners of the
Founding Companies. The data will not be comparable to, and may not be
indicative of, the Company's post-combination results of operations because (i)
the Founding Companies were not under common control or management and certain
Founding Companies had different tax structures (generally, S corporations or
partnerships) during the periods presented, (ii) the Company used the purchase
method to establish a new basis of accounting to record the Acquisitions, (iii)
the Company will incur incremental costs for its corporate management and the
costs of being a public company and (iv) the combined data do not reflect the
potential benefits and cost savings the Company expects to realize when
operating as a combined entity.
The following table sets forth certain supplemental unaudited pro forma
combined financial information for the periods indicated:
<TABLE>
<CAPTION>
FISCAL YEARS ENDED(A) YEAR ENDED
------------------------------------------------ SEPTEMBER 30,
1994 1995 1996 1997(b)
-------------- -------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues....................... $181,205 100% $211,626 100% $272,236 100% $312,747 100%
Cost of services............... 149,698 83 172,417 81 216,382 79 247,772 79
-------- --- -------- --- -------- --- -------- ---
Gross profit................. 31,507 17 39,209 19 55,854 21 64,975 21
Selling, general and
administrative expenses(c)... 23,752 13 28,506 13 34,528 13 42,006 13
-------- --- -------- --- -------- --- -------- ---
Income from operations....... $ 7,755 4% $ 10,703 6% $ 21,326 8% $ 22,969 8%
======== === ======== === ======== === ======== ===
</TABLE>
- ---------------
(a) The fiscal years ended 1994, 1995 and 1996 are the years ended December 31,
1994, 1995 and 1996 for all Founding Companies, except for Pollock and
Hatfield, for which the fiscal years presented are the years ended October
31, 1994, 1995 and 1996; Rodgers, for which the fiscal years presented are
the years ended September 30, 1995, 1996 and 1997; and Summit, for which the
fiscal years presented are the years ended March 31, 1995, 1996 and 1997.
(b) Represents the year ended September 30, 1997 for all Founding Companies,
except that the amounts included for Ace, Hatfield, Popp and Reynolds are
for the year ended June 30, 1997.
(c) The supplemental unaudited pro forma combined results for the year ended
September 30, 1997 exclude the $13.6 million non-recurring, non-cash
compensation charge recognized by IES in September 1997 related to the
issuance of Common Stock to management.
Pro Forma Combined Results for the year ended September 30, 1997 compared to
the fiscal year ended 1996
Revenues increased approximately $40.5 million, or 15%, from $272.2 million
for the fiscal year ended 1996 to $312.7 million for the year ended September
30, 1997. The increase in combined revenues occurred primarily at
Houston-Stafford, Mills, Daniel, Pollock and Haymaker. Houston-Stafford's
revenues increased $11.1 million, or 16%, from fiscal 1996 to the year ended
September 30, 1997, primarily due to an overall increase in market demand and
the consolidation of an electrical supply company partially offset by the
effects of unusually rainy weather in Texas. Mills' revenues increased $9.0
million, or 14%, from fiscal 1996 to the year ended September 30, 1997,
primarily due to a full year of revenues in 1997 from the acquisition of Fort
Worth Regional Electrical Systems, L.L.C. ("Regional Electric") in June 1996.
Daniel's revenues increased $5.8 million, or 46%, from fiscal 1996 to the year
ended September 30, 1997 primarily due to increased contract revenues on several
large high rise condominium projects in south Florida. Pollock's revenues
increased $4.5 million, or 28%, from fiscal 1996 to the year ended September 30,
1997, primarily due to an increase in large commercial contracts, increased data
cabling work and higher revenues for service work. Haymaker's revenues increased
$4.2 million, or 54%, from fiscal 1996 to the year ended September 30, 1997,
18
<PAGE> 22
primarily due to a large hospital contract and an overall increase in
construction activity in Birmingham, Alabama. Of the remaining ten Founding
Companies, five reported an increase in revenues and five recorded a decline in
revenues between fiscal 1996 and the year ended September 30, 1997. The most
significant decline in revenue of $0.8 million occurred at Bexar-Calhoun,
primarily due to the completion in fiscal 1996 of an unusually large electrical
construction contract for a state university in Laredo, Texas. The most
significant increase in revenues among these other Founding Companies of $2.5
million or 18% occurred at Amber, primarily due to three large retail
construction contracts in the year ended September 30, 1997.
Gross profit increased $9.1 million, or 16%, from $55.9 million for fiscal
1996, to $65.0 million for the year ended September 30, 1997. The increase in
combined gross profit occurred primarily due to increases in gross profit of
$3.9 million or 30% at Houston-Stafford, $2.0 million or 70% at Daniel, $1.4
million or 59% at Pollock and $1.3 million or 79% at Amber. Houston-Stafford's
gross margin increased from 18% in fiscal 1996 to 20% in the year ended
September 30, 1997, Daniel's gross margin increased from 23% to 27%, Pollock's
gross margin increased from 14% to 18% and Amber's gross margin increased from
12% to 18%. The increases in Houston-Stafford's gross profit and gross margin
are primarily attributable to favorable pricing associated with increased demand
and higher discounts on certain long-term material purchase commitments.
Daniel's gross profit and gross margin increases are primarily due to increased
labor efficiencies and an increase in higher margin high-rise residential
contracts. Pollock's gross margin increases are due to lower than expected
margins and loss contracts in 1996 that did not recur in 1997. Amber's gross
profit increased as a result of an increase in overall demand as well as demand
for higher margin retail construction contracts.
Selling, general and administrative expenses increased $7.5 million from
$34.5 million in fiscal 1996 to $42.0 million in the year ended September 30,
1997. This increase occurred primarily due to an increase in selling, general
and administrative expenses of $3.7 million at Houston-Stafford and $1.2 million
at Mills. The increase in Houston-Stafford's selling, general and administrative
expenses was primarily attributable to increased bonuses for certain key
employees and to a lesser degree higher insurance costs. Mills' increase in
selling, general and administrative expenses was attributable to a full year of
general and administrative expenses relating to the June 1996 acquisition of
Regional Electric, and a $0.2 million severance payment to the former owner of
Regional Electric.
Pro Forma Combined Results for the fiscal year ended 1996 compared to the
fiscal year ended 1995
Revenues increased approximately $60.6 million, or 29%, from $211.6 million
for the fiscal year ended 1995 to $272.2 million for the fiscal year ended 1996.
The increase in combined revenues occurred primarily at Houston-Stafford, Mills
and Bexar-Calhoun. Houston-Stafford's revenues increased $16.4 million, or 30%
from 1995 to 1996, primarily due to an overall increase in market demand and new
contractual arrangements for Houston-Stafford to be the sole or primary provider
of electrical installation services for certain residential contractors. Mills'
revenues increased $30.1 million, or 86%, from 1995 to 1996, primarily due to
the acquisition of Regional Electric in June 1996 (which represents
approximately $5.2 million of 1996 revenues), an increase in market demand for
large industrial construction contracts for manufacturing and distribution
facilities in the greater Dallas area, and a 30% increase in maintenance and
service revenues. Bexar-Calhoun's revenues increased $5.3 million, or 19%, from
1995 to 1996, as certain personnel were reassigned to the growing markets around
Laredo and New Braunfels, Texas, resulting in a $3.6 million increase in
revenues in these two markets between 1995 and 1996. Of the remaining 12
Founding Companies, seven reported an increase in revenues, one reported
relatively constant revenues and four recorded a decline in revenues between
1995 and 1996. The most significant decline in revenue of $2.0 million occurred
at Ace, where an unusually high demand for design-and-build projects in
Valdosta, Georgia in 1995 did not recur in 1996. The most significant increase
in revenues among these other Founding Companies of $4.2 million or 43% occurred
at Amber due to an increase in large commercial projects on shopping malls and
grocery stores in central Florida.
Gross profit increased $16.6 million, or 42%, from $39.2 million for the
fiscal year ended 1995, to $55.9 million for the fiscal year ended 1996. Gross
margin increased to 21% in 1996 from 19% in 1995. The increase in combined gross
profit occurred primarily due to increases in gross profit of $5.4 million or
74% at Houston-Stafford, $7.0 million or 89% at Mills, and $1.2 million or 18%
at Bexar-Calhoun. Houston-Stafford's
19
<PAGE> 23
gross margin increased from 14% in 1995 to 18% in 1996, Mills' gross margin
increased from 22% in 1995 to 23% in 1996, and Bexar-Calhoun's gross margin
remained constant at 24% in 1995 and 1996. The increases in Houston-Stafford's
gross profit and gross margin are primarily attributable to favorable pricing
associated with increased demand and higher discounts on certain long-term
material purchase commitments. Mills' gross profit and gross margin increases
are primarily attributable to the acquisition of Regional Electric, increased
demand for complex industrial contracts, and an increase in higher margin
maintenance service revenues. Bexar-Calhoun's gross profit increased as a result
of its overall increase in business volume.
Selling, general and administrative expenses increased 21% from $28.5
million in 1995 to $34.5 million in 1996. This increase occurred primarily due
to increases in selling, general and administrative expenses of $1.8 million at
Houston-Stafford and $2.9 million at Mills. The increase in Houston-Stafford's
selling, general and administrative expenses was primarily attributable to the
addition of infrastructure associated with its growth. Mills' increase in
selling, general and administrative expenses was attributable to increased
business volume, including that related to the acquisition of Regional Electric,
and increases in discretionary bonus and savings plan distributions.
Pro Forma Combined Results for the fiscal year ended 1995 compared to the
fiscal year ended 1994
Revenues increased $30.4 million, or 17%, from $181.2 million for the
fiscal year ended 1994, to $211.6 million for the fiscal year ended 1995. The
increase in combined revenues occurred primarily at Houston-Stafford, Mills and
Bexar-Calhoun. Houston-Stafford's revenues increased $6.1 million, or 13%, from
1994 to 1995, primarily due to an overall increase in demand and a new contract
under which Houston-Stafford is the sole or primary provider of electrical
installation services for a multifamily residential contractor. Mills' revenues
increased $9.8 million, or 38%, from 1994 to 1995, primarily due to increased
demand for higher margin industrial contracting services and a 61% increase in
maintenance and service revenues. Bexar-Calhoun's revenues increased $4.5
million, or 20%, from 1994 to 1995, due to an increase in retail construction
activity in San Antonio.
Of the remaining 12 Founding Companies, seven reported an increase in
revenues, two reported relatively constant revenues and three reported a decline
in revenues between 1994 and 1995. The most significant decline in revenues of
$1.3 million occurred at Hatfield, where an unusually large $2.0 million
contract was completed in 1994 and no comparable contract was performed in 1995.
The most significant increase in revenue among these other Founding Companies of
$2.6 million occurred at Ace due to an unusually high demand for
design-and-build commercial projects in 1995 as compared to 1994.
Gross profit increased $7.7 million, or 24%, from $31.5 million for the
fiscal year ended 1994, to $39.2 million for the fiscal year ended 1995. Gross
margin increased to 19% in 1995 from 17% in 1994. The increase in combined gross
profit occurred primarily due to increases in gross profit of $1.6 million or
26% at Houston-Stafford, $3.3 million or 71% at Mills, and $1.6 million or 30%
at Bexar-Calhoun. Houston-Stafford's gross margin increased from 12% in 1994 to
14% in 1995, Mills' gross margin increased from 18% in 1994 to 22% in 1995, and
Bexar-Calhoun's gross margin increased from 22% in 1994 to 24% in 1995,
respectively. The increase in Houston-Stafford's gross profit and gross margin
are primarily attributable to favorable pricing related to increased demand.
Mills' gross profit and gross margin increases are primarily attributable to
increased market demand for complex industrial contracts, and an increase in
higher margin maintenance and service revenues. Bexar-Calhoun's gross profit and
gross margin increased as a result of higher margin retail construction
contracts in San Antonio, Texas.
Selling, general and administrative expenses increased 20% from $23.8
million in 1994 to $28.5 million in 1995. The increase in combined selling,
general and administrative expenses occurred primarily due to increases in
selling, general and administrative expenses of $0.7 million at
Houston-Stafford, $1.3 million at Mills and $0.5 million at Bexar-Calhoun. The
increase in Houston-Stafford's selling, general and administrative expenses was
attributable to the addition of administrative infrastructure associated with
its growth. Mills' increase in selling, general and administrative expenses was
attributable to increased business volume and increases in discretionary bonus
and savings plan distributions. Bexar-Calhoun's increase in selling, general
20
<PAGE> 24
and administrative expenses was attributable to the addition of administrative
infrastructure associated with Bexar-Calhoun's growth.
Combined Liquidity and Capital Resources
As of December 31, 1997, the Company had, on a pro forma combined basis
(after the effect of the Acquisitions and the Offering), cash of $21.1 million
and available capacity under its Credit Facility of $65.0 million.
On a pro forma combined basis, the Founding Companies generated $12.4
million and $2.1 million (net of $8.8 million of cash bonuses to owners) of net
cash from operating activities during the year ended September 30, 1997 and the
three months ended December 31, 1997, respectively. Net cash used in investing
activities was $5.7 million and $0.4 million on a pro forma combined basis for
the year ended September 30, 1997, and the three months ended December 31, 1997,
respectively, and was primarily used for capital expenditures. Net cash used in
financing activities on a pro forma combined basis was $8.1 million and $2.3
million for the year ended September 30, 1997, and the three months ended
December 31, 1997, respectively, and was primarily used for debt repayment and
capital distributions.
The Company has a three-year revolving credit facility of up to $70 million
(the "Credit Facility") to be used for working capital and capital expenditures,
to finance acquisitions and for general corporate purposes. The amounts borrowed
under the Credit Facility bear interest at an annual rate equal to either (a)
the London Interbank Offered Rate ("LIBOR") plus 1.0% to 2.0%, as determined by
the ratio of the Company's total funded debt to EBITDA (as defined in the Credit
Facility) or (b) the higher of (i) the bank's prime rate and (ii) the Federal
Funds rate plus 0.5%, plus up to an additional 0.5% as determined by the ratio
of the Company's total funded debt to EBITDA. Commitment fees of 0.25% to
0.375%, as determined by the ratio of the Company's total funded debt to EBITDA,
are due on any unused borrowing capacity under the Credit Facility. The
Company's subsidiaries have guaranteed the repayment of all amounts due under
the facility, and the facility is secured by the capital and stock of the
guarantors and the accounts receivable of the Company and the guarantors. The
Credit Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payment of cash dividends by
the Company, restricts the ability of the Company to incur other indebtedness
and requires the Company to comply with certain financial covenants.
Availability of the Credit Facility is subject to customary drawing conditions.
The Company anticipates that its cash flow from operations and proceeds
from the Offerings will provide sufficient cash to enable the Company to meet
its working capital needs, debt service requirements and planned capital
expenditures for property and equipment through 1998.
The Company intends to continue pursuing attractive acquisition
opportunities. The timing, size or success of any acquisition effort and the
associated potential capital commitments cannot be predicted. The Company
expects to fund future acquisitions primarily with a portion of the net proceeds
of the Offering, working capital, cash flow from operations and borrowings,
including any unborrowed portion of the Credit Facility, as well as issuances of
additional equity. To the extent the Company funds a significant portion of the
consideration for future acquisitions with cash, it may have to increase the
amount of the Credit Facility or obtain other sources of financing. Capital
expenditures for equipment and expansion of facilities are expected to be funded
from cash flow from operations and supplemented as necessary by borrowings from
the Credit Facility.
Due to the relatively low levels of inflation experienced in fiscal 1994,
1995 and 1996, inflation did not have a significant effect on the results of the
combined Founding Companies in those fiscal years, or any of the Founding
Companies individually.
21
<PAGE> 25
HOUSTON-STAFFORD RESULTS OF OPERATIONS
Houston-Stafford was founded in 1973 and is headquartered in Stafford,
Texas near Houston. It operates primarily in Texas, with other significant
operations in Georgia, Virginia, Tennessee and Maryland. In April 1997,
Houston-Stafford financed the acquisition of an electrical supply company from a
third party for $100,000 cash.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED
--------------------------------------------- ----------------------------- SEPTEMBER 30,
1994 1995 1996 1996 1997 1997
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.................. $48,001 100% $54,082 100% $70,493 100% $53,062 100% $64,144 100% $81,575 100%
Cost of services.......... 42,163 88 46,712 86 57,662 82 44,485 84 51,654 81 64,831 80
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit............ 5,838 12 7,370 14 12,831 18 8,577 16 12,490 19 16,744 20
Selling, general and
administrative
expenses................ 5,319 11 6,027 11 7,810 11 4,404 8 8,068 13 11,474 14
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Income from
operations............ $ 519 1% $ 1,343 3% $ 5,021 7% $ 4,173 8% $ 4,422 6% $ 5,270 6%
======= === ======= === ======= === ======= === ======= === ======= ===
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
1996 1997
------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues.................. $17,431 100% $23,851 100%
Cost of services.......... 13,177 76 18,691 78
------- --- ------- ---
Gross profit............ 4,254 24 5,160 22
Selling, general and
administrative
expenses................ 3,406 20 7,124 30
------- --- ------- ---
Income from
operations............ $ 848 4% (1,964) (8)%
======= === ======= ===
</TABLE>
22
<PAGE> 26
Houston-Stafford results for the three months ended December 31, 1997 compared
to the three months ended December 31, 1996
Revenues increased $6.5 million, or 37%, from $17.4 million for the three
months ended December 31, 1996, to $23.9 million for the three months ended
December 31, 1997. The increase in revenues was principally due to approximately
$2.0 million of revenue related to the acquisition of an electrical supply
company in April 1997, higher demand for residential services under contract
with a national provider of multi-family apartments, and increased demand for
single-family electrical installation services.
Cost of services increased $5.5 million, or 42%, from $13.2 million for the
three months ended December 31, 1996, to $18.7 million for the three months
ended December 31, 1997. The increase in cost of services was principally due to
the acquisition of an electrical supply company in April 1997, and the
additional variable costs associated with the increased revenues noted above. As
a percentage of revenues, cost of services increased from 76% for the three
months ended December 31, 1996, to 78% for the three months ended December 31,
1997. This percentage increase was due to an agreed lower markup on certain
materials acquired under the contract for multi-family apartments noted above
and additional overtime associated with the overall increase in activity.
Selling, general and administrative expenses increased $3.7 million, or
109%, from $3.4 million for the three months ended December 31, 1996, to $7.1
million for the three months ended December 31, 1997. This increase in selling,
general and administrative expenses was primarily attributable to a $4.4 million
bonus paid to the owners of Houston-Stafford during the three months ended
December 31, 1997, compared to a $1.4 million bonus during the three months
ended December 31, 1996. Excluding such bonuses, selling, general and
administrative expenses as a percentage of revenues declined from 12% for the
three months ended December 31, 1996, to 11% for the three months ended December
31, 1997.
Houston-Stafford results for the year ended September 30, 1997 compared to the
year ended December 31, 1996.
Revenues increased $11.1 million, or 16%, from $70.5 million for the year
ended December 31, 1996 to $81.6 million for the year ended September 30, 1997
primarily as a result of increased demand and the consolidation of an electrical
supply company, partially offset by the effects of unusually rainy weather in
Texas.
Gross profit increased $3.9 million, or 30%, during the year ended
September 30, 1997 to $16.7 million, and gross margin increased to 20% during
the year ended September 30, 1997 from 18% during the year ended December 31,
1996 as a result of favorable pricing related to the increase in demand and
higher discounts on certain long-term material purchase commitments.
Selling, general and administrative expenses increased 47% from $7.8
million to $11.5 million. The increase was primarily attributable to an increase
in bonuses for certain key employees and to a lesser degree higher insurance
costs.
Houston-Stafford results for the nine months ended September 30, 1997 compared
to nine months ended September 30, 1996
Revenues increased $11.0 million, or 21%, from $53.1 million for the nine
months ended September 30, 1996 to $64.1 million for the nine months ended
September 30, 1997, primarily as a result of increased demand and the
consolidation of an electrical supply company, partially offset by the effects
of unusually rainy weather in Texas.
Gross profit increased $3.9 million, or 46%, during the first nine months
of 1997 to $12.5 million, and gross margin increased to 19% in 1997 from 16% in
1996 as a result of favorable pricing related to the increase in demand and
higher discounts on certain long-term material purchase commitments.
23
<PAGE> 27
Selling, general and administrative expenses increased 83% from $4.4
million to $8.1 million. The increase was attributable to an increase in bonuses
for certain key employees and to a lesser degree higher insurance costs.
Houston-Stafford results for the year ended December 31, 1996 compared to the
year ended December 31, 1995
Revenues increased $16.4 million, or 30%, from $54.1 million for the year
ended December 31, 1995, to $70.5 million for the year ended December 31, 1996,
primarily due to an overall increase in demand and new contracts under which
Houston-Stafford is the sole or primary provider of electrical installation
services for certain significant residential contractors.
Gross profit increased $5.4 million, or 74%, from $7.4 million for the year
ended December 31, 1995 to $12.8 million for the year ended December 31, 1996.
Gross margin increased from 14% to 18% over these periods. The increase in gross
profit amounts and percentages is primarily attributable to favorable pricing
related to the increase in demand and higher discounts on certain long-term
material purchase commitments.
Selling, general and administrative expenses increased 30% from $6.0
million to $7.8 million. The increase was attributable to the addition of
administrative infrastructure necessary to support Houston-Stafford's growth and
the establishment of a new merit bonus system. Selling, general and
administrative expenses as a percentage of revenues remained constant during
1996 when compared to 1995.
Houston-Stafford results for the year ended December 31, 1995 compared to the
year ended December 31, 1994
Revenues increased $6.1 million, or 13%, from $48.0 million for the year
ended December 31, 1994, to $54.1 million for the year ended December 31, 1995,
due to increased demand and a new contract where Houston-Stafford is the sole or
primary provider of electrical contracting services for a significant
multi-family residential contractor.
Gross profit increased $1.6 million, or 26%, from $5.8 million for the year
ended December 31, 1994 to $7.4 million for the year ended December 31, 1995.
Gross margin increased from 12% to 14% over these periods due to favorable
pricing partially offset by lower profits from government projects in 1995.
Selling, general and administrative expenses increased 13% in 1995 when
compared to 1994 as a result of the additional infrastructure necessary to
support Houston-Stafford's growth. Selling, general and administrative expenses
as a percentage of revenues remained constant during 1995 when compared to 1994.
HOUSTON-STAFFORD LIQUIDITY AND CAPITAL RESOURCES
Houston-Stafford generated $0.6 million of net cash from operating
activities for the nine months ended September 30, 1997, which declined compared
to fiscal 1996 as a result of an increase in accounts receivable and costs and
estimated earnings in excess of billings on contracts in progress, both of which
represented offsets to net income generated during the period. Net cash used in
investing activities was approximately $0.3 million, primarily for the purchase
of fixed assets. Net cash used in financing activities of $0.5 million resulted
from advances on Houston-Stafford's line of credit. Houston-Stafford had a $3.1
million line of credit as of September 30, 1997 that expires in July 1998. At
September 30, 1997, Houston-Stafford had $0.5 million outstanding under its line
of credit. Additionally, in April 1997, Houston-Stafford financed the
acquisition of an electrical supply company from a third party for $100,000
cash.
Houston-Stafford used $0.1 million of net cash from operating activities
for the year ended September 30, 1997, which represents a decline compared to
fiscal 1996 as a result of an increase in accounts receivable and costs and
estimated earnings in excess of billings on contracts in progress, both of which
represented offsets to net income generated during the period. Net cash used in
investing activities was approximately $0.5 million, primarily for additional
property and equipment. Net cash used in financing activities of $0.6 million
resulted from the net effect of borrowings and payments of long-term debt.
At December 31, 1997, Houston-Stafford had working capital of $4.5 million
and total debt of $2.1 million.
24
<PAGE> 28
Days sales outstanding in accounts receivable increased from 35 days as of
December 31, 1996 to 43 days as of September 30, 1997 (both calculated based on
sales for the years then ended). Such change is attributable to the effects on
receivables outstanding at September 30, 1997 of increased levels of sales
during the second and third quarters of 1997 due to seasonality and the
additional electrical supply company revenues.
Houston-Stafford generated $2.7 million in net cash from operating
activities for the year ended December 31, 1996, primarily due to an increase in
collections of accounts receivable and billings on contracts in progress. Net
cash used in investing activities was approximately $0.6 million for the
purchase of fixed assets. Net cash used in financing activities was $0.5 million
for the year ended December 31, 1996 primarily as a result of the repayment of
debt partially offset by additional borrowings.
At December 31, 1996 Houston-Stafford had working capital of $4.7 million
and total debt of $1.7 million.
25
<PAGE> 29
MILLS RESULTS OF OPERATIONS
Mills, headquartered in Dallas, Texas was founded in 1972 and operates
primarily in the greater Dallas-Fort Worth area. Mills derives a significant
portion of its revenues from higher margin design-and-build services and from
data cabling and fire alarm systems.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED
--------------------------------------------- ----------------------------- SEPTEMBER 30,
1994 1995 1996 1996 1997 1997
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $25,544 100% $35,250 100% $65,439 100% $43,684 100% $52,644 100% $74,399 100%
Cost of services......... 20,937 82 27,372 78 50,535 77 33,998 78 44,035 84 60,572 81
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit........... 4,607 18 7,878 22 14,904 23 9,686 22 8,609 16 13,827 19
Selling, general and
administrative
expenses............... 3,391 13 4,741 13 7,643 12 3,837 9 4,972 9 8,778 12
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Income (loss) from
operations........... $ 1,216 5% $ 3,137 9% $ 7,261 11% $ 5,849 13% $ 3,637 7% $ 5,049 7%
======= === ======= === ======= === ======= === ======= === ======= ===
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................. $21,755 100% $14,968 100%
Cost of services......... 16,537 76 11,700 78
------- --- ------- ---
Gross profit........... 5,218 24 3,268 22
Selling, general and
administrative
expenses............... 3,806 17 4,554 30
------- --- ------- ---
Income (loss) from
operations........... $ 1,412 7% $(1,286) (8)%
======= === ======= ===
</TABLE>
26
<PAGE> 30
Mills results for the three months ended December 31, 1997, compared to the
three months ended December 31, 1996.
Revenues decreased $6.8 million, or 31% from $21.8 million for the three
months ended December 31, 1996 to $15.0 million for the three months ended
December 31, 1997, primarily as a result of the completion of several large
commercial distribution facility projects and the delayed start of several
mid-sized commercial projects into January 1998.
Gross profit decreased $1.9 million, or 37%, during the first three months
of fiscal 1998 as compared to the three months ended December 31, 1996. Gross
margin decreased from 24% to 22%. The declines in gross profit and gross margin
relate to the changes in revenue discussed above.
Selling, general and administrative expenses increased 20% from $3.8
million to $4.6 million. The increase is primarily attributed to a nonrecurring
$1.5 million bonus paid to the owner of Mills during the three months ended
December 31, 1997.
Mills results for the year ended September 30, 1997 compared to the year ended
December 31, 1996
Revenues increased $9.0 million, or 14%, from $65.4 million for the year
ended December 31, 1996, to $74.4 million for the year ended September 30, 1997,
primarily due to the acquisition of Regional Electric in June 1996 (which
represents approximately $13 million of 1997 and $5.2 million of 1996 revenues).
Gross profit decreased $1.1 million, or 7%, from $14.9 million for the year
ended December 31, 1996 to $13.8 million for the year ended September 30, 1997.
Gross margin decreased from 23% to 19% due to a decrease in demand for higher
margin, complex industrial work offset by an increase in demand for lower margin
commercial work, as well as a planned increase in the operating infrastructure
at Regional Electric to support Mill's growth strategy in the Fort Worth market.
Selling, general and administrative expenses increased 15% from $7.6
million to $8.8 million. The increase was attributable to a full year of general
and administrative expenses relating to the June 1996 acquisition of Regional
Electric, and a $0.2 million severance payment to the former owner of Regional
Electric.
Mills results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $8.9 million, or 21%, from $43.7 million for the nine
months ended September 30, 1996 to $52.6 million for the nine months ended
September 30, 1997, primarily as a result of the acquisition of Regional
Electric, which specializes in commercial and industrial electrical contracting
and fire alarm, data cabling and control system installation in the greater Fort
Worth area.
Gross profit decreased $1.1 million, or 11%, during the first nine months
of 1997 as compared to the nine months ended September 30, 1996. Gross margin
decreased from 22% to 16% due to a decrease in demand for higher margin, complex
industrial work offset by an increase in demand for lower margin commercial
work, as well as a planned increase in the operating infrastructure at Regional
Electric to support Mill's growth strategy in the Fort Worth market.
Selling, general and administrative expenses increased 30% from $3.8
million to $5.0 million. The increase was attributable to a full year of general
and administrative expenses relating to the June 1996 acquisition of Regional
Electric, and a $0.2 million severance payment to the former owner of Regional
Electric.
Mills results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $30.1 million, or 86%, from $35.3 million for the year
ended December 31, 1995 to $65.4 million for the year ended December 31, 1996,
primarily due to the acquisition of Regional Electric in June 1996 (which
represents approximately $5.2 million of 1996 revenues), an increase in demand
for large and complex industrial construction contracts for manufacturing and
distribution facilities in the greater
27
<PAGE> 31
Dallas area for which only a select group of electrical contractors have the
resources and expertise to bid and a 30% increase in maintenance and service
revenues resulting from Mills' focus on increasing its maintenance and service
revenues.
Gross profit increased $7.0 million, or 89%, from $7.9 million for the year
ended December 31, 1995 to $14.9 million for the year ended December 31, 1996.
Gross margin increased to 23% from 22% during this period due to an increase in
higher margin maintenance and service work.
Selling, general and administrative expenses increased 61% from $4.7
million to $7.6 million. The increase was attributable to increased business
volume, including that related to the acquisition of operations of Regional
Electric and increases in discretionary bonus and savings plan distributions.
Mills results for the year ended December 31, 1995 compared to the year ended
December 31, 1994
Revenues increased $9.8 million, or 38%, from $25.5 million for the year
ended December 31, 1994 to $35.3 million for the year ended December 31, 1995,
primarily due to increased demand for higher margin new industrial contracting
services and a 61% increase in maintenance and service revenues.
Gross profit increased $3.3 million, or 71%, from $4.6 million for the year
ended December 31, 1994 to $7.9 million for the year ended December 31, 1995.
Gross margin increased to 22% from 18% due to the increases in higher margin
industrial contracting and maintenance service revenues.
Selling, general and administrative expenses increased 40% from $3.4
million to $4.7 million. The increase was attributable to increased business
volume and increases in discretionary bonus and savings plan distributions.
MILLS LIQUIDITY AND CAPITAL RESOURCES
Mills used approximately $2.9 million of net cash for operating activities
for the nine months ended September 30, 1997, primarily for working capital. Net
cash used in investing activities was approximately $1.2 million, primarily for
the purchase of tools and equipment. Net cash used in financing activities was
$0.3 million, primarily for stockholder distributions and long-term debt. At
September 30, 1997, Mills had a $2.0 million revolving line of credit available
that expires June 1, 1999. At September 30, 1997, there were outstanding draws
against this line of credit in the amount of $400,000, which are due and payable
within one year.
Mills generated $2.7 million of net cash from operating activities for the
year ended September 30, 1997. Net cash used in investing activities was
approximately $1.5 million, primarily for additions to property and equipment.
Net cash used in financing activities of $3.7 million primarily resulted from
distributions to stockholders.
At December 31, 1997, Mills had working capital of $5.9 million and total
debt obligations of $0.4 million that relate to the acquisition of Regional
Electric and certain capital leases.
Mills generated $7.9 million in net cash from operating activities for the
year ended December 31, 1996, as a result of increased profitability. Net cash
used in investing activities was approximately $0.6 million, representing $0.9
million used for the purchase of property and equipment, partly offset by $0.3
million, net, in collection of loans. Net cash used in financing activities was
$3.9 million for the year ended December 31, 1996, primarily for distribution of
dividends to stockholders. At December 31, 1996, Mills had a $2.0 million
revolving line of credit that was originally scheduled to expire June 1, 1997
and was extended to June 1, 1999. At December 31, 1996, there were no
outstanding draws against this line of credit.
At December 31, 1996, Mills had working capital of $5.5 million and total
debt obligations of $0.6 million.
28
<PAGE> 32
BEXAR-CALHOUN RESULTS OF OPERATIONS
Bexar was founded in 1966 and operates primarily in the areas around the
cities of San Antonio, New Braunfels and Laredo, Texas. Calhoun was founded in
1958 and operates in the counties around San Antonio.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED
--------------------------------------------- ----------------------------- SEPTEMBER 30,
1994 1995 1996 1996 1997 1997
------------- ------------- ------------- ------------- ------------- -------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................... $23,168 100% $27,730 100% $33,023 100% $24,994 100% $24,136 100% $32,165 100%
Cost of services........... 17,967 78 20,964 76 25,017 76 18,909 76 18,868 78 24,976 78
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit............. 5,201 22 6,766 24 8,006 24 6,085 24 5,268 22 7,189 22
Selling, general and
administrative
expenses................. 3,091 13 3,637 13 3,686 11 2,713 11 2,793 12 3,766 12
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Income from operations... $ 2,110 9% $ 3,129 11% $ 4,320 13% $ 3,372 13% $ 2,475 10% $ 3,423 10%
======= === ======= === ======= === ======= === ======= === ======= ===
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
-----------------------------
1996 1997
------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................... $ 8,029 100% $ 8,418 100%
Cost of services........... 6,108 76 6,112 73
------- --- ------- ---
Gross profit............. 1,921 24 2,306 27
Selling, general and
administrative
expenses................. 973 12 1,784 21
------- --- ------- ---
Income from operations... $ 948 12% $ 522 6
======= === ======= ===
</TABLE>
29
<PAGE> 33
Bexar-Calhoun results for the three months ended December 31, 1997 compared to
the three months ended December 31, 1996
Revenues increased $0.4 million, or 5%, from $8.0 million in 1996 to $8.4
million in 1997, primarily due to an increase in overall growth.
Gross profit increased $0.4 million, or 20%, from $1.9 million in 1996 to
$2.3 million in 1997. Gross margin increased from 24% in 1996 to 27% in 1997.
The increase in gross profit related to a change in customer mix associated with
higher margin retail construction and service work.
Selling, general and administrative expenses increased $0.8 million or 83%
from $1.0 million for the three months ended December 31, 1996, to $1.8 million
for the three months ended December 31, 1997. This increase is primarily
attributable to a non-recurring $0.8 million bonus paid to an owner of
Bexar-Calhoun during the three months ended December 31, 1997.
Bexar-Calhoun results of operations for the year ended September 30, 1997
compared to the year ended December 31, 1996
Revenues decreased $0.8 million, or 3%, from $33.0 million for the year
ended December 31, 1996, to $32.2 million for the year ended September 30, 1997,
primarily due to the completion in 1996 of an unusually large electrical
construction contract for a state university in Laredo, Texas.
Gross profit decreased $0.8 million, or 10%, from $8.0 million for the year
ended December 31, 1996, to $7.2 million for the year ended September 30, 1997.
Gross margins decreased to 22% from 24% over these periods. The decrease in
gross profit related to completion of the large state university contract in
1996 and gross margin declined due to a change in customer mix associated with a
decrease in higher margin retail construction in San Antonio.
Selling, general and administrative expenses remained relatively constant
in 1997 as compared to 1996.
Bexar-Calhoun results for the nine months ended September 30, 1997 compared to
nine months ended September 30, 1996
Revenues decreased $0.9 million, or 3%, from $25.0 million in 1996 to $24.1
million in 1997, primarily due to an increase in overall growth offset by the
completion in 1996 of an unusually large electrical construction contract for a
state university in Laredo, Texas.
Gross profit decreased $0.8 million, or 13%, from $6.1 million in 1996 to
$5.3 million in 1997. Gross margin decreased from 24% in 1996 to 22% in 1997.
The decrease in gross profit related to completion of the large state university
contract in 1996 and gross margin declined due to a change in customer mix
associated with a decrease in higher margin retail construction in San Antonio.
Selling, general and administrative expenses remained relatively constant
from 1996 to 1997.
Bexar-Calhoun results for the year ended December 31, 1996 compared to the
year ended December 31, 1995
Revenues increased $5.3 million, or 19%, from $27.7 million in 1995 to
$33.0 million in 1996, primarily due to reassignment of certain personnel to
Laredo and New Braunfels, Texas. Bexar-Calhoun realized a $3.6 million increase
in revenues in these two markets between 1995 and 1996, in part from an
unusually large electrical construction contract for a university in Laredo,
Texas.
Gross profit increased $1.2 million, or 18%, from $6.8 million in 1995 to
$8.0 million in 1996. Gross margin remained stable over these periods. The
increase in gross profit was attributable to higher revenues.
Selling, general and administrative expenses did not significantly change
from 1995 to 1996. Selling, general and administrative expenses declined as a
percentage of revenue from 13% in 1995 to 11% in 1996.
30
<PAGE> 34
Bexar-Calhoun results for the year ended December 31, 1995 compared to the
year ended December 31, 1994
Revenues increased $4.5 million, or 20%, from $23.2 million in 1994 to
$27.7 million in 1995, primarily due to a significant increase in the volume of
Bexar-Calhoun's retail construction business in the San Antonio, Texas market.
Gross profit increased $1.6 million, or 30%, from $5.2 million in 1994 to
$6.8 million in 1995. Gross margin increased from 22% in 1994 to 24% in 1995.
Gross profit increased due to the revenue increase, while gross margin increased
due to higher margin retail construction.
Selling, general and administrative expenses increased 18% from $3.1
million in 1994 to $3.6 million in 1995. The increase was attributable to the
addition of infrastructure associated with Bexar-Calhoun's growth.
BEXAR-CALHOUN LIQUIDITY AND CAPITAL RESOURCES
Bexar-Calhoun generated $3.1 million of net cash from operating activities
for the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $0.9 million, primarily for additions to property
and equipment and loans to stockholders. Net cash used in financing activities
of $1.5 million resulted from stockholder distributions net of debt repayments.
Bexar-Calhoun generated $3.3 million of net cash from operating activities
for the year ended September 30, 1997. Net cash used in investing activities was
approximately $1.1 million, primarily for additions of property and equipment.
Net cash used in financing activities of $1.9 million primarily resulted from
stockholder distributions and repayments of debt.
At December 31, 1997, Bexar-Calhoun had working capital of $5.1 million and
total debt of $0.1 million.
Bexar-Calhoun generated $2.7 million in net cash from operating activities
for the year ended December 31, 1996, primarily from net income offset by growth
in working capital. Net cash used in investing activities was approximately $0.6
million for additions to property and equipment net of stockholder loan
repayments. Net cash used by financing activities was $2.8 million for the year
ended December 31, 1996 primarily as a result of stockholder distributions net
of debt repayments.
At December 31, 1996 Bexar-Calhoun had working capital of $3.7 million and
total debt of $1.0 million.
31
<PAGE> 35
POLLOCK RESULTS OF OPERATIONS
Pollock was founded in 1983 and is headquartered in Houston, Texas. Pollock
has specialized expertise in design-and-build projects for commercial and
industrial customers.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED
YEARS ENDED OCTOBER 31, SEPTEMBER 30, YEAR ENDED
----------------------------- ------------------------------ SEPTEMBER 30,
1995 1996 1996 1997 1997
------------- ------------- -------------- ------------- --------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............................. $13,002 100% $15,816 100% $13,305 100% $17,780 100% $20,291 100%
Cost of services..................... 10,602 82 13,534 86 11,646 88 14,782 83 16,670 82
------- --- ------- --- ------- ---- ------- --- ------- ---
Gross profit....................... 2,400 18 2,282 14 1,659 12 2,998 17 3,621 18
Selling, general and administrative
expenses........................... 2,149 16 2,463 15 2,083 16 2,515 14 2,895 14
------- --- ------- --- ------- ---- ------- --- ------- ---
Income/(loss) from operations...... $ 251 2% $ (181) (1)% $ (424) (4)% $ 483 3% $ 726 4%
======= === ======= === ======= ==== ======= === ======= ===
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1996 1997
------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............................. $5,134 100% $7,011 100%
Cost of services..................... 4,070 79 6,119 87
------ ---- ------ ---
Gross profit....................... 1,064 21 892 13
Selling, general and administrative
expenses........................... 838 17 1,368 20
------ ---- ------ ---
Income/(loss) from operations...... $ 226 4% $ (476) (7)%
====== ==== ====== ===
</TABLE>
32
<PAGE> 36
Pollock results for the three months ended December 31, 1997 compared to the
three months ended December 31, 1996
Revenues increased $1.9 million, or 37% from $5.1 million for the three
months ended December 31, 1996 to $7.0 million for the three months ended
December 31, 1997, primarily due to an increase in large commercial contracts.
Gross profit decreased $0.2 million, or 16%, from $1.1 million for the
three months ended December 31, 1996 to $0.9 million for the three months ended
December 31, 1997. Gross margin decreased to 13% from 21% over these periods.
The gross profit and gross margin decreases in 1997 when compared to 1996 are
primarily attributable to specific low margin or loss contracts in 1997.
Selling, general and administrative expenses increased 63% from $0.8
million for the three months ended December 31, 1996, to $1.4 million for the
three months ended December 31, 1997. This increase is primarily attributed to a
nonrecurring $0.8 million bonus paid to the owner of Pollock during the three
months ended December 31, 1997.
Pollock results for the year ended September 30, 1997 compared to the year
ended October 31, 1996
Revenues increased $4.5 million, or 28%, from $15.8 million for the year
ended October 31, 1996 to $20.3 million for the year ended September 30, 1997,
primarily due to an increase in large commercial contracts, increased data
cabling work, and higher revenues from service work.
Gross profit increased $1.4 million, or 59%, from $2.2 million for the year
ended October 31, 1996 to $3.6 million for the year ended September 30, 1997.
Gross margin increased to 18% from 14% over these periods. The gross profit and
gross margin increases in 1997 when compared to 1996 are primarily attributable
to specific low margin or loss contracts in 1996 that did not recur in 1997.
Selling, general and administrative expenses increased 18% from $2.5
million to $2.9 million due to the addition of certain strategic management
personnel. As a percent of revenues, selling, general and administrative
expenses decreased in 1997 over 1996 by 1%.
Pollock results for the eleven months ended September 30, 1997 compared to
eleven months ended September 30, 1996
Revenues increased $4.5 million, or 34%, from $13.3 million for the eleven
months ended September 30, 1996 to $17.8 million for the eleven months ended
September 30, 1997, primarily due to an increase in large commercial contracts,
increased data cabling work and higher revenues for service and small project
work.
Gross profit increased $1.3 million, or 81%, from $1.7 million for the
eleven months ended September 30, 1996 to $3.0 million for the eleven months
ended September 30, 1997. Gross margin increased to 17% from 12% over these
periods. The gross profit and gross margin increases in 1997 when compared to
1996 are primarily attributable to specific low margin or loss contracts in 1996
that did not recur in 1997.
Selling, general and administrative expenses increased 21% from $2.1
million to $2.5 million due to the addition of certain strategic management
personnel. As a percentage of revenues, selling, general and administrative
expenses actually decreased in 1997 over 1996 by 2%.
Pollock results for the year ended October 31, 1996 compared to the year ended
October 31, 1995
Revenues increased $2.8 million, or 22%, from $13.0 million for the year
ended October 31, 1995, to $15.8 million for the year ended October 31, 1996,
primarily due to an increase in commercial construction and the addition of data
cabling services.
Gross profit decreased $0.1 million, or 5%, from $2.4 million for the year
ended October 31, 1995 to $2.3 million for the year ended October 31, 1996.
Gross margin decreased to 14% from 18% over these periods. These decreases were
due to specific low margin or loss contracts in 1996.
33
<PAGE> 37
Selling, general and administrative expenses increased 15% from $2.1
million to $2.5 million. The increase was attributable to an increase in
management staff necessary to support Pollock's growth strategy, including the
addition of data cabling expertise.
POLLOCK LIQUIDITY AND CAPITAL RESOURCES
Pollock used $0.1 million of net cash for operating activities during the
eleven months ended September 30, 1997. Net cash used in investing activities
was approximately $0.1 million, primarily for increases in the leasing of
capital assets. Net cash provided by financing activities of $0.3 million
resulted from additional short-term line of credit borrowings.
Net cash from operating activities for the year ended September 30, 1997
was not material in amount. Net cash used in investing activities was
approximately $0.2 million, primarily for increases in the leasing of capital
assets. Net cash provided by financing activities of $0.5 million resulted from
additional short-term line of credit borrowings.
At December 31, 1997, Pollock had working capital of $0.4 million and total
debt of $1.8 million.
Pollock used $0.7 million in net cash from operating activities for the
year ended October 31, 1996, primarily to fund working capital requirements. Net
cash used in investing activities was approximately $0.2 million for additions
to property and equipment. Net cash provided by financing activities was $0.7
million for the year ended October 31, 1996 primarily as a result of short-term
line of credit borrowings.
At October 31, 1996 Pollock had working capital of $0.5 million and total
debt of $1.5 million.
34
<PAGE> 38
MUTH RESULTS OF OPERATIONS
Muth was founded in 1970 and has seven offices located in South Dakota,
including its headquarters in Mitchell. Muth also from time to time operates in
Wyoming, Montana, Nebraska and Minnesota.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED
--------------------------------------------- ----------------------------- SEPTEMBER 30,
1994 1995 1996 1996 1997 1997
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $13,466 100% $16,012 100% $16,830 100% $12,517 100% $14,466 100% $18,779 100%
Cost of services.................. 9,805 73 12,189 76 12,834 76 9,751 78 11,428 79 14,511 77
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit.................... 3,661 27 3,823 24 3,996 24 2,766 22 3,038 21 4,268 23
Selling, general and
administrative expenses......... 2,678 20 2,923 18 2,957 18 2,147 17 2,264 16 3,074 16
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Income from operations.......... $ 983 7% $ 900 6% $ 1,039 6% $ 619 5% $ 774 5% $ 1,194 7%
======= === ======= === ======= === ======= === ======= === ======= ===
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues.......................... $4,251 100% $6,207 100%
Cost of services.................. 3,137 74 4,702 76
------ --- ------ ---
Gross profit.................... 1,114 26 1,505 24
Selling, general and
administrative expenses......... 697 16 899 14
------ --- ------ ---
Income from operations.......... $ 417 10% $ 606 10%
====== === ====== ===
</TABLE>
35
<PAGE> 39
Muth results for the three months ended December 31, 1997 compared to the
three months ended December 31, 1996
Revenues increased $1.9 million, or 46% from $4.3 million for the three
months ended December 31, 1996 to $6.2 million for the three months ended
December 31, 1997, due to a significant increase in market demand due to work
delays in 1996 caused by a harsh winter.
Gross profit increased $0.4 million, or 35% from $1.1 million for the three
months ended December 31, 1996 to $1.5 million for the three months ended
December 31, 1997. Gross margin decreased to 24% from 26% over these periods.
The increase in gross profit and decrease in gross margin is due to higher
revenues with a change in the mix from service work to slightly lower margin
construction contracts.
Selling, general and administrative expenses increased 29% from $0.7
million to $0.9 million. The increase was attributable to nonrecurring
professional fees and an increase in infrastructure to support growth.
Muth results for the year ended September 30, 1997 compared to the year ended
December 31, 1996
Revenues increased $2.0 million, or 12%, from $16.8 million for the fiscal
period ended December 31, 1996 to $18.8 million for the fiscal year ended
September 30, 1997, due to a significant increase in market demand that was
offset by work delays caused by the harsh winter, which lasted from November
1996 through early April 1997.
Gross profit increased $0.3 million, or 7%, from $4.0 million for the
fiscal period ended December 31, 1996 to $4.3 million for the fiscal year ended
September 30, 1997. The increase in gross profit is attributable to increased
market demand that was offset by work delays caused by the harsh winter, which
lasted from November 1996 through early April 1997. Gross margin decreased to
23% from 24% over these periods.
Muth results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $2.0 million, or 16%, from $12.5 million for the nine
months ended September 30, 1996 to $14.5 million for the nine months ended
September 30, 1997, due to a significant increase in market demand that was
offset by work delays caused by the harsh winter, which lasted from November
1996 through early April 1997.
Gross profit increased $0.2 million, or 10%, from $2.8 million for the nine
months ended September 30, 1996 to $3.0 million for the nine months ended
September 30, 1997. Gross margin decreased to 21% from 22% over these periods.
The decreases in the gross margin are solely attributable to the harsh winter
and related work delays in early 1997.
Selling, general and administrative expenses increased 5% from $2.1 million
to $2.3 million. The increase was attributable to the increase in market demand
and related infrastructure costs.
Muth results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $0.8 million, or 5%, from $16.0 million for the year
ended December 31, 1995 to $16.8 million for the year ended December 31, 1996,
due to increased market demands for electrical contracting services, slightly
offset by delays caused by the harsh winter, which started in November 1996 and
continued through early April 1997.
Gross profit increased $0.2 million, or 5%, from $3.8 million for the year
ended December 31, 1995 to $4.0 million for the year ended December 31, 1996.
There was no significant change in gross margin. The gross profit and gross
margin increases in 1996 when compared to 1995 were attributable to increased
margins on service work in 1996 and increased revenues.
Selling, general and administrative expenses remained constant over these
periods.
36
<PAGE> 40
Muth results for the year ended December 31, 1995 compared to the year ended
December 31, 1994
Revenues increased $2.5 million, or 19%, from $13.5 million for the year
ended December 31, 1994 to $16.0 million for the year ended December 31, 1995,
primarily due to increased overall demand.
Gross profit increased $0.1 million, or 4%, from $3.7 million for the year
ended December 31, 1994, to $3.8 million for the year ended December 31, 1995.
Gross margin decreased to 24% from 27% over these periods due to a lower and
more normal mix of higher margin design-and-build projects in 1995.
Selling, general and administrative expenses increased 9% from $2.7 million
to $2.9 million. The increase was due to an increase in administrative salaries
attributable to the additional infrastructure associated with Muth's growth.
MUTH LIQUIDITY AND CAPITAL RESOURCES
Muth generated $0.5 million of net cash from operating activities for the
nine months ended September 30, 1997. Net cash used in investing activities was
approximately $0.2 million, primarily for additions to property and equipment.
Net cash used in financing activities of $0.4 million primarily related to
distributions to stockholders.
Muth generated $0.5 million of net cash from operating activities for the
fiscal year ended September 30, 1997. Net cash used in investing activities was
approximately $0.2 million, primarily for additions to property and equipment.
Net cash used in financing activities of $0.3 million primarily relates to
payments of short-term debt.
At December 31, 1997, Muth had working capital of $2.2 million and no
outstanding debt. Muth currently has no long-term debt. Cash requirements
increased for the fiscal year ended September 30, 1997 as a result of a higher
proportion of government contracts, which typically have payment periods of 45
to 60 days rather than the 20-day period typical for private contracts.
Muth generated $0.5 million in net cash from operating activities for the
year ended December 31, 1996, primarily from earnings net of investments in
working capital. Net cash used in investing activities was approximately $0.4
million for additions to property and equipment. Net cash used by financing
activities was $0.1 million for the year ended December 31, 1996 primarily as a
result of stockholder distributions in excess of borrowings.
At December 31, 1996, Muth had working capital of $1.9 million and total
debt of $0.5 million.
37
<PAGE> 41
DANIEL RESULTS OF OPERATIONS
Daniel Electrical Contractors, Inc. was founded in 1986, is headquartered
in Miami, Florida, and operates primarily in South Florida. Daniel Electrical of
Treasure Coast Inc. was founded in 1995 and is headquartered in Vero Beach,
Florida. In addition to commercial and industrial contracting, Daniel services
high-end residential construction and repairs on a time-and-material basis, from
both its Miami and Vero Beach, Florida locations.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED
------------------------------ ----------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
------------- ------------- ------------ ------------- -------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $12,049 100% $12,585 100% $18,846 100% $14,670 100% $18,409 100%
Cost of services................... 11,725 97 9,713 77 6,675 75 10,480 71 13,518 73
------- --- ------- --- ------ --- ------- --- ------- ---
Gross profit..................... 324 3 2,872 23 2,171 25 4,190 29 4,891 27
Selling, general and administrative
expenses......................... 1,502 13 1,884 15 1,360 15 1,792 12 2,316 13
------- --- ------- --- ------ --- ------- --- ------- ---
Income/(loss) from operations.... $(1,178) (10)% $ 988 8% $ 811 10% $ 2,398 17% $ 2,575 14%
======= === ======= === ====== === ======= === ======= ===
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
----------------------------
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues........................... $3,739 100% $6,873 100%
Cost of services................... 3,038 81 5,106 74
------ --- ------ ---
Gross profit..................... 701 19 1,767 26
Selling, general and administrative
expenses......................... 524 14 973 14
------ --- ------ ---
Income/(loss) from operations.... $ 177 5% $ 794 12%
====== === ====== ===
</TABLE>
38
<PAGE> 42
Daniel results for the three months ended December 31, 1997 compared to the
three months ended December 31, 1996
Revenues increased $3.2 million or 84%, from $3.7 million for the three
months ended December 31, 1996 to $6.9 million for the three months ended
December 31, 1997, primarily due to an increase in revenue from high rise
condominium construction contracts.
Gross profit increased $1.1 million, or 152%, from $0.7 million for the
three months ended December 31, 1996 to $1.8 million for the three months ended
December 31, 1997. Gross margin increased from 19% to 26%, primarily due to
increased labor efficiencies and the increase in higher margin high rise
residential contracts.
Selling, general and administrative expenses increased $0.5 million, or
86%, from $0.5 million for the three months ended December 31, 1996 to $1.0
million for the three months ended December 31, 1997, primarily due to a
nonrecurring bonus of $0.5 million paid to the owners of Daniel during the
three-months ended December 31, 1997. As a percentage of revenues, selling,
general and administrative expenses remained constant from 1996 to 1997.
Daniel results for the year ended September 30, 1997 compared to the year
ended December 31, 1996
Revenues increased $5.8 million, or 46%, from $12.6 million for the year
ended December 31, 1996 to $18.4 million for the year ended September 30, 1997,
primarily due to increased contract revenues on several large high-rise
condominium projects in South Florida during the year ended September 30, 1997.
Gross profit increased $2.0 million, or 70%, from $2.9 million for the year
ended December 31, 1996 to $4.9 million for the year ended September 30, 1997.
Gross margin increased from 23% to 27%, primarily due to increased labor
efficiencies and an increase in higher margin high-rise residential contracts.
Selling, general and administrative expenses increased $0.4 million, or
23%, from $1.9 million for the year ended December 31, 1996 to $2.3 million for
the year ended September 30, 1997, primarily due to increases in office salaries
associated with increased revenues. As a percentage of revenues, selling,
general and administrative expenses decreased from 15% to 13%.
Daniel results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $5.9 million, or 66%, from $8.8 million for the nine
months ended September 30, 1996 to $14.7 million for the nine months ended
September 30, 1997, primarily due to favorable pricing for negotiated contracts
in process during the nine months ended September 30, 1997.
Gross profit increased $2.0 million, or 93%, from $2.2 million for the nine
months ended September 30, 1996 to $4.2 million for the nine months ended
September 30, 1997. Gross margin increased from 25% to 29%, primarily due to
increased labor efficiencies and an increase in higher margin high-rise
residential contracts.
Selling, general and administrative expenses increased $0.4 million, or
32%, from $1.4 million for the nine months ended September 30, 1996 to $1.8
million for the nine months ended September 30, 1997, primarily due to increases
in office salaries associated with increased revenues. As a percentage of
revenues, selling, general and administrative expenses decreased from 15% to
12%.
Daniel results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $0.6 million, or 4%, from $12.0 million for the year
ended December 31, 1995 to $12.6 million for the year ended December 31, 1996,
primarily due to increased revenues from negotiated contracts in process during
the year ended December 31, 1996.
Gross profit increased $2.6 million, or 786%, from $0.3 million for the
year ended December 31, 1995 to $2.9 million for the year ended December 31,
1996. Gross margin increased from 3% to 23%, as a result of cost
39
<PAGE> 43
overruns incurred in 1995 on certain projects and an increase in labor
efficiencies and an increase in higher margin high-rise residential contracts.
Selling, general and administrative expenses increased $0.4 million, or
25%, from $1.5 million for the year ended December 31, 1995 to $1.9 million for
the year ended December 31, 1996, as a result of the increase in revenues.
DANIEL LIQUIDITY AND CAPITAL RESOURCES
Daniel generated $1.8 million in net cash from operating activities for the
nine months ended September 30, 1997, primarily due to an increase in accounts
receivable and accounts payable, both of which represented offsets to net income
generated during the period. Net cash used in investing activities was
approximately $0.9 million, principally for capital expenditures. Net cash used
in financing activities was approximately $0.3 million, principally for
shareholder distributions net of long-term borrowings.
Daniel generated $2.0 million in net cash from operating activities for the
year ended September 30, 1997, primarily due to an increase in accounts
receivable and accounts payable, both of which represented offsets to net income
generated during the period. Net cash used in investing activities was
approximately $1.3 million, principally for capital expenditures. Net cash used
in financing activities was approximately $0.4 million, principally for
shareholder distributions net of long-term borrowings.
Working capital as of December 31, 1997 was $5.4 million, and total debt
outstanding was $0.1 million.
Days sales outstanding in accounts receivable increased from 42 days as of
December 31, 1996, to 68 days as of September 30, 1997. Such increase is
attributable to an increase in sales during the second and third quarters of
1997.
Daniel generated $1.2 million in net cash from operating activities for the
year ended December 31, 1996, primarily due to an increase in collections of
deposits and billings on contracts in progress. Net cash used in investing
activities was approximately $0.5 million, principally for capital expenditures
and increases in mutual fund investments. Net cash used in financing activities
was approximately $0.4 million, principally for debt repayments.
Working capital as of December 31, 1996 was $2.4 million, and total debt
outstanding was $0.6 million, all of which was owed to a shareholder.
40
<PAGE> 44
AMBER RESULTS OF OPERATIONS
Amber was founded in 1979 and operates from its base near Orlando, Florida.
Amber's revenues in fiscal 1996 were primarily from commercial and industrial
contracting.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED
---------------------------- --------------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
------------ ------------- --------------- --------------- ---------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $9,728 100% $13,878 100% $10,572 100% $13,080 100% $16,386 100%
Cost of services........ 8,635 89 12,215 88 8,710 82 9,910 76 13,415 82
------ --- ------- --- ------- --- ------- --- ------- ---
Gross profit.......... 1,093 11 1,663 12 1,862 18 3,170 24 2,971 18
Selling, general and
administrative
expenses.............. 957 10 1,160 8 978 9 1,197 9 1,379 8
------ --- ------- --- ------- --- ------- --- ------- ---
Income from
operations......... $ 136 1% $ 503 4% $ 884 8% $ 1,973 15% $ 1,592 10%
====== === ======= === ======= === ======= === ======= ===
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
---------------------------
1996 1997
------------ ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues................ $3,306 100% $4,704 100%
Cost of services........ 3,505 106 3,736 79
------ --- ------ ---
Gross profit.......... (199) (6) 968 21
Selling, general and
administrative
expenses.............. 182 6 1,618 35
------ --- ------ ---
Income from
operations......... $ (381) (12)% $ (650) (14)%
====== === ====== ===
</TABLE>
41
<PAGE> 45
Amber results for the three months ended December 31, 1997 compared to the
three months ended December 31, 1996
Revenues increased $1.4 million, or 42%, from $3.3 million for the three
months ended December 31, 1996 to $4.7 million for the three months ended
December 31, 1997, primarily due to an increase in large retail construction
contracts in 1997.
Gross profit increased $1.2 million, or 586%, from $(0.2) million in 1996
to $1.0 million in 1997. Gross margin increased from (6)% to 21% over these
periods. The improvement in gross margin was attributable to an increase in the
number of commercial contracts with higher gross margins recognized.
Selling, general and administrative expenses increased 789% from $0.2
million to $1.6 million for the three months ended December 31, 1996 compared to
the three months ended December 31, 1997. This increase is primarily attributed
to a nonrecurring $1.0 million bonus paid to the owner of Amber during the three
months ended December 31, 1997.
Amber results for the year ended September 30, 1997 compared to the year ended
December 31, 1996
Revenues increased $2.5 million, or 18%, from $13.9 million for the year
ended December 31, 1996 to $16.4 million for the year ended September 30, 1997,
primarily due to three large retail construction contracts in 1997.
Gross profit increased $1.3 million, or 79%, from $1.7 million for the year
ended December 31, 1996 to $3.0 million for the year ended September 30, 1997.
Gross margins increased to 18% from 12% over these periods. The gross profit and
gross margin increases in 1997 when compared to 1996 are attributable to an
increase in the overall demand, as well as demand for higher margin retail
construction contracts.
Selling, general and administrative expenses increased 19% from $1.2
million to $1.4 million. As a percentage of revenues, selling, general and
administrative expenses remained relatively constant in 1997 as compared to
1996.
Amber results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $2.5 million, or 24%, from $10.6 million for the nine
months ended September 30, 1996 to $13.1 million for the nine months ended
September 30, 1997, primarily from three large retail construction contracts in
1997.
Gross profit increased $1.3 million, or 70%, from $1.9 million in 1996 to
$3.2 million in 1997. Gross margin increased from 18% to 24% over these periods.
The improvement in gross margin was attributable to an increase in the number of
commercial contracts with higher gross margins recognized.
Selling, general and administrative expenses increased 22% from $1.0
million to $1.2 million for the nine months ended September 30, 1996 compared to
the nine months ended September 30, 1997.
Amber results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $4.2 million, or 43%, from $9.7 million in 1995 to $13.9
million in 1996, primarily due to increased commercial construction of shopping
malls and grocery stores in central Florida.
Gross profit increased $0.6 million, or 52%, from $1.1 million in 1995 to
$1.7 million in 1996. Gross margin remained stable over these periods.
Selling, general and administrative expenses increased 21% from $1.0
million in 1995 to $1.2 million in 1996. The increase was attributable to
increased management salaries associated with increased revenues.
42
<PAGE> 46
AMBER LIQUIDITY AND CAPITAL RESOURCES
Amber generated $0.7 million of net cash from operating activities for the
nine months ended September 30, 1997. Net cash used in investing activities was
approximately $0.3 million, primarily for additions to property and equipment.
Net cash used in financing activities was not material in amount for the nine
months ended September 30, 1997.
Amber generated $0.7 million of net cash from operating activities for the
year ended September 30, 1997. Net cash used in investing activities was
approximately $0.3 million, primarily for additions to property and equipment.
Net cash provided by financing activities was not material for the year ended
September 30, 1997.
At December 31, 1997, Amber had working capital of $0.9 million and total
debt of $1.1 million.
Amber generated $0.7 million in net cash from operating activities for the
year ended December 31, 1996, primarily for earnings and reductions in working
capital. Net cash used in investing activities was approximately $0.2 million
for additions of property and equipment. Net cash provided by financing
activities was not material for the year ended December 31, 1996.
At December 31, 1996, Amber had working capital of $0.6 million and total
debt of $0.7 million.
HAYMAKER RESULTS OF OPERATIONS
Haymaker was founded in 1981, is headquartered in Birmingham, Alabama, and
operates in Alabama, northwest Florida and North Carolina. Haymaker's revenues
in fiscal 1996 were primarily from commercial and industrial contracting
services.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED THREE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
DECEMBER 31, ----------------------------- SEPTEMBER 30, -----------------------------
1996 1996 1997 1997 1996 1997
------------- ------------- ------------- -------------- ------------- -------------
(UNAUDITED) (IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $7,634 100% $5,105 100% $9,243 100% $11,772 100% $2,527 100% $2,083 100%
Cost of services........ 6,412 84 4,419 87 7,927 86 9,920 84 1,993 79 1,891 91
------ ---- ------ ---- ------ ---- ------- ---- ------ ---- ------ ----
Gross profit.......... 1,222 16 686 13 1,316 14 1,852 16 534 21 192 9
Selling, general and
administrative
expenses.............. 680 9 364 7 824 9 1,140 10 315 12 (87) (4)
------ ---- ------ ---- ------ ---- ------- ---- ------ ---- ------ ----
Income from
operations.......... $ 542 7% $ 322 6% $ 492 5% $ 712 6% $ 219 9% $ 279 13%
====== ==== ====== ==== ====== ==== ======= ==== ====== ==== ====== ====
</TABLE>
Haymaker results for the three months ended December 31, 1997 compared to the
three months ended December 31, 1996
Revenues decreased $0.4 million, or 18% from $2.5 million for the three
months ended December 31, 1996, to $2.1 million for the three months ended
December 31, 1997, primarily due to delays in starting a large contract in 1997.
Gross profit decreased $0.3 million, or 64% from $0.5 million for the three
months ended December 31, 1996 to $0.2 million for the same period in 1997.
Gross margin decreased to 9% in 1997 from 21% in 1996 over these periods. The
decrease in gross profit and gross margin was attributable to higher than
expected costs on certain fixed price contracts.
Selling, general and administrative expenses decreased 128% from $0.3
million for the three months ended December 31, 1996, to $(0.1) million for the
three months ended December 31, 1997. The decrease was attributable to the
reversal of a $0.3 million owner bonus which was instead paid as a dividend
during the quarter ended December 31, 1997.
43
<PAGE> 47
Haymaker results for the year ended September 30, 1997 compared to the year
ended December 31, 1996
Revenues increased $4.2 million, or 54%, from $7.6 million for the year
ended December 31, 1996 to $11.8 million for the year ended September 30, 1997,
primarily due to a large hospital contract and an overall increase in
construction activity in Birmingham, Alabama.
Gross profit increased $0.7 million, or 52%, from $1.2 million for the year
ended December 31, 1996 to $1.9 million for the year ended September 30, 1997.
Gross margins remained constant at 16%. The gross profit increase in 1997 when
compared to 1996 was attributable to higher demand.
Selling, general and administrative expenses increased 68% from $0.7
million to $1.1 million due to higher bonus distributions under Haymaker's
incentive compensation plan. As a percentage of revenues, selling, general and
administrative expenses increased in 1997 as compared to 1996 by 1%.
Haymaker results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $4.1 million, or 81%, from $5.1 million for the nine
months ended September 30, 1996, to $9.2 million for the nine months ended
September 30, 1997, primarily due to a large hospital contract and an overall
increase in construction activity in Birmingham, Alabama.
Gross profit increased $0.6 million, or 92%, from $0.7 million for the nine
months ended September 30, 1996 to $1.3 million for the same period in 1997.
Gross margin increased to 14% in 1997 from 13% in 1996 over these periods. The
increase in gross profit and gross margin was attributable to higher demand and
lower than expected costs and certain fixed price contracts.
Selling, general and administrative expenses increased 126% from $0.4
million for the nine months ended September 30, 1996, to $0.8 million for the
nine months ended September 30, 1997. The increase was attributable to higher
bonus distributions under Haymaker's incentive compensation plan.
HAYMAKER LIQUIDITY AND CAPITAL RESOURCES
Haymaker generated $0.4 million of net cash for operating activities for
the nine months ended September 30, 1997. Net cash used in financing activities
of $0.1 million resulted from repayments of short-term borrowings.
Haymaker generated $0.7 million of net cash from operating activities for
the year ended September 30, 1997. Net cash used in investing activities was not
material in amount. Net cash used by financing activities of $0.5 million
resulted from distributions to owners of equity interests in consolidated
entities.
At December 31, 1997, Haymaker had working capital of $1.3 million and no
debt.
Haymaker used $0.1 million in net cash from operating activities for the
year ended December 31, 1996. Net cash used by financing activities was $0.4
million for the year ended December 31, 1996 primarily as a result of
distributions to owners of equity interests in consolidated entities.
At December 31, 1996 Haymaker had working capital of $1.3 million and no
debt.
44
<PAGE> 48
SUMMIT RESULTS OF OPERATIONS
Summit was founded in 1987 and is located in Houston, Texas. Summit's
revenues in its fiscal year ended March 31, 1997 were primarily from commercial
and industrial contracting. Summit has specialized expertise in data cable
design and installation and lighting design.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED SEPTEMBER 30, YEAR ENDED
MARCH 31, -------------------------------- SEPTEMBER 30,
1997 1996 1997 1997
------------- -------------- -------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues...................... $10,565 100% $5,735 100% $6,165 100% $10,995 100%
Cost of services.............. 9,157 87 4,946 86 5,243 85 9,454 86
------- --- ------ --- ------ --- ------- ---
Gross profit................ 1,408 13 789 14 922 15 1,541 14
Selling, general and
administrative expenses..... 1,340 12 699 12 822 13 1,463 13
------- --- ------ --- ------ --- ------- ---
Income (loss) from
operations............... $ 68 1% $ 90 2% $ 100 4% $ 78 1%
======= === ====== === ====== === ======= ===
<CAPTION>
THREE MONTHS ENDED DECEMBER 31,
---------------------------------
1996 1997
-------------- ---------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues...................... $2,463 100% $ 2,878 100%
Cost of services.............. 2,182 89 2,403 84
------ --- ------- ---
Gross profit................ 281 11 475 16
Selling, general and
administrative expenses..... 333 13 355 12
------ --- ------- ---
Income (loss) from
operations............... $ (52) (2)% $ 120 4%
====== === ======= ===
</TABLE>
45
<PAGE> 49
Summit results for the three months ended December 31, 1997 compared to the
three months ended December 31, 1996
Revenues increased $0.4 million, or 16%, from $2.5 million for the three
months ended December 31, 1996, to $2.9 million for the three months ended
December 31, 1997, primarily due to an increase in larger commercial contracts.
Gross profit increased $0.2 million, or 67%, from $0.3 million for the
three months ended December 31, 1996, to $0.5 million for the three months ended
December 31, 1997. Gross margins increased to 16% from 11% over these periods.
The gross profit and gross margin increases in 1997 when compared to 1996 are
primarily attributable to the increase in larger commercial contracts.
Selling, general and administrative expenses increased 5% from $0.3 million
to $0.4 million due to increases in management bonuses, higher insurance and
business promotional expenses. As a percentage of revenues, selling, general and
administrative expenses decreased from 13% for the three months ended December
31, 1996, to 12% for the three months ended December 31, 1997.
Summit results for the year ended September 30, 1997 compared to the year
ended March 31, 1997
Revenues increased $0.4 million, or 4%, from $10.6 million for the year
ended March 31, 1997, to $11.0 million for the year ended September 30, 1997,
primarily due to an increase in larger commercial contracts.
Gross profit increased $0.1 million, or 9%, from $1.4 million for the year
ended March 31, 1997, to $1.5 million for the year ended September 30, 1997.
Gross margins increased to 14% from 13% over these periods. The gross profit and
gross margin increases in 1997 when compared to 1996 are primarily attributable
to the increase in larger commercial contracts.
Selling, general and administrative expenses increased 9% from $1.3 million
to $1.5 million due to increases in management bonuses, higher insurance and
business promotional expenses. As a percentage of revenues, selling, general and
administrative expenses remained constant.
Summit results for the six months ended September 30, 1997 compared to six
months ended September 30, 1996
Revenues increased $0.5 million, or 7%, from $5.7 million for the six
months ended September 30, 1996 to $6.2 million for the six months ended
September 30, 1997, primarily due to the addition of large contracts with short
construction periods.
Gross profit increased $0.1 million, or 17%, from $0.8 million for the six
months ended September 30, 1996 to $0.9 million for the six months ended
September 30, 1997. Gross margin increased from 14% to 15% from 1996 to 1997.
The increase in gross profit was primarily attributable to high profitability on
certain jobs with tight deadlines, partially offset by the write-off of a
receivable from a contractor which went bankrupt.
Selling, general and administrative expenses increased 18% from $0.7
million to $0.8 million. The increase was attributable to management bonuses,
higher insurance and business promotional expenses.
SUMMIT LIQUIDITY AND CAPITAL RESOURCES
Summit generated $0.1 million of net cash from operating activities for the
six months ended September 30, 1997. Net cash provided by investing activities
and net cash provided by financing activities were not material in amount for
the six months ended September 30, 1997.
Summit generated near break-even levels of net cash from operating
activities for the year ended September 30, 1997. Summit used $0.2 million of
net cash from investing activities for the year ended September 30, 1997
primarily for the purchase of service trucks. Net cash provided by financing
activities of $0.2 million resulted from borrowings of long-term debt.
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<PAGE> 50
At December 31, 1997, Summit had working capital of $0.7 million and total
debt of $1.2 million.
Summit generated near break-even levels of net cash from operating
activities for the year ended March 31, 1997. Net cash used in investing
activities was approximately $0.2 million primarily for the purchase of service
trucks. Net cash provided by financing activities was $0.2 million for the year
ended March 31, 1997 primarily as a result of long-term borrowings.
At March 31, 1997 Summit had working capital of $0.6 million and total debt
of $0.9 million.
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<PAGE> 51
THURMAN & O'CONNELL RESULTS OF OPERATIONS
Thurman & O'Connell was founded in 1988. It is headquartered in Louisville,
Kentucky, and operates primarily in Louisville and the surrounding areas.
Thurman & O'Connell's revenues in 1996 and 1997 were primarily from commercial
and industrial contracting, with an emphasis on institutional and commercial
properties.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED
---------------------------- -------------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
------------ ------------ -------------- -------------- -------------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues............. $4,729 100% $4,551 100% $3,741 100% $3,239 100% $4,049 100%
Cost of services..... 3,309 70 3,059 67 2,531 68 1,653 51 2,181 54
------ --- ------ --- ------ --- ------ --- ------ ---
Gross profit....... 1,420 30 1,492 33 1,210 32 1,586 49 1,868 46
Selling, general and
administrative
expenses........... 512 11 503 11 397 10 397 12 503 12
------ --- ------ --- ------ --- ------ --- ------ ---
Income from
operations...... $ 908 19% $ 989 22% $ 813 22% $1,189 37% $1,365 34%
====== === ====== === ====== === ====== === ====== ===
<CAPTION>
THREE MONTHS ENDED
DECEMBER 31,
------------------------
1996 1997
---------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Revenues............. $810 100% $959 100%
Cost of services..... 528 65 533 56
---- --- ---- ---
Gross profit....... 282 35 426 44
Selling, general and
administrative
expenses........... 106 13 128 13
---- --- ---- ---
Income from
operations...... $176 22% $298 31%
==== === ==== ===
</TABLE>
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<PAGE> 52
Thurman & O'Connell results for the three months ended December 31, 1997
compared to the three months ended December 31, 1996
Revenues increased $0.2 million, or 25%, from $0.8 million in the three
months ended December 31, 1996 to $1.0 million in the three months ended
December 31, 1997, primarily due to an increase in overall activity.
Gross profit increased $0.1 million, or 33%, from $0.3 million in the three
months ended December 31, 1996 to $0.4 million in the three months ended
December 31, 1997, primarily due to favorable pricing on certain projects which
Thurman & O'Connell shares in cost savings provided to its customers. Gross
margin increased from 35% in the three months ended December 31, 1996 to 44% in
the three months ended December 31, 1997 due to a large multi-year lower profit
margin hospital project that was completed in 1996.
Selling, general and administrative expenses did not change significantly
between the three months ended December 31, 1997 and the three months ended
December 31, 1996.
Thurman & O'Connell results for the year ended September 30, 1997 compared to
the year ended December 31, 1996
Revenues decreased $0.6 million, or 11%, from $4.6 million for the year
ended December 31, 1996, to $4.0 million for the year ended September 30 1997,
primarily due to the completion of a large multi-year hospital project in 1996.
Gross profit increased $0.4 million, or 25%, from $1.5 million for the year
ended December 31, 1996, to $1.9 million for the year ended September 30, 1997.
Gross margin increased to 46% from 33% over these periods. The gross profit and
gross margin increases in 1997 when compared to 1996 are attributable to
favorable pricing on certain overbudget projects for which Thurman & O'Connell
shared in the cost savings it provided to its customers.
Selling, general and administrative expenses did not change significantly
between the year ended September 30, 1997 and the year ended December 31, 1996.
Thurman & O'Connell results for the nine months ended September 30, 1997
compared to nine months ended September 30, 1996
Revenues decreased $0.5 million, or 13%, from $3.7 million in the nine
months ended September 30, 1996 to $3.2 million in the nine months ended
September 30, 1997, primarily due to the completion of a large multi-year
hospital project in 1996.
Gross profit increased $0.4 million, or 31%, from $1.2 million in the nine
months ended September 30, 1996 to $1.6 million in the nine months ended
September 30, 1997, primarily due to favorable pricing on certain overbudget
projects for which Thurman & O'Connell shares in the cost savings provided to
its customers. Gross margin increased from 32% in the nine months ended
September 30, 1996 to 49% in the nine months ended September 30, 1997 due to a
large multi-year lower profit margin hospital project that was completed in
1996.
Selling, general and administrative expenses did not change significantly
between the nine months ended September 30, 1997 and the nine months ended
September 30, 1996.
Thurman & O'Connell results for the year ended December 31, 1996 compared to
the year ended December 31, 1995
Revenues decreased $0.1 million, or 4%, from $4.7 million in 1995 to $4.6
million in 1996, primarily due to the completion of a large multi-year hospital
project in 1996.
Gross profit increased $0.1 million, or 5%, from $1.4 million in 1995 to
$1.5 million in 1996. Gross margin increased 3% from 30% in 1995 to 33% in 1996.
Selling, general and administrative expenses remained relatively constant
between 1995 and 1996.
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<PAGE> 53
THURMAN & O'CONNELL LIQUIDITY AND CAPITAL RESOURCES
Thurman & O'Connell generated $0.9 million of net cash for operating
activities for the nine months ended September 30, 1997. Net cash used in
investing activities was not material in amount. Net cash used by financing
activities of $1.2 million primarily resulted from distributions to
stockholders.
Thurman & O'Connell generated $0.9 million of net cash from operating
activities for the year ended September 30, 1997. Net cash provided and used in
investing activities was not material in amount. Net cash used in financing
activities was $1.2 million, primarily for distributions to stockholders.
At December 31, 1997, Thurman & O'Connell had working capital of $0.8
million and total debt of $0.1 million.
Thurman & O'Connell generated $1.3 million in net cash from operating
activities for the year ended December 31, 1996, primarily from earnings net of
investments in working capital. Net cash used by financing activities was $0.6
million for the year ended December 31, 1996 primarily as a result of
distributions to stockholders and payments on debt.
At December 31, 1996 Thurman & O'Connell had working capital of $1.3
million and total debt of $0.1 million.
RODGERS RESULTS OF OPERATIONS
Rodgers was founded in 1977. It is headquartered in Everett, Washington,
and operates in Everett and the north Puget Sound area. Rodgers revenues are
primarily from electrical maintenance and service work and commercial and
industrial contracting.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED DECEMBER 31,
SEPTEMBER 30, -----------------------------
1997 1996 1997
--------------- ----------- --------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Revenues................................... $3,325 100% $548 100% $1,175 100%
Cost of services........................... 1,621 49 293 53 779 66
------ --- ---- --- ------ ---
Gross profit............................. 1,704 51 255 47 396 34
Selling, general and administrative
expenses................................. 1,238 37 154 28 196 17%
------ --- ---- --- ------ ---
Income from operations................... $ 466 14% $101 19% $200 17%
====== === ==== === ====== ===
</TABLE>
Rodgers results for the three months ended December 31, 1997 compared to three
months ended December 31, 1996
Revenues increased $0.7 million, or 140%, from $0.5 million in the three
months ended December 31, 1996 to $1.2 million in the three months ended
December 31, 1997, primarily due to an increase in commercial construction
contracts.
Gross profit increased $0.1 million or 33%, from $0.3 million in the three
months ended December 31, 1996 to $0.4 million in the three months ended
December 31, 1997, primarily due to the increase in revenues. Gross margin
decreased from 47% in the three months ended December 31, 1996 to 34% in the
three months ended December 31, 1997 due to the change in mix to a higher
component of lower margin commercial contracting revenues.
Selling, general and administrative expenses did not change significantly
between the three months ended December 31, 1997 and the three months ended
December 31, 1996.
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<PAGE> 54
RODGERS LIQUIDITY AND CAPITAL RESOURCES
Rodgers used $0.5 million of net cash from operating activities for the
three months ended December 31, 1997. Net cash provided by investing activities
was not material in amount. Net cash used in financing activities was not
material in amount.
At December 31, 1997, Rodgers had working capital of $0.9 million and total
debt of $0.1 million.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's results of operations from residential construction are
seasonal, depending on weather trends, with typically higher revenues generated
during the spring and summer and lower revenues during the fall and winter. The
commercial and industrial aspect of the Company's business is less subject to
seasonal trends, as this work is performed inside structures protected from the
weather. The Company's service business is not affected by seasonality. In
addition, the construction industry has historically been highly cyclical. The
Company's volume of business may be adversely affected by declines in
construction projects resulting from adverse regional or national economic
conditions. Quarterly results may also be materially affected by the timing of
acquisitions and the timing and magnitude of acquisition assimilation costs.
Accordingly, operating results for any fiscal period are not necessarily
indicative of results that may be achieved for any subsequent fiscal period.
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<PAGE> 55
BUSINESS
IES was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services focusing
primarily on the commercial, industrial and residential markets. On January 30,
1998, concurrent with the closing of the Offering, IES acquired 15 electrical
contracting and maintenance service companies and a related supply company with
pro forma combined revenues of $312.7 million and $86.3 million for the year
ended September 30, 1997 and the three months ended December 31, 1997,
respectively, making the Company one of the largest providers of electrical
contracting and maintenance services in the United States. Of such fiscal 1997
pro forma revenues, approximately 63% was derived from commercial and industrial
contracting, approximately 25% was derived from residential contracting and
approximately 12% was derived from electrical maintenance work. Combined
revenues of the Founding Companies, which have been in business an average of 18
years, increased at an average compound annual growth rate of approximately 23%
from fiscal 1994 through 1996.
The Company offers a broad range of electrical contracting services,
including design and installation for both new and renovation projects in the
commercial, industrial and residential markets. The Company also offers
long-term and per-call maintenance services, which generally provide recurring
revenues that are relatively independent of levels of construction activity.
Typically, the Founding Companies specialize in either commercial and industrial
or residential work, although a few of the Founding Companies have both
commercial and industrial and residential operations.
In certain markets the Company offers design-and-build expertise and
specialized services, which typically require specific skills and equipment and
provide higher margins than general electrical contracting and maintenance
services. In a design-and-build project, the electrical contractor applies
in-house electrical engineering expertise to design the most cost-effective
electrical system for a given structure and purpose, taking into account local
code requirements. Specialized services offered by the Company include
installations of wiring or cabling for the following: data cabling for computer
networks; fiber optic cable systems; telecommunications systems; energy
management systems which control the amount of power used in facilities; fire
alarm and security systems; cellular phone transmission sites; "smart houses"
that integrate computer, energy management, security, safety, comfort and
telecommunication systems; lightning protection systems; clean rooms for
fabrication of microprocessors and similar devices; computer rooms; back-up
electrical systems and uninterruptible power supplies; high voltage distribution
and traffic signal systems.
INDUSTRY OVERVIEW
General. Virtually all construction and renovation in the United States
generates demand for electrical contracting services. Depending upon the exact
scope of work, electrical work generally accounts for approximately 8% to 12% of
the total construction cost of the Company's commercial and industrial projects
and 5% to 10% of the total construction cost of the Company's residential
projects. In recent years, the Founding Companies have experienced a growing
demand for electrical contracting services per project due to increased
electrical code requirements, demand for additional electrical capacity,
including increased capacity for computer systems, additional data cabling
requirements and the construction of "smart houses" with integrated systems.
The overall electrical contracting industry, including commercial,
industrial and residential markets, was estimated by the U.S. Census to have
generated annual revenues in excess of $40 billion in 1992, the most recent
available U.S. Census data. These Census data indicate that the electrical
contracting industry is highly fragmented with more than 54,000 companies, most
of which are small, owner-operated businesses, performing various types of
electrical work. The Company believes there are significant opportunities for a
well-capitalized national company to provide comprehensive electrical
contracting and maintenance services and that the fragmented nature of the
electrical contracting industry will provide significant opportunities to
consolidate commercial and industrial and residential electrical contracting and
maintenance service businesses.
Commercial and Industrial Market. Commercial and industrial consumers of
electrical contracting and maintenance services include general contractors;
developers; consulting engineers; architects; owners and
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<PAGE> 56
managers of large retail establishments, office buildings, apartments and
condominiums; theaters and restaurants; hotels and casinos; manufacturing and
processing facilities; arenas and convention centers; hospitals; school
districts; military and other government agencies; airports; prisons and car
lots. High-rise residential projects are viewed as commercial rather than
residential projects because the electrical wiring methods and field skills
require similar techniques. Commercial and industrial electrical construction is
most often performed by a subcontractor for a general contractor, although an
electrical contractor may also perform services directly as a prime contractor.
Generally, contracts are obtained through a competitive bid process or on
negotiated terms through ongoing customer relationships.
Typically, electrical contracting services for the industrial and
commercial market involve wiring a structure to specifications set by the
customer, increasingly with design-and-build engineering expertise provided by
the electrical contractor. The normal commercial or industrial job is wired
through pipe or conduit, which is installed through metal or concrete
structures. Some commercial and industrial contractors prefabricate certain
components offsite, at the contractor's office or at the facilities of a
subcontractor or manufacturer, and these items are transported to the job site
ready to be installed.
From fiscal 1994 through 1996, the Founding Companies' revenues from
electrical contracting for commercial and industrial customers have grown at an
average compound annual rate of approximately 23% per year. The Company believes
that growth in the commercial and industrial market reflects a number of
factors, including (i) levels of construction and renovation activity; (ii)
regulations imposed by electric codes, which establish minimum power and wiring
requirements; (iii) safety codes mandating additional installation of smoke
detectors and the use of ground fault circuit protection devices in more
locations; (iv) revised national energy standards that dictate the use of more
energy-efficient lighting fixtures and other equipment; (v) continuing demand to
build out lease spaces in office buildings and to reconfigure space for new
tenants; (vi) increases in use of electrical power, creating needs for increased
capacity and outlets, as well as data cabling and fiber optics and (vii)
requirements of building owners and developers to facilitate marketing their
properties to tenants and buyers by installing electrical capacity in excess of
minimum code requirements.
Residential Market. Contracting work for the residential market consists
primarily of electrical installations in new single family and low-rise
multifamily residence construction for customers such as large homebuilders and
apartment developers. The Company also provides maintenance services to these
customers as well as to individual property owners in some locations. The
typical residential electrical wiring job is done with plastic-jacketed wiring
installed through wood studs. As in the commercial and industrial market, the
opportunities for design-and-build projects have grown recently for residential
contractors. The residential market, with its repetitive floor plans, lends
itself to prefabrication techniques. The use of prefabricated components
increases productivity by reducing construction time, labor costs and skill
requirements. The residential market is primarily dependent on the number of
single family and multifamily home starts, which are in turn affected by
interest rates, tax considerations and general economic conditions. Competitive
factors particularly important in the residential market include a contractor's
ability to build relationships with customers such as large homebuilders and
apartment developers by providing services in diverse geographic markets as
construction activity shifts to new locations. The Founding Companies'
residential electrical contracting revenues have grown at an average compound
annual rate of approximately 22% from fiscal 1994 through 1996.
Residential electrical contractors with specialized expertise and the
necessary licenses are in a position to meet market demand for increasingly
complex residential electrical systems. For example, some newly constructed
homes have been designed as smart houses with integrated computer-controlled
systems wired in during construction. In addition, more stringent building and
fire codes have resulted in more complex wiring requirements for smoke detectors
and alarms.
STRATEGY
The Company believes that its size, geographical diversity of operations,
industry relationships, expertise in specialized markets, number of licensed
electricians and access to design technology give the Company significant
competitive advantages in the electrical contracting and maintenance services
industry. Through
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<PAGE> 57
increased size, the Company believes it has greater ability to compete for
larger jobs that require greater technical expertise, personnel availability and
bonding capacity, to more effectively allocate and share resources in serving
customers in each of its markets and to attract, train and retain qualified
electricians. The Company also believes that increased size provides increased
efficiency in materials purchasing, computer system development, employee
benefits, bonding, insurance and financing. The Company believes that the
diversity of its operations diminishes the effects of regional and market
downturns, offers opportunities to pursue growth in its existing markets and
creates a base of expertise to expand into new markets and serve new customers.
The Company plans to leverage its experienced management and extensive
relationships within the electrical contracting industry to increase its
revenues and reduce its cost infrastructure through internal growth as well as
the acquisition of additional electrical contracting businesses. The Company's
management includes a Chief Executive Officer and two Chief Operating Officers,
each with 25 years or more of experience in the electrical contracting industry.
The Company has extensive business relationships within the industry, in part
through Founding Companies that are members of the IEC. The IEC is the second
largest electrical trade organization in the U.S. and has nearly 3,000
contracting firms as members. The Company's Chief Executive Officer is a past
president of the IEC, and two founders are members of the executive committee of
the IEC. The IEC sponsors forum groups, which are discussion groups of members
of the IEC that foster the sharing of best business practices. The Founding
Companies are members of the IEC and other trade organizations, and the Company
intends to expand the practice of sharing best practices among the Founding
Companies and with future acquisitions.
The Company's goal is to become a leading national provider of electrical
services by improving its operations, expanding its business and markets through
internal growth and pursuing an aggressive acquisition strategy.
Operating Strategy. The Company believes there are significant
opportunities to increase revenues and profitability of the Founding Companies
and subsequently acquired businesses. The key elements of the Company's
operating strategy are:
Share Information, Technical Capabilities and Best Practices. The
Company believes it will be able to expand the services it offers in its
local markets by leveraging the specialized technical and marketing
strengths of individual Founding Companies. The Company will identify and
share best practices that can be successfully implemented throughout its
operations. The Company intends to use the computer-aided-design technology
and expertise of certain of the Founding Companies to bid for more
design-and-build projects and to assist customers in value engineering and
creating project documents. The Company believes that its increased size,
capital and workforce will permit it to pursue projects that require
greater design and performance capabilities and the ability to meet
accelerated timetables.
Expand Scope of Maintenance and Specialized Services. The Company
intends to further develop its long-term and per call maintenance service
operations, which generally realize higher gross margins and provide
recurring revenues that are relatively independent of levels of
construction activity. The Company also believes that certain specialized
businesses currently offered by only a few of the Founding Companies can be
expanded throughout the Company and in some cases can provide higher
margins. Through sharing of expertise and specialized licenses and the
ability to demonstrate a safety record in specialized markets served by the
Founding Companies, the Company intends to expand its presence and
profitability in markets where it previously relied on subcontractors.
Establish National Market Coverage. The Company believes that the
growth of many of the Founding Companies has been restricted due to the
geographic limitations of existing operations and that the Company's broad
geographic coverage will increase internal growth opportunities. The
Company intends to leverage its geographic diversity to bid for additional
business from existing customers that operate on a regional and national
basis, such as developers, contractors, homebuilders and owners of national
chains. The Company believes that significant demand exists from such
companies to utilize the services of a single electrical contracting and
maintenance service provider and existing local and regional relationships
can be expanded as the Company develops a nationwide network.
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<PAGE> 58
Operate on Decentralized Basis. The Company believes that, while
maintaining strong operating and financial controls, a decentralized
operating structure will retain the entrepreneurial spirit present in each
of the Founding Companies. The Company also will be structured to allow it
to capitalize on the considerable local and regional market knowledge and
customer relationships possessed by each Founding Company, as well as
companies that may be acquired in the future. By maintaining a local and
regional focus in each of its markets, the Company believes it will be able
to build relationships with general contractors and other customers,
address design preferences and code requirements, respond quickly to
customer demands for higher-margin renovation and upgrade projects and
adjust to local conditions.
Attract and Retain Quality Employees. The Company believes that the
ability to attract and retain qualified electricians is a critical
competitive factor and that the Acquisitions and the Offerings will provide
competitive advantages in this regard. The Company intends to attract and
develop skilled employees by extending active recruiting and training
programs, offering stock-based compensation for key employees, and offering
expanded career paths and more stable income through the larger public
company. The Company believes that this ability will allow it to increase
efficiency and pursue additional customer relationships.
Achieve Operating Efficiencies. Certain administrative functions will
be centralized following the Offerings. In addition, by combining
overlapping operations of certain of the Founding Companies, the Company
expects to realize savings in overhead and other expenses. The Company
intends to use its increased purchasing power to gain volume discounts in
areas such as electrical materials, vehicles, advertising, bonding,
employee benefits and insurance. The Company will seek to realize cost
savings and other benefits by the sharing of purchasing, pricing, bidding
and other business practices and the sharing of licenses. The Company
intends to further develop and extend the use of computer systems to
facilitate communication among the Founding Companies. At some locations,
the larger combined workforce will provide additional staffing flexibility.
Acquisition Strategy. The Company believes that, due to the highly
fragmented nature of the electrical contracting and maintenance services
industry, it has significant opportunities to pursue its acquisition strategy.
The Company intends to focus on acquiring companies with management philosophies
based on an entrepreneurial attitude as well as a willingness to learn and share
improved business practices through open communications. The Company believes
that many electrical contracting and maintenance service businesses that lack
the capital necessary to expand operations will become acquisition candidates.
For these acquisition candidates, the Company will provide (i) information on
best practices, (ii) expertise to expand in specialized markets, (iii) the
opportunity to focus on customers rather than administration, (iv) national name
recognition, (v) increased liquidity and (vi) the opportunity for a continued
role in management. The Founding Companies participate in professional
associations such as the IEC and Associated Builders and Contractors, and the
Company intends to continue these relationships, in part to assist in
identifying attractive acquisition candidates. Other key elements of the
Company's acquisition strategy are:
Enter New Geographic Markets. The Company will pursue acquisitions
that are located in new geographic markets, are financially stable and have
the customer base necessary to integrate with or complement its existing
business. The Company also expects that increasing its geographic diversity
will allow it to better serve an increasingly nationwide base of customers
and further reduce the impact on the Company of local and regional economic
cycles, as well as weather-related or seasonal variations in business.
Expand Within Existing Markets. Once the Company has entered a market,
it will seek to acquire other well-established electrical contracting and
maintenance businesses operating within that region, including "tuck-in"
acquisitions of smaller companies. The Company believes that tuck-in
acquisitions afford the opportunity to improve its overall cost structure
through the integration of such acquisitions into existing operations as
well as to increase revenues through access to additional specialized
markets, such as heavy industrial markets. Despite the integration
opportunities afforded by such tuck-in
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<PAGE> 59
acquisitions, the Company intends to maintain existing business names and
identities to retain goodwill for marketing purposes.
COMPANY OPERATIONS
The Company offers a broad range of electrical contracting services,
including installation and design, for both new and renovation projects in the
commercial, industrial and residential markets. The Company also offers
long-term and per call maintenance services, which generally provide recurring
revenues that are relatively independent of levels of construction activity.
In certain markets the Company offers design-and-build expertise and
specialized services, which typically require specific skills and equipment and
provide higher margins than general electrical contracting and maintenance
services. The Company also acts as a subcontractor for a variety of national,
regional and local builders in the installation of electrical and other systems.
Commercial and Industrial. New commercial and industrial work begins with
either a design request or engineer's plans from the owner or general
contractor. Initial meetings with the parties allow the contractor to prepare
preliminary and then more detailed design specifications, engineering drawings
and cost estimates. Once a project is awarded, it is conducted in scheduled
phases, and progress billings are rendered to the owner for payment, less a
retainage of 5% to 10% of the construction cost of the project. Actual field
work (ordering of equipment and materials, fabrication or assembly of certain
components, delivery of materials and components to the job site, scheduling of
work crews and inspection and quality control) is coordinated during these
phases. The Company generally provides the materials to be installed as a part
of these contracts, which vary significantly in size from a few hundred dollars
to several million dollars and vary in duration from less than a day to more
than a year.
Residential. New residential installations begin with a builder providing
architectural or mechanical drawings for the residences within the tract being
developed. The Company typically submits a bid or contract proposal for the
work. Company personnel analyze the plans and drawings and estimate the
equipment, materials and parts and the direct and supervisory labor required for
the project. The Company delivers a written bid or negotiates an arrangement for
the job. The installation work is coordinated by the Company's field supervisors
along with the builder's personnel. Payments for the project are generally
obtained within 30 days, at which time any mechanics' and materialmen's liens
securing such payments are released. Interim payments are often obtained to
cover labor and materials costs on larger projects.
Maintenance Services. The Company's maintenance services are supplied on a
long-term and per call basis. The Company's long-term maintenance services are
provided through service contracts that require the customer to pay an annual or
semiannual fee for periodic diagnostic services at a specific discount from
standard prices for repair and replacement services. The Company's per call
maintenance services are initiated when a customer requests emergency repair
service or the Company calls the client to schedule periodic maintenance work.
Service technicians are scheduled for the call or routed to the customer's
residence or business by the dispatcher. Service personnel work out of the
Company's service vehicles, which carry an inventory of equipment, tools, parts
and supplies needed to complete the typical variety of jobs. The technician
assigned to a service call travels to the residence or business, interviews the
customer, diagnoses the problem, prepares and discusses a price quotation,
performs the work and often collects payment from the customer. Most work is
warrantied for one year. During the year ended September 30, 1997, the Company
had $35.8 million in revenues for periodic maintenance services provided under
existing service contracts and for emergency or other routine service calls.
Major Customers. The Company has a diverse customer base, with no single
customer accounting for more than 5% of the Company's pro forma combined
revenues for the year ended September 30, 1997. As a result of emphasis on
quality and worker reliability, management and a dedicated sales and work force
at the Founding Companies have been responsible for developing and maintaining
successful relationships with key customers. Customers of the Founding Companies
generally include general contractors; developers; consulting engineers;
architects; owners and managers of large retail establishments, office
buildings, apartments and condominiums, theaters and restaurants; hotels and
casinos; manufacturing and processing facilities; arenas
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<PAGE> 60
and convention centers; hospitals; school districts; military and other
government agencies; airports; prisons and car lots. The Company intends to
continue its emphasis on developing and maintaining relationships with its
customers by providing superior, high-quality service.
Employee Screening, Training and Development. The Company is committed to
providing the highest level of customer service through the development of a
highly trained workforce. Employees are encouraged to complete a progressive
training program to advance their technical competencies and to ensure that they
understand and follow the applicable codes, the Company's safety practices and
other internal policies. The Company supports and funds continuing education for
its employees, as well as apprenticeship training for its technicians under the
Bureau of Apprenticeship and Training of the Department of Labor and similar
state agencies. Employees who train as apprentices for four years may seek to
become journeymen electricians and, after additional years of experience, master
electricians. The Company pays progressive increases in compensation to
employees who acquire such additional training, and more highly trained
employees serve as foremen, estimators and project managers. The Company's
master electricians are licensed in one or more cities or other jurisdictions in
order to obtain the permits required in the Company's business, and certain
master electricians have also obtained specialized licenses in areas such as
security systems and fire alarm installation. In some areas, licensing boards
have set continuing education requirements for maintenance of licenses. Because
of the lengthy and difficult training and licensing process for electricians,
the Company believes that the number, skills and licenses of its employees
constitute a competitive strength in the industry.
The Company actively recruits and screens applicants for its technical
positions and has established programs in some locations to recruit apprentice
technicians directly from high schools and vocational-technical schools. Prior
to employment, the Company will make an assessment of the technical competence
level of all potential new employees, confirm background references, conduct
random drug testing and check criminal and driving records.
Purchasing. As a result of economies of scale derived through the
Acquisitions and the Company's in-house supply operations, the Company believes
it will be able to purchase equipment, parts and supplies at discounts to
historical levels. In addition, as a result of the Company's size, it believes
it will also lower its costs for (i) the purchase or lease and maintenance of
vehicles; (ii) bonding, casualty and liability insurance; (iii) health insurance
and related benefits; (iv) retirement benefits administration; (v) office and
computer equipment; (vi) marketing and advertising; (vii) long distance services
and (viii) a variety of accounting, financial management and legal services.
Substantially all the equipment and component parts the Company sells or
installs are purchased from manufacturers and other outside suppliers. The
Company is not materially dependent on any of these outside sources.
MANAGEMENT INFORMATION AND CONTROLS
The Company intends to centralize its consolidated accounting and financial
reporting activities at its operational headquarters in Houston, Texas, while
basic accounting activities will be conducted at the operating level. The
Company believes that its current information systems hardware and software are
adequate to meet current needs for financial reporting, internal management
control and other necessary information and the needs of newly acquired
corporations.
PROPERTY AND EQUIPMENT
The Company operates a fleet of approximately 850 owned and leased service
trucks, vans and support vehicles. It believes these vehicles generally are
adequate for the Company's current operations.
At September 30, 1997, the Company maintained offices at 48 locations. All
of the Company's facilities are leased. The Company's corporate headquarters are
located in Houston, Texas. The paragraphs below summarize the Company's primary
office and operating facilities.
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The Company's primary warehouses, sales facilities and administrative
offices are as follows, subject to consolidation of certain facilities to
achieve operating efficiencies:
<TABLE>
<CAPTION>
APPROXIMATE
LOCATION SQUARE FT. TYPE
-------- ----------- ----
<S> <C> <C>
Birmingham, AL............................ 3,800 Offices
Phoenix, AZ............................... 6,900 Offices
Scottsdale, AZ............................ 6,400 Warehouse/Offices
Milford, CT............................... 900 Warehouse/Offices
Miami, FL................................. 19,000 Warehouse/Offices
Ocoee, FL................................. 12,800 Warehouse/Offices
Vero Beach, FL............................ 3,550 Warehouse/Offices
Aceworth, GA.............................. 5,256 Warehouse/Offices
Duluth, GA................................ 3,875 Warehouse/Offices
Valdosta, GA.............................. 11,084 Warehouse/Offices
Louisville, KY............................ 17,000 Warehouse/Offices
Monroe, NC................................ 4,500 Warehouse/Offices
Henderson, NV............................. 1,500 Warehouse/Offices
Cincinnati, OH............................ 6,000 Warehouse/Offices
Deadwood, SD.............................. 2,650 Warehouse/Offices
Huron, SD................................. 5,000 Warehouse/Offices/Showroom
Mitchell, SD.............................. 14,439 Warehouse/Offices
Mitchell, SD.............................. 8,000 Offices
Rapid City, SD............................ 5,830 Warehouse/Offices
Sioux Falls, SD........................... 5,000 Warehouse/Offices
Spearfish, SD............................. 1,825 Warehouse/Offices
Watertown, SD............................. 5,020 Warehouse/Offices
Austin, TX................................ 3,465 Warehouse/Offices
Austin, TX................................ 2,970 Warehouse/Offices
Austin, TX................................ 1,200 Warehouse/Offices
Dallas, TX................................ 32,424 Warehouse/Offices
Fort Worth, TX............................ 18,000 Warehouse/Offices
Grapevine, TX............................. 6,850 Warehouse/Offices
Houston, TX............................... 23,040 Warehouse/Offices
Houston, TX............................... 19,000 Warehouse
Houston, TX............................... 8,722 Warehouse/Offices
Katy, TX.................................. 5,000 Warehouse/Offices
Laredo, TX................................ 1,700 Warehouse/Offices
New Braunfels, TX......................... 3,164 Warehouse/Offices
Rowlett, TX............................... 4,000 Warehouse/Offices
Saginaw, TX............................... 37,000 Warehouse/Offices
San Antonio, TX........................... 16,692 Warehouse/Offices
San Antonio, TX........................... 13,492 Warehouse/Offices
San Antonio, TX........................... 6,535 Warehouse/Offices
San Antonio, TX........................... 5,588 Warehouse/Offices
San Antonio, TX........................... 5,000 Warehouse/Offices
Spring, TX................................ 5,500 Warehouse/Offices
Stafford, TX.............................. 15,000 Warehouse/Offices
Stafford, TX.............................. 10,500 Warehouse/Offices
Stafford, TX.............................. 3,500 Warehouse/Offices
Stafford, TX.............................. 3,500 Warehouse/Offices
Stafford, TX.............................. 1,661 Office
Webster, TX............................... 7,054 Warehouse/Offices
Everrett, WA.............................. 9,000 Lot
Everrett, WA.............................. 3,500 Warehouse/Offices
</TABLE>
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In addition to the facilities listed above, the Company may operate on a
short-term basis in other locations as may be required from time to time to
perform its contracts. The Company will lease its principal and administrative
offices in Houston, Texas and is currently in the process of obtaining office
space for this purpose.
The Company believes that its properties are generally adequate for its
present needs. Furthermore, the Company believes that suitable additional or
replacement space will be available as required.
COMPETITION
The electrical contracting industry is highly fragmented and competitive.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a limited geographic area. There are few public companies
focused on providing electrical contracting services. In the future, competition
may be encountered from new entrants, such as public utilities and other
companies attempting to consolidate electrical contracting service companies.
Competitive factors in the electrical contracting industry include (i) the
availability of qualified and licensed electricians, (ii) safety record, (iii)
cost structure, (iv) relationships with customers, (v) geographic diversity,
(vi) ability to reduce project costs, (vii) access to technology, (viii)
experience in specialized markets and (ix) ability to obtain bonding. See "Risk
Factors -- Competition."
REGULATIONS
The Company's operations are subject to various federal, state and local
laws and regulations, including (i) licensing requirements applicable to
electricians; (ii) building and electrical codes; (iii) regulations relating to
consumer protection, including those governing residential service agreements
and (iv) regulations relating to worker safety and protection of the
environment. The Company believes it has all required licenses to conduct its
operations and is in substantial compliance with applicable regulatory
requirements. Failure of the Company to comply with applicable regulations could
result in substantial fines or revocation of the Company's operating licenses.
Many state and local regulations governing electricians require permits and
licenses to be held by individuals. In some cases, a required permit or license
held by a single individual may be sufficient to authorize specified activities
for all the Company's electricians who work in the state or county that issued
the permit or license. The Company intends to implement a policy to ensure that,
where possible, any such permits or licenses that may be material to the
Company's operations in a particular geographic region are held by at least two
Company employees within that region.
LITIGATION
Each of the Founding Companies has, from time to time, been a party to
litigation arising in the normal course of its business, most of which involves
claims for personal injury or property damage incurred in connection with its
operations. Management believes that none of these actions will have a material
adverse effect on the financial condition or results of operations of the
Company.
EMPLOYEES
At September 30, 1997, the Company had approximately 3,550 employees. The
Company is not a party to any collective bargaining agreements. The Company
believes that its relationship with its employees is satisfactory.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors, officers and certain key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
C. Byron Snyder......................... 49 Chairman of the Board of Directors
Jon Pollock............................. 51 President, Chief Executive Officer and Director
Jerry Mills............................. 57 Senior Vice President and Chief Operating
Officer -- Commercial and Industrial and Director
Ben L. Mueller.......................... 50 Senior Vice President and Chief Operating
Officer --
Residential and Director
Jim P. Wise............................. 54 Senior Vice President and Chief Financial Officer
John F. Wombwell........................ 36 Senior Vice President, General Counsel and
Secretary
John S. Stanfield....................... 42 Vice President -- Mergers and Acquisitions
D. Merril Cummings...................... 37 Vice President -- Mergers and Acquisitions
J. Paul Withrow......................... 32 Vice President and Chief Accounting Officer
Richard Muth............................ 50 President of Muth Electric, Inc., and Director
Alan R. Sielbeck........................ 44 Director
Robert Stalvey.......................... 47 Vice President of Ace Electric, Inc., and Director
Richard L. Tucker....................... 62 Director
Bob Weik................................ 62 President of BW Consolidated, Inc., and Director
Thomas E. White, Jr..................... 53 Director
</TABLE>
Directors are elected at each annual meeting of stockholders. All officers
serve at the discretion of the Board of Directors, subject to terms of their
employment agreement terms. See "-- Employment Agreements."
C. Byron Snyder has been Chairman of the Board of Directors of the Company
since its inception. Mr. Snyder is owner and President of Relco Refrigeration
Co., a distributor of refrigerator equipment, which he acquired in 1992. Prior
to 1992, Mr. Snyder was the owner and Chief Executive Officer of Southwestern
Graphics International, Inc., a diversified holding company which owned Brandt &
Lawson Printing Co., a Houston-based general printing business, and Acco Waste
Paper Company, an independent recycling business. Brandt & Lawson Printing Co.
was sold to Hart Graphics in 1989, and Acco Waste Paper Company was sold to
Browning-Ferris Industries in 1991. Mr. Snyder is a director of Carriage
Services, Inc., a publicly held death care company.
Jon Pollock has been President, Chief Executive Officer and a director of
the Company since consummation of the Offering. Mr. Pollock has been the
president of Pollock Electric Inc., one of the Founding Companies, since he
founded that company in 1983. Mr. Pollock is a Registered Professional Engineer
in Texas and several other states and holds Master Electrician licenses from 50
different jurisdictions. Mr. Pollock received a bachelor of science in
electrical engineering from Washington University. Mr. Pollock is past National
President of the Independent Electrical Contractors Association and received the
IEC Electrical Man of the Year award in 1996. As National President of the IEC,
Mr. Pollock was responsible for overseeing the IEC's activities relating to the
development and execution of apprenticeship and safety training programs,
industry lobbying activities and the development of national electrical code
standards.
Jerry Mills has been Senior Vice President and Chief Operating
Officer -- Commercial and Industrial and a director of the Company since
consummation of the Offering. Mr. Mills has been the President of Mills
Electrical Contractors, Inc., one of the founding companies, since he began that
company in 1972. Mr. Mills is a past board member of the Independent Electrical
Contractors, the Associated Builders and Contractors, the
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Associated General Contractors and the Richardson Electrical Board. Prior to
1972, Mr. Mills was an officer and part owner of Koegel Cash Consulting
Engineers.
Ben L. Mueller has been Senior Vice President, Chief Operating
Officer -- Residential and a director of the Company since consummation of the
Offering. Mr. Mueller has been the Executive Vice President of Houston-Stafford
since 1993 and has served as vice president of Houston-Stafford since 1975. Mr.
Mueller is a past member of the board of the IEC, Houston Chapter, and has
served on the Electrical Board for the City of Sugar Land, Texas.
Jim P. Wise joined the Company in September 1997 as Senior Vice President
and Chief Financial Officer. From September 1994 to September 1997, he was Vice
President -- Finance and Chief Financial Officer at Sterling Chemicals, Inc., a
publicly held manufacturer of commodity petrochemicals and pulp chemicals. From
July 1994 to September 1994, he was Senior Vice President and Chief Financial
Officer of U.S. Delivery Systems, Inc., a delivery service consolidator. From
September 1991 to July 1994, he was Chairman and Chief Executive Officer of
Neostar Group, Inc., a private investment banking and financial advisory firm.
Mr. Wise was employed by Transco Energy Company as Executive Vice President,
Chief Financial Officer and was a member of the Board of Directors from November
1982 until September 1991.
John F. Wombwell has been Senior Vice President, General Counsel and
Secretary of the Company since consummation of the Offering. Mr. Wombwell was a
partner at Andrews & Kurth L.L.P., where he practiced law in the area of
corporate and securities matters for more than five years.
John S. Stanfield joined the Company as Vice President -- Mergers and
Acquisitions in October 1997. From March 1996 to October 1997, he served as
Controller of Pollock Electric, Inc., one of the Founding Companies. From April
1993 through March 1996, Mr. Stanfield was an independent financial consultant,
specializing in acquisition, corporate reorganization, and accounting and
financial control services. From 1988 through 1993, Mr. Stanfield served as
Chief Financial Officer for companies in the distribution and manufacturing
industries. Mr. Stanfield was employed in various positions by Arthur Andersen
LLP from 1978 through 1988. Mr. Stanfield is a Certified Public Accountant.
D. Merril Cummings joined the Company as Vice President -- Mergers and
Acquisitions in October 1997. Mr. Cummings has served as a consultant to the
Company since its inception in June 1997. From February 1997 through June 1997
he served as a consultant to C. Byron Snyder and his privately owned
corporations. From 1992 through 1996, Mr. Cummings served as Vice President and
Chief Financial Officer for J A Interests, Inc., a private asset management
company, and its commonly owned affiliates, including Southern Jet Management,
Inc., a general aviation services and charter company. From 1982 through January
1992, Mr. Cummings held various positions with Arthur Andersen LLP. Mr. Cummings
is a Certified Public Accountant.
J. Paul Withrow has served as Vice President and Chief Accounting Officer
of the Company since October 1997. From 1987 to 1997, Mr. Withrow held various
positions with Arthur Andersen LLP. Mr. Withrow is a Certified Public
Accountant.
Richard Muth has been a director of the Company since consummation of the
Offering. Mr. Muth founded Muth Electric, Inc. in 1970 and has been the owner
and president since that time. Mr. Muth served on the South Dakota State
Electrical Commission from 1980 to 1991 and the Associated General Contractors
Associate Division Board. Mr. Muth also received the South Dakota Electrical
Council "Man of the Year" award in 1993. Mr. Muth holds electrical contractors'
licenses in South Dakota, Minnesota, Nebraska, Wyoming and Montana.
Alan R. Sielbeck has been a director of the Company since consummation of
the Offering. Mr. Sielbeck has served as Chairman of the Board and Chief
Executive Officer of Service Experts, Inc., a publicly traded heating,
ventilation and air conditioning service company, since its inception in March
1996. Mr. Sielbeck has served as Chairman of the Board and President of AC
Service and Installation Co. Inc. and Donelson Air Conditioning Company, Inc.
since 1990 and 1991, respectively. From 1985 to 1990, Mr. Sielbeck served as
President of RC Mathews Contractor, Inc., a commercial building general
contractor, and Chief Financial Officer of RCM Interests, Inc., a commercial
real estate development company.
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Robert Stalvey has been a director of the Company since consummation of the
Offering. Mr. Stalvey has served as Vice President of Ace since 1976. Mr.
Stalvey will continue to serve in these positions following the consummation of
the Offerings.
Richard L. Tucker has been a director of the Company since consummation of
the Offering. Dr. Tucker holds the Joe C. Walter Jr. Chair in Engineering, is
Director of the Construction Industry Institute, and is Director of the Sloan
Program for the Construction Industry at the University of Texas at Austin. Dr.
Tucker has been on the faculty at the University of Texas since 1976. Dr. Tucker
is a registered engineer.
Bob Weik has been a director of the Company since consummation of the
Offering. Mr. Weik has served as President, Treasurer and a director of the
Bexar-Calhoun companies since their inception in 1958. Mr. Weik will continue to
serve in those positions following the consummation of the Offerings.
Thomas E. White, Jr. has been a director of the Company since consummation
of the Offering. Mr. White has served as Chairman and Chief Executive Officer of
Enron Ventures Corp., a subsidiary of Enron Corp., since December 1996. Mr.
White served as Chairman and Chief Executive Officer of Enron Operations Corp.
from June 1993 until December 1996. Mr. White served as Chairman and Chief
Executive Officer of Enron Power Corp. from June 1991 until June 1993. Mr. White
joined Enron Corp. in 1990 as Vice President of Operations for Enron Power
Corp., after a twenty-three year career in the United States Army, from which he
retired in July 1990 with the rank of Brigadier General.
The Board of Directors has established an Audit Committee and a
Compensation Committee. The Audit Committee recommends the appointment of
auditors and oversees the accounting and audit functions of the Company. The
Compensation Committee will determines the salaries and bonuses of executive
officers and administers the 1997 Stock Plan. Messrs. Seilbeck, Tucker and White
serve as members of the Company's Compensation Committee and Audit Committee.
Any future material transactions, including the issuance of securities other
than through the 1997 Stock Plan and the 1997 Directors Stock Plan, between the
Company and its management and affiliates will be subject to prior review and
approval by the members of the Board of Directors without an interest in such
transaction.
The Board of Directors is divided into three classes of directors, with
directors serving staggered three-year terms, expiring at the annual meeting of
stockholders following the 1998 fiscal year, 1999 fiscal year and 2000 fiscal
year, respectively. At each annual meeting of stockholders, one class of
directors will be elected for a full term of three years to succeed that class
of directors whose terms are expiring.
C. Byron Snyder and trusts for the benefit of his children, as the holders
of all of the outstanding Restricted Common Stock, are be entitled to elect one
member of the Company's Board of Directors and to one-half of one vote for each
share held on all other matters. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors. Only the holders of the
Restricted Common Stock may remove the director such holders are entitled to
elect. See "Description of Capital Stock."
DIRECTOR COMPENSATION
Directors who are employees of the Company or a subsidiary do not receive
additional compensation for serving as directors. Each director who is not an
employee of the Company or a subsidiary will receive a fee of $2,000 for
attendance at each Board of Directors meeting and $1,000 for each committee
meeting (unless held on the same day as a Board of Directors meeting). Directors
of the Company will be reimbursed for reasonable out-of-pocket expenses incurred
in attending meetings of the Board of Directors or committees thereof, and for
other expenses reasonably incurred in their capacity as directors of the
Company. Each non-employee director will receive stock options to purchase 5,000
shares of Common Stock upon initial election to the Board of Directors and
thereafter an annual grant of 5,000 options on each September 30 on which the
non-employee director continues to serve. See "-- 1997 Directors Stock Plan."
EXECUTIVE COMPENSATION
The Company was incorporated in June 1997 and, prior to the Offering, has
not conducted any operations other than activities related to the Acquisitions
and the Offering. During 1998 the annualized base salaries of
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its most highly compensated executive officers will be: Mr. Pollock -- $225,000,
Mr. Mills -- $200,000, Mr. Mueller -- $200,000, Mr. Wise -- $190,000 and Mr.
Wombwell -- $190,000.
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each executive
officer of the Company which prohibits such officer from disclosing the
Company's confidential information and trade secrets and generally restricts
these individuals from competing with the Company for a period of two years
after the date of the termination of employment with the Company. Each of the
agreements has an initial term of five years and provides for annual extensions
at the end of its initial term, subject to the parties' mutual agreement, and is
terminable by the Company for "cause" upon ten days' written notice and without
"cause" (i) by the employee upon thirty days' written notice or (ii) by the
Company upon approval of 51% of the Board of Directors. The employment
agreements provide that the Company shall pay each executive officer the annual
salary set forth above under "-- Executive Compensation," which salary may be
increased by the Board of Directors. Such agreements also provide that each
executive officer will be reimbursed for out-of-pocket business expenses and
shall be eligible to participate in all benefit plans and programs as are
maintained from time to time by the Company. All employment agreements provide
that if the officer's employment is terminated by the Company without "cause" or
is terminated by the officer for "good reason," the officer will be entitled to
receive a lump sum severance payment at the effective time of termination equal
to the base salary (at the rate then in effect) for the greater of (i) the time
period remaining under the term of the agreement or (ii) one year. In addition,
the time period during which such officer is restricted from competing with the
Company will be shortened from two years to one year.
The employment agreements contain certain provisions concerning a
change-in-control of the Company, including the following: (i) in the event the
officer's employment is terminated within two years following the change in
control by the Company other than for "cause" or by the officer for "good
reason," or the officer is terminated by the Company within three months prior
to the change in control at the request of the acquirer in anticipation of the
change in control, the officer will be entitled to receive a lump sum severance
amount equal to the greater of (i) three years' base salary or (ii) the base
salary for whatever period is then remaining on the initial term and the
provisions which restrict competition with the Company shall not apply; (ii) in
any change-of-control situation, the officer may elect to terminate his
employment by giving five business days' written notice prior to the closing of
the transaction giving rise to the change-in-control, which will be deemed a
termination of employment by the Company without "cause," and the provisions of
the employment agreement governing the same will apply, except that the
severance amount otherwise payable shall be doubled (but not to exceed six times
the officer's base pay) (if the successor does not give written notice of its
acceptance of the Company's obligations under the employment agreement at least
ten business days prior to the anticipated closing date, the severance amount
shall be tripled, but not to exceed nine times base salary) and provisions which
restrict competition with the Company shall not apply; and (iii) if any payment
to the officer is subject to the 20% excise tax on excess parachute payments,
the officer shall be made "whole" on a net aftertax basis. A change in control
is generally defined to occur upon (i) the acquisition by any person of 20% or
more of the total voting power of the outstanding securities of the Company,
(ii) the first purchase pursuant to a tender or exchange offer for Common Stock,
(iii) the approval of certain mergers, sale of substantially all the assets, or
dissolution of the Company or (iv) a change in a majority of the members of the
Company's Board of Directors.
In general, a "parachute payment" is any "payment" made by the Company in
the nature of compensation that is contingent on a change in control of the
Company and includes the present value of the accelerations of vesting and the
payment of options and other deferred compensation amounts upon a change in
control. If the aggregate present value of the parachute payments to certain
individuals, including officers, equals or exceeds three times that individual's
"base amount" (generally, the individual's average annual compensation from the
Company for the five calendar years ending before the date of the change in
control), then all parachute amounts in excess of the base amount are "excess"
parachute payments. An individual will be subject to a 20% excise tax on excess
parachute amounts and the Company will not be entitled to a tax deduction for
such payments.
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1997 STOCK PLAN
The Company's 1997 Stock Plan was adopted by the Board of Directors and
stockholders in October 1997. The purpose of the 1997 Stock Plan is to provide
officers, employees and consultants with additional incentives by increasing
their ownership interests in the Company. Individual awards under the 1997 Stock
Plan may take the form of one or more of: (i) either incentive stock options
("ISOs") or non-qualified stock options ("NQSOs"); (ii) stock appreciation
rights; (iii) restricted or phantom stock; (iv) bonus stock awards; (v) awards
not otherwise provided for, the value of which is based in whole or in part upon
the value of the Common Stock and (vi) cash awards that may or may not be based
on the achievement of performance goals, including goals related to one or more
of the following: cash flow, return on equity, sales, profit margin, earnings
per share and stock price.
The Compensation Committee or the Company's President, to the extent such
duties are delegated to him by the Compensation Committee, will administer the
1997 Stock Plan and select the individuals who will receive awards and establish
the terms and conditions of those awards. The Compensation Committee will not be
eligible to receive awards under the plan, and the President will not have the
authority to make grants to officers or directors of the Company. See
"Management -- Directors and Executive Officers" for the composition of the
Compensation Committee following the consummation of the Offerings. The maximum
number of shares of Common Stock that may be subject to outstanding awards,
determined immediately after the grant of any award, may not exceed the greater
of 3,500,000 shares or 15% of the aggregate number of shares of Common Stock
outstanding; provided, however, that ISOs may not be granted with respect to
more than 1,000,000 shares. Shares of Common Stock which are attributable to
awards which have expired, terminated or been canceled or forfeited are
available for issuance or use in connection with future awards. The maximum
number of shares of Common Stock with respect to which any person may receive
options and stock appreciation rights in any year is 250,000 shares and the
maximum value of any other amount may not exceed $4 million as of the date of
its grant.
The 1997 Stock Plan will remain in effect for ten years, unless earlier
terminated by the Board of Directors. The 1997 Stock Plan may be amended by the
Board of Directors or the Compensation Committee without the consent of the
stockholders of the Company, except that any amendment will be subject to
stockholder approval if required by any federal or state law or regulation or by
the rules of any stock exchange or automated quotation system on which the
Common Stock may then be listed or quoted.
NQSOs to purchase 150,000 shares of Common Stock have been granted to each
of Mr. Wise and Mr. Wombwell. In addition, at the consummation of the Offering,
NQSOs to purchase approximately 2,446,547 shares were granted to other key
employees of the Company and to employees of the Founding Companies. Each of the
foregoing options has an exercise price equal to the initial public offering
price of the shares offered hereby, other than the options granted to Messrs.
Wise and Wombwell, which have been granted with exercise price equal to 60% of
the initial public offering price per share. Each of these options will vest at
the rate of 20% per year, commencing on the first anniversary of grant and will
expire at the earliest of (i) ten years from the date of grant, (ii) three
months following termination of employment, other than due to death or
disability or (iii) one year following a termination of employment due to death
or disability.
1997 DIRECTORS STOCK PLAN
The Company's 1997 Directors Stock Plan was adopted by the Board of
Directors and approved by the Company's stockholders in October 1997. The
Directors Plan provides for (i) the automatic grant to each non-employee
director serving at the consummation of the Offerings of an option to purchase
5,000 shares, (ii) the automatic grant to each non-employee director of an
option to purchase 5,000 shares upon such person's initial election as a
director and (iii) an automatic annual grant to each non-employee director of an
option to purchase 5,000 shares on each September 30th on which such director
remains a non-employee director. All options will have an exercise price per
share equal to the fair market value of the Common Stock on the date of grant,
will vest over five years at the rate of 20% per year and will expire on the
earliest of (i) ten years from the date of grant, (ii) three months after
termination of service as a director, other than due to death or disability or
(iii) one year following a termination of employment due to death or disability.
In
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addition, options can be granted to a non-employee director upon such terms as
the Board determines, whenever it believes such additional grant is appropriate.
The maximum number of shares of Common Stock that may be subject to outstanding
awards determined immediately after the grant of any award is 250,000.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
The Company was founded in June 1997 by C. Byron Snyder. In connection with
the formation of IES, IES issued to Mr. Snyder, the Snyder Children's Trust and
D. Merril Cummings a total of 2,329,600 shares of Common Stock for nominal
consideration. The shares issued to the Snyder Children's Trust were
subsequently transferred to two separate trusts, each for the benefit of one of
Mr. Snyder's children. Mr. Snyder is currently a director of the Company. The
trustees of the trusts are independent third parties not subject to control by
Mr. Snyder. In September 1997, IES issued an additional 442,589 shares to Mr.
Snyder and such trusts. The total value of the shares (based upon a value of
$9.75 per share) issued to Mr. Snyder and the trusts were recognized as
acquisition costs in connection with the Acquisitions. In October 1997, Mr.
Snyder and the trusts exchanged 2,655,709 shares of Common Stock for an equal
number of shares of Restricted Common Stock. Mr. Snyder agreed to advance
whatever funds were necessary to effect the Acquisitions and the Offerings. As
of September 30, 1997, Mr. Snyder had outstanding advances to the Company in the
aggregate amount of approximately $1.6 million at September 30, 1997. The
initial $1 million of such advances bears interest at a stated rate (8.5% as of
the date of this Prospectus), and additional advances bear interest at LIBOR
plus 1.5%. All of Mr. Snyder's advances were repaid from the net proceeds of the
Offering.
The Company has issued a total of 1,396,602 shares of Common Stock at $.01
per share to various members of management, including: Mr. Pollock -- 465,914
shares, Mr. Mills -- 232,957 shares, Mr. Mueller -- 232,957 shares, Mr.
Wise -- 100,000 shares, Mr. Wombwell -- 100,000 shares and other key
employees -- 264,774 shares. The Company also granted options to purchase 5,000
shares of Common Stock under the 1997 Directors Stock Plan, effective upon the
consummation of the Offerings, to each of the non-employee directors of the
Company.
Simultaneously with the closing of the Offering, the Company acquired by
stock purchase all the issued and outstanding capital stock and other equity
interests of the Founding Companies, at which time each Founding Company became
a wholly owned subsidiary of the Company. The Acquisitions Consideration was
negotiated by the parties and was based primarily upon the pro forma adjusted
net income of each Founding Company. The Acquisitions Consideration consisted of
(i) approximately $53.4 million in cash and (ii) 12,313,025 shares of Common
Stock. In addition, the Company repaid historical indebtedness of the Founding
Companies. In connection with the Acquisitions, owners of certain of the
Founding Companies received the Owner Amounts, as described below.
Individuals who are executive officers or directors of the Company received
the following portions of the Acquisitions Consideration for their interests in
the Founding Companies.
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<PAGE> 69
<TABLE>
<CAPTION>
SHARES OF
COMPANY CASH COMMON STOCK
------- ----------- ------------
<S> <C> <C>
Houston-Stafford
Ben Mueller............................................... $ 4,648,161 1,072,652
Mills
Jerry Mills............................................... 9,306,722 2,147,705
Bexar-Calhoun
Bob Weik(a)............................................... 6,174,713 1,424,935
Pollock
Jon Pollock............................................... 985,493 319,729
Muth
Richard Muth(b)........................................... 1,939,750 447,635
Ace
Robert Stalvey............................................ 413,956 95,528
----------- ---------
Total............................................. $23,468,795 5,508,184
=========== =========
</TABLE>
- ---------------
(a) Excludes cash of $322,989 and 74,536 shares of Common Stock received by two
related trusts in which Mr. Weik may be deemed to have an interest, as to
which Mr. Weik disclaims beneficial ownership.
(b) Excludes cash of $111,320 and 25,689 shares of Common Stock received by Mr.
Muth's wife, Darlene Muth, as to which he disclaims beneficial ownership.
The foregoing table does not include Owner Amounts (based on September 30,
1997 balances), as follows: $2.4 million received by Mr. Mueller, $9.4 million
received by Mr. Mills, $2.0 million received by Mr. Weik, $383,000 received by
Mr. Pollock, $1.8 million received by Mr. Muth and $204,000 received by Mr.
Stalvey.
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
During fiscal 1994, 1995 and 1996, Houston-Stafford made payments totaling
$174,000, $124,000 and $187,000, respectively, to the Brown-Mueller Joint
Venture, a general partnership of which Mr. Mueller is a member, for lease
payments on certain real properties used as electrical shops. For the year ended
September 30, 1997, such lease payments totaled $109,000. Mr. Mueller is Senior
Vice President, Chief Operating Officer -- Residential and a director of the
Company.
At December 31, 1996, Houston-Stafford owed Mr. Mueller $185,985 on a
promissory note, payable in monthly installments and maturing April 2001. Such
note was prepaid by Houston-Stafford in October 1997.
At December 31, 1996, Houston-Stafford owed Mr. Mueller $766,400 related to
a promissory note maturing August 2003 and secured by Mr. Mueller's stock in
Houston-Stafford, and such obligation and any related obligations shall be
terminated at the consummation of the Offerings. Mr. Mueller will receive
approximately $4.6 million and 1.1 million shares of Common Stock in connection
with the Acquisitions in exchange for such promissory note as well as 0.2
million shares for his new role as a member of IES management. Houston-Stafford
will recognize a non-cash, non-recurring compensation charge of approximately
$17.0 million related to the transfer of such cash and shares of Common Stock to
Mr. Mueller at the time of the Acquisitions.
Pursuant to a 5-year lease agreement effective November 1, 1997,
Houston-Stafford agreed to lease certain facilities owned by Mr. Mueller in
Spring, Texas. Such lease agreement provides for an annual rent of $20,000,
which the Company believes is not in excess of fair rental value for such
facilities.
During fiscal 1994, Mills derived contract revenues of $187,000 from CIMA
Services, Inc. ("CIMA"), an electrical services company of which Mr. Mills was a
part owner until October 1997. Additionally, during fiscal 1994, Mills paid
$2,900,000 to CIMA for material purchases. At December 31, 1994, Mills had
outstanding accounts receivable from CIMA of $145,000 and accounts payable to
CIMA of $294,000. Mr. Mills is Senior Vice President and Chief Operating
Officer -- Commercial and Industrial and a director of the Company.
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<PAGE> 70
During fiscal 1995, Mills derived contract revenues of $1.1 million from
CIMA. Additionally, during fiscal 1995, Mills paid $812,000 to CIMA for material
purchases. At December 31, 1995, Mills had outstanding accounts receivable from
CIMA of $2,000 and accounts payable to CIMA of $23,000.
During fiscal 1996, Mills derived contract revenues of $1.3 million from
CIMA. Additionally, during fiscal 1996, Mills paid $1.1 million to CIMA for
material purchases. At December 31, 1996, Mills had outstanding accounts
receivable from CIMA of $208,000 and accounts payable to CIMA of $633,000.
From January 1, 1997 to September 1, 1997, Mills derived contract revenues
of $776,000 from CIMA. Additionally, during this period of time, Mills paid $1.1
million to CIMA for material purchases. At August 31, 1997, Mills had
outstanding accounts receivable from CIMA of $314,000 and accounts payable to
CIMA of $119,000.
Mills leases certain real property from Mr. Mills. Amounts paid pursuant to
this lease were $26,000 for 1995, $156,000 for 1996 and $117,000 for the nine
months ended September 30, 1997.
During 1995, Mr. Weik incurred indebtedness from Bexar-Calhoun of which the
largest aggregate amount outstanding at any time was $647,000. All of such
indebtedness was repaid as of April 18, 1997. Mr. Weik is a director of the
Company.
During 1997, Mr. Weik incurred indebtedness from Bexar-Calhoun of which the
largest aggregate amount outstanding at any time was $533,525. All of such
indebtedness was repaid as of August 6, 1997.
Prior to the closing of the Acquisitions and the consummation of the
Offerings, Bexar-Calhoun will distribute all interest it owns, directly or
indirectly, in real property to Mr. Weik and his immediate family. It is
anticipated that such real estate will be leased to the Company for an annual
rent of approximately $150,000. The Company believes that such rent is not in
excess of fair rental value for such facilities.
Pollock leases certain real property from Mr. Pollock. Amounts paid
pursuant to this lease were $20,000 for fiscal 1995, $36,000 for fiscal 1996 and
$36,000 for fiscal 1997.
Since January 1, 1996, Mr. Muth has from time to time incurred indebtedness
from Muth, of which the largest aggregate amount outstanding at any time was
$205,000. All amounts owed by Mr. Muth to Muth will be repaid prior to the
closing of the Offerings. Mr. Muth is a director of the Company.
Prior to the closing of the Acquisitions and the consummation of the
Offerings, certain assets of Muth will be purchased by Mr. Muth for $217,140.
From time to time in the past Muth has completed electrical contracts for
Muth Properties, L.L.C., a limited liability company of which Mr. Muth is a
member. Total electrical contracts completed by Muth for Muth Properties, L.L.C.
were $82,731 for 1995, $82,032 for 1996 and $120,915 for the six months ended
June 30, 1997. Prior to the closing of the Acquisitions and the consummation of
the Offerings, a final payment of $162,900 will be made by Muth Properties,
L.L.C. to Muth.
Prior to July 1, 1997, Muth leased certain real property from Mr. Muth,
d/b/a D & D Properties. Lease payments made by Muth to Mr. Muth totaled $80,725
for 1994, $95,180 for 1995, $118,088 for 1996 and $56,906 for the six months
ended June 30, 1997. Effective July 1, 1997, Muth Properties, L.L.C. became the
lessor of these properties. It is anticipated that annual rentals paid to Muth
Properties, L.L.C. by Muth will be approximately $120,000.
Stalvey Rentals, a general partnership of which Mr. Stalvey is a member, is
presently constructing a new facility to lease to Ace in Valdosta, Georgia and
an inducement letter has been executed regarding Ace's commitment to lease the
new facility for a period of 20 years beginning as soon as a certificate of
occupancy is obtained. Ace entered into a five year lease, with a five year
option period, with Mr. Stalvey and his brother. Initial annual rent on this
facility is $103,200, without respect to property taxes and insurance. Mr.
Stalvey is a director of the Company.
In addition to the transactions described above, certain of the Founding
Companies have entered into lease agreements with parties related to the
Company, for rents that the Company believes are not in excess of fair rental
value.
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<PAGE> 71
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock, as of January 30, 1997, by (i) all
persons known to the Company to be the beneficial owner of 5% or more thereof,
(ii) each director and nominee for director, (iii) each executive officer and
(iv) all officers and directors as a group. Unless otherwise indicated, the
address of each such person is c/o Integrated Electrical Services, Inc., 2301
Preston, Houston, Texas 77003. All persons listed have sole voting and
investment power with respect to their shares unless otherwise indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AFTER OFFERINGS
--------------------
SHARES PERCENT
--------- -------
<S> <C> <C>
C. Byron Snyder(a).......................................... 2,655,709 11.4%
Jon Pollock(b).............................................. 785,743 3.4
Jerry Mills................................................. 2,380,662 10.2
Ben L. Mueller.............................................. 1,311,609(c) 5.6
Jim P. Wise................................................. 100,000 *
John F. Wombwell............................................ 100,000 *
Richard Muth(d)............................................. 473,324 2.0
Alan R. Sielbeck(e)......................................... -- *
Robert Stalvey.............................................. 95,528 *
Richard L. Tucker(e)........................................ -- *
Bob Weik(f)................................................. 1,499,469 6.4
Thomas E. White, Jr.(c)..................................... -- *
Roy D. Brown(e)............................................. 1,608,979 6.9
All executive officers and directors as a group (15
persons)(g)............................................... 9,660,718 41.3%
</TABLE>
- ---------------
* Less than one percent.
(a) Includes 1,118,193 shares held by trusts for the benefit of Mr. Snyder's
children, as to which Mr. Snyder disclaims beneficial ownership. Consists
entirely of Restricted Common Stock, which represents all of the Restricted
Common Stock outstanding. The holders of Restricted Common Stock, voting
together as a single class, are entitled to elect one member of the
Company's Board of Directors and to one-half of one vote for each share held
on all other matters on which they are entitled to vote. Holders of
Restricted Common Stock are not entitled to vote on the election of any
other directors. Such shares may be converted to Common Stock in certain
circumstances. See "Description of Capital Stock."
(b) Includes 465,914 shares of Common Stock held by the Pollock Family
Partnership, Ltd.
(c) Includes 6,000 shares held by a trust for the benefit of Mr. Mueller's
daughter.
(d) Includes 25,689 shares of Common Stock owned by Mr. Muth's wife, as to which
Mr. Muth disclaims beneficial ownership.
(e) Mr. Sielbeck's address is Service Experts, Inc., 111 Westwood Place, Suite
420, Brentwood, TN 37027. Mr. Tucker's address is The University of Texas at
Austin, 3208 Red River Street, Suite 300, Austin, TX 78705-2697. Mr. White's
address is Enron Ventures Corp., 1400 Smith Street, Houston, TX 77002-7361.
Mr. Brown's address is Houston-Stafford Electric, Inc., 10203 Mula Circle,
Stafford, Texas 77477.
(f) Includes 74,536 shares of Common Stock owned by two related trusts, as to
which Mr. Weik disclaims beneficial ownership.
(g) Includes 2,655,709 shares of Restricted Common Stock described in Note (a)
above.
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<PAGE> 72
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $0.01 per share, 2,655,709 shares of Restricted Common
Stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par
value $0.01 per share. 23,365,336 shares of Common Stock and Restricted Common
Stock are issued and outstanding. The following summary of the terms and
provisions of the Company's capital stock does not purport to be complete and is
qualified in its entirety by reference to the Company's Amended and Restated
Certificate of Incorporation and Bylaws, which have been filed as exhibits to
the Company's registration statement, of which this Prospectus is a part, and
applicable law.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Such
holders are not entitled to vote cumulatively for the election of directors.
Holders of a majority of the shares of Common Stock entitled to vote in any
election of directors may elect all of directors standing for election.
The holders of Restricted Common Stock, voting together as a single class,
are entitled to elect one member of the Company's Board of Directors and to
one-half of one vote for each share held on all other matters on which they are
entitled to vote. Holders of Restricted Common Stock are not entitled to vote on
the election of any other directors. Only the holder of the Restricted Common
Stock may remove the director such holder is entitled to elect.
Subject to the rights of any then outstanding shares of preferred stock,
holders of Common Stock and Restricted Common Stock are together entitled to
participate pro rata in such dividends as may be declared in the discretion of
the Board of Directors out of funds legally available therefor. Holders of
Common Stock and Restricted Common Stock together are entitled to share ratably
in the net assets of the Company upon liquidation after payment or provision for
all liabilities and any preferential liquidation rights of any preferred stock
then outstanding. Holders of Common Stock and holders of Restricted Common Stock
have no preemptive rights to purchase shares of stock of the Company. Shares of
Common Stock are not subject to any redemption provisions and are not
convertible into any other securities of the Company. Shares of Restricted
Common Stock are not subject to any redemption provisions and are convertible
into Common Stock as described below. All outstanding shares of Common Stock and
Restricted Common Stock are, and the shares of Common Stock to be issued
pursuant to the Offering and the Acquisitions will be, upon payment therefor,
fully paid and non-assessable.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis in the event of a disposition of such share of
Restricted Common Stock by the holder thereof (other than a distribution by a
holder to its partners or beneficial owners, or a transfer to a related party of
such holders (as defined in Sections 267, 707, 318 and/or 4946 of the Internal
Revenue Code of 1986, as amended)).
The Common Stock is listed on the NYSE under the symbol "IEE." The
Restricted Common Stock will not be listed on any exchange.
PREFERRED STOCK
The preferred stock may be issued from time to time by the Board of
Directors as shares of one or more classes or series. Subject to the provisions
of the Company's Amended and Restated Certificate of Incorporation and
limitations prescribed by law, the Board of Directors is expressly authorized to
adopt resolutions to issue the shares, to fix the number of shares and to change
the number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative), dividend
rates, terms of redemption (including sinking fund provisions), redemption
prices, conversion rights and liquidation preferences of the shares constituting
any
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<PAGE> 73
class or series of the preferred stock, in each case without any further action
or vote by the stockholders. The Company has no current plans to issue any
shares of preferred stock of any class or series.
One of the effects of undesignated preferred stock may be to enable the
Board of Directors to render more difficult or to discourage an attempt to
obtain control of the Company by means of a tender offer, proxy contest, merger
or otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of preferred stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, preferred stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of preferred stock may discourage
bids for the Common Stock at a premium or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder, (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding shares owned by persons who are both officers and
directors of the corporation, and shares held by certain employee stock
ownership plans) or (iii) on or after the date the person becomes an interested
stockholder, the business combination is approved by the corporation's board of
directors and by the holders of at least 66% of the corporation's outstanding
voting stock at an annual or special meeting, excluding shares owned by the
interested stockholder. Under Section 203, an "interested stockholder" is
defined as any person who is (i) the owner of 15% or more of the outstanding
voting stock of the corporation or (ii) an affiliate or associate of the
corporation and who was the owner of 15% or more of the outstanding voting stock
of the corporation at any time within the three-year period immediately prior to
the date on which it is sought to be determined whether such person is an
interested stockholder.
A corporation may, at its option, exclude itself from the coverage of
Section 203 by including in its certificate of incorporation or bylaws by action
of its stockholders to exempt itself from coverage. The Company has not adopted
such an amendment to its Amended and Restated Certificate of Incorporation or
Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Amended and Restated Certificate of Incorporation
and under Delaware law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of the duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a knowing
violation of law, for dividend payments or stock repurchases illegal under
Delaware law or any transaction in which a director has derived an improper
personal benefit. The Company has entered into indemnification agreements with
its directors and executive officers which indemnify such person to the fullest
extent permitted by its Amended and Restated Certificate of Incorporation, its
Bylaws and the Delaware General Corporation Law. The Company also intends to
obtain directors' and officers' liability insurance. The foregoing provisions
may extend to liabilities arising due to violations of the federal securities
laws. It is the position of the Securities and Exchange Commission (the
"Commission") that indemnification for liabilities under the Securities Act is
against public policy and is, therefore, unenforceable.
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<PAGE> 74
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
include provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or an unsolicited acquisition
proposal that a stockholder might consider favorable, including a proposal that
might result in the payment of a premium over the market price for the shares
held by stockholders. These provisions are summarized in the following
paragraphs.
Classified Board of Directors. The Amended and Restated Certificate of
Incorporation provides for the Board of Directors to be divided into three
classes of directors serving staggered three-year terms. The classification of
the Board of Directors has the effect of requiring at least two annual
stockholder meetings, instead of one, to replace a majority of members of the
Board of Directors.
Supermajority Voting. The Amended and Restated Certificate of Incorporation
requires the approval of the holders of at least 75% of the then outstanding
shares of the Company's capital stock entitled to vote thereon and the approval
of the holders of at least 75% of the then outstanding shares of each class of
stock of the Company voting separately as a class on, among other things,
certain amendments to the Amended and Restated Certificate of Incorporation. The
Board of Directors may amend, alter, change or repeal any bylaws without the
assent or vote of the stockholders, but any such bylaws may be altered, amended
or repealed upon the affirmative vote of at least 66 2/3% of the stock entitled
to vote thereon.
Authorized but Unissued or Undesignated Capital Stock. The Company's
authorized capital stock will consist of 100,000,000 shares of Common Stock,
2,655,709 shares of Restricted Common Stock, and 10,000,000 shares of preferred
stock. After the Offerings, the Company will have outstanding 23,365,336 shares
of Common Stock and Restricted Common Stock (assuming the Underwriters' over-
allotment options are not exercised). The authorized but unissued (and in the
case of preferred stock, undesignated) stock may be issued by the Board of
Directors in one or more transactions. In this regard, the Company's Amended and
Restated Certificate of Incorporation grants the Board of Directors broad power
to establish the rights and preferences of authorized and unissued preferred
stock. The issuance of shares of preferred stock pursuant to the Board of
Directors' authority described above could decrease the amount of earnings and
assets available for distribution to holders of Common Stock and adversely
affect the rights and powers, including voting rights, of such holders and may
also have the effect of delaying, deferring or preventing a change in control of
the Company. The Board of Directors does not currently intend to seek
stockholder approval prior to any issuance of preferred stock, unless otherwise
required by law.
Special Meeting of Stockholders. The Bylaws provide that special meetings
of stockholders of the Company may only be called by the Chairman of the Board
of Directors upon the written request of the Board of Directors pursuant to a
resolution approved by a majority of the Board of Directors.
Stockholder Action by Written Consent. The Amended and Restated Certificate
of Incorporation and Bylaws generally provide that any action required or
permitted by the stockholders of the Company must be effected at a duly called
annual or special meeting of the stockholders and may not be effected by any
written consent of the stockholders.
Notice Procedures. The Bylaws establish advance notice procedures with
regard to stockholder proposals relating to the nomination of candidates for
election as director, the removal of directors and amendments to the Amended and
Restated Certificate of Incorporation or Bylaws to be brought before annual
meetings of stockholders of the Company. These procedures provide that notice of
such stockholder proposals must be timely given in writing to the Secretary of
the Company prior to the annual meeting. Generally, to be timely, notice must be
received at the principal executive offices of the Company not less than 80 days
prior to an annual meeting (or if fewer than 90 days' notice or prior public
disclosure of the date of the annual meeting is given or made by the Company,
not later than the tenth day following the date on which the notice of the date
of the annual meeting was mailed or such public disclosure was made). The notice
must contain certain information specified in the Bylaws, including a brief
description of the business desired to be brought before the annual meeting and
certain information concerning the stockholder submitting the proposal.
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<PAGE> 75
Charter Provisions Relating to Rights Plan. The Amended and Restated
Certificate of Incorporation authorizes the Board of Directors of the Company to
create and issue rights (the "Rights") entitling the holders thereof to purchase
from the Company shares of capital stock or other securities. The times at
which, and the terms upon which, the Rights are to be issued may be determined
by the Board of Directors and set forth in the contracts or instruments that
evidence the Rights. The authority of the Board of Directors with respect to the
Rights includes, but is not limited to, the determination of (i) the initial
purchase price per share of the capital stock or other securities of the Company
to be purchased upon exercise of the Rights, (ii) provisions relating to the
times at which and the circumstances under which the Rights may be exercised or
sold or otherwise transferred, either together with or separately from, any
other securities of the Company, (iii) antidilutive provisions which adjust the
number or exercise price of the Rights or amount or nature of the securities or
other property receivable upon exercise of the Rights, (iv) provisions which
deny the holder of a specified percentage of the outstanding securities of the
Company the right to exercise the Rights and/or cause the Rights held by such
holder to become void, (v) provisions which permit the Company to redeem the
Rights and (vi) the appointment of a rights agent with respect to the Rights. If
authorized by the Board of Directors, the Rights would be intended to protect
the Company's stockholders from certain non-negotiated takeover attempts which
present the risk of a change of control on terms which may be less favorable to
the Company's stockholder than would be available in a transaction negotiated
with and approved by the Board of Directors. The Board of Directors believes
that the interests of the stockholders generally are best served if any
acquisition of the Company or a substantial percentage of the Company's Common
Stock results from arm's-length negotiations and reflects the Board of
Directors' careful consideration of the proposed terms of a transaction. In
particular, the Rights if issued would be intended to help (i) reduce the risk
of coercive two-tiered, front-end loaded or partial offers which may not offer
fair value to all stockholders of the Company, (ii) deter market accumulators
who through open market or private purchases may achieve a position of
substantial influence or control without paying to stockholders a fair control
premium and (iii) deter market accumulators who are simply interested in putting
the Company "in play."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Trust and
Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the
sale of substantial amounts of Common Stock in the public market. As of January
30, 1998, 20,709,627 shares of Common Stock and 2,655,709 shares of Restricted
Common Stock were issued and outstanding. Of such shares, 13,709,627 shares of
Common Stock and all of the shares of Restricted Common Stock were issued in a
transaction not registered under the Securities Act, and, accordingly, such
shares may not be sold except in transactions registered under the Securities
Act or pursuant to an exemption from registration, including the exemptions
contained in Rules 144 and 701 under the Securities Act. All of the 7,000,000
shares sold in the Offering, except for shares acquired by affiliates of the
Company, are freely tradeable.
In general, under Rule 144 as currently in effect, a person, or persons
whose shares are aggregated, who has beneficially owned his or her shares for at
least one year but not more than two years, or a person who may be deemed an
"affiliate" of the Company who has beneficially owned shares for at least one
year, would be entitled to sell within any three month period a number of shares
that does not exceed the greater of 1% of the then outstanding shares of the
Common Stock or the average weekly trading volume of the Common Stock during the
four calendar weeks preceding the date on which notice of the proposed sale is
sent to the Commission. Sales under Rule 144 are also subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about the Company. A person who is not deemed to have been an
affiliate of the Company at any time for 90 days preceding a sale and who has
beneficially owned his shares for at least two years would be entitled to sell
such shares under Rule 144 without regard to the volume limitations, manner of
sale provisions, notice requirements or the availability of current public
information about the Company.
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<PAGE> 76
In general, under Rule 701 under the Securities Act, any employee, officer,
or director of or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701. Such provisions permit nonaffiliates to sell
their Rule 701 shares without having to comply with the public information,
holding period, volume limitation, or notice provisions of Rule 144 and permit
affiliates to sell their Rule 701 shares without having to comply with the Rule
144 holding period restrictions, in each case commencing 90 days after the
commencement of the Offerings.
The Company has authorized (i) the issuance of 3,500,000 shares of its
Common Stock in accordance with the terms of the 1997 Stock Plan and (ii) the
issuance of 250,000 shares of its Common Stock in accordance with the terms of
the 1997 Directors Stock Plan. Options to purchase 2,761,547 shares have been
granted under the 1997 Stock Plan and the 1997 Directors Stock Plan to certain
officers, directors and former stockholders of the Company and the Founding
Companies. The Company intends to file a registration statement on Form S-8
under the Securities Act registering the issuance of shares upon exercise of
options granted under the 1997 Stock Plan. As a result, such shares will be
eligible for resale in the public market.
The Company and each of its directors and executive officers have agreed
not to (i) directly or indirectly, offer, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise transfer or dispose
of any shares of Common Stock or any securities convertible into or exchangeable
or exercisable for Common Stock or file any registration statement under the
Securities Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of the Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, for a period of 180 days from the date of the
Offering without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated on behalf of the Underwriters, except for (i) shares issued
in connection with acquisitions, provided that (except with respect to shares
issued in transactions in which the issuance or resale of such shares is not
registered under the Securities Act), the recipients of such shares agree to be
bound by similar restrictions and (ii) any shares of Common Stock issued or
options to purchase Common Stock granted pursuant to the Company's benefit plans
described herein. In addition, the current stockholders of the Company and the
owners of the Founding Companies have agreed with the Company not to sell,
contract to sell or otherwise dispose of any shares of Common Stock owned as of
the consummation of the Acquisitions, including shares received as consideration
in the Acquisitions, for a period of two years following receipt thereof,
subject to the rights of such holders to exercise their registration rights as
described below.
Prior to the Offering, there was no established trading market for the
Common Stock, and no predictions can be made as to the effect that sales of
Common Stock under Rule 144, pursuant to a registration statement, or otherwise,
or the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common Stock
in the public market, or the perception that such sales could occur, could
depress the prevailing market price. Such sales may also make it more difficult
for the Company to issue or sell equity securities or equity-related securities
in the future at a time and price that it deems appropriate. See "Risk
Factors -- Shares Eligible for Future Sale."
Former stockholders of the Founding Companies, certain executive officers
and directors are entitled to certain rights with respect to the registration of
their shares of Common Stock under the Securities Act. In the aggregate, these
groups hold 16,365,336 shares of Common Stock and Restricted Common Stock. If
the Company proposes to register any of its securities under the Securities Act,
such stockholders are entitled to notice of such registration and are entitled
to include, at the Company's expense, all or a portion of their shares therein,
subject to certain conditions. These registration rights do not apply to the
registration statement containing this Prospectus or to any registration
statement filed with respect to employee benefit plans.
73
<PAGE> 77
PLAN OF DISTRIBUTION
This Prospectus may be used by the Company for the offer and sale of up to
21,000,000 shares of Common Stock from time to time in connection with the
acquisition of other businesses, assets or securities in business combination
transactions. The consideration offered by the Company in such acquisitions, in
addition to any shares of Common Stock offered by this Prospectus, may include
assets, debt or other securities or assumption by the Company of liabilities of
the business being acquired, or a combination thereof. The terms of acquisitions
are typically determined by negotiations between the Company and the owners of
the businesses, assets or securities to be acquired, with the Company taking
into account the quality of management, the past and potential earning power and
growth of the businesses, assets or securities to be acquired, and other
relevant factors. Shares of Common Stock issued to the owners of the businesses,
assets or securities to be acquired are generally valued at a price reasonably
related to the market value of the shares of Common Stock either at the time the
terms of the acquisition are tentatively agreed upon or at or about the time or
times of added delivery of the shares of Common Stock.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by John F. Wombwell, Esq., Senior
Vice President, General Counsel and Secretary of the Company.
EXPERTS
The audited financial statements of IES and the Founding Companies included
in this Prospectus and elsewhere in the Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which is included as part of the
Registration Statement, does not contain all the information contained in the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements made in the Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected, without charge, at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Citicorp Center, 500 West Madison Street, Room 1400, Chicago, IL 60661, and 7
World Trade Center, Suite 1300, New York, NY 10048 or on the Internet at
http://www.sec.gov. Copies of such material can also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as may be
required from time to time by law or the New York Stock Exchange.
74
<PAGE> 78
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial
Statements............................................ F-3
Unaudited Pro Forma Combined Balance Sheet............. F-4
Unaudited Pro Forma Combined Statement of Operations... F-5
Notes to Unaudited Pro Forma Combined Financial
Statements............................................ F-7
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
Report of Independent Public Accountants............... F-12
Consolidated Balance Sheets............................ F-13
Consolidated Statements of Operations.................. F-14
Consolidated Statements of Cash Flows.................. F-15
Consolidated Statements of Stockholders' Equity........ F-16
Notes to Consolidated Financial Statements............. F-17
INTEGRATED ELECTRICAL SERVICES, INC.
Report of Independent Public Accountants............... F-28
Balance Sheets......................................... F-29
Statements of Operations............................... F-30
Statements of Cash Flows............................... F-31
Statements of Stockholders' Equity..................... F-32
Notes to Financial Statements.......................... F-33
FOUNDING COMPANIES:
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
Report of Independent Public Accountants............... F-37
Consolidated Balance Sheets............................ F-38
Consolidated Statements of Operations.................. F-39
Consolidated Statements of Cash Flows.................. F-40
Consolidated Statements of Stockholders' Equity........ F-41
Notes to Consolidated Financial Statements............. F-42
BW CONSOLIDATED, INC. AND SUBSIDIARIES
Report of Independent Public Accountants............... F-49
Consolidated Balance Sheets............................ F-50
Consolidated Statements of Operations.................. F-51
Consolidated Statements of Cash Flows.................. F-52
Consolidated Statements of Stockholders' Equity........ F-53
Notes to Consolidated Financial Statements............. F-54
MUTH ELECTRIC, INC.
Report of Independent Public Accountants............... F-63
Balance Sheets......................................... F-64
Statements of Operations............................... F-65
Statements of Cash Flows............................... F-66
Statements of Stockholders' Equity..................... F-67
Notes to Financial Statements.......................... F-68
</TABLE>
F-1
<PAGE> 79
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
POLLOCK ELECTRIC INC.
Report of Independent Public Accountants............... F-73
Balance Sheets......................................... F-74
Statements of Operations............................... F-75
Statements of Cash Flows............................... F-76
Statements of Stockholder's Equity..................... F-77
Notes to Financial Statements.......................... F-78
CHARLES P. BAGBY, CO., INC.
Report of Independent Public Accountants............... F-86
Balance Sheets......................................... F-87
Statements of Operations............................... F-88
Statements of Cash Flows............................... F-89
Statements of Stockholder's Equity..................... F-90
Notes to Financial Statements.......................... F-91
AMBER ELECTRIC, INC.
Report of Independent Public Accountants............... F-95
Balance Sheets......................................... F-96
Statements of Operations............................... F-97
Statements of Cash Flows............................... F-98
Statements of Stockholder's Equity..................... F-99
Notes to Financial Statements.......................... F-100
DANIEL ELECTRICAL CONTRACTORS, INC. AND DANIEL ELECTRICAL OF
TREASURE COAST INC.
Report of Independent Public Accountants............... F-107
Combined Balance Sheets................................ F-108
Combined Statements of Operations...................... F-109
Combined Statements of Cash Flows...................... F-110
Combined Statements of Stockholder's Equity............ F-111
Notes to Combined Financial Statements................. F-112
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
Report of Independent Public Accountants............... F-119
Balance Sheets......................................... F-120
Statements of Operations............................... F-121
Statements of Cash Flows............................... F-122
Statements of Stockholder's Equity..................... F-123
Notes to Financial Statements.......................... F-124
THURMAN & O'CONNELL CORPORATION
Report of Independent Public Accountants............... F-131
Balance Sheets......................................... F-132
Statements of Operations............................... F-133
Statements of Cash Flows............................... F-134
Statements of Stockholders' Equity..................... F-135
Notes to Financial Statements.......................... F-136
RODGERS ELECTRIC COMPANY, INC.
Report of Independent Public Accountants............... F-142
Balance Sheets......................................... F-143
Statements of Operations............................... F-144
Statements of Cash Flows............................... F-145
Statements of Stockholders' Equity..................... F-146
Notes to Financial Statements.......................... F-147
</TABLE>
F-2
<PAGE> 80
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to (i) the acquisitions by Integrated Electrical Services, Inc. (IES), of the
outstanding capital stock and other equity interests of Ace, Amber,
Bexar-Calhoun, Daniel, Hatfield, Haymaker, Houston-Stafford, Mills, Muth,
Pollock, Reynolds, Rodgers, Summit, Popp and Thurman & O'Connell (together, the
Founding Companies), and related transactions, and (ii) IES's initial public
offerings in the United States and Canada and outside the United States and
Canada (including the underwriters exercise of the overallotment option for
1,050,000 shares) (the Offering). The acquisitions (the Acquisitions) occurred
simultaneously with the closing of the Offering and were accounted for using the
purchase method of accounting. Houston-Stafford has been reflected as the
accounting acquirer for financial statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and related transactions, and the Offerings, as if they had
occurred on December 31, 1997. The unaudited pro forma combined statement of
operations gives effect to these transactions as if they had occurred on October
1, 1996.
IES has preliminarily analyzed the savings that it expects to be realized
from reductions in salaries, bonuses and certain benefits to the owners. To the
extent the owners of the Founding Companies have contractually agreed to
prospective changes in salary, bonuses, benefits and lease payments, these
changes have been reflected in the unaudited pro forma combined statement of
operations. With respect to other potential cost savings, IES has not and cannot
currently quantify these savings. It is anticipated that these savings will be
offset by costs related to IES's new corporate management and by the costs
associated with being a public company. However, because these costs cannot be
accurately quantified at this time, they have not been included in the pro forma
combined financial information of IES.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that Company management deems appropriate
and may be revised as additional information becomes available. The pro forma
financial data do not purport to represent what IES's combined financial
position or results of operations would actually have been if such transactions
in fact had occurred on those dates and are not necessarily representative of
IES's combined financial position or results of operations for any future
period. Since the Founding Companies were not under common control or
management, historical combined results may not be comparable to, or indicative
of, future performance. The unaudited pro forma combined financial statements
should be read in conjunction with the historical financial statements and notes
thereto included elsewhere in this Prospectus. See also "Risk Factors" included
elsewhere herein.
F-3
<PAGE> 81
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
BEXAR- HOUSTON-
AMBER CALHOUN DANIEL HAYMAKER STAFFORD MILLS MUTH POLLOCK SUMMIT
------ ------- ------ -------- -------- ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 594 $2,859 $2,524 $ 579 $ 524 $ 1,000 $ 766 $ 22 $ (90)
Accounts receivable..................... 3,977 5,070 5,920 1,807 14,439 13,428 2,783 6,012 2,710
Less-Allowance.......................... (55) (131) (148) (44) (482) (353) (91) (173) (122)
------ ------- ------ ------ ------- ------- ------ ------ ------
Accounts Receivable, net.............. 3,922 4,939 5,772 1,763 13,957 13,075 2,692 5,839 2,588
------ ------- ------ ------ ------- ------- ------ ------ ------
Costs and profits recognized in excess
of billings........................... 186 101 598 164 52 1,010 521 613 361
Inventories............................. 29 652 215 -- 2,465 50 807 -- --
Prepaid expenses and other.............. 160 17 172 -- 752 199 17 494 101
------ ------- ------ ------ ------- ------- ------ ------ ------
Total current assets.................. 4,891 8,568 9,281 2,506 17,750 15,334 4,803 6,968 2,960
PROPERTY AND EQUIPMENT, NET.............. 617 3,014 502 65 1,383 2,458 1,075 367 163
OTHER ASSETS............................. -- 1,319 -- -- 204 443 68 -- 315
GOODWILL, NET............................ -- -- -- -- 1,859 171 24 -- --
------ ------- ------ ------ ------- ------- ------ ------ ------
Total assets.......................... $5,508 $12,901 $9,783 $2,571 $21,196 $18,406 $5,970 $7,335 $3,438
====== ======= ====== ====== ======= ======= ====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.... $ 388 $ 145 $ 59 $ -- $ 1,393 $ 232 $ -- $1,748 $1,095
Accounts payable and accrued expenses... 1,842 2,415 2,302 675 7,742 6,518 1,906 3,612 1,075
Billings in excess of costs and profits
recognized............................ 473 891 1,535 61 3,150 2,632 661 1,193 0
Other................................... 1,267 -- -- 437 927 -- -- -- 43
------ ------- ------ ------ ------- ------- ------ ------ ------
Total current liabilities............. 3,970 3,451 3,896 1,173 13,212 9,382 2,567 6,553 2,213
------ ------- ------ ------ ------- ------- ------ ------ ------
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities............................ 697 -- 89 -- 687 128 -- 57 88
Deferred income taxes................... 52 -- -- -- 92 -- -- 160 11
Other long-term liabilities and minority
interest.............................. -- 1,302 483 -- 1,047 74 -- -- --
------ ------- ------ ------ ------- ------- ------ ------ ------
Total long-term liabilities........... 749 1,302 572 -- 1,826 202 -- 217 99
------ ------- ------ ------ ------- ------- ------ ------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock............................ 1 20 8 -- 295 1 74 1 1
Restricted common stock................. -- -- -- -- -- -- -- -- --
Receivable from stockholders............ -- -- -- -- -- -- -- -- --
Additional paid-in capital.............. -- 205 -- -- 112 175 -- 9 --
Retained earnings and unrealized
gain/loss on stock.................... 1,222 7,923 5,307 1,398 6,876 8,697 3,329 555 1,125
Treasury stock.......................... (434) -- -- -- (1,125) (51) -- -- --
------ ------- ------ ------ ------- ------- ------ ------ ------
Total stockholders' equity............ 789 8,148 5,315 1,398 6,158 8,822 3,403 565 1,126
------ ------- ------ ------ ------- ------- ------ ------ ------
Total liabilities and stockholders'
equity.............................. $5,508 $12,901 $9,783 $2,571 $21,196 $18,406 $5,970 $7,335 $3,438
====== ======= ====== ====== ======= ======= ====== ====== ======
<CAPTION>
OTHER PRO POST-
THURMAN & FOUNDING PRO FORMA FORMA MERGER
O'CONNELL RODGERS COMPANIES IES ADJUSTMENTS COMBINED ADJUSTMENTS
--------- ------- --------- -------- ----------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 322 $ 331 $ 630 $ 11 $ (2,953) $ 7,119 $ 13,973
Accounts receivable..................... 765 1,004 5,035 -- (379) 62,571 --
Less-Allowance.......................... (18) (24) (98) -- -- (1,739) --
------ ------ ------ -------- -------- -------- --------
Accounts Receivable, net.............. 747 980 4,937 -- (379) 60,832 --
------ ------ ------ -------- -------- -------- --------
Costs and profits recognized in excess
of billings........................... 10 -- 456 -- -- 4,072 --
Inventories............................. 239 5 361 -- -- 4,823 --
Prepaid expenses and other.............. 18 63 49 4,424 (8) 6,458 (4,348)
------ ------ ------ -------- -------- -------- --------
Total current assets.................. 1,336 1,379 6,433 4,435 (3,340) 83,304 9,625
PROPERTY AND EQUIPMENT, NET.............. 289 352 1,137 23 (335) 11,110 --
OTHER ASSETS............................. -- 158 33 -- (1,459) 1,081 --
GOODWILL, NET............................ -- 12 15 -- 151,856 153,937 --
------ ------ ------ -------- -------- -------- --------
Total assets.......................... $1,625 $1,901 $7,618 $ 4,458 $146,722 $249,432 $ 9,625
====== ====== ====== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.... $ 7 $ 28 $ 782 $ -- $ 53,277 $59,154 $(59,069)
Accounts payable and accrued expenses... 225 316 1,775 4,640 426 35,469 (4,348)
Billings in excess of costs and profits
recognized............................ 304 76 528 -- -- 11,504 --
Other................................... 4 72 515 -- 406 3,671 --
------ ------ ------ -------- -------- -------- --------
Total current liabilities............. 540 492 3,600 4,640 54,109 109,798 (63,417)
------ ------ ------ -------- -------- -------- --------
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities............................ 87 56 464 -- 22,822 25,175 (18,472)
Deferred income taxes................... -- 75 -- -- 869 1,259 --
Other long-term liabilities and minority
interest.............................. -- -- 3 -- (2,310) 599 --
------ ------ ------ -------- -------- -------- --------
Total long-term liabilities........... 87 131 467 -- 21,381 27,033 (18,472)
------ ------ ------ -------- -------- -------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock............................ 300 15 42 41 (663) 136 81
Restricted common stock................. -- -- -- -- 27 27 --
Receivable from stockholders............ -- -- -- (40) 40 -- --
Additional paid-in capital.............. -- -- 198 13,618 111,990 126,307 91,433
Retained earnings and unrealized
gain/loss on stock.................... 698 1,263 3,341 (13,801) (41,802) (13,869) --
Treasury stock.......................... -- -- (30) -- 1,640 -- --
------ ------ ------ -------- -------- -------- --------
Total stockholders' equity............ 998 1,278 3,551 (182) 71,232 112,601 91,514
------ ------ ------ -------- -------- -------- --------
Total liabilities and stockholders'
equity.............................. $1,625 $1,901 $7,618 $ 4,458 $146,722 $249,432 $ 9,625
====== ====== ====== ======== ======== ======== ========
<CAPTION>
AS
ADJUSTED
--------
<S> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 21,092
Accounts receivable..................... 62,571
Less-Allowance.......................... (1,739)
--------
Accounts Receivable, net.............. 60,832
--------
Costs and profits recognized in excess
of billings........................... 4,072
Inventories............................. 4,823
Prepaid expenses and other.............. 2,110
--------
Total current assets.................. 92,929
PROPERTY AND EQUIPMENT, NET.............. 11,110
OTHER ASSETS............................. 1,081
GOODWILL, NET............................ 153,937
--------
Total assets.......................... $259,057
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.... $ 85
Accounts payable and accrued expenses... 31,121
Billings in excess of costs and profits
recognized............................ 11,504
Other................................... 3,671
--------
Total current liabilities............. 46,381
--------
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities............................ 6,703
Deferred income taxes................... 1,259
Other long-term liabilities and minority
interest.............................. 599
--------
Total long-term liabilities........... 8,561
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock............................ 217
Restricted common stock................. 27
Receivable from stockholders............ --
Additional paid-in capital.............. 217,740
Retained earnings and unrealized
gain/loss on stock.................... (13,869)
Treasury stock.......................... --
--------
Total stockholders' equity............ 204,115
--------
Total liabilities and stockholders'
equity.............................. $259,057
========
</TABLE>
F-4
<PAGE> 82
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
BEXAR- HOUSTON-
AMBER CALHOUN DANIEL HAYMAKER STAFFORD MILLS MUTH POLLOCK
------- ------- ------- -------- -------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES........................................ $ 4,704 $8,418 $ 6,873 $ 2,083 $ 23,851 $14,968 $ 6,207 $7,011
COST OF SERVICES................................ 3,736 6,112 5,106 1,891 18,691 11,700 4,702 6,119
------- ------- ------- ------- -------- ------- ------- -------
Gross profit................................... 968 2,306 1,767 192 5,160 3,268 1,505 892
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 1,618 1,784 973 (87) 7,124 4,554 899 1,368
GOODWILL AMORTIZATION........................... -- -- -- -- -- -- -- --
------- ------- ------- ------- -------- ------- ------- -------
INCOME (LOSS) FROM OPERATIONS................... (650) 522 794 279 (1,964) (1,286) 606 (476)
OTHER INCOME (EXPENSE):
Interest expense............................... (82) (11) (13) -- (47) (45) (4) (49)
Other, net..................................... 15 202 12 4 29 39 2 15
------- ------- ------- ------- -------- ------- ------- -------
Other income (expense), net.................... (67) 191 (1) 4 (18) (6) (2) (34)
------- ------- ------- ------- -------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES............... (717) 713 793 283 (1,982) (1,292) 604 (510)
PROVISION (BENEFIT) FOR INCOME TAXES............ 244 -- -- -- (820) 84 -- (179)
------- ------- ------- ------- -------- ------- ------- -------
NET INCOME (LOSS)............................... $ (961) $ 713 $ 793 $ 283 $ (1,162) $(1,376) $ 604 $ (331)
======= ======= ======= ======= ======== ======= ======= =======
NET INCOME PER SHARE............................
SHARES USED IN COMPUTING PRO FORMA NET INCOME
PER SHARE(1)...................................
<CAPTION>
OTHER
THURMAN & FOUNDING PRO FORMA PRO FORMA
SUMMIT O'CONNELL RODGERS COMPANIES IES ADJUSTMENTS COMBINED
------- --------- ------- --------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES........................................ $2,878 $ 959 $1,175 $ 7,215 $ -- $ -- $ 86,342
COST OF SERVICES................................ 2,403 533 779 5,368 -- -- 67,140
------- ------ ------ ------- -------- ------- -----------
Gross profit................................... 475 426 396 1,847 -- -- 19,202
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 355 128 196 1,211 183 (9,635) 10,671
GOODWILL AMORTIZATION........................... -- -- -- -- -- 962 962
------- ------ ------ ------- -------- ------- -----------
INCOME (LOSS) FROM OPERATIONS................... 120 298 200 636 (183) 8,673 7,569
OTHER INCOME (EXPENSE):
Interest expense............................... (24) (2) (2) (35) -- 97 (217)
Other, net..................................... 4 14 6 (238) -- (133) (29)
------- ------ ------ ------- -------- ------- -----------
Other income (expense), net.................... (20) 12 4 (273) -- (36) (246)
------- ------ ------ ------- -------- ------- -----------
INCOME (LOSS) BEFORE INCOME TAXES............... 100 310 204 363 (183) 8,637 7,323
PROVISION (BENEFIT) FOR INCOME TAXES............ -- 5 34 42 -- 3,821 3,231
------- ------ ------ ------- -------- ------- -----------
NET INCOME (LOSS)............................... $ 100 $ 305 $ 170 $ 321 $ (183) $ 4,816 $ 4,092
======= ====== ====== ======= ======== ======= ===========
NET INCOME PER SHARE............................ $ .17
===========
SHARES USED IN COMPUTING PRO FORMA NET INCOME
PER SHARE(1)................................... 24,535,336
===========
</TABLE>
- ---------------
(1) Includes (a) 2,655,709 shares issued to the IES founder and chairman of the
board, (b) 1,396,602 shares issued to management of IES, (c) 12,313,025
shares issued to owners of the Founding Companies and (d) the 8,050,000
shares sold in the Offering (including the underwriters exercise of the
overallotment option of 1,050,000 shares). Additionally, includes 120,000
shares computed under the treasury stock method related to 300,000 options
which are currently outstanding.
F-5
<PAGE> 83
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
BEXAR- HOUSTON-
AMBER CALHOUN DANIEL HAYMAKER STAFFORD MILLS MUTH
------- ------- ------- -------- -------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES........................................... $16,386 $32,165 $18,409 $11,772 $ 81,575 $74,399 $18,779
COST OF SERVICES................................... 13,415 24,976 13,518 9,920 64,831 60,572 14,511
------- ------- ------- ------- -------- ------- -------
Gross profit...................................... 2,971 7,189 4,891 1,852 16,744 13,827 4,268
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....... 1,379 3,766 2,316 1,140 11,474 8,778 3,074
GOODWILL AMORTIZATION.............................. -- -- -- -- -- -- --
------- ------- ------- ------- -------- ------- -------
INCOME (LOSS) FROM OPERATIONS...................... 1,592 3,423 2,575 712 5,270 5,049 1,194
OTHER INCOME (EXPENSE):
Interest expense.................................. (45) (108) (60) (2) (187) (46) (27)
Other, net........................................ 69 (121) 100 -- 425 279 1
------- ------- ------- ------- -------- ------- -------
Other income (expense), net....................... 24 (229) 40 (2) 238 233 (26)
------- ------- ------- ------- -------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES.................. 1,616 3,194 2,615 710 5,508 5,282 1,168
PROVISION (BENEFIT) FOR INCOME TAXES............... 632 72 -- -- 2,192 274 --
------- ------- ------- ------- -------- ------- -------
NET INCOME (LOSS).................................. $ 984 $ 3,122 $ 2,615 $ 710 $ 3,316 $ 5,008 $ 1,168
======= ======= ======= ======= ======== ======= =======
NET INCOME PER SHARE...............................
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER
SHARE(1)..........................................
<CAPTION>
OTHER
THURMAN & FOUNDING PRO FORMA
POLLOCK SUMMIT O'CONNELL RODGERS COMPANIES IES ADJUSTMENTS
------- ------- --------- ------- --------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES........................................... $20,291 $10,995 $4,049 $3,325 $20,602 $ -- $ --
COST OF SERVICES................................... 16,670 9,454 2,181 1,621 16,103 -- --
------- ------- ------ ------ ------- -------- -------
Gross profit...................................... 3,621 1,541 1,868 1,704 4,499 -- --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....... 2,895 1,463 503 1,238 3,980 13,618 (19,686)
GOODWILL AMORTIZATION.............................. -- -- -- -- -- -- 3,848
------- ------- ------ ------ ------- -------- -------
INCOME (LOSS) FROM OPERATIONS...................... 726 78 1,365 466 519 (13,618) 15,838
OTHER INCOME (EXPENSE):
Interest expense.................................. (172) (79) (6) (7) (87) -- (239)
Other, net........................................ 3 23 70 36 129 -- (477)
------- ------- ------ ------ ------- -------- -------
Other income (expense), net....................... (169) (56) 64 29 42 -- (716)
------- ------- ------ ------ ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES.................. 557 22 1,429 495 561 (13,618) 15,122
PROVISION (BENEFIT) FOR INCOME TAXES............... 214 21 46 178 (51) 7,287
------- ------- ------ ------ ------- -------- -------
NET INCOME (LOSS).................................. $ 343 $ 1 $1,383 $ 317 $ 612 $(13,618) $ 7,835
======= ======= ====== ====== ======= ======== =======
NET INCOME PER SHARE...............................
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER
SHARE(1)..........................................
<CAPTION>
PRO FORMA
COMBINED
-----------
<S> <C>
REVENUES........................................... $ 312,747
COST OF SERVICES................................... 247,772
-----------
Gross profit...................................... 64,975
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....... 35,938
GOODWILL AMORTIZATION.............................. 3,848
-----------
INCOME (LOSS) FROM OPERATIONS...................... 25,189
OTHER INCOME (EXPENSE):
Interest expense.................................. (1,065)
Other, net........................................ 537
-----------
Other income (expense), net....................... (528)
-----------
INCOME (LOSS) BEFORE INCOME TAXES.................. 24,661
PROVISION (BENEFIT) FOR INCOME TAXES............... 10,865
-----------
NET INCOME (LOSS).................................. $ 13,796
===========
NET INCOME PER SHARE............................... $ .56
===========
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER
SHARE(1).......................................... 24,535,336
===========
</TABLE>
- ---------------
(1) Includes (a) 2,655,709 shares issued to the IES founder and chairman of the
board, (b) 1,396,602 shares issued to management of IES, (c) 12,313,025
shares issued to owners of the Founding Companies and (d) the 8,050,000
shares sold in the Offering (including the underwriters exercise of the
overallotment option of 1,050,000 shares). Additionally, includes 120,000
shares computed under the treasury stock method related to 300,000 options
which were outstanding at September 30, 1997.
F-6
<PAGE> 84
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
Integrated Electrical Services, Inc. (IES), was founded to create a leading
national provider of electrical contracting and maintenance services to the
commercial, industrial and residential markets. IES has not conducted
substantial operations to date and acquired the Founding Companies (the
Acquisitions) concurrently with the closing of the Offering.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements. The periods included in
these financial statements for the individual Founding Companies are as of and
for the year ended September 30, 1997, except for Ace, Hatfield, Reynolds, and
Popp for which the period is as of and for the year ended June 30, 1997. The
audited historical financial statements included elsewhere herein have been
included in accordance with Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently with the closing of the Offering, IES acquired all of the
outstanding capital stock and other equity interests of the Founding Companies.
The acquisitions were accounted for using the purchase method of accounting with
Houston-Stafford being reflected as the accounting acquirer.
The following table sets forth the consideration paid (a) in cash and (b)
in shares of Common Stock to the common stockholders of each of the Founding
Companies, other than the accounting acquirer (Houston-Stafford). For purposes
of computing the estimated purchase price for accounting purposes, the value of
the shares (including 3.9 million of the 4.1 million shares issued to the
corporate management of IES, the founder and Chairman of the Board of IES and
the trusts for the benefit of his children, which are reflected as additional
acquisition cost) was determined using an estimated fair value of $9.75 per
share (or $124.6 million), which is less than the initial public offering price
of $13.00 per share due primarily to restrictions on the sale and
transferability of the shares issued. The total purchase price, including cash
consideration of $38.8 million, is $163.4 million. The table does not reflect
net transfers of $28.3 million which represents previously undistributed
earnings and nonoperating assets and liabilities that were transferred in
connection with the Acquisitions to the owners of the Founding Companies.
<TABLE>
<CAPTION>
SHARES OF
CASH COMMON STOCK
------- -------------
(IN THOUSANDS)
<S> <C> <C>
Ace......................................................... $ 828 191
Amber....................................................... 2,308 533
Bexar-Calhoun............................................... 8,075 1,863
Daniel...................................................... 3,691 852
Hatfield.................................................... 903 208
Haymaker.................................................... 1,884 435
Mills....................................................... 10,806 2,494
Muth........................................................ 2,051 473
Pollock..................................................... 985 320
Reynolds.................................................... 872 201
Rodgers..................................................... 1,563 361
Summit...................................................... 1,793 321
Popp........................................................ 906 209
Thurman & O'Connell......................................... 2,165 500
------- -----
Total............................................. $38,830 8,961
======= =====
</TABLE>
F-7
<PAGE> 85
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the transfer in connection with the Acquisitions of $28.3
million of previously undistributed earnings and nonoperating assets and
liabilities to the owners of the Founding Companies, which was estimated
to be funded using $3.0 million of cash, $1.6 million of nonoperating
assets, net of liabilities, and accounts and notes payable to owners of
$23.7 million (of which $16.4 million was paid with offering proceeds,
$6.4 million expected to be retired with new borrowings under the
proposed credit facility and $1.0 million is expected to be paid with
existing cash).
(b) Records the liability for the cash portion of the consideration to be
paid to Houston-Stafford, the accounting acquirer.
(c) Records the merger of IES with Houston-Stafford, the accounting
acquirer, and the payment of the receivable from IES stockholders.
(d) Records the purchase of the Founding Companies by IES consisting of
notes payable of $38.8 million and 12,780,340 shares of Common Stock
valued at $9.75 per share (or $124.6 million) for a total purchase price
of $163.04 million resulting in excess purchase price of $152.8 million
over the net assets acquired of $10.6 million (see Note 2).
The following reconciles the combined historical net assets of the
Founding Companies to the net assets acquired (in
thousands):
<TABLE>
<CAPTION>
TOTAL LESS: ACQUIRED
COMBINED HOUSTON-STAFFORD FOUNDING COMPANIES
-------- ---------------- ------------------
<S> <C> <C> <C>
Historical net assets.................................. $41,440 (6,228) $35,212
Transfer of Owner Amounts (as defined elsewhere
herein).............................................. (28,345) 3,709 (24,636)
------- ------- -------
Net assets after transfers and purchase adjustments.... $13,095 $(2,519) $10,576
======= ======= =======
</TABLE>
(e) Records the noncash, non-recurring compensation charge related to the
exchange of cash and shares of Common Stock for a note receivable from
an officer of Houston-Stafford. The compensation charge has not been
included in the accompanying unaudited pro forma combined statement of
operations as it represents a non-recurring charge directly related to
the Acquisitions.
(f) Records the net cash proceeds of $79.8 million from the issuance of
shares of IES common stock (based on an initial public offering price of
$13.00 per share and net of estimated offering costs, including
underwriters commissions and discounts, accounting, legal and other
estimated Offering costs of $11.2 million).
(g) Records payment of the cash portion of the consideration to the
stockholders of the Founding Companies of $53.4 million in connection
with the Acquisitions (see (b) and (d) above), the expected repayment of
remaining historical short- and long-term debt totaling $7.8 million and
the payment of $16.4 million of the Owner Amounts (see (a) above).
F-8
<PAGE> 86
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following tables summarize unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
-------------------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
-------- -------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Current assets --
Cash and cash equivalents.................. $ (2,953) $ -- $ -- $ -- $ -- $ (2,953)
Accounts receivable........................ (379) -- -- -- -- (379)
Prepaid expenses and other................. (8) -- -- -- -- (8)
-------- -------- -------- -------- -------- --------
Total current assets................. (3,340) -- -- -- -- (3,340)
Property and equipment, net.................. (335) -- -- -- -- (335)
Other assets................................. (1,459) -- -- -- -- (1,459)
Goodwill, net................................ -- -- -- 151,856 -- 151,856
-------- -------- -------- -------- -------- --------
Total assets......................... $ (5,134) $ -- $ -- $151,856 $ -- $146,722
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Current maturities of long-term debt....... $ (80) $ 14,526 $ -- $ 38,831 $ -- $ 53,277
Accounts payable and accrued expenses...... -- -- -- 426 -- 426
Other...................................... 952 -- -- (546) -- 406
-------- -------- -------- -------- -------- --------
Total current liabilities............ 872 14,526 -- 38,711 -- 54,109
-------- -------- -------- -------- -------- --------
Long-term debt, net of current maturities.... 22,822 -- -- -- -- 22,822
Deferred income taxes........................ -- -- -- 869 -- 869
Other long-term liabilities.................. (483) -- -- (1,827) -- (2,310)
-------- -------- -------- -------- -------- --------
Total long-term liabilities.......... 22,339 -- -- (958) -- 21,381
-------- -------- -------- -------- -------- --------
Stockholders' equity --
Common stock............................... -- -- (262) (401) -- (663)
Restricted common stock.................... -- -- -- 27 -- 27
Receivable from stockholders............... -- -- 40 -- -- 40
Additional paid-in capital................. -- (14,526) (14,521) 124,001 17,036 111,990
Retained earnings.......................... (28,345) -- 13,618 (10,039) (17,036) (41,802)
Treasury stock............................. -- -- 1,125 515 -- 1,640
-------- -------- -------- -------- -------- --------
Total stockholders' equity........... (28,345) (14,526) -- 114,103 -- 71,232
-------- -------- -------- -------- -------- --------
Total liabilities and stockholders'
equity............................. $ (5,134) $ -- $ -- $151,856 $ -- $146,722
======== ======== ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
ADJUSTMENT
------------------- POST-MERGER
(F) (G) ADJUSTMENTS
------- -------- -----------
<S> <C> <C> <C>
ASSETS
Current assets --
Cash and cash equivalents................................. $91,514 $(77,541) $ 13,973
Prepaid expenses and other................................ -- (4,348) (4,348)
------- -------- --------
Total current assets................................ 91,514 (81,889) 9,625
------- -------- --------
Total assets........................................ $91,514 $(81,889) $ 9,625
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Current maturities of long-term debt...................... $ -- $(59,069) $(59,069)
Accounts payable and accrued expenses..................... -- (4,348) (4,348)
------- -------- --------
Total current liabilities........................... -- (63,417) (63,417)
------- -------- --------
Long-term debt, net of current maturities................... -- (18,472) (18,472)
------- -------- --------
Total long-term liabilities......................... -- (18,472) (18,472)
------- -------- --------
Stockholders' equity --
Common stock.............................................. 81 -- 81
Additional paid-in capital................................ 91,433 -- 91,433
------- -------- --------
Total stockholders' equity.......................... 91,514 -- 91,514
------- -------- --------
Total liabilities and stockholders' equity.......... $91,514 $(81,889) $ 9,625
======= ======== ========
</TABLE>
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE
THREE MONTHS ENDED DECEMBER 31, 1997:
(a) Reflects the reduction in salaries, bonuses and benefits and lease
payments to the owners of the Founding Companies. These reductions in
salaries, bonuses and benefits and lease payments have
F-9
<PAGE> 87
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
been agreed prospectively in accordance with the terms of employment
agreements executed as part of the Acquisitions. Such employment
agreements are primarily for five years, contain restrictions related
to competition and provide severance for termination of employment in
certain circumstances.
(b) Reflects the amortization of goodwill to be recorded as a result of
these Acquisitions over a 40-year estimated life.
(c) Reflects elimination of interest income, additional interest expense on
borrowings of $6.4 million related to the transfers discussed in 3. (a)
above, net of interest savings on the $8.1 million of historical debt
to be repaid using proceeds from the Offerings or to be transferred to
the owners of the Founding Companies. The additional interest expense
was calculated utilizing an assumed annual effective interest rate of
approximately 7.5%.
(d) Reflects the incremental provision for federal and state income taxes
at a 38% overall tax rate, before non-deductible goodwill and other
permanent items, relating to the other statements of operations
adjustments and for income taxes on the pretax income of Founding
Companies that have historically elected S Corporation tax status.
The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
------------------------------------ PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
------- ----- ----- ------- -----------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative
expenses.............................. $(9,635) $ -- -- $ -- $(9,635)
Goodwill amortization................... -- 962 -- -- 962
------- ----- ----- ------- -------
Income (loss) from operations......... 9,635 (962) -- -- 8,673
Other income (expense) --
Interest expense...................... -- -- 97 -- 97
Other, net............................ -- -- (133) -- (133)
------- ----- ----- ------- -------
Other income (expense), net........... -- -- (36) -- (36)
------- ----- ----- ------- -------
Income (loss) before income taxes..... 9,635 (962) (36) -- 8,637
Provision for income taxes.............. -- -- -- 3,821 3,821
------- ----- ----- ------- -------
Net income (loss)....................... $ 9,635 $(962) $ (36) $(3,821) $ 4,816
======= ===== ===== ======= =======
</TABLE>
5. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE YEAR
ENDED SEPTEMBER 30, 1997:
(a) Reflects the reduction in salaries, bonuses and benefits and lease
payments to the owners of the Founding Companies. These reductions in
salaries, bonuses and benefits and lease payments have been agreed
prospectively in accordance with the terms of employment agreements
executed as part of the Acquisitions. Such employment agreements are
primarily for five years, contain restrictions related to competition
and provide severance for termination of employment in certain
circumstances.
(b) Reflects the amortization of goodwill to be recorded as a result of
these Acquisitions over a 40-year estimated life, as well as a
reduction in historical Founding Companies' minority interest expense
attributable to minority interests that were acquired as part of the
transaction.
F-10
<PAGE> 88
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
(c) Reflects the reversal of the non-recurring, non-cash compensation
charge of $13.6 million recorded by IES for common stock issued to
management for nominal consideration. Also, reflects elimination of
interest income, additional interest expense on borrowings of $6.4
million related to the transfers discussed in 3.(a) above, net of
interest savings on the $8.1 million of historical debt to be repaid
using proceeds from the Offering or to be transferred to the owners of
the Founding Companies. The additional interest expense was calculated
utilizing an assumed annual effective interest rate of approximately
7.5%.
(d) Reflects the incremental provision for federal and state income taxes
at a 38% overall tax rate, before non-deductible goodwill and other
permanent items, relating to the other statements of operations
adjustments and for income taxes on the pretax income of Founding
Companies that have historically elected S Corporation tax status.
The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
-------------------------------------- PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
------- ------- -------- ------- -----------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative
expenses......................... $(6,068) $ -- $(13,618) $ -- $(19,686)
Goodwill amortization.............. -- 3,848 -- -- 3,848
------- ------- -------- ------- --------
Income (loss) from operations.... 6,068 (3,848) 13,618 -- 15,838
Other income (expense) --
Interest expense................. -- -- (239) -- (239)
Other, net....................... -- 316 (793) -- (477)
------- ------- -------- ------- --------
Other income (expense), net...... -- 316 (1,032) -- (716)
------- ------- -------- ------- --------
Income (loss) before income
taxes......................... 6,068 (3,532) 12,586 -- 15,122
Provision for income taxes......... -- -- -- 7,287 7,287
------- ------- -------- ------- --------
Net income (loss).................. $ 6,068 $(3,532) $ 12,586 $(7,287) $ 7,835
======= ======= ======== ======= ========
</TABLE>
F-11
<PAGE> 89
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Houston-Stafford Electric, Inc.:
We have audited the accompanying consolidated balance sheets of
Houston-Stafford Electric, Inc., a Texas corporation, and consolidated entity
(see Note 1) as of December 31, 1995 and 1996 and September 30, 1997, and the
related consolidated statements of operations, cash flows and stockholder's
equity for each of the three years in the period ended December 31, 1996 and for
the year ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Houston-Stafford Electric,
Inc. and consolidated entity as of December 31, 1995 and 1996 and September 30,
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 and for the year ended
September 30, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-12
<PAGE> 90
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
(SEE NOTE 1)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1997
------ ------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $1,048 $ 2,682 $ 2,492 $ 524
Accounts receivable --
Trade, net of allowance of $220, $264, $342
and $482, respectively...................... 4,605 5,445 9,580 11,035
Retainage..................................... 1,480 1,847 2,511 2,922
Inventories, net................................. 337 346 2,878 2,465
Costs and estimated earnings in excess of
billings on uncompleted contracts............. 259 247 934 52
Prepaid expenses and other current assets........ 560 663 1,162 752
------ ------- ------- -------
Total current assets..................... 8,289 11,230 19,557 17,750
RECEIVABLES FROM RELATED PARTIES................... 335 338 309 --
OTHER RECEIVABLES.................................. 210 166 264 98
GOODWILL AND OTHER INTANGIBLE ASSETS............... -- 23 2,008 1,859
OTHER NON-CURRENT ASSETS........................... 38 41 207 106
PROPERTY AND EQUIPMENT, net........................ 485 1,428 2,125 1,383
------ ------- ------- -------
Total assets............................. $9,357 $13,226 $24,470 $21,196
====== ======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............. $ 353 $ 428 $ 721 $ 1,393
Accounts payable and accrued expenses............ 3,921 3,682 9,549 7,742
Income taxes payable............................. -- -- 1,234 442
Billings in excess of costs and estimated
earnings on uncompleted contracts............. 1,143 1,733 2,417 3,150
Other current liabilities........................ 197 716 222 485
------ ------- ------- -------
Total current liabilities................ 5,614 6,559 14,143 13,212
------ ------- ------- -------
LONG-TERM DEBT, net of current maturities.......... 634 1,295 968 687
OTHER NON-CURRENT LIABILITIES...................... 5 21 1,151 1,139
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $5 par value, 500,000 shares
authorized, 59,000 shares issued and 2 ,000
shares outstanding............................ 295 295 295 295
Additional paid-in capital....................... 112 112 112 112
Retained earnings................................ 3,022 6,069 8,926 6,876
Treasury stock, 29,000 and 39,000 shares, at
cost, respectively............................ (325) (1,125) (1,125) (1,125)
------ ------- ------- -------
Total stockholder's equity............... 3,104 5,351 8,208 6,158
------ ------- ------- -------
Total liabilities and stockholder's
equity................................. $9,357 $13,226 $24,470 $21,196
====== ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE> 91
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
(SEE NOTE 1)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------- ----------------- SEPTEMBER 30, -----------------
1994 1995 1996 1996 1997 1997 1996 1997
------- ------- ------- ------- ------- ------------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES.................................... $48,001 $54,082 $70,493 $53,062 $64,144 $81,575 $17,431 $23,851
COST OF SERVICES (including depreciation)... 42,163 46,712 57,662 44,485 51,654 64,831 13,177 18,691
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........................ 5,838 7,370 12,831 8,577 12,490 16,744 4,254 5,160
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................. 5,319 6,027 7,810 4,404 8,068 11,474 3,406 7,124
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from operations....... 519 1,343 5,021 4,173 4,422 5,270 848 (1,964)
------- ------- ------- ------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense.......................... (137) (254) (134) (90) (143) (187) (44) (47)
Other..................................... 66 58 94 49 380 425 45 29
------- ------- ------- ------- ------- ------- ------- -------
Other income (expense), net......... (71) (196) (40) (41) 237 238 1 (18)
------- ------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES..................................... 448 1,147 4,981 4,132 4,659 5,508 849 (1,982)
PROVISION FOR INCOME TAXES.................. 186 416 1,934 1,544 1,802 2,192 390 (820)
------- ------- ------- ------- ------- ------- ------- -------
NET INCOME.................................. $ 262 $ 731 $ 3,047 $ 2,588 $ 2,857 $ 3,316 $ 459 $(1,162)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE> 92
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
(SEE NOTE 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------- ----------------- SEPTEMBER 30, -----------------
1994 1995 1996 1996 1997 1997 1996 1997
------- ------- ------- ------- ------- ------------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................ $ 262 $ 731 $ 3,047 $ 2,588 $ 2,857 $ 3,316 $ 459 $(1,162)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities --
Depreciation and amortization........... 55 76 133 54 108 187 79 192
Loss (gain) on sale of property and
equipment............................. (29) (5) 2 -- (140) (138) 2 15
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable................. (1,725) (625) (1,237) (1,687) (4,081) (3,631) 450 (1,866)
Inventories......................... (331) 315 (9) -- (1,400) (1,409) (9) 413
Costs and estimated earnings in
excess of billings on uncompleted
contracts......................... (298) 850 12 313 (687) (988) (301) 882
Prepaid expenses and other current
assets............................ (31) 156 (85) 49 (153) (287) (134) 410
Increase (decrease) in --
Accounts payable and accrued
expenses.......................... 367 617 (239) (202) 2,600 2,563 (37) (1,807)
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... 281 637 590 1,283 683 (10) (693) 733
Other current liabilities........... 68 157 505 1,014 556 47 (509) (529)
Other, net.............................. 28 (29) (4) 30 250 216 (34) 158
------- ------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities.............................. (1,353) 2,880 2,715 3,442 593 (134) (727) (2,561)
------- ------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment............................... 48 49 12 -- 35 47 12 82
Additions of property and equipment....... (64) (145) (642) (494) (330) (478) (148) (223)
Purchase of business...................... -- -- -- -- (100) (100)
Collections of notes receivable........... -- -- -- -- 77 77 -- 475
------- ------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities.............................. (16) (96) (630) (494) (318) (454) (136) 334
------- ------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............. 3,146 405 2,875 2,070 10,015 10,820 805 391
Payments of long-term debt................ (1,543) (2,397) (3,326) (2,375) (10,480) (11,431) (951) --
Distributions to stockholders............. -- (15) -- -- -- -- -- (132)
------- ------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities.............................. 1,603 (2,007) (451) (305) (465) (611) (146) 259
------- ------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 234 777 1,634 2,643 (190) (1,199) (1,009) (1,968)
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 37 271 1,048 1,048 2,682 3,691 3,691 2,492
------- ------- ------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period.... $ 271 $ 1,048 $ 2,682 $ 3,691 $ 2,492 $ 2,492 $ 2,682 $ 524
======= ======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................................ $ 137 $ 254 $ 134 $ 111 $ 143 $ 166 $ 23 $ 37
Income taxes............................ 104 225 1,482 332 900 2,050 1,150 --
Non-cash property distribution............ -- -- -- -- -- -- -- 756
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE> 93
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
(SEE NOTE 1)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED TREASURY STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993......... 59,000 $295 $112 $2,044 $ (325) $2,126
Distributions to stockholders.... -- -- -- (15) -- (15)
Net income....................... -- -- -- 262 -- 262
------ ---- ---- ------ ------- ------
BALANCE, December 31, 1994......... 59,000 295 112 2,291 (325) 2,373
Net income....................... -- -- -- 731 -- 731
------ ---- ---- ------ ------- ------
BALANCE, December 31, 1995......... 59,000 295 112 3,022 (325) 3,104
Purchase of treasury stock....... -- -- -- -- (800) (800)
Net income....................... -- -- -- 3,047 -- 3,047
------ ---- ---- ------ ------- ------
BALANCE, December 31, 1996......... 59,000 295 112 6,069 (1,125) 5,351
Net income....................... -- -- -- 2,857 -- 2,857
------ ---- ---- ------ ------- ------
BALANCE, September 30, 1997........ 59,000 295 112 8,926 (1,125) 8,208
Net income (unaudited)............. -- -- -- (1,162) -- (1,162)
Distributions to stockholders
(unaudited)...................... -- -- -- (888) -- (888)
------ ---- ---- ------ ------- ------
BALANCE, December 31, 1997
(unaudited)...................... 59,000 $295 $112 $6,876 $(1,125) $6,158
====== ==== ==== ====== ======= ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE> 94
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION AND BASIS OF PRESENTATION:
Houston-Stafford Electric, Inc. (the Company), a Texas corporation, focuses
on providing electrical system installation and repair services primarily for
residential and mid-sized to large commercial facilities. Work on new structures
is performed primarily under fixed-price contracts. The Company performs the
majority of its contract work under fixed-price contracts with contract terms
ranging from six to 18 months. The Company performs the majority of its work in
Texas and has operations in other states.
In April 1997, the Company acquired an electrical supply company from a
third party for $100,000. The purchase of such electrical supply company has
been reflected as a purchase business combination. Consequently, the
accompanying financial statements reflect the consolidated results of operations
and financial position of the Company and the acquired electrical supply company
for periods subsequent to April 1997. All significant intercompany transactions
and balances have been eliminated for those periods.
In October 1997, the Company and its stockholder entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment. The Company has changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
F-17
<PAGE> 95
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities
for the years ended December 31, 1996 and September 30, 1997 and the nine months
ended September 30, 1996 and 1997 (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
---------------------------- SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, -------------
1996 1997 1996 1997
------------ ------------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C>
Treasury stock purchased........................ $800 $ -- 800 --
Debt assumed in treasury stock purchase
transaction................................... 800 -- 800 --
Purchase price of real property................. 496 396 396 296
Debt assumed in connection with purchase of
property...................................... 368 321 343 296
Receivables reduced in connection with purchase
of property................................... 79 26 53 --
Debt assumed in connection with prepayments..... -- 31 -- 31
</TABLE>
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued by the Company at the lower of cost or market
using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $55,000, $76,000 and $133,000 for the years ended December 31,
1994, 1995 and 1996 and $187,000 for the year ended September 30, 1997,
respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Provisions for total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income. The
effects of these revisions are recognized in the period in which the revisions
are determined. An amount equal to contract costs attributable to claims is
included in revenues when realization is probable and the amount can be reliably
estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's
F-18
<PAGE> 96
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
experience with similar contracts in recent years, the retention balance at each
balance sheet date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
Accounts receivable at December 31, 1995, 1996 and September 30, 1997,
include approved claims and change orders which were expected to be collected
within the fiscal year.
The Company provides an allowance for doubtful accounts based on a
specified percentage of outstanding receivables and the specific identification
of accounts receivable where collection is no longer probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities, and are measured using enacted tax rates
and laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 11 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the consolidated financial position
or results of operations of the Company.
F-19
<PAGE> 97
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, SEPTEMBER 30,
USEFUL LIVES ----------------- -------------
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
<S> <C> <C> <C> <C>
Land..................................... N/A $ 236 $ 461 $ 569
Buildings................................ 5-32 144 439 634
Transportation equipment................. 5 1,432 615 967
Machinery and equipment.................. 3-10 329 370 479
Computer and telephone equipment......... 5-7 180 129 174
Building and Leasehold improvements...... 5-32 185 251 273
Furniture and fixtures................... 5-7 198 207 403
------- ------- -------
2,704 2,472 3,499
Less -- Accumulated depreciation and
amortization........................... (2,219) (1,044) (1,374)
------- ------- -------
Property and equipment, net.... $ 485 $ 1,428 $ 2,125
======= ======= =======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------- -------------
1995 1996 1997
----- ---- -------------
<S> <C> <C> <C>
Balance at beginning of period......................... $ 395 $220 $264
Additions to costs and expenses........................ 49 58 85
Deductions for uncollectible receivables written off
and recoveries....................................... (224) (14) (7)
----- ---- ----
Balance at end of period............................... $ 220 $264 $342
===== ==== ====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Accounts payable, trade.............................. $2,210 $1,748 $6,093
Accrued compensation and other expenses.............. 1,711 1,934 3,456
------ ------ ------
$3,921 $3,682 $9,549
====== ====== ======
</TABLE>
F-20
<PAGE> 98
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress.......... $ 15,370 $ 22,926 $ 22,201
Estimated earnings............................... 2,193 4,269 3,286
-------- -------- --------
17,563 27,195 25,487
Less -- Billings to date......................... (18,447) (28,681) (26,970)
-------- -------- --------
$ (884) $ (1,486) $ (1,483)
======== ======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. $ 259 $ 247 $ 934
Less -- Billings in excess of costs and
estimated earnings on uncompleted
contracts................................... (1,143) (1,733) (2,417)
-------- -------- --------
$ (884) $ (1,486) $ (1,483)
======== ======== ========
</TABLE>
F-21
<PAGE> 99
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------- -------------
1995 1996 1997
----- ------ -------------
<S> <C> <C> <C>
Note payable to an officer, dated August 1996,
payable in monthly payments of $12 including
interest at a rate of 8%, maturing August 2003 and
secured by treasury stock.......................... $ -- $ 766 $ 699
Note payable to a bank, dated October 1994, payable
in monthly payments of $21 plus interest at prime
plus .75%, maturing October 1998 and secured by
trade receivables, inventory and equipment......... 729 458 --
Line of credit with a bank with total borrowing
capacity of $3,100,000, bearing interest at prime
plus 1/2 percent, maturing in July 1998 and
secured by the Company's trade receivables,
inventory and equipment. (Prime was 8.5 percent as
of September 30, 1997)............................. -- -- 507
Mortgage payable to an officer, dated April 1996,
payable in monthly installments of $4 including
interest at 10%, maturing April 2001 and secured by
certain real property.............................. -- 186 159
Mortgage payable to an individual, dated September
1996, payable in monthly installments of $3
including interest at 9%, maturing October 2001 and
secured by certain real property................... -- 130 115
Mortgage payable to a financial institution, dated
December 1995, payable in monthly installments of
$1 including interest at 7.426%, maturing October
2112 and secured by certain real property.......... 113 110 108
Mortgage payable to a bank, renewed January 1996,
payable in monthly installments of $2 plus interest
at 9.25%, maturing January 1999 and secured by
certain
real property...................................... 70 48 30
Mortgage payable to a bank, assumed December 1996,
payable in monthly installments of $.5 including
interest at 9.875%, maturing October 2006 and
secured by certain real property................... -- 25 --
Capital lease obligations............................ -- -- 65
Other................................................ 75 -- 6
----- ------ ------
987 1,723 1,689
Less -- Current maturities........................... (353) (428) (721)
----- ------ ------
Total long-term debt....................... $ 634 $1,295 $ 968
===== ====== ======
</TABLE>
F-22
<PAGE> 100
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal payments due on long-term debt at September 30, 1997 are as
follows (in thousands):
<TABLE>
<S> <C>
1997........................................................ $ 83
1998........................................................ 718
1999........................................................ 190
2000........................................................ 198
2001........................................................ 174
2002........................................................ 141
Thereafter.................................................. 185
------
Total............................................. $1,689
======
</TABLE>
6. LEASES:
The Company leases various facilities, at which it conducts some of its
operations, under operating leases from third parties. Lease expiration dates
and approximate lease payments for the years ending December 31, 1995 and 1996,
and for the year ended September 30, 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
LOCATION EXPIRATION 1995 1996 1997
-------- ---------- ---- ---- -------------
<S> <C> <C> <C> <C>
Austin.............................. October 31, 1997 $ 7 $ 2 $ 12
S.A. Com............................ August 15, 1999 -- 3 25
Fort Worth.......................... September 21, 2000 14 14 24
Acworth............................. November 30, 2002 7 7 10
Duluth.............................. February 28, 1998 18 18 19
Nevada.............................. January 31, 1998 -- 13 15
Polaris............................. December 31, 1997 -- 6 6
--- --- ----
$46 $63 $111
=== === ====
</TABLE>
Future minimum lease payments under these noncancelable operating leases
are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31 --
1997................................................. $ 51
1998................................................. 95
1999................................................. 76
2000................................................. 51
2001................................................. 24
2002................................................. 23
----
$320
====
</TABLE>
For a discussion of leases with certain related parties, see Note 8.
F-23
<PAGE> 101
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1994 1995 1996 1997
----- ----- ------- -------------
<S> <C> <C> <C> <C>
Federal --
Current..................................... $158 $372 $1,455 $2,155
Deferred.................................... 28 (9) 235 (240)
State --
Current..................................... -- 54 210 311
Deferred.................................... -- (1) 34 (34)
---- ---- ------ ------
$186 $416 $1,934 $2,192
==== ==== ====== ======
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
before provision for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1994 1995 1996 1997
----- ----- ------- -------------
<S> <C> <C> <C> <C>
Provision at the statutory rate............... $157 $401 $1,743 $1,928
Increase resulting from --
Non-deductible expenses..................... 29 (19) 32 84
State income tax, net of benefit for federal
deduction................................ -- 34 159 180
---- ---- ------ ------
$186 $416 $1,934 $2,192
==== ==== ====== ======
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Deferred income tax assets --
Bad debts........................................... $ 148 $ 137 $ 162
Reserves and accrued expenses....................... 386 365 564
Other............................................... 1 -- --
----- ----- -----
Total deferred income tax asset............. 535 502 726
----- ----- -----
Deferred income tax liabilities --
Property and equipment.............................. -- (21) (81)
Deferred contract revenue........................... (138) (353) (220)
Accrued expenses.................................... -- -- (40)
----- ----- -----
Total deferred income tax liability......... (138) (374) (341)
----- ----- -----
Net deferred income tax asset............... $ 397 $ 128 $ 385
===== ===== =====
</TABLE>
F-24
<PAGE> 102
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Deferred tax assets --
Current............................................. $ 535 $ 502 $ 726
Long-term........................................... -- -- --
----- ----- -----
Total....................................... 535 502 726
----- ----- -----
Deferred tax liabilities --
Current............................................. (138) (353) (260)
Long-term........................................... -- (21) (81)
----- ----- -----
Total....................................... $(138) $(374) $(341)
===== ===== =====
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
The Company is owned by Roy D. Brown and conducts business with the
following affiliated entities:
<TABLE>
<S> <C>
Houston-Stafford Plumbing, Inc. T and R Development
HSC Building Co., Inc. Ten Ninety Two, Ltd.
Brown-Mueller Joint Venture Lite Management
Hospital Solutions, Inc.
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C>
RECEIVABLES:
Lite Management................................. $ -- $ 23,000 $23,000
Hospital Solutions, Inc......................... -- 25,000 73,396
T and R Development............................. 98,717 106,638 106,637
Houston-Stafford Plumbing....................... 74,495 -- --
Brown-Mueller Joint Venture..................... -- 2,457 29,753
Houston-Stafford Bldg. Co....................... 36,379 -- --
Principal, Houston-Stafford Electric, Inc....... 52,502 84,840 84,841
Ben Mueller, officer............................ -- 25,943 25,943
PAYABLES:
Houston-Stafford Plumbing, Inc.................. 5,645 13,163 13,785
</TABLE>
TRANSACTIONS
The Company leases certain real properties from certain related parties for
use as electrical shops. These leases are open without binding contracts. The
annual rentals for 1994, 1995, 1996 and for the year ended September 30, 1997,
approximated $204,000, $154,000, $217,000 and $139,000 respectively, including
payments to Brown-Mueller Joint Venture (co-owned by Roy Brown and Ben Mueller)
of $174,000, $124,000, $187,000 and $109,000 respectively.
The Company has a mortgage payable to an officer of $159,000 which is
payable in monthly installments of $4,000. This mortgage matures in April 2001
and is secured by certain real property. The Company has a mortgage payable to a
related party of $115,000 which is payable in monthly installments of $3,000
(including interest at 9%). This mortgage matures in October 2001 and is secured
by certain real property. See Note 5 for additional disclosure regarding these
mortgages.
F-25
<PAGE> 103
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company received two pieces of real property in exchange for the
elimination of a balance due from HSC Building Company, of $79,449 and the
assumption of a note due HSC Building Co., Inc., of $25,376.
At September 30, 1997, the company did not have a balance due to or from
HSC Building Co., Inc.
In May 1996, the Company acquired a building and land at a cost of
$220,115. The financing for the acquisition was provided by an officer of the
Company, Ben Mueller. An installment promissory note of $208,123 was signed by
the Company. The note is payable over five years at 10 percent interest.
In August 1996, the Company negotiated the purchase of the stock of Ben
Mueller, a principal who had a one-third interest. The selling price of the
shares totaled $800,000. The Company has signed an installment promissory note
which will provide for the payout of $800,000 over seven years at 8 percent
interest and is secured by the purchased stock. Subsequent to the August 1996
transaction, Mr. Mueller remained an officer of the Company and was paid cash
compensation of approximately $372,000 during the last four months of 1996 and
approximately $252,000 during the first nine months of 1997. These amounts have
been reflected as compensation expense in the accompanying income statements for
the applicable periods.
Pursuant to a 5-year lease agreement effective November 1, 1997,
Houston-Stafford agreed to lease certain facilities owned by Mr. Mueller in
Spring, Texas. Such lease agreement provides for an annual rent of $20,000,
which the Company believes is not in excess of fair rental value for such
facilities.
As a result of the acquisition of the electrical supply company, the
Company assumed two non-compete agreements with certain related parties. The
total amount due under these agreements at September 30, 1997 is $1,051,000, the
majority of which is payable monthly and due August 2006.
9. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution benefit plan. The Company may make
discretionary contributions. Through September 30, 1997, the Company has made no
contributions to the plan.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, other receivables,
accounts payable, a line of credit, notes payable and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company also
carries employment practices liability coverage. The Company has not incurred
significant uninsured losses on any of these items.
Additionally, the Company provides workers' compensation coverage. The
policy has no deductible and provides coverage in the amount of $500,000 per
accident.
F-26
<PAGE> 104
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1997, a general contractor with which the Company does business
acquired a line of credit from a bank on which the Company agreed to act as
second guarantor. This guaranty expires in December of 1997 and is in the amount
of $750,000.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 15 percent, 11 percent and 10
percent of total sales to one major customer during the years ended December 31,
1995, 1996 and September 30, 1997, respectively.
In addition, the Company grants credit, generally without collateral, to
its customers, which are general contractors and home builders, located
primarily in Texas. Consequently, the Company is subject to potential credit
risk related to changes in business and economic factors within the Texas
construction and home-building market. However, management believes that its
contract acceptance, billing and collection policies are adequate to minimize
any potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
13. SUBSEQUENT EVENT CONDITIONAL UPON IES TRANSACTION (UNAUDITED):
As a condition of the definitive agreement with IES discussed in Note 1,
the Company will recognize a non-cash, non-recurring compensation charge of
approximately $17.0 million related to the exchange of cash and 1.1 million
shares of Common Stock for a note payable by the Company to an officer of the
Company, and the issuance of 0.2 million shares to such officer for his new role
as IES management.
F-27
<PAGE> 105
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Electrical Services, Inc.:
We have audited the accompanying balance sheet of Integrated Electrical
Services, Inc., a Delaware corporation, as of September 30, 1997, and the
related statements of operations, cash flows and stockholders' equity for the
period from inception (June 26, 1997) through September 30, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Electrical
Services, Inc. as of September 30, 1997, and the results of its operations and
its cash flows for the period from inception (June 26, 1997) through September
30, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-28
<PAGE> 106
INTEGRATED ELECTRICAL SERVICES, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
CASH AND CASH EQUIVALENTS................................... $ -- $ 11
DEFERRED OFFERING COSTS..................................... 1,560 4,424
-------- --------
Total current assets.............................. 1,560 4,435
PROPERTY AND EQUIPMENT, NET................................. 6 23
-------- --------
Total assets...................................... $ 1,566 $ 4,458
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES.................... $ -- $ 1,901
AMOUNTS DUE TO STOCKHOLDER.................................. 1,565 2,739
-------- --------
Total current liabilities......................... 1,565 4,640
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 authorized,
none issued and outstanding............................ -- --
Common stock, $.01 par value, 100,000,000 shares
authorized, 4,052,311 shares issued and outstanding.... 41 41
Receivable from stockholders.............................. (40) (40)
Additional paid-in capital................................ 13,618 13,618
Retained deficit.......................................... (13,618) (13,801)
-------- --------
Total stockholders' equity........................ 1 (182)
-------- --------
Total liabilities and stockholders' equity........ $ 1,566 $ 4,458
======== ========
</TABLE>
- ---------------
Reflects a 2,329.6-for-one stock split effected in October 1997.
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE> 107
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
THROUGH ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
REVENUES.................................................... $ -- $ --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 13,618 183
-------- ------
LOSS BEFORE INCOME TAXES.................................... (13,618) (183)
PROVISION FOR INCOME TAXES.................................. -- --
-------- ------
NET LOSS.................................................... $(13,618) (183)
======== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-30
<PAGE> 108
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION THREE MONTHS
THROUGH ENDED
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(13,618) $ (183)
Non-cash compensation charge.............................. 13,618 --
Adjustments to reconcile net loss to net cash used in
operating activities --
Changes in assets and liabilities --
Increase in deferred offering costs.................. (1,560) (2,864)
Increase in accounts payable and accrued
liabilities......................................... -- 1,902
Increase in amounts due to stockholder............... 1,565 1,174
-------- -------
Net cash provided by operating activities......... 5 29
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures...................................... (6) (17)
-------- -------
Net cash used in investing activities............. (6) (17)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial capitalization.................................... 1 --
-------- -------
Net cash provided by financing activities......... 1 --
-------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS................... -- 12
CASH AND CASH EQUIVALENTS, beginning of period.............. -- --
-------- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ -- $ 12
======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 109
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION
(JUNE 26, 1997) THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK RECEIVABLE ADDITIONAL TOTAL
------------------ FROM PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCKHOLDERS CAPITAL DEFICIT EQUITY
--------- ------ ------------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
INITIAL CAPITALIZATION, June
26, 1997.................... 2,329,600 $23 $ -- $ -- $ -- $ 23
ISSUANCE OF ADDITIONAL SHARES
TO MANAGEMENT............... 1,722,711 18 -- -- -- 18
NET INCOME (LOSS)............. -- -- -- 13,618 (13,618) --
RECEIVABLE FROM STOCKHOLDERS
FOR STOCK ISSUED............ -- -- (40) -- -- (40)
--------- --- ---- ------- -------- -----
BALANCE, September 30, 1997... 4,052,311 41 (40) 13,618 (13,618) 1
NET LOSS (unaudited).......... -- -- -- -- (183) (183)
--------- --- ---- ------- -------- -----
BALANCE, December 31, 1997
(unaudited)................. 4,052,311 $41 $(40) $13,618 $(13,801) $(182)
========= === ==== ======= ======== =====
</TABLE>
- ---------------
Reflects a 2,329.6-for-one stock split effected in October 1997.
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 110
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Integrated Electrical Services, Inc., a Delaware corporation (IES or the
Company), was founded in June 1997 to create a leading national provider of
electrical contracting and maintenance services, focusing primarily on the
residential, commercial and industrial markets. IES intends to acquire certain
U.S. businesses (the Acquisitions), complete the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of its common stock and, subsequent to the Offerings,
continue to acquire through merger or purchase similar companies to expand its
national and regional operations. The Company has elected a September fiscal
year.
IES has not conducted any operations, and all activities to date have
related to the Offerings and the Acquisitions. All expenditures of the Company
to date have been funded by its founder and current primary stockholder, on
behalf of the Company. The Company's founder and primary stockholder has also
committed to fund future organization expenses and offering costs. As of
September 30, 1997, costs of approximately $1,560,000 have been incurred in
connection with the Offerings, and such costs will be a reduction of the
proceeds from the Offerings. IES has treated these costs as deferred offering
costs in the accompanying balance sheet. IES is dependent upon the Offerings to
execute the pending Acquisitions and to repay its current primary stockholder
for funding deferred offering costs. There is no assurance that the pending
Acquisitions will be completed. The ability of IES to generate future operating
revenues is dependent upon the ability of the Company to manage the effect on
the combined companies of changes in demand for commercial and residential
construction, the effect of business growth, including the availability of
electricians, and the need for other key personnel. These risk factors are
discussed in more detail in "Risk Factors".
2. STOCKHOLDERS' EQUITY:
Common Stock and Preferred Stock
In connection with the organization and initial capitalization of IES, the
Company issued 2,329,600 shares (as restated for the 2,329.6-for-one stock split
discussed below) of common stock at $.01 par value (Common Stock). IES
subsequently issued another 1,722,711 shares (as restated for the
2,329.6-for-one stock split discussed below) of Common Stock at $.01 par value
to certain management of IES. Consequently, as restated for the 2,329.6-for-one
stock split discussed below, the Company had issued a total of 2,655,709 shares
to its founder and Chairman of the Board, and certain trusts established for the
benefit of his children, and an aggregate of 1,396,602 shares to other executive
management of the Company. As a result of the issuance of shares to management
for nominal consideration, the Company recorded for financial statement
presentation purposes, a nonrecurring, noncash compensation charge of $13.6
million, calculated based on the fair value of such shares which has been
determined to be $9.10 and $9.80 per share (a discount of 35% and 30%,
respectively, from the estimated initial public offering price) for the shares
issued in June 1997 and September 1997, respectively. The fair value of such
shares was based on specific factors related to the Company and the transaction
including restrictions on transferability and sale, the time value of money
during the holding period and the substantive progress of the transaction at
each issuance date. The nonrecurring compensation charge discussed above does
not include any of the shares issued to the founder and chairman of the board,
and certain trusts established for the benefit of his children. The shares
issued to the founder and Chairman of the Board, and such trusts, will be
reflected as acquisition costs in connection with the Acquisitions.
IES effected a 2,329.6-for-one stock split in October 1997, for each share
of common stock of the Company then outstanding. In addition, the Company
increased the number of authorized shares of common stock to 100,000,000 and
increased the number of authorized shares of $.01 par value preferred stock to
10,000,000. The effects of the Common Stock split and the increase in the shares
of authorized common stock have been retroactively reflected on the balance
sheet, statement of stockholders' equity and in the accompanying notes.
Additionally, the difference between the initial capitalization and the par
value of
F-33
<PAGE> 111
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Common Stock outstanding subsequent to the stock split has been reflected as a
receivable from stockholders, which is presented as a reduction in stockholders'
equity in the accompanying financial statements.
Restricted Common Stock
In October 1997, the 2,655,709 shares of Common Stock held by the founder
of IES were converted into 2,655,709 shares of restricted common stock. The
shares of restricted common stock have rights similar to shares of Common Stock,
except that such shares are entitled to elect one member of the board of
directors and are entitled to one-half of one vote for each share held on all
other matters. Each share of restricted common stock will convert into Common
Stock upon disposition by the holder of such shares.
Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the Company's 1997 Stock Plan (the Plan), which provides for the
granting or awarding of incentive or nonqualified stock options, stock
appreciation rights, restricted or phantom stock, and other incentive awards to
directors, officers, key employees and consultants of the Company. The number of
shares authorized and reserved for issuance under the Plan is the greater of 3.5
million shares or 15% of the aggregate number of shares of Common Stock
outstanding. The terms of the option awards will be established by the
Compensation Committee of the Company's board of directors. The Company intends
to file a registration statement on Form S-8 under the Securities Act of 1933
registering the issuance of shares upon exercise of options granted under this
Plan. The Company expects to grant nonqualified stock options to purchase a
total of approximately 2.3 million shares of Common Stock to key employees of
the Company at the initial public offering price upon consummation of the
Offerings. These options will vest at the rate of 20 percent per year,
commencing on the first anniversary of the grant date and will expire ten years
from the date of grant, three months following termination of employment due to
death or disability, or one year following termination of employment by means
other than death or disability. In September 1997, 300,000 options were granted
to certain key employees under the Plan with an exercise price equal to 60% of
the initial public offering price. These options vest at a rate of 20 percent
per year, commencing on the date of grant. The compensation expense recognized
for these options prior to September 30, 1997 was not material as they were not
granted until September 1997.
Directors' Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the 1997 Directors' Stock Plan (the Directors' Plan), which provides
for the granting or awarding of stock options to nonemployee directors. The
number of shares authorized and reserved for issuance under the Directors' Plan
is 250,000 shares. The Directors' Plan provides for the automatic grant of
options to purchase 5,000 shares to each nonemployee director serving in such
capacity at the commencement of the Offerings.
Each nonemployee director will be granted options to purchase an additional
5,000 shares at the time of an initial election of such director. In addition,
each director will be automatically granted options to purchase 5,000 shares
annually at each September 30 on which such director remains a director. All
options will have an exercise price based on the fair market value at the date
of grant and have vesting terms similar to options granted under the Stock Plan
discussed above.
The Directors' Plan allows nonemployee directors to receive additional
option grants in amounts and at terms as deemed appropriate by the Company's
board of directors.
3. STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25 under which compensation expense is recorded to the extent
that the fair market value
F-34
<PAGE> 112
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
of the related stock is in excess of the options exercise price at date of
grant. Entities electing to remain with the accounting in APB Opinion No. 25
must make pro forma disclosures of net income and earnings per share as if the
fair value method of accounting prescribed in SFAS No. 123 had been applied. The
Company will measure compensation expense attributable to stock options based on
the method prescribed in APB Opinion No. 25 and will provide the required pro
forma disclosure of net income and earnings per share, as applicable, in the
notes to future consolidated annual financial statements.
4. NEW ACCOUNTING PRONOUNCEMENTS:
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share will be computed
based on weighted average shares outstanding and will exclude dilutive
securities such as options and warrants. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. The
Company will adopt this statement in December 1997, but does not anticipate that
the statement will have a material impact on the Company.
SFAS No. 129 will require additional disclosure of information about an
entity's capital structure, including information about dividend and liquidation
preferences, voting rights, contracts to issue additional shares, and conversion
and exercise prices. The Company will adopt this statement in December 1997.
SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. This statement is
not anticipated to have a material impact on the Company or its financial
disclosures, as the Company currently does not plan to enter into any material
transactions which result in charges (or credits) directly to equity (such as
additional minimum pension liability changes, currency translation adjustments,
and unrealized gains and losses on available for sale securities).
5. FOUNDING COMPANY ACQUISITIONS:
IES has signed definitive agreements to acquire the following entities (the
Founding Companies) to be effective contemporaneously with the Offerings. The
entities to be acquired are:
Ace Electric, Inc.
Amber Electric, Inc.
BW Consolidated, Inc. and Subsidiaries
Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure
Coast Inc.
Hatfield Electric, Inc.
Charles P. Bagby, Co., Inc. and General Partner, Inc.
Houston-Stafford Electric, Inc. and Stark Investments, Inc.
Mills Electrical Contractors, Inc.
Muth Electric, Inc.
Pollock Electric Inc.
Reynolds Electric Corp.
Rodgers Electric Company, Inc.
Summit Electric of Texas, Incorporated
Thomas Popp & Company
Thurman & O'Connell Corporation
The aggregate consideration that will be paid by IES to acquire the
Founding Companies will be approximately $53.4 million in cash and 12.3 million
shares of Common Stock. Additionally, approximately
F-35
<PAGE> 113
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3.9 million of the 4.1 million shares issued to the IES founder and Chairman of
the Board and certain trusts, and certain other management, will be reflected as
acquisition costs as part of the acquisition transactions.
In addition, the Company has entered into employment agreements with
certain key executives of the Founding Companies and the executive officers of
IES. These employment agreements generally prohibit such individuals from
disclosing confidential information and trade secrets, and restrict such
individuals from competing with the Company for a period of two years following
termination of employment. The initial term of these employment agreements is
five years with provisions for annual extensions at the end of the initial term.
6. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED)
The Company has entered into a credit facility with a commercial bank. The
credit facility will be a three-year revolving credit facility of up to $65
million to be used for working capital, capital expenditures, other corporate
purposes and acquisitions. Amounts borrowed under the proposed credit facility
will bear interest at an annual rate equal to either (a) the London interbank
offered rate ("LIBOR") plus 1.0% to 2.0%, as determined by the ratio of the
Company's total funded debt to EBITDA (as defined in the credit facility), or
(b) the higher of (i) the bank's prime rate and (ii) the Federal Funds rate plus
0.5%, plus up to 0.5%, as determined by the ratio of the Company's total funded
debt to EBITDA. Commitment fees of 0.25% to 0.375%, as determined by the ratio
of the Company's total funded debt to EBITDA, will be due on any unused
borrowing capacity under the credit facility. The Company's existing and future
subsidiaries will guarantee the repayment of all amounts due under the facility,
and the facility is secured by the capital stock of those subsidiaries and the
accounts receivable of the Company and those subsidiaries. The credit facility
requires the consent of the lenders for acquisitions exceeding a certain level
of cash consideration, prohibits the payment of cash dividends on the Common
Stock, restricts the ability of the Company to incur other indebtedness and
requires the Company to comply with certain financial covenants.
F-36
<PAGE> 114
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mills Electrical Contractors, Inc.:
We have audited the accompanying consolidated balance sheets of Mills
Electrical Contractors, Inc., a Texas corporation, and Subsidiary as of December
31, 1995 and 1996 and September 30, 1997, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended December 31, 1996 and for the year ended
September 30, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Mills Electrical
Contractors, Inc. and Subsidiary as of December 31, 1995 and 1996 and September
30, 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1996 and for the year ended
September 30, 1997, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-37
<PAGE> 115
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1997
------- ------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................... $ 1,808 $ 5,239 $ 833 $ 1,000
Accounts receivable --
Trade, net of allowance of $148, $252, $353
and $353, respectively.................... 6,251 10,121 13,137 11,242
Retainage, net of allowance of $20, $74, $42
and $42, respectively..................... 796 2,669 1,621 1,807
Related parties............................. 3 208 632 --
Other receivables........................... 307 1,055 27 25
Inventories, net............................... 69 49 93 51
Costs and estimated earnings in excess of
billings on uncompleted contracts........... 131 329 1,584 1,010
Prepaid expenses and other current assets...... 29 118 120 199
------- ------- ------- -------
Total current assets................... 9,394 19,788 18,047 15,334
PROPERTY AND EQUIPMENT, net...................... 912 1,675 2,397 2,458
GOODWILL, net.................................... -- 180 173 171
OTHER ASSETS..................................... 340 394 443 443
------- ------- ------- -------
Total assets........................... $10,646 $22,037 $21,060 $18,406
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line-of-Credit and current maturities of
long-term debt.............................. $ 131 $ 294 $ 643 $ 232
Accounts payable and accrued expenses --
Trade....................................... 4,439 8,886 7,672 6,518
Related parties............................. 23 633 -- --
Billings in excess of costs and estimated
earnings on uncompleted contracts........... 1,746 4,523 1,966 2,632
Unearned revenue and other current
liabilities................................. 98 -- -- --
------- ------- ------- -------
Total current liabilities.............. 6,437 14,336 10,281 9,382
------- ------- ------- -------
LONG-TERM DEBT, net of current maturities........ 260 333 169 128
MINORITY INTEREST................................ -- 3 75 74
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares
authorized, 855 shares issued and 727 shares
outstanding................................. 1 1 1 1
Additional paid-in capital..................... 175 175 175 175
Retained earnings.............................. 3,824 7,240 10,410 8,697
Treasury stock, 128 shares, at cost............ (51) (51) (51) (51)
------- ------- ------- -------
Total stockholders' equity............. 3,949 7,365 10,535 8,822
------- ------- ------- -------
Total liabilities and stockholders'
equity............................... $10,646 $22,037 $21,060 $18,406
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
<PAGE> 116
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED THREE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------- ----------------- SEPTEMBER 30, -------------------
1994 1995 1996 1996 1997 1997 1996 1997
------- ------- ------- ------- ------- ------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES........................ $25,544 $35,250 $65,439 $43,684 $52,644 $74,399 $21,755 $14,968
COST OF SERVICES (including
depreciation and
amortization)................. 20,937 27,372 50,535 33,998 44,035 60,572 16,537 11,700
------- ------- ------- ------- ------- ------- ------- -------
Gross profit.......... 4,607 7,878 14,904 9,686 8,609 13,827 5,218 3,268
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....... 3,391 4,741 7,643 3,837 4,972 8,778 3,806 4,554
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations.......... 1,216 3,137 7,261 5,849 3,637 5,049 1,412 (1,286)
------- ------- ------- ------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense.............. (22) (56) (61) (34) (19) (46) (27) (45)
Other......................... 92 195 215 153 215 277 62 39
------- ------- ------- ------- ------- ------- ------- -------
Other income
(expense), net...... 70 139 154 119 196 231 35 (6)
------- ------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND PROVISION FOR
STATE INCOME TAXES............ 1,286 3,276 7,415 5,968 3,833 5,280 1,447 (1,292)
Minority interest in net
(income) loss of subsidiary... -- -- (3) (5) -- 2 2 --
------- ------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) BEFORE PROVISION
FOR STATE INCOME TAXES........ 1,286 3,276 7,412 5,963 3,833 5,282 1,449 (1,292)
Provision for state income
taxes......................... 52 131 309 182 147 274 127 84
------- ------- ------- ------- ------- ------- ------- -------
NET INCOME (LOSS)............... $ 1,234 $ 3,145 $ 7,103 $ 5,781 $ 3,686 $ 5,008 $ 1,322 $(1,376)
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
<PAGE> 117
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED SEPTEMBER YEAR ENDED ENDED
DECEMBER 31, 30, SEPTEMBER 30, DECEMBER 31,
--------------------------- ----------------- ------------- -----------------
1994 1995 1996 1996 1997 1997 1996 1997
------- ------- ------- ------- ------- ------------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 1,234 $ 3,145 $ 7,103 $ 5,781 $ 3,686 $ 5,008 $ 1,322 $(1,376)
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities --
Depreciation and amortization........... 179 253 385 197 449 637 188 272
Loss (gain) on sale of property and
equipment............................. (2) -- (20) (21) 5 6 1 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable................. (2,107) (1,894) (6,997) (9,998) (1,364) 1,637 3,001 2,342
Inventories, net.................... 10 1 20 2 (45) (27) 18 43
Costs and estimated earnings in
excess of billings on uncompleted
contracts......................... (402) 386 (198) (307) (1,255) (1,146) 109 574
Prepaid expenses and other current
assets............................ (46) 105 (89) (149) (2) 58 60 (78)
Increase (decrease) in --
Accounts payable and accrued
expenses.......................... 1,780 1,178 5,057 3,090 (1,846) 121 1,967 (1,155)
Billings in excess of costs and
estimated earnings on uncompleted
contracts......................... (353) 1,159 2,777 3,926 (2,556) (3,705) (1,149) 666
Unearned revenue and other current
liabilities....................... -- 98 (98) (98) -- -- -- --
Other, net.............................. (64) (29) (52) (130) 22 100 78 2
------- ------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities............................ 229 4,402 7,888 2,293 (2,906) 2,689 5,595 1,290
------- ------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable.............. (12) (291) (75) (75) -- -- -- --
Collection of notes receivable............ 140 141 377 377 -- -- -- --
Proceeds from sale of property and
equipment............................... 8 15 44 44 8 8 -- --
Additions of property and equipment....... (279) (255) (912) (538) (1,177) (1,551) (374) (333)
------- ------- ------- ------- ------- ------- ------- -------
Net cash used in investing
activities........................ (143) (390) (566) (192) (1,169) (1,543) (374) (333)
------- ------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............. -- -- -- -- 1,000 1,000 -- --
Payments of long-term debt................ (19) (136) (204) (117) (815) (902) (87) (452)
Distributions to stockholders............. (147) (2,216) (3,687) (426) (516) (3,777) (3,261) (337)
Sale of treasury stock.................... 181 -- -- -- -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities.............. 15 (2,352) (3,891) (543) (331) (3,679) (3,348) (789)
------- ------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... 101 1,660 3,431 1,558 (4,406) (2,533) 1,873 168
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 47 148 1,808 1,808 5,239 3,366 3,366 833
------- ------- ------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period.... $ 148 $ 1,808 $ 5,239 $ 3,366 $ 833 $ 833 $ 5,239 $ 1,001
======= ======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................................ $ 22 $ 56 $ 61 $ 34 $ 19 46 $ 27 $ 45
Income Taxes............................ $ -- $ 55 $ 93 $ 93 $ 105 $ 105 $ 127 $ 84
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-40
<PAGE> 118
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993.......... 855 $ 1 $ 11 $ 1,808 $(68) $ 1,752
Sale of 42 shares of treasury
stock........................ -- -- 164 -- 17 181
Distributions to
stockholders................. -- -- -- (147) -- (147)
Net income..................... -- -- -- 1,234 -- 1,234
--- --- ---- ------- ---- -------
BALANCE, December 31, 1994.......... 855 1 175 2,895 (51) 3,020
Distributions to
stockholders................. -- -- -- (2,216) -- (2,216)
Net income..................... -- -- -- 3,145 -- 3,145
--- --- ---- ------- ---- -------
BALANCE, December 31, 1995.......... 855 1 175 3,824 (51) 3,949
Distributions to
stockholders................. -- -- -- (3,687) -- (3,687)
Net income..................... -- -- -- 7,103 -- 7,103
--- --- ---- ------- ---- -------
BALANCE, December 31, 1996.......... 855 1 175 7,240 (51) 7,365
Distributions to
stockholders................. -- -- -- (516) -- (516)
Net income..................... -- -- -- 3,686 -- 3,686
--- --- ---- ------- ---- -------
BALANCE, September 30, 1997......... 855 1 175 10,410 (51) 10,535
Distributions to stockholders
(unaudited).................. -- -- -- (337) -- (337)
Net loss (unaudited)........... -- -- -- (1,376) -- (1,376)
--- --- ---- ------- ---- -------
BALANCE, December 31, 1997
(unaudited)....................... 855 $ 1 $175 $ 8,697 $(51) (8,822)
=== === ==== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-41
<PAGE> 119
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying consolidated financial statements include the accounts of
Mills Electrical Contractors, Inc. (Mills), a Texas corporation, and its 89%
owned subsidiary, Fort Worth Regional Electrical Systems, L.L.C. (RES), a Texas
limited liability company (collectively, the Company). The subsidiary was formed
during 1996. In September 1997, Mills sold 10% of the capital stock of RES to an
officer of RES at net book value per share resulting in proceeds to the Company
of $71,000. Financial statements prior to 1996 reflect only the accounts of
Mills. All significant intercompany transactions have been eliminated in
consolidation.
The Company focuses on providing electrical system installation and repair
services primarily for mid-sized to large commercial facilities as well as
residential facilities. The Company performs the majority of its contract work
under fixed price contracts, with contract terms generally ranging from 12 to 36
months. The Company performs the majority of its work in the Dallas-Fort Worth,
Texas, area.
In October 1997, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment. The Company has changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim consolidated financial statements for the nine months ended
September 30, 1996 and 1997, are unaudited and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, the unaudited interim consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities
for the years ended December 31, 1994, 1995, 1996 and September 1997 and the
nine months ended September 30, 1996 and 1997:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, -------------
1994 1995 1996 1997 1996 1997
---- ---- ---- ------------- ----- -----
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Property acquired in capital lease
transactions........................ $290 $195 $254 $17 $237 $ --
Goodwill recognized in purchase
transactions........................ $ -- $ -- $185 -- 185 --
</TABLE>
F-42
<PAGE> 120
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost, net of an allowance for
obsolescence, or market using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation and
amortization expense was $179,000, $253,000 and $385,000 and $637,000 for the
years ended December 31, 1994, 1995 and 1996 and September 30, 1997,
respectively.
In June 1996, RES agreed to purchase a business, consisting of equipment in
a capital lease transaction and an agreement to lease a building under an
operating lease, as well as the purchase of the rights to the name "Regional
Electric Systems" from an individual who became an officer of RES. The acquired
assets were recorded at their estimated fair market value using the purchase
method of accounting. The transaction resulted in the recognition of goodwill of
approximately $185,000 which is being amortized over a 20 year period.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools
and repairs. Provisions for the total estimated losses on uncompleted contracts
are made in the period in which such losses are determined. Changes in job
performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
F-43
<PAGE> 121
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable and a general reserve based upon the total trade and retainage accounts
receivable balances.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company itself is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
Consequently, the accompanying consolidated financial statements of the Company
include only a provision for state income taxes and do not include a provision
for current or deferred federal income taxes. The Company intends to terminate
its S Corporation status concurrently with the effective date of the Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's consolidated financial
statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the consolidated financial position or results of operations
of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------ SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ------- ------- ------------
<S> <C> <C> <C> <C>
Transportation equipment............... 3-5 $ 788 $ 1,031 $ 1,346
Machinery and equipment................ 5 785 1,071 1,266
Leasehold improvements................. 5-10 170 330 421
Furniture and fixtures................. 5 591 901 1,439
Less -- Accumulated depreciation and
amortization......................... (1,422) (1,658) (2,075)
------- ------- ---------
Property and equipment,
net........................ $ 912 $ 1,675 $ 2,397
======= ======= =========
</TABLE>
F-44
<PAGE> 122
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
------------------------------------
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
<S> <C> <C> <C> <C>
Balance at beginning of period................... $ 77 $128 $168 $432
Additions to/(reduction of) costs and expenses... 51 40 158 (37)
---- ---- ---- ----
Balance at end of period......................... $128 $168 $326 $395
==== ==== ==== ====
</TABLE>
Included as a component of other receivables at December 31, 1995, is a
note receivable from a corporation of $291,000 with interest at 10 percent per
annum. This note was collected during 1996.
Accounts payable and accrued expenses, trade consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Accounts payable, trade.................................. $2,236 $4,922 $6,275
Accrued compensation and benefits........................ 1,608 3,423 1,017
Other accrued expenses................................... 595 541 380
------ ------ ------
$4,439 $8,886 $7,672
====== ====== ======
</TABLE>
Electrical system installation contracts in progress are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress............... $33,016 $ 55,954 $ 80,236
Estimated earnings, net of losses..................... 7,090 15,879 16,534
------- -------- --------
40,106 71,833 96,770
Less -- Billings to date.............................. (41,721) (76,027) (97,152)
------- -------- --------
$(1,615) $ (4,194) $ (382)
======= ======== ========
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... $ 131 $ 329 $ 1,584
Less -- Billings in excess of costs and estimated
earnings on uncompleted contracts................ (1,746) (4,523) (1,966)
------- -------- --------
$(1,615) $ (4,194) $ (382)
======= ======== ========
</TABLE>
5. LINE-OF-CREDIT DEBT:
The Company has a $2,000,000 line-of-credit agreement with a bank to be
drawn upon as needed, with variable interest at the bank's prime rate, as
defined, secured by accounts receivable, furniture, fixtures and equipment, an
assignment of a $500,000 life insurance policy on the president and the
president's personal guaranty. In June 1997, the line-of-credit agreement was
extended to June of 1999. At September 30, 1997, there was an outstanding draw
against this line of credit in the amount of $400,000, which is due and payable
within one year.
F-45
<PAGE> 123
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The line-of-credit agreement with the bank contains various covenants
pertaining to working capital, certain financial ratios and net worth. At
September 30, 1997, the Company was in compliance with all such covenants.
LONG-TERM DEBT
Long-term debt consists primarily of capital leases for the purchase of
vehicles and construction equipment as discussed in Note 6.
The Company has a term note payable with a bank, secured by a Company
vehicle. The principal is payable monthly in the amount of $1,000 plus interest
at 9.75 percent. At December 31, 1996 and September 30, 1997, a balance of
$5,000 and $0 was due and payable within one year, respectively.
The Company has an obligation to a related party for the purchase of the
rights to the name "Regional Electric Systems" requiring monthly payments of
principal and interest, at 8.25 percent, of $6,000 through May 1999. At December
31, 1996 and September 30, 1997, a balance of $60,000 and $63,000 was due and
payable within one year, respectively.
The maturities of the line of credit and long-term debt as of September 30,
1997, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending September 30 --
1998................................................... $643
1999................................................... 143
2000................................................... 26
----
$812
====
</TABLE>
6. LEASES:
Obligations Under Capital Leases
The Company leases certain vehicles and construction equipment under leases
classified as capital leases. The construction equipment lease is with an
officer of the Company. The following is a schedule showing the future minimum
lease payments under capital leases by years and the present value of the
minimum lease payments as of September 30, 1997 (in thousands):
<TABLE>
<S> <C>
Year ending September 30 --
1998...................................................... $212
1999...................................................... 103
2000...................................................... 5
----
Total minimum lease payments...................... 320
Less -- Amounts representing interest....................... 17
----
Present value of minimum lease payments........... $303
====
</TABLE>
Operating Leases
The Company leases a building which is owned by the principal stockholder
of the Company. The lease is classified as an operating lease and expires on
October 31, 1997. The rent paid under this related-party lease was approximately
$156,000, $156,000 and $156,000 for the years ended December 31, 1995, 1996 and
September 30, 1997, respectively. The Company also leases a building which is
owned by an officer of the Company. This lease commenced during 1996. The lease
is classified as an operating lease and expires on May 31, 1999. The Company has
an option to renew the lease for one additional two-year term at a reduced
F-46
<PAGE> 124
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lease rate. The rent paid under this related-party lease was approximately
$60,000 for the year ended September 30, 1997. The Company also rents certain
office equipment and warehouse space under several operating lease agreements
which vary in length and terms. The rent paid under these lease agreements was
approximately $8,000, $45,000 and $49,000 for the years ended December 31, 1995,
1996 and September 30, 1997, respectively.
Future minimum lease payments under these noncancelable operating leases
are as follows (in thousands):
<TABLE>
<S> <C>
Year Ended September 30 --
1998................................................... $138
1999................................................... 67
2000................................................... 38
Thereafter............................................. 71
----
$314
====
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
The Company has entered into operating and capital lease transactions with
related parties as discussed in Note 6.
CIMA Services, Inc. (CIMA) and RES are related parties due to the ownership
by the Company's president of 49% and 1%, respectively, of these companies'
capital stock.
The related-party transactions and balances are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
--------------- -------------
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Accounts receivable from CIMA.......................... $ 2 $ 208 $ 632
Accounts receivable from sale of subsidiary stock...... -- -- 71
Interest receivable from CIMA and officer.............. 1 -- --
Accounts payable to CIMA............................... 23 633 --
Contract revenues from CIMA............................ 1,116 1,257 1,368
Purchases of material from CIMA........................ 812 1,080 2,062
Interest income received from CIMA and officers........ 38 14 1
Minority interest in net income of RES................. -- 3 (2)
Liability attributable to minority interest............ -- 3 75
Capital lease obligation to an officer of RES.......... -- 116 82
Payments under capital lease obligation with an officer
of RES............................................... -- 31 54
Payments under operating leases with officers of the
Company.............................................. 26 232 270
</TABLE>
Additionally, the Company has guaranteed an officer note at a bank with an
outstanding balance of approximately $125,000 at September 30, 1997. The
Company's property and equipment has been cross-pledged as collateral.
8. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit-sharing plan that covers all
employees meeting certain age and service requirements. Company contributions to
the plan are at the discretion of the board of directors. Contributions to the
plan charged to operations in 1994, 1995, 1996 and the year ended September 30,
1997 were $186,000, $450,000, $789,000 and $789,000, respectively.
F-47
<PAGE> 125
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit, notes payable and
long-term debt. The Company believes that the carrying values of these
instruments on the accompanying consolidated balance sheets approximates their
fair values.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's consolidated
financial position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including workers'
compensation, business auto liability, commercial general liability, property
and an umbrella policy. The Company has not incurred significant uninsured
losses on any of these items.
11. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10 percent of total sales to three major
customers (comprising approximately 20%, 12% and 11% of total sales), two major
customers (comprising approximately 15% and 13% of total sales), two major
customers (comprising approximately 20% and 18% of total sales) and one major
customer (comprising approximately 32% of total sales) during the years ended
December 31, 1994, 1995, 1996 and September 1997, respectively.
In addition, the Company grants credit, generally without collateral, to
its customers, which are usually general contractors located primarily in the
Dallas-Fort Worth, Texas area. Consequently, the Company is subject to potential
credit risk related to changes in business and economic factors within the
Dallas-Fort Worth, Texas, area. However, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
Cash and Cash Equivalents
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
12. BACKCHARGE CLAIMS:
It is the Company's policy to recognize income from backcharge claims only
when a definitive agreement has been reached and collection is reasonably
assured. In December 1996, the Company reached a settlement on one of its
backcharge claims related to prior periods for approximately $856,000 which is
reflected in the accompanying consolidated statement of operations for the year
ended December 31, 1996, as an increase in revenues and as a component of other
receivables in the accompanying consolidated balance sheet at December 31, 1996.
This amount was collected in 1997.
F-48
<PAGE> 126
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BW Consolidated, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of BW
Consolidated, Inc., a Texas corporation, and Subsidiaries as of December 31,
1995 and 1996 and September 30, 1997, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1996 and for the year ended September 30, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of BW Consolidated, Inc. and
Subsidiaries as of December 31, 1995 and 1996 and September 30, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 and for the year ended September 30, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-49
<PAGE> 127
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1997
------- ------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.................... $ 1,180 $ 507 $ 1,275 $ 2,859
Accounts receivable --
Trade, net of allowance of $82, $119, $124
and $132, respectively.................. 3,178 4,718 4,835 4,098
Retainage................................. 471 768 601 622
Other receivables......................... 62 53 71 219
Notes receivable from stockholders........... 42 -- -- --
Inventories, net of allowance of $24, $29,
$28 and $28, respectively................. 461 557 541 652
Costs and estimated earnings in excess of
billings.................................. 186 182 224 101
Prepaid expenses and other current assets.... 5 10 29 17
------- ------- ------- -------
Total current assets................. 5,585 6,795 7,576 8,568
PROPERTY AND EQUIPMENT, net.................... 3,925 4,609 5,206 3,014
NOTE RECEIVABLE FROM STOCKHOLDERS, net of
current portion.............................. 470 -- -- --
OTHER ASSETS................................... 21 27 49 1,319
------- ------- ------- -------
Total assets......................... $10,001 $11,431 $12,831 $12,901
======= ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt......... $ 214 $ 94 $ 96 $ 146
Accounts payable and accrued expenses........ 2,318 2,131 2,400 2,413
Income taxes payable......................... 130 166 -- --
Billings in excess of costs and estimated
earnings.................................. 606 749 840 892
------- ------- ------- -------
Total current liabilities............ 3,268 3,140 3,336 3,451
------- ------- ------- -------
LONG-TERM DEBT, net of current maturities...... 951 861 842 --
DEFERRED TAXES................................. 180 -- -- --
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY... -- 209 1,302 1,302
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 2,000,000,
500,000, 500,000 and 500,000 shares
authorized, respectively; 31,598, 20,000,
20,000 and 20,000 shares issued and
outstanding, respectively................. 32 20 20 20
Additional paid-in capital................... 566 205 205 205
Retained earnings............................ 5,965 6,996 7,126 7,923
Treasury stock, 5,088 shares, at cost........ (961) -- -- --
------- ------- ------- -------
Total stockholders' equity........... 5,602 7,221 7,351 8,148
------- ------- ------- -------
Total liabilities and stockholders'
equity............................. $10,001 $11,431 $12,831 $12,901
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
<PAGE> 128
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------- ----------------- SEPTEMBER 30, ---------------
1994 1995 1996 1996 1997 1997 1996 1997
------- ------- ------- ------- ------- ------------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES................................ $23,168 $27,730 $33,023 $24,994 $24,136 $32,165 $8,029 $8,418
COST OF SERVICES (including
depreciation)......................... 17,967 20,964 25,017 18,909 18,868 24,976 6,108 6,112
------- ------- ------- ------- ------- ------- ------ ------
Gross profit................... 5,201 6,766 8,006 6,085 5,268 7,189 1,921 2,306
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 3,091 3,637 3,686 2,713 2,793 3,766 973 1,784
------- ------- ------- ------- ------- ------- ------ ------
Income from operations......... 2,110 3,129 4,320 3,372 2,475 3,423 948 522
------- ------- ------- ------- ------- ------- ------ ------
OTHER INCOME (EXPENSE):
Interest expense...................... (135) (120) (97) (73) (84) (108) (24) (11)
Other................................. 97 263 174 137 158 195 37 202
------- ------- ------- ------- ------- ------- ------ ------
Other income (expense), net.... (38) 143 77 64 74 87 13 191
------- ------- ------- ------- ------- ------- ------ ------
NET INCOME BEFORE INCOME TAX AND
MINORITY INTEREST..................... 2,072 3,272 4,397 3,436 2,549 3,510 961 713
INCOME TAX EXPENSE (BENEFIT)............ 772 1,238 (28) (67) 33 72 39 --
------- ------- ------- ------- ------- ------- ------ ------
NET INCOME BEFORE MINORITY INTEREST..... 1,300 2,034 4,425 3,503 2,516 3,438 922 713
MINORITY INTEREST EXPENSE............... -- -- 250 203 269 316 47 --
------- ------- ------- ------- ------- ------- ------ ------
NET INCOME.............................. $ 1,300 $ 2,034 $ 4,175 $ 3,300 $ 2,247 $ 3,122 $ 875 $ 713
======= ======= ======= ======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
<PAGE> 129
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
-------------------------- ----------------- SEPTEMBER 30, -----------------
1994 1995 1996 1996 1997 1997 1996 1997
------ ------- ------- ------- ------- ------------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $1,300 $ 2,034 $ 4,175 $ 3,300 $ 2,247 $ 3,122 $ 875 $ 713
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation and amortization.......... 292 329 426 296 404 534 130 142
Loss (gain) on sale of property and
equipment............................ 9 (54) (17) (19) (5) (3) 2 --
Deferred tax benefit................... -- -- (180) (180) -- -- -- --
Minority interest expense.............. -- -- 250 203 269 316 47 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable.................. (459) (244) (1,828) (1,115) 50 (663) (713) 568
Inventories.......................... (7) 131 (96) (109) 16 29 13 (111)
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... 80 (13) 4 (194) (42) 156 198 123
Prepaid expenses and other current
assets............................. (3) 4 (5) (5) (19) (19) -- 3
Increase (decrease) in --
Accounts payable and accrued
expenses........................... (153) 141 (187) 222 269 (140) (409) 14
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (51) 282 143 200 91 34 (57) 52
Other current liabilities............ 34 41 36 (18) (166) (112) 54 --
------ ------- ------- ------- ------- ------- ------- -------
Net cash provided by operating
activities....................... 1,042 2,651 2,721 2,581 3,114 3,254 140 1,504
------ ------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment.............................. 4 141 66 63 20 23 3
Stockholder receivable................... -- (512) 512 512 -- -- --
Other assets............................. 1 (3) (6) 3 (22) (31) (9)
Additions of property and equipment...... (485) (1,001) (1,160) (984) (892) (1,068) (176) (144)
------ ------- ------- ------- ------- ------- ------- -------
Net cash used in investing
activities....................... (480) (1,375) (588) (406) (894) (1,076) (182) (144)
------ ------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt............ 643 515 1,832 632 800 2,000 1,200 140
Borrowings of long-term debt............. -- -- 10 24 39 25 (14)
Repayments of short-term debt............ (643) (515) (1,832) (632) (800) (2,000) (1,200)
Repayments of long-term debt............. (377) (310) (219) (200) (198) (217) (19)
Stockholder distributions................ -- (32) (2,556) (2,222) (2,117) (2,451) (334) (232)
Minority interest contributions.......... -- -- 85 85 935 935 -- 316
Minority interest distributions.......... -- -- (126) (72) (111) (165) (54) --
Purchase of treasury stock............... -- (961) -- -- -- --
------ ------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities............. (377) (1,303) (2,806) (2,385) (1,452) (1,873) (421) 224
------ ------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 185 (27) (673) (210) 768 305 (463) 1,584
CASH AND CASH EQUIVALENTS, beginning of
period................................... 1,022 1,207 1,180 1,180 507 970 970 1,275
------ ------- ------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period................................... $1,207 $ 1,180 $ 507 $ 970 $ 1,275 $ 1,275 $ 507 $ 2,859
====== ======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest............................... $ 137 $ 119 $ 97 $ 73 $ 84 $ 108 $ 24 $ 11
Income taxes........................... 744 1,197 132 128 198 202 39 --
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-52
<PAGE> 130
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------- ------ ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993........ 31,151 $ 31 $ 512 $ 2,663 $ -- $ 3,206
Sale of common stock............ 261 1 30 -- -- 31
Net income...................... -- -- -- 1,300 -- 1,300
------- ---- ----- ------- ----- -------
BALANCE, December 31, 1994........ 31,412 32 542 3,963 -- 4,537
Sale of common stock............ 186 -- 24 -- -- 24
Net income...................... -- -- -- 2,034 -- 2,034
Dividends paid.................. -- -- -- (32) -- (32)
Purchase of treasury stock...... -- -- -- -- (961) (961)
------- ---- ----- ------- ----- -------
BALANCE, December 31, 1995........ 31,598 32 566 5,965 (961) 5,602
Shares retired upon merger...... (26,510) (27) 154 (127) -- --
Treasury stock canceled......... (5,088) (5) (515) (441) 961 --
Shares issued................... 1,000 10 -- (10) -- --
Stock split 20 to 1 and
recapitalization (Note 1).... 19,000 10 -- (10) -- --
Distributions to stockholders... -- -- -- (2,556) -- (2,556)
Net income...................... -- -- -- 4,175 -- 4,175
------- ---- ----- ------- ----- -------
BALANCE, December 31, 1996........ 20,000 20 205 6,996 -- 7,221
Distributions to stockholders... -- -- -- (2,117) -- (2,117)
Net income...................... -- -- -- 2,247 -- 2,247
------- ---- ----- ------- ----- -------
BALANCE, September 30, 1997....... 20,000 20 205 7,126 -- 7,351
Distributions to stockholders
(unaudited)..................... -- -- -- (232) -- (232)
Net income (unaudited)............ -- -- -- 713 -- 713
Other (unaudited)................. -- -- -- 316 -- 316
------- ---- ----- ------- ----- -------
BALANCE, December 31, 1997........ 20,000 $ 20 $ 205 $ 7,923 $ -- $ 8,148
======= ==== ===== ======= ===== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-53
<PAGE> 131
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
BW Consolidated, Inc. (the Company), a Nevada S Corporation, and
Subsidiaries, two of which are Texas limited partnerships, focuses on providing
electrical system installation and repair services primarily for residential and
mid-sized to large commercial facilities. The Company performs the majority of
its contract work under fixed-price contracts with contract terms generally
ranging from three to 24 months. The Company performs the majority of its work
in Texas.
In January 1996, the original parent company, Bexar Enterprises, Inc., a
Nevada C Corporation, was merged with BW Investments, Inc., Bexar Electric
Company, Inc., and Calhoun Electric Company, Inc., all wholly owned
subsidiaries. The survivor of the merger was Calhoun Electric Company, Inc., a
Texas S Corporation, and its 90 percent owned subsidiary, Bexar Electric
Company, Ltd. (BEC), a Texas limited partnership. The 10 percent minority
interest in the partnership was purchased by employees of Bexar Electric
Company, Ltd. An additional 10 percent minority interest in Bexar Electric
Company, Ltd. (a Texas limited partnership), was purchased by employees of the
Company in January 1997.
In May 1997, Calhoun Electric Company, Inc., a Texas S Corporation,
transferred its assets and liabilities to Calhoun Electric Company, Ltd. (CEC),
a Texas limited partnership. Subsequent to this transfer, Calhoun Electric
Company, Inc., a Texas S Corporation, reorganized as a Nevada S Corporation and
changed its name to BW Consolidated, Inc.
The accompanying financial statements present BW Consolidated, Inc. (and
its predecessors), together with its majority-owned subsidiaries on a
consolidated basis. All significant intercompany activity has been eliminated in
consolidation. Additionally, minority interests in subsidiaries of BW
Consolidated, Inc. have been reflected as "Minority Interest in Consolidated
Subsidiary" in the accompanying consolidated financial statements.
In October 1997, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment. Additionally, in October 1997, the majority shareholder of the
Company transferred 15 percent of its interest in CEC to a former shareholder of
Calhoun Electric Company, Inc. and current employee of CEC. The Company has
changed from a Calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
F-54
<PAGE> 132
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less when purchased to be cash equivalents.
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities
for the years ended December 31, 1994, 1995 and 1996, for the year ended
September 30, 1997, and the nine months ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
1994 1995 1996 1997 1996 1997
---- ---- ---- ------------- ----- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
Property and equipment purchased with
direct financing......................... $-- $25 $-- $141 $-- $141
Like-kind exchange of equipment............ -- 15 6 6 -- 6
Employee Stock Option Plan contribution
through stock distribution............... 30 25 -- -- -- --
Exchange of property and equipment for note
receivable............................... -- -- -- 18 -- 18
</TABLE>
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
average cost method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the consolidated statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
their effects are recognized in the period in which the revisions are
determined. An amount equal to contract costs attributable to claims is included
in revenues when realization is probable and the amount can be reliably
estimated.
F-55
<PAGE> 133
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts,"' represents billings in excess of revenues
recognized.
Warranty Costs
The Company warrants labor for the first year after installation of new
electrical systems and servicing of existing electrical systems. A reserve for
warranty costs is recorded based upon the historical level of warranty claims
and management's estimate of future costs.
Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company has elected S Corporation status effective January 1, 1996, as
defined by the Internal Revenue Code, whereby the Company itself is not subject
to taxation for federal purposes. Under S Corporation status, the stockholders
report their share of the Company's taxable earnings or losses in their personal
tax returns. Consequently, the accompanying financial statements of the Company
do not include a provision for current or deferred income taxes (see Note 7).
The Company intends to terminate its S Corporation status concurrently with the
effective date of the Offerings (see Note 1).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the consolidated financial position or results of operations
of the Company.
F-56
<PAGE> 134
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
<S> <C> <C> <C> <C>
Transportation equipment................. 10 $ 2,783 $ 3,446 $ 3,953
Machinery and equipment.................. 5-10 709 673 684
Land and buildings....................... 40 2,592 2,592 2,941
Furniture, fixtures and office
equipment.............................. 3-15 680 926 965
------- ------- -------
6,764 7,637 8,543
Less -- Accumulated depreciation and
amortization........................... (2,839) (3,028) (3,337)
------- ------- -------
Property and equipment, net.... $ 3,925 $ 4,609 $ 5,206
======= ======= =======
</TABLE>
4. DETAIL OF CERTAIN CONSOLIDATED BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
<S> <C> <C> <C>
Balance at beginning of period.......................... $ 80 $ 82 $105
Additions to costs and expenses......................... 27 127 49
Deductions for uncollectible receivables written off and
recoveries............................................ (25) (90) (30)
---- ---- ----
Balance at end of period.............................. $ 82 $119 $124
==== ==== ====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Accounts payable, trade.............................. $1,134 $1,191 $1,441
Wages................................................ 700 407 470
Insurance............................................ 238 146 83
Contract costs....................................... 141 207 208
Warranty reserve..................................... 83 99 97
Other................................................ 22 81 101
------ ------ ------
Total accounts payable and accrued
expenses................................. $2,318 $2,131 $2,400
====== ====== ======
</TABLE>
F-57
<PAGE> 135
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Amended contract amount............................ $15,945 $18,918 $16,983
Revenue recognized to date......................... 7,953 11,105 8,663
------- ------- -------
Unearned contract amount, backlog.................. $ 7,992 $ 7,813 8,320
======= ======= =======
Costs incurred on uncompleted contracts............ $ 5,647 $ 8,298 6,433
Estimated earnings................................. 2,306 2,807 2,230
------- ------- -------
Total contract revenue earned to date.... 7,953 11,105 8,663
Less -- Billings to date........................... 8,403 11,711 9,278
------- ------- -------
Net overbilled open contracts...................... (450) (606) (615)
Unbilled completed contracts....................... 30 39 (1)
------- ------- -------
$ (420) $ (567) $ (616)
======= ======= =======
Costs and estimated earnings in excess of
billings......................................... $ 186 $ 182 $ 224
Billings in excess of costs and estimated
earnings......................................... (606) (749) (840)
------- ------- -------
$ (420) $ (567) $ (616)
======= ======= =======
</TABLE>
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
------ ---- -------------
<S> <C> <C> <C>
Note payable to a bank, interest at prime plus .75
percent (prime rate at 8.50 percent at September 30,
1997, principal and interest due monthly of $10
maturing in March 2004, secured by certain real
estate.............................................. $ 678 $632 $586
Note payable to a corporation, interest at 7 percent,
principal and interest due monthly of $2 maturing in
July 2004, secured by certain real estate........... 140 128 --
Note payable to a bank, interest at prime, principal
and interest due monthly of $3, maturing in November
2003, secured by certain real estate................ 205 190 179
Note payable to a bank, interest at prime plus .75
percent, principal and interest due monthly of $2
maturing in February 2007, secured by real estate... -- -- $173
Notes payable to manufacturers, interest at 7.9
percent, principal and interest due monthly of $3,
maturing in December 1996 and May 1997, secured by
certain equipment................................... 43 5 --
Notes payable to a bank, interest at 8.25 percent,
principal and interest due monthly of $6, maturing
in July and October 1996, secured by certain
vehicles and equipment.............................. 50 -- --
Various notes payable to a bank, interest ranging from
7.9 percent to 8.25 percent, principal and interest
due monthly of $7, maturing in July through November
1996, secured by certain vehicles, machinery and
office equipment.................................... 49 -- --
------ ---- ----
Total debt.................................. 1,165 955 938
Less -- current maturities............................ 214 94 96
------ ---- ----
Long-term debt less current maturities................ $ 951 $861 $842
====== ==== ====
</TABLE>
F-58
<PAGE> 136
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The maturities of long-term debt at September 30, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 96
1999........................................................ 112
2000........................................................ 116
2001........................................................ 126
2002........................................................ 138
Thereafter.................................................. 350
----
$938
====
</TABLE>
The Company currently has two lines of credit established. The first line
of credit for $750,000, secured by BEC accounts receivable, inventory and
equipment, requires monthly payments of interest at 1 percent over the prime
rate. At December 31, 1995 and 1996 and at September 30, 1997, respectively,
there were no advances outstanding against the line and the full $750,000 was
available. The note maturity date is April 1998. The second line of credit for
$500,000, secured by CEC accounts receivable, inventory, equipment and trucks,
requires monthly payments of interest at 1/2 percent over the prime rate. During
the 1997, this line of credit agreement was renewed and was increased from
$300,000 to $500,000. At December 31, 1995 and 1996, respectively, there were no
advances outstanding against the line and the full $300,000 was available. At
September 30, 1997, there was no advance outstanding against the line and the
full $500,000 was available. The note maturity date is May 1998.
The Company had an irrevocable letter of credit from a bank in the amount
of $199,000 in favor of the Company's workers' compensation carrier. The
expiration date was July 1, 1997. Security for this letter of credit consisted
of the assignment of $125,000 in certificates of deposit and a second lien on
real estate of the Company, and the personal guarantee of the major stockholder.
6. LEASES:
The Company leased undeveloped property from the majority stockholder for
storage of equipment and trailers. The lease was entered into on July 1, 1994,
and expired on June 30, 1997, and was on a month-to-month basis. The
consideration for this lease was $8,000, $17,000, $19,000 and $10,000 in 1994,
1995, 1996 and the year ended September 30, 1997 respectively.
7. INCOME TAXES (IN THOUSANDS):
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1995
---- ------
<S> <C> <C>
Federal --
Current.................................................. $663 $1,118
Deferred................................................. 26 (45)
State --
Current.................................................. 83 157
Deferred................................................. -- 8
---- ------
$772 $1,238
==== ======
</TABLE>
F-59
<PAGE> 137
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34% to income before
provision for income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------
1994 1995
---- ------
<S> <C> <C>
Provision at the statutory rate............................ $704 $1,112
State income tax, net of benefit for federal deduction..... 54 107
Other...................................................... 14 19
---- ------
$772 $1,238
==== ======
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Deferred income tax assets --
Allowance for bad debt.................................... $ 4
Accrued liabilities and expenses.......................... 122
------
Total deferred income tax asset................... 126
------
Deferred income tax liabilities --
Property and equipment.................................... (306)
------
Total deferred income tax liability............... (306)
------
Net deferred income tax liability................. $ (180)
======
</TABLE>
The net deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Deferred tax assets --
Current................................................... $ 126
Long-term................................................. --
-----
Total............................................. $ 126
=====
Deferred tax liabilities --
Current................................................... $ --
Long-term................................................. (306)
-----
Total............................................. $(306)
=====
</TABLE>
Effective January 1, 1996, the Company elected S Corporation status for
Calhoun Electric and partnership status for Bexar Electric. The Company will no
longer be directly responsible for any deferred tax liability which might exist.
The removal of the deferred tax liability which existed as of December 31, 1995,
is recognized in the 1996 consolidated statement of operations (see Note 2).
F-60
<PAGE> 138
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS:
Notes receivable from a stockholder consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1995 1996 1997
---- ---- -------------
<S> <C> <C> <C>
Note receivable, secured by a second lien on real estate,
interest at 7.5 percent, payable in 60 quarterly
installments of $3....................................... $107 $ -- $ --
Note receivable, unsecured, interest at 7.45 percent,
payments due annually in January of 15 percent of
principal plus accrued interest, balance due in January
2000..................................................... 405 -- --
---- ---- ------
Total notes receivable from a stockholder........ 512 -- --
Current portion............................................ 42 -- --
---- ---- ------
Noncurrent portion......................................... $470 $ -- $ --
==== ==== ======
</TABLE>
The Company recognized interest income from a stockholder of $--, $30,000,
$13,000 and $5,000 in 1994, 1995, 1996 and for the year ended September 30,
1997, respectively.
9. EQUITY:
In 1991, the Company adopted an employee stock ownership plan (ESOP) for
the benefit of the Company's employees. The plan covered substantially all
employees of the Company. The Company's contributions to the plan are at the
discretion of the board of directors, but may not exceed the maximum allowable
deduction permitted under the Internal Revenue Code at the time of the
contribution. Under this ESOP plan, employees cannot make contributions to the
plan. The Company made a contribution of $35,000 and $25,000 in 1994 and 1995,
respectively. Effective December 8, 1995, the Company has requested and received
approval from the Internal Revenue Service to terminate the ESOP plan. In
accordance with the termination of the ESOP, the Company repurchased as treasury
stock 5,088 shares for $961,000.
In 1996, the Company sold a minority interest in the limited partnership of
Bexar Electric to certain employees of the Company. The minority interest is
considered a limited partner; the minority interest held 10 percent and 20
percent at December 31, 1996 and September 30, 1997, respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, notes receivable from stockholders, accounts payable, a
line of credit, notes payable and long-term debt. The Company believes that the
carrying value of these instruments on the accompanying consolidated balance
sheets approximates their fair value.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's consolidated
financial position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
F-61
<PAGE> 139
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 11 percent of total sales to one
major customer during the year ended December 31, 1996.
The Company had accounts receivable balances of approximately 15 percent
and 14 percent of total accounts receivable from two major customers as of
December 31, 1996, and approximately 10% due from one major customer for the
year ended September 30, 1997.
The Company had cash and cash equivalents in financial institutions which
exceeded the federally insured limits by $911,000, $269,000 and $858,000 at
December 31, 1995 and 1996, and September 30, 1997, respectively.
In addition, the Company grants credit, generally without collateral, to
its customers, which are primarily general contractors, located in Central and
South Texas. Consequently, the Company is subject to potential credit risk
related to changes in business and economic factors within the state of Texas.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
F-62
<PAGE> 140
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Muth Electric, Inc.:
We have audited the accompanying balance sheets of Muth Electric, Inc., a
South Dakota corporation, as of December 31, 1995 and 1996 and September 30,
1997, and the related statements of operations, cash flows and stockholder's
equity for each of the three years in the period ended December 31, 1996 and for
the year ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Muth Electric, Inc., as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the year ended September 30, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-63
<PAGE> 141
MUTH ELECTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1997
------ ------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 53 $ 82 $ 81 $ 766
Accounts receivable --
Trade, net of allowance of $55, $63, $91, and
$91 respectively............................ 1,718 2,556 3,154 2,043
Retainage..................................... 417 212 383 643
Related party................................. -- 74 246 6
Inventories...................................... 750 820 898 807
Costs and estimated earnings in excess of
billings on uncompleted contracts............. 545 436 675 521
Prepaid expenses and other current assets........ 150 140 135 17
------ ------ ------ ------
Total current assets..................... 3,633 4,320 5,572 4,803
PROPERTY AND EQUIPMENT, net........................ 946 1,140 1,133 1,167
------ ------ ------ ------
Total assets............................. $4,579 $5,460 $6,705 $5,970
====== ====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable.................................... $ -- $ 530 $ 540 $ --
Accounts payable and accrued expenses............ 1,621 1,680 2,177 1,906
Billings in excess of costs and estimated
earnings on uncompleted contracts............. 305 180 543 661
------ ------ ------ ------
Total current liabilities................ 1,926 2,390 3,260 2,567
------ ------ ------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $100 par value, 3,000 shares
authorized, 737 shares issued and
outstanding................................... 74 74 74 74
Retained earnings................................ 2,579 2,996 3,371 3,329
------ ------ ------ ------
Total stockholder's equity............... 2,653 3,070 3,445 3,403
------ ------ ------ ------
Total liabilities and stockholder's
equity................................. $4,579 $5,460 $6,705 $5,970
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-64
<PAGE> 142
MUTH ELECTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
--------------------------- ----------------- SEPTEMBER 30, ---------------
1994 1995 1996 1996 1997 1997 1996 1997
------- ------- ------- ------- ------- ------------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES............................ $13,466 $16,012 $16,830 $12,517 $14,466 $18,779 $4,251 $6,207
COST OF SERVICES (including
depreciation)..................... 9,805 12,189 12,834 9,751 11,428 14,511 3,137 4,702
------- ------- ------- ------- ------- ------- ------ ------
Gross profit................ 3,661 3,823 3,996 2,766 3,038 4,268 1,114 1,505
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 2,678 2,923 2,957 2,147 2,264 3,074 697 899
------- ------- ------- ------- ------- ------- ------ ------
Income from operations...... 983 900 1,039 619 774 1,194 417 606
------- ------- ------- ------- ------- ------- ------ ------
OTHER INCOME (EXPENSE):
Interest income (expense)......... 6 11 (24) (17) (20) (27) (4) (4)
Other............................. (79) (95) 27 22 (4) 1 5 2
------- ------- ------- ------- ------- ------- ------ ------
Other income (expense),
net....................... (73) (84) 3 5 (24) (26) 1 (2)
------- ------- ------- ------- ------- ------- ------ ------
NET INCOME.......................... $ 910 $ 816 $ 1,042 $ 624 $ 750 $ 1,168 $ 418 $ 604
======= ======= ======= ======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 143
MUTH ELECTRIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS YEAR THREE MONTHS
YEAR ENDED ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
---------------------- ------------- ------------- -------------
1994 1995 1996 1996 1997 1997 1996 1997
----- ----- ------ ----- ----- ------------- ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 910 $ 816 $1,042 $ 624 $ 750 $ 1,168 $ 418 $ 604
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization................. 142 185 224 194 182 212 30 70
Loss (gain) on sale of property and
equipment................................... (6) 16 (28) (16) (14) (26) (12)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable...................... (260) 70 (674) (406) (941) (1,209) (268) 1,091
Inventories.............................. 31 (38) (70) (66) (78) (82) (4) 91
Costs and estimated earnings in excess of
billings on uncompleted contracts...... 579 (291) 70 (44) (239) (125) 114 154
Prepaid expenses and other current
assets................................. (41) 5 10 96 5 (81) (86) 26
Increase (decrease) in --
Accounts payable and accrued expenses.... (478) 525 59 105 497 451 (46) (271)
Billings in excess of costs and estimated
earnings on uncompleted contracts...... (252) (95) (119) 47 363 197 (166) 118
----- ----- ------ ----- ----- ------- ----- -----
Net cash provided by (used in) operating
activities............................. 625 1,193 514 534 525 505 (20) 1,883
----- ----- ------ ----- ----- ------- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.... 11 5 53 34 23 42 19
Additions of property and equipment............. (201) (560) (443) (401) (184) (226) (42) (12)
----- ----- ------ ----- ----- ------- ----- -----
Net cash used in investing activities.... (190) (555) (390) (367) (161) (184) (23) (12)
----- ----- ------ ----- ----- ------- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) or notes payable...... -- -- 530 240 10 300 290 (540)
Payments of long-term loan receivable........... 390 -- -- -- -- --
Distributions to stockholders................... (715) (722) (625) (375) (375) (625) (250) (646)
----- ----- ------ ----- ----- ------- ----- -----
Net cash provided by (used in) financing
activities............................. (325) (722) (95) (135) (365) (325) 40 (1,186)
----- ----- ------ ----- ----- ------- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 110 (84) 29 32 (1) (4) (3) 685
CASH AND CASH EQUIVALENTS, beginning of period.... 27 137 53 53 82 85 85 81
----- ----- ------ ----- ----- ------- ----- -----
CASH AND CASH EQUIVALENTS, end of period.......... $ 137 $ 53 $ 82 $ 85 $ 81 $ 81 $ 82 $ 766
===== ===== ====== ===== ===== ======= ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest...................................... $ 9 $ 4 $ 33 $ 25 $ 28 $ 36 $ 4 $ 4
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE> 144
MUTH ELECTRIC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993......................... 737 $74 $2,290 $2,364
Distributions to stockholders.................... -- -- (715) (715)
Net income....................................... -- -- 910 910
--- --- ------ ------
BALANCE, December 31, 1994......................... 737 74 2,485 2,559
Distributions to stockholders.................... -- -- (722) (722)
Net income....................................... -- -- 816 816
--- --- ------ ------
BALANCE, December 31, 1995......................... 737 74 2,579 2,653
Distributions to stockholders.................... -- -- (625) (625)
Net income....................................... -- -- 1,042 1,042
--- --- ------ ------
BALANCE, December 31, 1996......................... 737 74 2,996 3,070
Distributions to stockholders.................... -- -- (375) (375)
Net income....................................... -- -- 750 750
--- --- ------ ------
BALANCE, September 30, 1997........................ 737 $74 $3,371 $3,445
Distributions to stockholders (unaudited)........ -- -- (646) (646)
Net income (unaudited)........................... -- -- 604 604
--- --- ------ ------
BALANCE, December 31, 1997 (unaudited)............. 737 $74 $3,329 $3,403
=== === ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE> 145
MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Muth Electric, Inc. (the Company), a South Dakota corporation, focuses on
providing electrical system installation and repair services primarily for
residential and commercial facilities. The Company performs the majority of its
contract work under fixed-price contracts with contract terms generally ranging
from one to 12 months. The Company performs the majority of its work in South
Dakota and surrounding states.
In October 1997, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment. The Company has changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the estimated useful
life of the asset. Depreciation expense was approximately $142,000, $185,000,
$224,000 and $212,000 for the years ended December 31, 1994, 1995, 1996 and
September 30, 1997, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-68
<PAGE> 146
MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor and depreciation
costs. Provisions for the total estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes in job
performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
The Company warrants labor and materials for the first year after
installation of new electrical systems. A reserve for warranty costs is recorded
based upon the historical level of warranty claims and management's estimate of
future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable, as well as provides a general reserve for potential unknown
adjustments.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company itself is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
Consequently, the accompanying financial statements of the Company do not
include a provision for current or deferred income taxes. The Company intends to
terminate its S Corporation status concurrently with the effective date of the
Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 9 for discussion of
significant estimates reflected in the Company's financial statements.
F-69
<PAGE> 147
MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, SEPTEMBER 30,
USEFUL LIVES ----------------- -------------
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
<S> <C> <C> <C> <C>
Transportation equipment................... 5 $ 806 $ 868 $ 890
Machinery and equipment.................... 7 466 635 707
Leasehold improvements..................... 40 409 479 517
Furniture and fixtures..................... 5 403 425 444
------- ------- ------
2,084 2,407 2,558
Less -- Accumulated depreciation and
amortization............................. (1,138) (1,267) (1,425)
------- ------- ------
Property and equipment, net...... $ 946 $ 1,140 $1,133
======= ======= ======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------- -------------
1995 1996 1997
---- ---- -------------
<S> <C> <C> <C>
Balance at beginning of period........................... $60 $55 $63
Additions (deductions) to costs and expenses............. (5) 8 28
--- --- ---
Balance at end of period................................. $55 $63 $91
=== === ===
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Accounts payable, trade................................ $ 652 $ 757 $1,258
Accrued compensation and benefits...................... 376 520 435
Other accrued expenses................................. 593 403 484
------ ------ ------
$1,621 $1,680 $2,177
====== ====== ======
</TABLE>
F-70
<PAGE> 148
MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
-------- ------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress.............. $ 9,215 $ 7,159 $ 7,250
Estimated earnings, net of losses.................... 1,914 1,277 2,082
-------- ------- -------
11,129 8,436 9,332
Less -- Billings to date............................. (10,889) (8,180) (9,200)
-------- ------- -------
$ 240 $ 256 $ 132
======== ======= =======
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................. $ 545 $ 436 $ 675
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts.................. (305) (180) (543)
-------- ------- -------
$ 240 $ 256 $ 132
======== ======= =======
</TABLE>
5. LINE OF CREDIT:
The Company has three lines of credit with a bank totaling $1,140,000 of
available credit. The line of credit expires January 1998 and bears interest at
9 percent. The line of credit is unsecured. At September 30, 1997, borrowings
outstanding under the line of credit were $540,000.
6. EMPLOYEE BENEFIT PLAN:
The Company has a defined 401(k) contribution profit-sharing plan. The Plan
provides for the Company to match one-half of the first 5 percent contributed by
each employee. Total contributions by the Company under the plan were
approximately $83,000, $93,000 and $85,000 for the years ending December 31,
1995, 1996 and September 31, 1997 respectively. The Company may also make
discretionary contributions. The Company declared discretionary contributions of
$70,000 and $65,000 for the years ended December 31, 1995 and 1996,
respectively, and had accrued approximately $74,000 at December 31, 1996,
relating to all contributions to be funded in the subsequent fiscal year.
7. RELATED-PARTY TRANSACTIONS:
The Company periodically will obtain loans from the stockholder to meet
current cash needs. The Company will also loan out excess funds to the
stockholder. Loans neither to nor from the stockholder are charged interest. A
total of $172,000 was due from a stockholder at September 30, 1997.
The Company has an outstanding trade receivable in the amount of $74,000 to
a company owned by a member of the stockholder's family.
The Company also provides real estate management services to a company
owned by the stockholder.
The Company leases facilities from the Company's stockholder. The leases
expire annually. The rent paid under these related-party leases was
approximately $95,000, $118,000 and $115,000 for the years ended December 31,
1995 and 1996 and September 30, 1997, respectively.
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, lines of credit, notes payable and
long-term debt. The Company believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.
F-71
<PAGE> 149
MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability, workers compensation and an umbrella policy.
The Company has not incurred significant uninsured losses on any of these items.
The Company is self-insured for medical claims up to $20,000 per year per
covered individual. Claims in excess of these amounts are covered by a stop-loss
policy. The Company has recorded reserves for its portion of self-insured claims
based on estimated claims incurred through December 31, 1995 and 1996 or 1997.
10. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company did not have sales greater than 10 percent of total sales to
any one customer during the years ended December 31, 1994, 1995 and 1996 or
September 30, 1997.
In addition, the Company grants credit, generally without collateral, to
its customers located primarily in the Midwest region. Consequently, the Company
is subject to potential credit risk related to changes in business and economic
factors within the Midwest. However, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
F-72
<PAGE> 150
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pollock Electric Inc.:
We have audited the accompanying balance sheets of Pollock Electric Inc., a
Texas corporation, as of October 31, 1995 and 1996 and September 30, 1997, and
the related statements of operations, cash flows and stockholder's equity for
the years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Pollock Electric Inc. as of
October 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-73
<PAGE> 151
POLLOCK ELECTRIC INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31,
--------------- SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1997
------ ------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 302 $ 222 $ 347 22
Accounts receivable --
Trade, net of allowance of $96, $178, $175 and
$173, respectively.......................... 2,204 4,030 4,536 5,139
Retainage..................................... 99 566 765 700
Other receivables............................. 40 4 13 --
Inventories, net................................. -- -- 18 --
Costs and estimated earnings in excess of
billings on uncompleted contracts............. 399 202 767 613
Deferred tax asset............................... 161 263 343 343
Prepaid expenses and other current assets........ 49 115 198 151
------ ------ ------ ------
Total current assets..................... 3,254 5,402 6,987 6,968
PROPERTY AND EQUIPMENT, net........................ 280 341 379 367
------ ------ ------ ------
Total assets............................. $3,534 $5,743 $7,366 $7,335
====== ====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable and capital lease obligations...... $ 28 $ 67 $ 167 $ --
Advances outstanding under line of credit........ 625 1,350 1,610 1,748
Accounts payable and accrued expenses............ 1,378 3,013 3,335 3,612
Income taxes payable............................. 354 181 231 --
Billings in excess of costs and estimated
earnings on uncompleted contracts............. 234 317 889 1,193
Unearned revenue and other current liabilities... 14 13 146 --
------ ------ ------ ------
Total current liabilities................ 2,633 4,941 6,378 6,553
------ ------ ------ ------
CAPITAL LEASE OBLIGATIONS, net of current
portion.......................................... 75 75 71 57
DEFERRED TAX LIABILITY............................. 20 20 21 160
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 1,000,000 shares
authorized, 1,000 shares issued and
outstanding................................... 1 1 1 1
Additional paid-in capital....................... 9 9 9 9
Retained earnings................................ 796 697 886 555
------ ------ ------ ------
Total stockholder's equity............... 806 707 896 565
------ ------ ------ ------
Total liabilities and stockholder's
equity................................. $3,534 $5,743 $7,366 $7,335
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE> 152
POLLOCK ELECTRIC INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED ELEVEN MONTHS ENDED YEAR ENDED THREE MONTHS
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, ENDED DECEMBER 31,
----------------------- ------------------------ ------------- ------------------
1995 1996 1996 1997 1997 1996 1997
------- ------------- ------------- ------- ------------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES............. $13,002 $15,816 $13,305 $17,780 $20,291 $ 5,134 $ 7,011
COST OF SERVICES
(including
depreciation)...... 10,602 13,534 11,646 14,782 16,670 4,070 6,119
------- ------- ------- ------- ------- ------- -------
Gross
profit.... 2,400 2,282 1,659 2,998 3,621 1,064 892
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES........... 2,149 2,463 2,083 2,515 2,895 838 1,368
------- ------- ------- ------- ------- ------- -------
Income
(loss)
from
operations... 251 (181) (424) 483 726 226 (476)
------- ------- ------- ------- ------- ------- -------
OTHER INCOME
(EXPENSE):
Interest expense... (77) (104) (87) (155) (172) (29) (49)
Other.............. -- 156 154 1 3 2 15
------- ------- ------- ------- ------- ------- -------
Other income
(expense),
net....... (77) 52 67 (154) (169) (27) (34)
------- ------- ------- ------- ------- ------- -------
INCOME (LOSS) BEFORE
INCOME TAXES....... 174 (129) (357) 329 557 199 (510)
PROVISION (BENEFIT)
FOR INCOME TAXES... 82 (30) (104) 140 214 71 (179)
------- ------- ------- ------- ------- ------- -------
NET INCOME (LOSS).... $ 92 $ (99) $ (253) $ 189 $ 343 $ 128 $ (331)
======= ======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE> 153
POLLOCK ELECTRIC INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ELEVEN MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
--------------- --------------- ------------- ---------------
1995 1996 1996 1997 1997 1996 1997
----- ------- ------- ----- ------------- ------- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).................................. $ 92 $ (99) $ (253) $ 189 $ 343 $ 128 $(331)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities --
Depreciation and amortization.................... 64 107 83 107 131 30 35
Deferred income taxes............................ (141) (103) (146) (78) (35)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable......................... 577 (2,257) (1,492) (714) (1,479) (147) (525)
Inventories................................. -- -- -- (18) (18) -- 18
Costs and estimated earnings in excess of
billings on uncompleted contracts......... (164) 197 (134) (565) (234) (83) 154
Prepaid expenses and other current assets... (30) (41) (71) (83) (78) 19 46
Increase (decrease) in --
Accounts payable and accrued expenses....... (546) 1,635 815 323 1,143 (4) 276
Income taxes payable........................ 170 (172) (243) 49 120 74 --
Billings in excess of costs and estimated
earnings on uncompleted contracts......... 9 83 636 572 19 (181) 304
Unearned revenue and other current
liabilities............................... (31) (1) 29 133 103 (42) (237)
----- ------- ------- ----- ------- ------- -----
Net cash provided by (used in) operating
activities................................ -- (651) (776) (85) 15 (206) (260)
----- ------- ------- ----- ------- ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment................ (77) (154) (112) (133) (175) (47) (22)
----- ------- ------- ----- ------- ------- -----
Net cash used in investing activities....... (77) (154) (112) (133) (175) (47) (22)
----- ------- ------- ----- ------- ------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit................ 241 725 609 343 484 243 (43)
----- ------- ------- ----- ------- ------- -----
Net cash provided by (used in)
financing activities...................... 241 725 609 343 484 243 (43)
----- ------- ------- ----- ------- ------- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................................ 164 (80) (279) 125 324 (10) (325)
CASH AND CASH EQUIVALENTS, beginning of period....... 138 302 302 222 23 23 347
----- ------- ------- ----- ------- ------- -----
CASH AND CASH EQUIVALENTS, end of period............. $ 302 $ 222 $ 23 $ 347 $ 347 $ 13 $ 22
===== ======= ======= ===== ======= ======= =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest......................................... $ 77 $ 104 $ 88 $ 155 $ 171 $ 29 $ 49
Income taxes..................................... 21 245 245 38 38 71 --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE> 154
POLLOCK ELECTRIC INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1994.................... 1,000 $ 1 $ 9 $ 704 $ 714
Net income................................. -- -- -- 92 92
----- --- --- ------ ------
BALANCE, October 31, 1995.................... 1,000 1 9 796 806
Net income................................. -- -- -- (99) (99)
----- --- --- ------ ------
BALANCE, October 31, 1996.................... 1,000 1 9 697 707
Net income................................. -- -- -- 189 189
----- --- --- ------ ------
BALANCE, September 30, 1997.................. 1,000 $ 1 $ 9 $ 886 $ 896
Net loss (unaudited)....................... -- -- -- (331) (331)
----- --- --- ------ ------
BALANCE, December 31, 1997 (unaudited)....... 1,000 $ 1 $ 9 $ 555 $ 565
===== === === ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE> 155
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Pollock Electric Inc., a Texas corporation (the Company), provides
electrical system installation, data and fiber optic cabling installation and
repair services primarily for mid-sized to large commercial facilities. The
Company performs the majority of its contract work under fixed-price contracts,
with contract terms generally ranging from one to 12 months. The Company
performs the majority of its work in the commercial and industrial markets in
Harris County, Texas, and surrounding areas.
In October 1997, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment. The Company has changed from an October to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the eleven months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
$64,144, $107,242 and $131,190 for the years ended October 31, 1995 and 1996 and
September 30, 1997, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Contract costs include all direct material and labor costs and those indirect
costs related to contract
F-78
<PAGE> 156
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. Provisions for the total estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes in job
performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reasonably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor and materials for the
first year after installation of new electrical systems. The Company generally
warrants labor for one year after servicing existing electrical systems. A
reserve for warranty costs is recorded based upon the historical level of
warranty claims and management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
Accounts receivable at October 31, 1995 and 1996 and September 30, 1997,
include immaterial amounts of claims and unapproved change orders, however, the
Company generally does not recognize change orders until they are approved.
The Company provides an allowance for doubtful accounts based upon a
percentage of gross sales revenue. In addition, the Company reserves for
specific accounts when collection of such accounts is no longer probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred tax assets and liabilities are recorded for
future tax consequences of temporary differences between the financial reporting
and tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 11 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and
F-79
<PAGE> 157
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
circumstances indicate that property and equipment or other assets may be
impaired, an evaluation of recoverability would be performed. If an evaluation
is required, the estimated future undiscounted cash flows associated with the
asset are compared to the asset's carrying amount to determine if an impairment
of such property is necessary. The effect of any impairment would be to expense
the difference between the fair value of such property and its carrying value.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31, SEPTEMBER 30,
USEFUL LIVES -------------- -------------
IN YEARS 1995 1996 1997
------------ ----- ----- ----
<S> <C> <C> <C> <C>
Transportation equipment................. 4-5 $ 95 $ 132 $ 143
Machinery and equipment.................. 5-7 221 267 331
Computer and telephone equipment......... 5 161 201 259
Leasehold improvements................... 5-39 71 107 119
Furniture and fixtures................... 5-7 15 24 24
----- ----- -----
563 731 876
Less -- Accumulated depreciation and
amortization........................... (283) (390) (497)
----- ----- -----
Property and equipment, net.... $ 280 $ 341 $ 379
===== ===== =====
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, SEPTEMBER 30,
------------ -------------
1995 1996 1997
---- ---- ----
<S> <C> <C> <C>
Balance at beginning of period.......................... $ 68 $ 96 $178
Additions to costs and expenses......................... 59 108 26
Deductions for uncollectible receivables written off and
recoveries............................................ (31) (26) (29)
---- ---- ----
Balance at end of period................................ $ 96 $178 $175
==== ==== ====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31, SEPTEMBER 30,
---------------- -------------
1995 1996 1997
------ ------ ----
<S> <C> <C> <C>
Accounts payable, trade.............................. $ 944 $2,553 $2,859
Accrued compensation and benefits.................... 301 344 302
Other accrued expenses............................... 133 116 174
------ ------ ------
$1,378 $3,013 $3,335
====== ====== ======
</TABLE>
F-80
<PAGE> 158
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31, SEPTEMBER 30,
------------------ -------------
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress............ $ 1,300 $ 6,592 $ 9,484
Estimated earnings, net of losses.................. 239 742 1,748
------- ------- --------
1,539 7,334 11,232
Less -- Billings to date........................... (1,374) (7,449) (11,354)
------- ------- --------
$ 165 $ (115) $ (122)
======= ======= ========
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... $ 399 $ 202 $ 767
Less -- Billings in excess of costs and estimated
earnings on uncompleted contracts................ (234) (317) (889)
------- ------- --------
$ 165 $ (115) $ (122)
======= ======= ========
</TABLE>
5. LINE OF CREDIT:
The Company has a $2,500,000 line of credit with a bank. At October 31,
1995 and 1996 and September 30, 1997, unpaid borrowings were $625,000,
$1,350,000 and $1,610,000, respectively. The line of credit expires February 28,
1998, and bears interest at the bank's prime lending rate plus 1 percent. The
line of credit is personally guaranteed by Jon Pollock, sole stockholder and
president of the Company, and is secured by all accounts, contract rights,
chattel paper, instruments, general intangibles, rights to payments of any kind,
all interest of the Company in any goods, and a blanket lien of all property and
equipment. The borrowing base is limited to 75 percent of eligible accounts
receivable that are outstanding less than 60 days from the invoice date.
Interest is computed monthly on the unpaid balance and is payable monthly.
The Company has restrictive and various financial covenants with which the
Company was in compliance at September 30, 1997.
6. LEASES:
The Company leases its office space from its sole stockholder and president
under a lease agreement with a primary lease term of one year beginning November
15, 1991. At the expiration of the primary lease term, the Company exercised its
option to extend the lease for an additional five-year period. Effective
November 1, 1995, the lease agreement was modified to include additional office
space. The basic rent was increased to $3,000 per month, and the expiration date
was extended to November 30, 1998.
In addition to the basic lease cost, the Company must pay insurance, actual
taxes, maintenance and other operating costs. The rent paid under this
related-party lease was approximately $20,000, $36,000 and $36,000 for the years
ended October 31, 1995 and 1996 and September 30, 1997, respectively.
Future minimum lease payments under this noncancelable operating lease are
as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31, SEPTEMBER 30,
----------- -------------
<S> <C> <C>
1997............................................. $36 $--
1998............................................. 36 36
1999............................................. 3 6
--- ---
$75 $42
=== ===
</TABLE>
F-81
<PAGE> 159
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Certain vehicles and equipment have been leased under terms that constitute
capital leases. Accordingly, the costs of the assets (the lower of the cash
purchase price or the present value of the future minimum lease payments) were
recorded as an addition to property and the related liabilities were recorded as
lease obligations. The assets are amortized using the straight-line method, and
interest expense is recorded on the basis of the outstanding lease obligation.
The net present value of future minimum lease payments under the capital
leases as recorded in short-term and long-term debt at October 31, 1996 and
September 30, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending October 31 --
1997...................................................... $ 54
1998...................................................... 51
1999...................................................... 32
----
Total lease payments........................................ 137
Less -- Amounts representing interest....................... (16)
----
Present value of minimum lease payments..................... $121
====
Year ending September 30 --
1998...................................................... $ 71
1999...................................................... 54
2000...................................................... 20
2001...................................................... 7
----
Total lease payments........................................ 152
Less -- Amounts representing interest....................... (19)
----
Present value of minimum lease payments..................... $133
====
</TABLE>
7. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Federal --
Current..................................... $ 259 $ 72 $ 318
Deferred.................................... (187) (99) (122)
State --
Current..................................... 35 10 39
Deferred.................................... (25) (13) (21)
----- ----- -----
$ 82 $ (30) $ 214
===== ===== =====
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
(loss) for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
OCTOBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Income tax expense (benefit) at the statutory
rate........................................ $ 61 $ (45) $ 194
Increase (decrease) resulting from --
State income taxes, net of related tax
effect................................... 6 (2) 12
Nondeductible expenses...................... 15 17 8
----- ----- -----
$ 82 $ (30) $ 214
===== ===== =====
</TABLE>
F-82
<PAGE> 160
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes result from temporary differences in the recognition
of income and expenses for financial reporting purposes and for tax purposes.
The tax effects of these temporary differences, representing deferred tax assets
and liabilities, result principally from the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Deferred income tax assets --
Bad debt reserve.................................... $ 42 $ 51 $ 53
Warranty reserve.................................... 28 44 49
Contracts........................................... 51 50 75
Accrued expenses.................................... 40 118 166
----- ----- -----
Total deferred income tax assets............ 161 263 343
----- ----- -----
Deferred income tax liabilities --
Property and equipment.............................. (17) (17) (52)
State taxes......................................... (1) (4) (4)
Contracts........................................... (116) (103) (208)
----- ----- -----
Total deferred income tax liabilities....... (134) (124) (264)
----- ----- -----
Total deferred income tax assets............ $ 27 $ 139 $ 79
===== ===== =====
</TABLE>
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Deferred tax assets --
Current............................................. $ 161 $ 263 $ 343
Long-term........................................... -- -- --
----- ----- -----
Total....................................... 161 263 343
----- ----- -----
Deferred tax liabilities --
Current............................................. (114) (104) (243)
Long-term........................................... (20) (20) (21)
----- ----- -----
Total....................................... (134) (124) (264)
----- ----- -----
Net deferred income tax assets.............. $ 27 $ 139 $ 79
===== ===== =====
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
The Company leases its office space from its sole stockholder and
president. Total payments made under this lease agreement were approximately
$20,000, $36,000, and $36,000 for the years ended October 31, 1995 and 1996 and
September 30, 1997, respectively. (See Note 6).
In 1995, the Company encouraged its employees to purchase personal
computers by making the down payments for the purchases. The employees are
repaying the Company through payroll deductions. The outstanding amounts are
classified as accounts receivable, other in the accompanying balance sheets.
9. EMPLOYEE BENEFIT PLANS:
Stock Appreciation Plan
On May 4, 1994, the Company adopted a stock appreciation rights plan titled
the Stock Unit Plan (the Plan). Under the Plan, stock rights or units were
awarded to employees valued at the book value of the
F-83
<PAGE> 161
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Company's stock at that date. Subsequent increases in the book value of the
stock accrue to the benefit of the officer or employee, while decreases in the
book value reduce accrued benefits. Payments of amounts accrued under the Plan
are payable at retirement or resignation from the Company, except for cases of
termination with cause, at which time the units and benefits are forfeited.
Deferred compensation liability accrued under the Plan totaled $11,500, $17,435
and $17,435 at October 31, 1995 and 1996 and September 30, 1997, respectively.
The change in the value of the stock appreciation rights under the Plan are
recorded as compensation expense as the Company's net book value fluctuates.
Stock Purchase Agreement
The Company has entered into various agreements with certain of its
officers to provide for business continuity in the event of the death of the
Company's president and sole stockholder. The agreements provide for the
purchase of life insurance on the Company's president through split-dollar
arrangements and term insurance to provide funds for the officers of the Company
to acquire the president's stock in the event of his death. All amounts advanced
by the Company to pay premiums that are not subject to reimbursement from the
officers shall be collectible by the Company from the net equity of the
insurance policy or from the proceeds paid thereon.
Profit-Sharing and 401(k) Plan
Effective November 1, 1994, the Company established a defined contribution
plan for its employees. Employees over the age of 21 are eligible to participate
after one year of service with the Company. Under this plan, employees may elect
to defer up to 15 percent of their salary, subject to Internal Revenue Code
limits. The Company may make a discretionary match as well as a discretionary
profit-sharing contribution. The Company's contribution for the years ended
October 31, 1995 and 1996, totaled $16,970 and $22,466, respectively, and the
Company has accrued approximately $21,500 at September 30, 1997, for
contributions to be funded in the subsequent fiscal year.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit and notes payable. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, workers' compensation, general liability and an umbrella policy.
The Company has not incurred significant uninsured losses on any of these items.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 16 percent of total sales to one
major customer during the years ended October 31, 1995 and 1996. During the year
ended September 30, 1997, the Company had sales of approximately 11% and 10% of
total sales to two major customers.
F-84
<PAGE> 162
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In addition, the Company grants credit, generally without collateral, to
its customers, which are general contractors located primarily in Harris County,
Texas, and surrounding areas. Consequently, the Company is subject to potential
credit risk related to changes in business and economic factors within the
commercial and industrial markets in this geographic region. However, management
believes that its contract acceptance, billing and collection policies are
adequate to minimize the potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-85
<PAGE> 163
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charles P. Bagby, Co., Inc.:
We have audited the accompanying balance sheets of Charles P. Bagby, Co.,
Inc., an Alabama S-Corporation, as of December 31, 1996 and September 30, 1997,
and the related statements of operations, cash flows and stockholder's equity
for the years ended December 31, 1996 and September 30, 1997 and for the nine
months ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Charles P. Bagby, Co., Inc.
as of December 31, 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1996 and
September 30, 1997, and for the nine months ended September 30, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-86
<PAGE> 164
CHARLES P. BAGBY, CO., INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
1996 1997 1997
------------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents...................... $ 624 $ 851 $ 579
Accounts receivable --
Trade, net of allowance of $42, $48 and $44,
respectively................................ 1,186 1,289 970
Retainage................................... 444 602 739
Notes receivable, related party................ 2 15 54
Costs and estimated earnings in excess of
billings on uncompleted
contracts................................... 167 755 164
Prepaid expenses and other current assets...... 359 323 --
------ ------ ------
Total current assets................... 2,782 3,835 2,506
PROPERTY AND EQUIPMENT, net...................... 221 246 65
------ ------ ------
Total assets........................... $3,003 $4,081 $2,571
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses.......... $1,402 $1,821 $1,112
Billings in excess of costs and estimated
earnings on
uncompleted contracts....................... 66 366 61
------ ------ ------
Total current liabilities.............. 1,468 2,187 1,173
------ ------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, $1 par value, 1,000 shares
authorized and outstanding.................. 1 1 1
Retained earnings.............................. 1,534 1,893 1,397
------ ------ ------
Total stockholder's equity............. 1,535 1,894 1,398
------ ------ ------
Total liabilities and stockholder's
equity.............................. $3,003 $4,081 $2,571
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE> 165
CHARLES P. BAGBY, CO., INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
ENDED ENDED
YEAR ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
DECEMBER 31, -------------------- SEPTEMBER 30, ---------------
1996 1996 1997 1997 1996 1997
------------ ----------- ------ ------------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES....................... $7,634 $5,105 $9,243 $11,772 $2,527 $2,083
COST OF SERVICES (including
depreciation)................ 6,412 4,419 7,927 9,920 1,993 1,891
------ ------ ------ ------- ------ ------
Gross profit......... 1,222 686 1,316 1,852 534 192
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...... 680 364 824 1,140 315 (87)
------ ------ ------ ------- ------ ------
Income from
operations......... 542 322 492 712 219 279
------ ------ ------ ------- ------ ------
OTHER INCOME (EXPENSE):
Other........................ 39 37 (4) (2) 3 4
------ ------ ------ ------- ------ ------
Other income
(expense), net..... 39 37 (4) (2) 3 4
------ ------ ------ ------- ------ ------
NET INCOME..................... $ 581 $ 359 $ 488 $ 710 $ 222 $ 283
====== ====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE> 166
CHARLES P. BAGBY, CO., INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
NINE MONTHS ENDED
YEAR ENDED ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
DECEMBER 31, ------------------- SEPTEMBER 30, -------------
1996 1996 1997 1997 1996 1997
------------ ----------- ----- ------------- ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 581 $ 359 $ 488 $ 710 $ 222 $ 283
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities --
Depreciation and amortization............... 21 15 17 23 6 6
Changes in operating assets and
liabilities -- (Increase) decrease in --
Accounts receivable..................... (764) (159) (274) (879) (605) 143
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................. (15) 94 (588) (697) (109) 590
Prepaid expenses and other current
assets................................ (136) (183) 36 83 47 323
Increase (decrease) in --
Accounts payable and accrued expenses... 130 (582) 419 1,131 712 (709)
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 51 37 301 315 14 (306)
Other, net.............................. 30 20 2 12 10 --
----- ------ ----- ------- ----- -----
Net cash provided by (used in) operating
activities............................ (102) (399) 401 698 297 330
----- ------ ----- ------- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment........... (20) (16) (54) (48) (4) --
----- ------ ----- ------- ----- -----
Net cash used in investing activities... (20) (16) (54) (48) (4) --
----- ------ ----- ------- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings......................... -- -- 230 230 -- --
Payments on short-term borrowings............. -- (230) (230) -- --
Distributions to shareholders................. (360) (10) (120) (480) (350) (603)
----- ------ ----- ------- ----- -----
Net cash used in financing activities... (360) (10) (120) (480) (350) (603)
----- ------ ----- ------- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (482) (425) 227 170 (57) (273)
----- ------ ----- ------- ----- -----
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 1,106 1,106 624 681 681 851
----- ------ ----- ------- ----- -----
CASH AND CASH EQUIVALENTS, end of
period........................................ $ 624 $ 681 $ 851 $ 851 $ 624 $ 578
===== ====== ===== ======= ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest.................................... $ 1 $ 1 $ 10 $ 10 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE> 167
CHARLES P. BAGBY, CO., INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995.......................... 1,000 $ 1 $1,283 $1,284
Distributions to shareholder...................... -- -- (360) (360)
Net unrealized gains.............................. -- -- 30 30
Net income........................................ -- -- 581 581
----- ------- ------ ------
BALANCE, December 31, 1996.......................... 1,000 1 1,534 1,535
Distributions to shareholder...................... -- -- (120) (120)
Net unrealized gains (losses)..................... -- -- (9) (9)
Net income........................................ -- -- 488 488
----- ------- ------ ------
BALANCE, September 30, 1997......................... 1,000 $ 1 $1,893 $1,894
Distributions to shareholders (unaudited)......... -- -- (779) (779)
Net Income (unaudited)............................ -- -- 283 283
----- ------- ------ ------
BALANCE, December 31, 1997 (unaudited).............. 1,000 $ 1 1,397 1,398
===== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-90
<PAGE> 168
CHARLES P. BAGBY, CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Charles P. Bagby, Co., Inc. (an Alabama S-Corporation), and its
majority-owned subsidiary, Haymaker Electric, Ltd. (collectively, the
"Company"), focuses on providing electrical system installation and repair
services primarily for mid-sized to large commercial facilities. The Company
performs the majority of its contract work under cost-plus-fee contracts and
fixed price contracts, with contract terms generally ranging from two to 18
months. The Company performs the majority of its work in the state of Alabama.
All significant intercompany activity has been eliminated in consolidation.
In October 1997, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment. The Company has changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996, are unaudited and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less when purchased to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
$21,000 for the year ended December 31, 1996, and $23,000 for the year ended
September 30, 1997.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each
F-91
<PAGE> 169
CHARLES P. BAGBY, CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
contract. Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and their effects are recognized in the period in which the revisions
are determined. An amount equal to contract costs attributable to claims is
included in revenues when realization is probable and the amount can be reliably
estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company is an Alabama sub-chapter S corporation and is not subject to
federal income tax. The earnings of the Company are taxable to the individual
stockholder.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the financial position or results of operations of the
Company.
F-92
<PAGE> 170
CHARLES P. BAGBY, CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Transportation equipment...................... 5-6 $ 52 $ 84
Machinery and equipment....................... 5-10 33 33
Buildings and leasehold improvements.......... 40 208 208
Furniture and fixtures........................ 3-10 83 93
----- -----
376 418
Less -- Accumulated depreciation and
amortization................................ (155) (172)
----- -----
Property and equipment, net......... $ 221 $ 246
===== =====
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Balance at beginning of period............................. $22 $26
Additions to costs and expenses............................ 20 22
--- ---
Balance at end of period................................... $42 $48
=== ===
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Accounts payable, trade.................................... $ 685 $1,120
Accrued compensation and benefits.......................... 175 624
Other accrued expenses..................................... 542 77
------ ------
$1,402 $1,821
====== ======
</TABLE>
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Costs incurred on contracts in progress.................... $ 4,304 $ 5,937
Estimated earnings, net of losses.......................... 546 1,321
------- -------
4,850 7,258
Less -- Billings to date................................... (4,749) (6,869)
------- -------
$ 101 $ 389
======= =======
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $ 167 $ 755
Less -- Billings in excess of costs and estimated earnings
on uncompleted contracts................................. (66) (366)
------- -------
$ 101 $ 389
======= =======
</TABLE>
F-93
<PAGE> 171
CHARLES P. BAGBY, CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
The Company has a $650,000 line of credit with a bank. The line of credit
expires June 30, 1998, and bears interest at 1 percent over the prime lending
rate. The line of credit is secured by a stockholder of a partner corporation.
No borrowings were outstanding under this line of credit at December 31, 1996 or
September 30, 1997.
6. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit-sharing plan. The plan
provides for the Company to match 3 percent of the gross salary of each employee
subject to certain limitations. All participants are immediately fully vested.
Total contributions by the Company under the plan were approximately $51,000 for
the year ended December 31, 1996, and $106,000 for the year ended September 30,
1997.
7. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, a line of credit and
short-term borrowings. The Company believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.
8. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
9. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales comprising approximately 10%, 11% and 11% of total
sales to three major customers during the years ended December 31, 1996 and
September 30, 1997.
F-94
<PAGE> 172
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Amber Electric, Inc.:
We have audited the accompanying balance sheets of Amber Electric, Inc., a
Florida corporation, as of December 31, 1995 and 1996 and September 30, 1997,
and the related statements of operations, cash flows and stockholder's equity
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Amber Electric, Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-95
<PAGE> 173
AMBER ELECTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1997
------ ------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents......................... $ 83 $ 565 $ 988 $ 594
Accounts receivable --
Trade, net of allowance of $28, $40, $51, and
$55, respectively............................ 1,159 1,382 2,365 3,477
Retainage...................................... 468 518 470 441
Inventories....................................... 39 28 25 29
Costs and estimated earnings in excess of billings
on uncompleted contracts....................... 25 151 119 186
Employee advances (Note 8)........................ 2 29 4 4
Note receivable, related party (Note 8)........... -- -- 123 --
Deferred tax asset................................ 36 65 63 63
Prepaid expenses and other current assets......... 22 -- 54 97
------ ------ ------ ------
Total current assets...................... 1,834 2,738 4,211 4,891
PROPERTY AND EQUIPMENT, net......................... 284 380 516 617
NOTE RECEIVABLE, related party (Note 8)............. 37 58 -- --
------ ------ ------ ------
Total assets.............................. $2,155 $3,176 $4,727 $5,508
====== ====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.............. $ 96 $ 133 $ 179 $ 388
Line of credit.................................... 101 -- -- --
Accounts payable and accrued expenses............. 696 1,157 1,276 1,842
Income taxes payable.............................. 3 244 676 1,144
Billings in excess of costs and estimated earnings
on uncompleted contracts....................... 355 408 196 473
Note payable, related party (Note 8).............. -- 100 -- --
Other............................................. 129 97 122 123
------ ------ ------ ------
Total current liabilities................. 1,380 2,139 2,449 3,970
------ ------ ------ ------
LONG-TERM DEBT, net of current maturities........... 573 538 568 697
DEFERRED TAX LIABILITY.............................. 38 45 52 52
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 7,500 shares
authorized, 1,100 shares issued and
outstanding.................................... 1 1 1 1
Retained earnings................................. 597 887 2,091 1,222
Treasury stock, 539 shares, at cost............... (434) (434) (434) (434)
------ ------ ------ ------
Total stockholder's equity................ 164 454 1,658 789
------ ------ ------ ------
Total liabilities and stockholder's
equity.................................. $2,155 $3,176 $4,727 $5,508
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE> 174
AMBER ELECTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED NINE MONTHS ENDED ENDED
DECEMBER 31, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------- ----------------- SEPTEMBER 30, ---------------
1995 1996 1996 1997 1997 1996 1997
------ ------- ------- ------- ------------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES.......................... $9,728 $13,878 $10,572 $13,080 $16,386 $3,306 $4,704
COST OF SERVICES (including
depreciation)................... 8,635 12,215 8,710 9,910 13,415 3,505 3,736
------ ------- ------- ------- ------- ------ ------
Gross profit (loss)...... 1,093 1,663 1,862 3,170 2,971 (199) 968
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES......... 957 1,160 978 1,197 1,379 182 1,618
------ ------- ------- ------- ------- ------ ------
Income (loss) from
operations............. 136 503 884 1,973 1,592 (381) (650)
------ ------- ------- ------- ------- ------ ------
OTHER INCOME (EXPENSE):
Interest expense................ (65) (51) (51) (45) (45) -- (82)
Other........................... 24 36 10 43 69 26 15
------ ------- ------- ------- ------- ------ ------
Other income (expense),
net.................... (41) (15) (41) (2) 24 26 (67)
------ ------- ------- ------- ------- ------ ------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES.................... 95 488 843 1,971 1,616 (355) (717)
PROVISION FOR INCOME TAXES........ 36 198 333 767 632 (135) 244
------ ------- ------- ------- ------- ------ ------
NET INCOME (LOSS)................. $ 59 $ 290 $ 510 $ 1,204 $ 984 $ (220) $ (961)
====== ======= ======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE> 175
AMBER ELECTRIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------- --------------- SEPTEMBER 30, ---------------
1995 1996 1996 1997 1997 1996 1997
----- ----- ----- ------- ------------- ----- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................................... $ 59 $ 290 $ 510 $ 1,204 $ 984 $(220) $ (961)
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization........................... 62 87 61 146 172 26 34
Bad debt expense........................................ 17 35 9 11 37 26 --
(Gain) Loss on sale of property and equipment........... -- 5 4 (1) -- 1 --
Increase in cash surrender value of life insurance
policy................................................ (14) -- -- -- -- -- --
Deferred income taxes................................... (41) 24 (31) 34 89 -- --
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable................................ (299) (308) (112) (946) (1,142) (196) (1,087)
Inventories........................................ 15 11 3 3 11 8 (4)
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... (6) (126) (129) 32 35 3 (67)
Employee advances.................................. 14 (27) (15) 25 13 --
Prepaid expenses and other current assets.......... (7) 22 (19) (54) (13) 29 (39)
Note receivable, related party..................... -- (21) (21) (65) (65) -- 123
Increase (decrease) in --
Accounts payable and accrued expenses.............. 20 461 188 119 392 273 568
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 304 53 (171) (212) 12 224 277
Income taxes payable............................... 49 163 377 432 218 (214) 468
Other, net.............................................. 4 1 -- (7) (6) 1 91
----- ----- ----- ------- ------- ----- -------
Net cash provided by (used in) operating activities... 177 670 654 721 737 (39) (597)
----- ----- ----- ------- ------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 5 2 2 8 8
Additions of property and equipment....................... (155) (190) (157) (290) (323) (33) (135)
----- ----- ----- ------- ------- ----- -------
Net cash used in investing activities.............. (150) (188) (155) (282) (315) (33) (135)
----- ----- ----- ------- ------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable, related party............................... -- 100 -- (100) -- 100 --
Borrowings of line of credit.............................. 101 -- -- -- -- -- --
Payments of line of credit................................ (125) (101) (101) -- -- -- --
Borrowings of long-term debt.............................. 104 131 95 200 236 36 338
Payments of long-term debt................................ (74) (130) (83) (116) (163) (47) --
----- ----- ----- ------- ------- ----- -------
Net cash provided by (used in) financing
activities....................................... 6 -- (89) (16) 73 89 338
----- ----- ----- ------- ------- ----- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS...................................... 33 482 410 423 495 17 (394)
CASH AND CASH EQUIVALENTS, beginning of period.............. 50 83 83 565 493 548 988
----- ----- ----- ------- ------- ----- -------
CASH AND CASH EQUIVALENTS, end of period.................... $ 83 $ 565 $ 493 $ 988 $ 988 $ 565 $ 594
===== ===== ===== ======= ======= ===== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest................................................ $ 65 $ 51 $ 51 $ 45 $ 45 $ -- $ 82
Income taxes............................................ 27 10 8 301 303 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-98
<PAGE> 176
AMBER ELECTRIC, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- RETAINED TREASURY STOCKHOLDER'S
SHARES AMOUNT EARNINGS STOCK EQUITY
------ ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994..................... 1,100 $1 $ 538 $(434) $ 105
Net income................................... -- -- 59 -- 59
----- -- ------ ----- ------
BALANCE, December 31, 1995..................... 1,100 1 597 (434) 164
Net income................................... -- -- 290 -- 290
----- -- ------ ----- ------
BALANCE, December 31, 1996..................... 1,100 1 887 (434) 454
Net income................................... -- -- 1,204 -- 1,204
----- -- ------ ----- ------
BALANCE, September 30, 1997.................... 1,100 1 2,091 (434) 1,658
Net income (unaudited)......................... -- -- (961) -- (961)
Other (unaudited) -- -- 92 -- 92
----- -- ------ ----- ------
BALANCE, December 31, 1997 (unaudited)......... 1,100 $1 $1,222 $(434) $ 789
===== == ====== ===== ======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-99
<PAGE> 177
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Amber Electric, Inc. (the Company), a Florida corporation, focuses on
providing electrical system installation and repair services primarily for
residential and mid-sized to large commercial facilities. The Company performs
the majority of its contract work under fixed price contracts, with contract
terms generally ranging from two to 12 months. The Company performs the majority
of its work in central Florida.
In October 1997, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment. The Company has changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line and declining-balance methods over the estimated useful
lives of the related assets. Leasehold improvements are capitalized and
amortized over the estimated useful life of the asset. Depreciation and
amortization expense was approximately $62,000, $87,000 and $172,000 for the
years ended December 31, 1995, 1996, and September 30, 1997, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-100
<PAGE> 178
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
their effects are recognized in the period in which the revisions are
determined. An amount equal to contract costs attributable to claims is included
in revenues when realization is probable and the amount can be reliably
estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
one year after servicing of existing electrical systems.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities, and are measured using enacted tax rates
and laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote for discussion of significant
estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
F-101
<PAGE> 179
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31, SEPTEMBER 30,
USEFUL LIVES -------------- -------------
IN YEARS 1995 1996 1997
------------ ----- ----- -------------
<S> <C> <C> <C> <C>
Transportation equipment................. 3-7 $ 430 $ 541 $ 631
Machinery and equipment.................. 3-7 101 78 99
Leasehold improvements................... 5-39 76 74 87
Furniture and fixtures................... 3-7 121 91 191
----- ----- ------
728 784 1,008
Less - Accumulated depreciation and
amortization........................... (444) (404) (492)
----- ----- ------
Property and equipment, net.... $ 284 $ 380 $ 516
===== ===== ======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Balance at beginning of period...................... $ 17 $ 28 $ 40
Additions to costs and expenses..................... 17 35 11
Deductions for uncollectible receivables written off
and recoveries.................................... (6) (23) --
------- ------- ------
Balance at end of period............................ $ 28 $ 40 $ 51
======= ======= ======
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Accounts payable, trade............................. $ 537 $ 882 $1,006
Accrued compensation and benefits................... 84 110 187
Other accrued expenses.............................. 75 165 83
------- ------- ------
$ 696 $ 1,157 $1,276
======= ======= ======
</TABLE>
F-102
<PAGE> 180
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress............. $ 1,912 $ 2,100 $ 1,582
Estimated earnings, net of losses................... 333 258 192
------- ------- -------
2,245 2,358 1,774
Less -- Billings to date............................ (2,575) (2,615) (1,851)
------- ------- -------
$ (330) $ (257) $ (77)
======= ======= =======
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... $ 25 $ 151 $ 119
Less -- Billings in excess of costs and
estimated earnings on uncompleted
contracts.................................... (355) (408) (196)
------- ------- -------
$ (330) $ (257) $ (77)
======= ======= =======
</TABLE>
5. LONG-TERM DEBT:
Long-term debt consists of notes payable to various banks. The debt is
secured by certain equipment. The notes are payable in monthly installments
including interest at rates ranging from 8 percent to 10.9 percent.
The Company has a note payable to a former stockholder payable in monthly
installments of $4,333, including interest at 7.5 percent, due August 2004. The
debt is guaranteed by the majority stockholder. The balance of such debt was
approximately $330,000, $302,000 and $279,000 at December 31, 1995, 1996 and
September 30, 1997, respectively.
The Company also has a note payable outstanding to an individual with a 5
percent stated interest rate and an 8.12 percent imputed interest rate. The note
is payable in monthly installments of principal and interest of $1,893,
collateralized by equipment and inventories, and is due February 2005. The
balance of the note was approximately $168,000, $153,000 and $142,000 at
December 31, 1995, 1996 and September 30, 1997, respectively.
The maturities of long-term debt as of September 30, 1997, are as follows
(in thousands):
<TABLE>
<S> <C>
Year ending December 31 --
1998................................................... $179
1999................................................... 155
2000................................................... 115
2001................................................... 76
2002................................................... 70
Thereafter............................................. 152
----
$747
====
</TABLE>
At September 30, 1997 and December 31, 1996, the Company had a $500,000
line of credit with a bank, collateralized by accounts receivable and certain
other assets. Interest is payable monthly at the bank's prime rate (8.5 percent
at September 30, 1997). The agreement stipulates a minimum interest rate of 8
percent. Any amounts available are limited to 75 percent of eligible accounts
receivable, as defined. At September 30, 1997 and December 31, 1996, the entire
amount of the line remains available to be borrowed. The line of credit is
subject to a continuing guarantee by the Company's majority stockholder. The
line of credit is due on demand, but in no event no later than July 5, 1998.
F-103
<PAGE> 181
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1995, the maximum amount available under such line of
credit was approximately $99,000 as the Company had a $200,000 line of credit
with the bank.
6. LEASES:
The Company leases office space from the majority stockholder under a
month-to-month operating lease. Rent expense incurred under this related-party
lease was approximately $67,000, $81,000 and $83,000 for the years ended
December 31, 1995, 1996 and September 30, 1997, respectively.
There are no future minimum lease payments under this operating lease.
7. INCOME TAXES (IN THOUSANDS):
Federal income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1995 1996 1997
---- ---- -------------
<S> <C> <C> <C>
Federal --
Current............................................... $ 1 $224 $510
Deferred.............................................. 30 (54) 32
State --
Current............................................... -- 27 95
Deferred.............................................. 5 1 (5)
---- ---- ----
$ 36 $198 $632
==== ==== ====
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
before provision for income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1995 1996 1997
---- ---- -------------
<S> <C> <C> <C>
Provision at the statutory rate.......................... $33 $171 $565
Increase resulting from --
State income taxes, net of related federal benefit..... 3 19 59
Permanent differences, primarily meals and
entertainment....................................... -- 8 8
--- ---- ----
$36 $198 $632
=== ==== ====
</TABLE>
F-104
<PAGE> 182
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Deferred tax assets --
Allowance for doubtful accounts..................... $ 11 $ 17 $ 20
Other accrued expenses not deducted for tax
purposes......................................... 25 48 43
----- ----- -----
Total....................................... 36 65 63
----- ----- -----
Deferred tax liabilities --
Accounting for long-term contracts.................. (129) (97) (122)
Bases differences on property and equipment and
capital
lease accounting................................. (38) (45) (52)
----- ----- -----
Total....................................... (167) (142) (174)
----- ----- -----
Net deferred income tax liabilities......... $(131) $ (77) $(111)
===== ===== =====
</TABLE>
The net deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------- -------------
1995 1996 1997
----- ---- -------------
<S> <C> <C> <C>
Deferred tax assets --
Current.............................................. $ 36 $ 65 $ 63
Long-term............................................ -- -- --
----- ---- -----
Total........................................ 36 65 63
----- ---- -----
Deferred tax liabilities --
Current.............................................. (129) (97) (122)
Long-term............................................ (38) (45) (52)
----- ---- -----
Total........................................ (167) (142) (174)
----- ---- -----
Net deferred tax liability................... $(131) $(77) $(111)
===== ==== =====
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
During 1995, the Company transferred its interest in the cash surrender
value of life insurance policies in exchange for a note receivable bearing
annual interest of 4 percent to a partnership controlled by the majority
stockholder of the Company. The entire principal and accrued interest is due
August 2005. The Company continues to pay premiums for this policy, also
increasing the receivable.
The Company had a note payable to the majority stockholder at December 31,
1996, which represented a bonus to the stockholder and was loaned to the Company
without interest attached. The balance was subsequently paid to the stockholder.
The Company will advance money to employees on occasion. Advanced amounts
are based on certain levels of employment and are repaid to the Company based on
a variety of repayment plans.
9. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit-sharing plan. The plan
provides for the Company to match, on a discretionary basis, one-half of the
first 4 percent contributed by each employee. Total
F-105
<PAGE> 183
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
contributions by the Company under the plan were approximately $31,000, $44,000
and $56,000 for the years ending December 31, 1995, 1996 and September 30, 1997,
respectively. The Company had accrued approximately $5,000 at September 30,
1997, for contributions to be funded in the subsequent fiscal year.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, employee advances, notes receivable, a line of credit,
accounts payable, notes payable and long-term debt. The Company believes that
the carrying value of these instruments on the accompanying balance sheets
approximates their fair value.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
The Company provides for workers' compensation insurance through a
partially self-insured plan whereby the Company is responsible for certain
incurred losses with a maximum of 125 percent of standard state-rated workers'
compensation premiums. Estimated claims incurred during the years ended December
31, 1995, 1996 and September 30, 1997 were not material. Accordingly, the
Company has not recorded any reserves for its portion of self-insurance claims.
During 1997, the Company enrolled in a secured individual preferred dividend
safety incentive program for workers' compensation with a maximum premium of 100
percent of the total normal state-rated premium. Employee health insurance is
provided for under a fully insured medical plan consisting of HMO and POS
programs.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 16 percent of total sales to one
major customer for the year ended December 31, 1995, sales of approximately 15
and 13 percent of total sales to two major customers for the year ended December
31, 1996, and sales of approximately 22 percent of total sales to one major
customer during the year ended September 30, 1997.
In addition, the Company grants credit, generally without collateral, to
its customers, which are real estate operations, general contractors, etc.,
located primarily in central Florida. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors within
the central Florida region. However, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-106
<PAGE> 184
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Daniel Electrical Contractors, Inc. and
Daniel Electrical of Treasure Coast Inc.:
We have audited the accompanying combined balance sheets of Daniel
Electrical Contractors, Inc., a Florida corporation, and Daniel Electrical of
Treasure Coast Inc., a Florida corporation, as of December 31, 1995 and 1996 and
September 30, 1997, and the related combined statements of operations, cash
flows and stockholder's equity for the years then ended and for the nine months
ended September 30, 1997. These combined financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Daniel
Electrical Contractors, Inc. and Daniel Electrical of Treasure Coast Inc., as of
December 31, 1995 and 1996 and September 30, 1997, and the combined results of
their operations and their cash flows for the years then ended and for the nine
months ended September 30, 1997, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-107
<PAGE> 185
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1997
------ ------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.............................. $ 62 $ 411 $ 917 $1,020
Investments............................................ 393 694 1,504 1,504
Accounts receivable --
Trade, net of allowance of $68, $69 and $115,
respectively...................................... 1,819 1,444 3,443 4,030
Retainage, net of allowance of $ -- , $12 and $12,
respectively...................................... 815 1,353 1,294 1,742
Employee receivables (Note 7)....................... 8 17 30 --
Inventories............................................ 103 84 23 215
Costs and estimated earnings in excess of billings on
uncompleted contracts............................... 119 719 510 598
Prepaid expenses and other current assets.............. 24 35 166 172
------ ------ ------ ------
Total current assets........................... 3,343 4,757 7,887 9,281
PROPERTY AND EQUIPMENT, net.............................. 322 371 541 502
------ ------ ------ ------
Total assets................................... $3,665 $5,128 $8,428 $9,783
====== ====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................... $ 46 $ 34 $ 62 $ 59
Accounts payable and accrued expenses.................. 1,325 946 1,840 2,302
Billings in excess of costs and estimated earnings on
uncompleted contracts............................... 121 752 1,370 1,535
Deposit on contract in progress........................ -- 500 -- --
Other current liabilities (Note 7)..................... 477 114 81 --
------ ------ ------ ------
Total current liabilities...................... 1,969 2,346 3,353 3,896
------ ------ ------ ------
LONG-TERM DEBT, net of current maturities................ 42 52 102 89
OTHER LONG-TERM LIABILITIES (Note 7)..................... 483 483 483 483
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 and $0.01 par value, 7,500 and 2,000
shares authorized, 7,500 and 100 shares issued and
outstanding at December 31, 1995, 1996, and
September 30, 1997 for Daniel Electrical
Contractors, Inc. and Daniel Electrical of Treasure
Coast Inc., respectively............................ 8 8 8 8
Retained earnings...................................... 1,110 2,111 4,131 4,956
Unrealized gain on securities.......................... 53 128 351 351
------ ------ ------ ------
Total stockholder's equity..................... 1,171 2,247 4,490 5,315
------ ------ ------ ------
Total liabilities and stockholder's equity..... $3,665 $5,128 $8,428 $9,783
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-108
<PAGE> 186
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
----------------- --------------------- SEPTEMBER 30, ---------------
1995 1996 1996 1997 1997 1996 1997
------- ------- ----------- ------- ------------- ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES..................... $12,049 $12,585 $8,846 $14,670 $18,409 $3,739 $6,873
COST OF SERVICES (including
depreciation).............. 11,725 9,713 6,675 10,480 13,518 3,038 5,106
------- ------- ------ ------- ------- ------ ------
Gross profit....... 324 2,872 2,171 4,190 4,891 701 1,767
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.... 1,502 1,884 1,360 1,792 2,316 524 973
------- ------- ------ ------- ------- ------ ------
Income (loss) from
operations....... (1,178) 988 811 2,398 2,575 177 794
------- ------- ------ ------- ------- ------ ------
OTHER INCOME (EXPENSE):
Interest expense........... (46) (73) (58) (45) (60) (15) (13)
Other...................... 71 86 48 62 100 38 12
------- ------- ------ ------- ------- ------ ------
Other income
(expense), net... 25 13 (10) 17 40 23 (1)
------- ------- ------ ------- ------- ------ ------
NET INCOME (LOSS)............ $(1,153) $ 1,001 $ 801 $ 2,415 $ 2,615 $ 200 $ 793
======= ======= ====== ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-109
<PAGE> 187
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS THREE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30, YEAR ENDED ENDED DECEMBER 31,
---------------- -------------------- SEPTEMBER 30, -------------------
1995 1996 1996 1997 1997 1996 1997
------- ------ ----------- ------ ------------- ----- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................... $(1,153) $1,001 $ 801 $2,415 $ 2,615 $ 200 $ 793
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization............. 113 125 100 116 141 25 44
Provision for bad debts................... 29 205 23 47 229 182 --
Loss on abandonment of leasehold
improvements............................ -- -- -- 34 34 -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable.................. 423 (185) (577) (1,998) (1,606) 392 (1,005)
Inventories.......................... 14 19 43 61 37 (24) (192)
Costs and estimated earnings in
excess of billings on uncompleted
contracts.......................... 733 (600) (436) 209 45 (164) (86)
Prepaid expenses and other current
assets............................. 25 (11) 17 (130) (158) (28) (6)
Increase (decrease) in --
Accounts payable and accrued
expenses........................... (567) (379) (151) 895 667 (228) 399
Deposits on contracts in progress.... -- 500 500 (500) (500) -- --
Billings in excess of costs and
estimated earnings on uncompleted
contracts.......................... (92) 631 701 618 548 (70) 165
Other current liabilities............ (42) (87) (8) 11 (68) (79) (51)
------- ------ ----- ------ ------- ----- -------
Net cash provided by (used in)
operating activities............... (517) 1,219 1,013 1,778 1,984 206 61
------- ------ ----- ------ ------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments..................... (31) (306) (3) (586) (889) (303) --
Additions of property and equipment......... (97) (175) (84) (353) (444) (91) (5)
------- ------ ----- ------ ------- ----- -------
Net cash used in investing
activities......................... (128) (481) (87) (939) (1,333) (394) (5)
------- ------ ----- ------ ------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt................ 350 17 -- 154 171 17 47
Payments of long-term debt.................. (44) (406) (323) (92) (175) (83) --
Distributions to stockholders............... -- -- -- (395) (395) -- --
------- ------ ----- ------ ------- ----- -------
Net cash provided by (used in)
financing activities............... 306 (389) (323) (333) (399) (66) 47
------- ------ ----- ------ ------- ----- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................. (339) 349 603 506 252 (254) 103
CASH AND CASH EQUIVALENTS, beginning of
period...................................... 401 62 62 411 665 665 917
------- ------ ----- ------ ------- ----- -------
CASH AND CASH EQUIVALENTS, end of period...... $ 62 $ 411 $ 665 $ 917 $ 917 $ 411 $ 1,020
======= ====== ===== ====== ======= ===== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest.................................... $ 20 $ 113 $ 18 $ 7 $ 102 $ 58 $ 45
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-110
<PAGE> 188
DANIEL ELECTRICAL CONTRACTORS INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN (LOSS) TOTAL
--------------- RETAINED ON STOCKHOLDER'S
SHARES AMOUNT EARNINGS SECURITIES EQUITY
------ ------ -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994............................... 7,500 $8 $ 2,263 $(13) $ 2,258
Issuance of stock in Daniel Electrical of Treasure
Coast Inc. ......................................... 100 -- -- -- --
Change in unrealized gain on securities................ -- -- -- 66 66
Net loss............................................... -- -- (1,153) -- (1,153)
----- -- ------- ---- -------
BALANCE, December 31, 1995............................... 7,600 8 1,110 53 1,171
Change in unrealized gain on securities................ -- -- -- 75 75
Net income............................................. -- -- 1,001 -- 1,001
----- -- ------- ---- -------
BALANCE, December 31, 1996............................... 7,600 8 2,111 128 2,247
Distributions to stockholders.......................... -- -- (395) -- (395)
Change in unrealized gain on securities................ -- -- -- 223 223
Net income............................................. -- -- 2,415 -- 2,415
----- -- ------- ---- -------
BALANCE, September 30, 1997.............................. 7,600 $8 $ 4,131 $351 $ 4,490
===== == ======= ==== =======
Net Income (unaudited)................................. -- -- 793 -- 793
Other (unaudited)...................................... -- -- 32 -- 32
----- -- ------- ---- -------
BALANCE, December 31, 1997 (unaudited)................... 7,600 $8 $ 4,956 $351 $ 5,315
===== == ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-111
<PAGE> 189
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure Coast
Inc., (collectively, the Company), both Florida corporations focuses on
providing electrical system installation and repair services primarily for
residential and mid-sized to large commercial facilities. The Company performs
the majority of its contract work under fixed price contracts with contract
terms generally ranging from six to 18 months. The Company performs the majority
of its work in Dade County, Florida.
The combined financial statements include the accounts of Daniel Electrical
Contractors, Inc. and Daniel Electrical of Treasure Coast Inc. These entities
are related by virtue of common ownership. All material intercompany
transactions and balances have been eliminated in combination.
In October 1997, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings)of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment. The Company has changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 are unaudited and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Investments
Investments in securities are classified as securities available for sale
and consist of equity securities. Unrealized holding gains and losses on
securities available-for-sale are reported as net amount as a separate component
of stockholder's equity.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
F-112
<PAGE> 190
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation and
amortization expense was $113,000, $125,000 and $141,000 for the years ended
December 31, 1995, 1996 and September 30, 1997, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed, except when
work is being performed under a construction contract. Revenues from
construction contracts are recognized on the percentage-of-completion method
measured by the percentage of costs incurred to date to total estimated costs
for each contract. Contract costs include all direct material and labor costs
and those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation costs. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and their effects are recognized in the period in which the revisions
are determined. An amount equal to contract costs attributable to claims is
included in revenues when realization is probable and the amount can be reliably
estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company itself is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
Consequently, the
F-113
<PAGE> 191
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
accompanying financial statements of the Company do not include a provision for
current or deferred income taxes. The Company intends to terminate its S
Corporation status concurrently with the effective date of the Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's combined financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairments would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the combined financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ----- ----- -------------
<S> <C> <C> <C> <C>
Transportation equipment................... 5 $ 446 $ 517 $ 597
Machinery and equipment.................... 5 120 134 151
Computer and telephone equipment........... 5 92 114 141
Leasehold improvements..................... 5 116 144 209
Furniture and fixtures..................... 5 26 29 29
----- ----- ------
800 938 1,127
Less -- Accumulated depreciation and
amortization............................. (478) (567) (586)
----- ----- ------
Property and equipment, net...... $ 322 $ 371 $ 541
===== ===== ======
</TABLE>
F-114
<PAGE> 192
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
---- ----- -------------
<S> <C> <C> <C>
Balance at beginning of period.......................... $47 $ 68 $ 87
Additions to costs and expenses......................... 29 205 229
Deductions for uncollectible receivables written off and
recoveries............................................ (8) (192) (189)
--- ----- -----
Balance at end of period...................... $68 $ 81 $ 127
=== ===== =====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
------ ---- -------------
<S> <C> <C> <C>
Accounts payable, trade............................... $1,009 $686 $1,296
Accrued compensation and benefits..................... 76 28 180
Other accrued expenses................................ 240 232 364
------ ---- ------
$1,325 $946 $1,840
====== ==== ======
</TABLE>
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress............. $6,197 $ 8,381 $ 11,760
Estimated earnings, net of losses................... 1,238 2,993 4,120
------ ------- --------
7,435 11,374 15,880
Less -- Billings to date............................ (7,437) (11,407) (16,740)
------ ------- --------
$ (2) $ (33) $ (860)
====== ======= ========
Costs and estimated earnings in excess of billings
on uncompleted
contracts......................................... $ 119 $ 719 $ 510
Less -- Billings in excess of costs and estimated
earnings on uncompleted contracts................. (121) (752) (1,370)
------ ------- --------
$ (2) $ (33) $ (860)
====== ======= ========
</TABLE>
F-115
<PAGE> 193
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of installment obligations collateralized by
certain transportation and computer equipment, and due in various monthly
installments, including interest ranging from 6 percent to 11 percent.
The maturities of long-term debt at September 30, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
1998........................................................ $ 62
1999........................................................ 44
2000........................................................ 36
2001........................................................ 15
2002........................................................ 7
----
$164
====
</TABLE>
The Company has a $400,000 open line of credit with a bank. The line of
credit bears interest based upon the prime lending rate, which was 8.25% at
September 30, 1997. The line of credit is secured by the Company's investment in
securities and borrowings under such line of credit are due on demand. No
borrowings were outstanding under this line of credit at September 30, 1997.
6. LEASES:
In February of 1997, the Company leased its Miami facility from a Limited
Partnership which is controlled by the Company's stockholder. Prior to February
1997, the Company leased office space from a third party, and such lease expired
January 1997. The rent paid under this lease was approximately $71,000 for
December 31, 1996. The Company leases its Vero Beach facility from a company
which is owned by the Company's stockholder and is leased on a month-to-month
basis.
7. RELATED-PARTY TRANSACTIONS:
Related-Party Notes Payable
The Company has a $483,000 subordinated long-term note payable to the
president of the Company at December 31, 1995, 1996 and at September 30, 1997.
The Company also has a $175,000, $115,000 and $81,000 note payable due on demand
to the president of the Company at the respective periods.
Related-Party Accounts Receivable
The Company has an $8,000, $8,000 and $18,000 account receivable due from
the president of the Company at December 31, 1995, 1996 and at September 30,
1997, respectively. The Company also has a $9,000 and $12,000 employee
receivable at December 31, 1996 and at September 30, 1997, respectively.
Related-Party Entertainment Expense
Costs related to related-party entertainment expense amounted to $15,000,
$8,000 and $4,000 for the years ended December 31, 1995, 1996 and September 30,
1997, respectively.
Related-Party Compensation
The Company paid $58,000, $72,000 and $72,000 for the years ended December
31, 1995, 1996 and September 30, 1997, respectively to a related-party company
for compensation.
F-116
<PAGE> 194
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. EMPLOYEE BENEFIT PLAN:
The Company has a nonqualifying discriminatory pension plan for certain key
executives. Contributions are subject to management's discretion. Total
contributions by the Company under the plan were approximately $9,000, $14,000
and $14,000 for the years ended December 31, 1995, 1996 and September 30, 1997,
respectively.
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
investments, accounts receivable, accounts payable, a line of credit, notes
payable and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
The Company is self-insured for medical claims up to $14,000 per year in
total for all covered individuals. Additionally, the Company is part of the
state's workers' compensation plan and is responsible for claims up to $100,000
per accident with a maximum aggregate exposure for 24 months of $500,000. Claims
in excess of these amounts are covered by a stop-loss policy. Under the state's
policy, the Company has a $305,000 letter of credit which expires April 1, 1998.
The Company has recorded reserves for its portion of self-insured claims based
on estimated claims incurred through March 31, 1995 and 1996, December 31, 1996,
and September 30, 1997.
11. INVESTMENTS AVAILABLE-FOR-SALE:
Investments in securities consist of equity securities and mutual funds
with an aggregate market value of $393,000, $694,000 and $1,504,000 at December
31, 1995, 1996 and September 30, 1997, respectively, and unrealized holding
gains of $66,000, $75,000 and $237,000 for the respective periods.
F-117
<PAGE> 195
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 32 percent and 21 percent of total
sales to two major customers during the year ended December 31, 1995, sales of
approximately 29 percent and 25 percent of total sales to two major customers
during the year ended December 31, 1996, and sales of approximately 30 percent
and 38 percent of total sales to two major customers during the year ended
September 30, 1997.
In addition, the Company grants credit, generally without collateral, to
its customers, which are general contractors located primarily in southern
Florida. Consequently, the Company is subject to potential credit risk related
to changes in business and economic factors within the southern Florida region.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-118
<PAGE> 196
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Summit Electric of Texas, Incorporated:
We have audited the accompanying balance sheets of Summit Electric of
Texas, Incorporated, a Texas corporation, as of March 31, 1997 and September 30,
1997, and the related statements of operations, cash flows and stockholder's
equity for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Summit Electric of Texas,
Incorporated as of March 31, 1997 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-119
<PAGE> 197
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30, DECEMBER 31,
1997 1997 1997
--------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................... $ 57 $ 157 $ (90)
Accounts receivable --
Trade, net of allowance of $112, $122, and $122
respectively................................... 2,270 2,543 2,199
Retainage........................................ 128 91 142
Receivable from stockholder...................... -- 66 247
Other receivables................................ 6 8 --
Deferred tax asset.................................. 69 69 69
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 239 178 361
Prepaid expenses and other current assets........... 25 27 32
------ ------ ------
Total current assets........................ 2,794 3,139 2,960
NOTES RECEIVABLE FROM RELATED PARTIES................. 270 268 268
PROPERTY AND EQUIPMENT, net........................... 223 180 163
OTHER ASSETS.......................................... 49 50 47
------ ------ ------
Total assets................................ $3,336 $3,637 $3,438
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt, including current maturities of
long-term debt................................... $ 819 $ 808 $1,095
Accounts payable and accrued expenses............... 974 1,494 1,075
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 436 182 --
Other current liabilities........................... 3 19 43
------ ------ ------
Total current liabilities................... 2,232 2,503 2,213
------ ------ ------
LONG-TERM DEBT, net of current maturities............. 101 88 88
DEFERRED TAX LIABILITY................................ 11 11 11
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 10,000 shares
authorized, 1,000 shares issued and
outstanding...................................... 1 1 1
Retained earnings................................... 991 1,034 1,125
------ ------ ------
Total stockholder's equity.................. 992 1,035 1,126
------ ------ ------
Total liabilities and stockholder's
equity.................................... $3,336 $3,637 $3,438
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-120
<PAGE> 198
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
YEAR ENDED ENDED SEPTEMBER 30, YEAR ENDED ENDED DECEMBER 31,
MARCH 31, -------------------- SEPTEMBER 30, ------------------
1997 1996 1997 1997 1996 1997
---------- -------- -------- ------------- ------- -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES........................ $10,565 $5,735 $6,165 $10,995 $2,463 $2,878
COST OF SERVICES (including
depreciation)................. 9,157 4,946 5,243 9,454 2,182 2,403
------- ------ ------ ------- ------ ------
Gross profit.......... 1,408 789 922 1,541 281 475
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....... 1,340 699 822 1,463 333 355
------- ------ ------ ------- ------ ------
Income from
operations.......... 68 90 100 78 (52) 120
------- ------ ------ ------- ------ ------
OTHER INCOME (EXPENSE):
Interest expense.............. (56) (19) (42) (79) (16) (24)
Other......................... 25 13 11 23 6 4
------- ------ ------ ------- ------ ------
Other expense, net.... (31) (6) (31) (56) (10) (20)
------- ------ ------ ------- ------ ------
INCOME BEFORE PROVISION FOR
INCOME TAXES.................. 37 84 69 22 (62) 100
PROVISION FOR INCOME TAXES...... 23 28 26 21 (20) --
------- ------ ------ ------- ------ ------
NET INCOME (LOSS)............... $ 14 $ 56 $ 43 $ 1 $ (42) $ 100
======= ====== ====== ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-121
<PAGE> 199
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS THREE MONTHS
YEAR ENDED ENDED
ENDED SEPTEMBER 30, YEAR ENDED DECEMBER 31,
MARCH 31, ------------- SEPTEMBER 30, --------------
1997 1996 1997 1997 1996 1997
---------- ----- ----- ------------- ----- -----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $ 14 $ 56 $ 43 $ 1 $ (42) $ 100
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities --
Depreciation and amortization........... 72 38 41 75 20 26
Provision for doubtful accounts......... -- -- 10 10 -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable................ 316 452 (284) (420) 192 $ 120
Receivable from stockholder........ 56 48 (66) (58) -- 1
Other receivables.................. 32 25 35 42 -- --
Costs and estimated earnings in
excess of billings on uncompleted
contracts........................ (105) 1 61 (45) (47) (183)
Prepaid expenses and other current
assets........................... (23) (16) (1) (8) (8) 5
Increase (decrease) in --
Accounts payable and accrued
expenses......................... (498) (519) 520 541 (219) (420)
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................ 48 (52) (253) (153) -- (182)
Other, net.............................. 3 2 14 15 74 8
----- ----- ----- ----- ----- -----
Net cash provided by (used in)
operating activities............. (85) 35 120 -- (30) (525)
----- ----- ----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on notes receivable from related
parties................................. 3 1 2 4 -- --
Additions to property and equipment....... (191) (35) -- (156) (138) (9)
----- ----- ----- ----- ----- -----
Net cash provided by (used in)
investing activities............. (188) (34) 2 (152) (138) (9)
----- ----- ----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt and notes
payable................................. 238 3 (9) 226 171 287
Payments of long-term debt................ (19) (8) (13) (24) -- --
----- ----- ----- ----- ----- -----
Net cash provided by (used in)
financing activities............. 219 (5) (22) 202 171 287
----- ----- ----- ----- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (54) (4) 100 50 3 (247)
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 111 111 57 107 107 157
----- ----- ----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of period.... $ 57 $ 107 $ 157 $ 157 $ 110 $ (90)
===== ===== ===== ===== ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................................ $ 56 $ 19 $ 42 $ 79 $ 16 $ 24
Income taxes............................ 35 19 3 19 -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-122
<PAGE> 200
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1996............................ 1,000 $1 $ 977 $ 978
Net income....................................... -- -- 14 14
----- -- ------ ------
BALANCE, March 31, 1997............................ 1,000 1 991 992
Net income....................................... -- -- 43 43
----- -- ------ ------
BALANCE, September 30, 1997........................ 1,000 $1 $1,034 $1,035
Net income (unaudited)........................... -- -- 100 100
----- -- ------ ------
Other (unaudited)................................ -- -- (9) (9)
BALANCE, December 31, 1997 (unaudited)............. 1,000 $1 $1,125 $1,126
===== == ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-123
<PAGE> 201
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Summit Electric of Texas, Incorporated (the Company), a Texas corporation,
focuses on providing electrical system installation and repair services
primarily for mid-sized to large commercial facilities. The Company performs the
majority of its contract work under fixed price contracts, with contract
duration generally ranging from two to eight months. The Company performs the
majority of its work primarily in Houston, Texas.
On a limited basis, the Company provides auto repair and restoration
services to its sole stockholder (the Stockholder) and third parties. The
revenues and cost of services related to such activities have not been removed
from the Company's results of operations for the year ended March 31, 1997 and
September 30, 1997, as such amounts are not material.
In October 1997, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment. The Company has changed from a March to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the six months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using an accelerated method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
$72,101 and $75,358 for the years ended March 31, 1997 and September 30, 1997,
respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-124
<PAGE> 202
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income, and
their effects are recognized in the period in which the revisions are
determined. An amount equal to contract costs attributable to claims is included
in revenues when realization is probable and the amount can be reliably
estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates and
laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 11 for discussion of
significant estimates reflected in the Company's financial statements.
F-125
<PAGE> 203
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES MARCH 31, SEPTEMBER 30,
IN YEARS 1997 1997
------------ --------- -------------
<S> <C> <C> <C>
Transportation equipment......................... 5 $ 450 $ 447
Machinery and equipment.......................... 7 11 11
Computer and telephone equipment................. 5 84 84
Leasehold improvements........................... 31.5 52 52
Furniture and fixtures........................... 7 43 43
----- -----
640 637
Less -- Accumulated depreciation and
amortization................................... (417) (457)
----- -----
Property and equipment, net............ $ 223 $ 180
===== =====
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Balance at beginning of period.............................. $112 $112
Additions to costs and expenses............................. -- 10
Deductions for uncollectible receivables written off and
recoveries................................................ -- --
---- ----
Balance at end of period.................................... $112 $122
==== ====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Accounts payable, trade..................................... $696 $ 1,175
Other accrued expenses...................................... 278 319
---- -------
$974 $ 1,494
==== =======
</TABLE>
F-126
<PAGE> 204
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Costs incurred on contracts in progress..................... $ 6,482 $ 6,373
Estimated earnings, net of losses........................... 2,122 1,818
------- -------
8,604 8,191
Less -- Billings to date.................................... (8,801) (8,195)
------- -------
$ (197) $ (4)
======= =======
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 239 $ 178
Less -- Billings in excess of costs and estimated earnings
on uncompleted contracts............................... (436) (182)
------- -------
Net liability..................................... $ (197) $ (4)
======= =======
</TABLE>
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Note payable to bank bearing interest at 9.15%, payable in
monthly installments of principal and interest of $2,612
through October 2001, secured by transportation
equipment................................................. $117 $106
Note payable to a financing company bearing interest at
7.9%, payable in monthly installments of principal and
interest of $557 through January 1999, secured by
transportation equipment.................................. 11 9
---- ----
128 115
Less -- Current portion..................................... (27) (27)
---- ----
Long-term debt............................................ $101 $ 88
==== ====
</TABLE>
The maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
YEAR ENDED --------- -------------
<S> <C> <C>
1998................................................... $ 27 $ 27
1999................................................... 29 28
2000................................................... 26 27
2001................................................... 28 28
2002................................................... 18 5
---- ----
$128 $115
==== ====
</TABLE>
The Company has a $1,000,000 line of credit with a bank. The line of credit
expired September 30, 1997, and bears interest at 1 percent above the prime
lending rate. The weighted average interest rate under this line of credit was
9.25 percent for fiscal 1997. The line of credit is secured by contracts
receivable, equipment, furniture and fixtures, and the personal guarantee of the
Stockholder. Outstanding borrowings under this line of credit at March 31, 1997,
total $788,142.
On September 30, 1997, the Company negotiated an amendment to its existing
bank line of credit (the Amended Line of Credit). The Amended Line of Credit has
a $1,500,000 borrowing base and is due
F-127
<PAGE> 205
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
October 3, 1998. The Amended Line of Credit bears interest at 1 percent above
the prime lending rate. Outstanding borrowings under this line of credit at
September 30, 1997, total $779,458.
The bank line of credit requires the Company to maintain certain net worth
and profitability covenants. At March 31, 1997 and September 30, 1997, the
Company was in compliance with its line-of-credit covenants, as amended.
6. LEASES:
The Company leases a facility from a company which is owned by the
Company's stockholder. The lease expires on November 30, 1998. The rent paid
under this related-party lease was approximately $96,000 for each of the years
ended March 31, 1997 and September 30, 1997. The Company also leases two
facilities from third parties. The rent paid under these leases were
approximately $7,144 and $15,051 for the years ended March 31, 1997 and
September 30, 1997, respectively.
Future minimum lease payments under these noncancelable operating leases
are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
1998................................................... $ 99 $ 99
1999................................................... 66 26
2000................................................... 1 --
Thereafter............................................. -- --
---- ----
$166 $125
==== ====
</TABLE>
7. INCOME TAXES:
Federal income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Current --
Federal................................................... $17 $19
State..................................................... 6 2
--- ---
$23 $21
=== ===
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the blended U.S. federal and state statutory corporate rate of 28
percent to income before provision for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------
MARCH 31, SEPTEMBER 30,
1997 1997
---------- -------------
<S> <C> <C>
Provision at the statutory rate............................. $10 $ 6
Increase resulting from --
Permanent differences, primarily meals and
entertainment.......................................... 9 14
State income tax, net of benefit for federal deduction.... 4 1
--- ---
$23 $21
=== ===
</TABLE>
F-128
<PAGE> 206
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities result principally from the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Allowance for doubtful accounts............................ $ 40 $ 40
Warranty and contract allowances........................... 29 29
Bases difference on property and equipment................. (15) (29)
---- ----
Deferred tax assets.............................. $ 54 $ 40
==== ====
</TABLE>
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Deferred tax assets --
Current................................................... $ 69 $ 69
Long-term................................................. -- --
---- ----
Deferred tax assets............................... 69 69
---- ----
Deferred tax liabilities --
Current................................................... (4) (18)
Long-term................................................. (11) (11)
---- ----
Deferred tax liability............................ (15) (29)
---- ----
Net deferred tax assets..................................... $ 54 $ 40
==== ====
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
Notes receivable from related parties consist of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Note receivable from the Stockholder, bearing an interest
rate of 7.07%, requiring monthly payments of interest,
maturing November 1998.................................... $250 $250
Note receivable from the spouse of the Stockholder, bearing
an interest rate of 8%, requiring monthly installments of
principal and interest of $480, maturing April 2001....... 20 18
---- ----
$270 $268
==== ====
</TABLE>
The Company provides auto repair and restoration services to the
Stockholder. The Stockholder reimbursed the Company $81,161 and $122,979 for
such services for the years ended March 31, 1997 and September 30, 1997,
respectively.
9. EMPLOYEE BENEFIT PLAN:
The Company adopted a 401(k) savings and investment plan approved by the
Internal Revenue Service effective January 1, 1996, covering all eligible
Company employees. Contributions may be made to the plan by an employee at a
percentage of salary but cannot exceed the maximum allowed by the Internal
Revenue Code and may be matched by a discretionary Company contribution.
F-129
<PAGE> 207
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's contributions to the plan for the years ended March 31, 1997
and September 30, 1997, totaled $24,747 and $24,660, respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, and short and long-term
debt. The Company believes that the carrying values of these instruments on the
accompanying balance sheets approximate their fair values.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability, workers' compensation and an umbrella policy.
The Company has not incurred significant uninsured losses on any of these items.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
For the years ended March 31, 1997 and September 30, 1997, revenues from no
one individual customer exceeded 10 percent of total revenues.
In addition, the Company grants credit, generally without collateral, to
its customers, which are primarily general contractors located in Houston,
Texas. Consequently, the Company is subject to potential credit risk related to
changes in business and economic factors within Houston, Texas. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
F-130
<PAGE> 208
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Thurman & O'Connell Corporation:
We have audited the accompanying balance sheets of Thurman & O'Connell
Corporation, a Kentucky corporation, as of December 31, 1995 and 1996 and
September 30, 1997, and the related statements of operations, cash flows and
stockholders' equity for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Thurman & O'Connell
Corporation as of December 31, 1995 and 1996 and September 30, 1997, and the
results of its operations and its cash flows for the years then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-131
<PAGE> 209
THURMAN & O'CONNELL CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------- SEPTEMBER 30, DECEMBER 31,
1995 1996 1997 1997
------ ------ ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 860 $1,488 $1,160 $ 322
Accounts receivable --
Trade, net of allowance of $37, $10, $17 and
$18, respectively........................... 1,078 315 538 533
Retainage..................................... 348 78 124 181
Other receivables............................. 12 17 9 33
Inventories...................................... 1,072 273 213 239
Costs and estimated earnings in excess of
billings on uncompleted contracts............. -- 22 52 10
Prepaid expenses and other current assets........ 4 13 15 18
------ ------ ------ ------
Total current assets..................... 3,374 2,206 2,111 1,336
PROPERTY AND EQUIPMENT, net........................ 342 306 301 289
------ ------ ------ ------
Total assets............................. $3,716 $2,512 $2,412 $1,625
====== ====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............. $ 13 $ 6 $ 7 $ 7
Accounts payable and accrued expenses............ 663 242 262 229
Dividends payable to stockholders................ 160 200 -- --
Billings in excess of costs and estimated
earnings on uncompleted contracts............. 1,652 479 361 304
------ ------ ------ ------
Total current liabilities................ 2,488 927 630 540
------ ------ ------ ------
LONG-TERM DEBT, net of current maturities.......... 96 93 88 86
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 2,000 shares
authorized, 200 shares issued and
outstanding................................... 300 300 300 300
Retained earnings................................ 832 1,192 1,394 699
------ ------ ------ ------
Total stockholders' equity............... 1,132 1,492 1,694 999
------ ------ ------ ------
Total liabilities and stockholders'
equity................................. $3,716 $2,512 $2,412 $1,625
====== ====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-132
<PAGE> 210
THURMAN & O'CONNELL CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31,
--------------- --------------- ------------- ------------
1995 1996 1996 1997 1997 1996 1997
------ ------ ------ ------ ------------- ---- ----
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES.............................................. $4,729 $4,551 $3,741 $3,239 $4,049 $810 $959
COST OF SERVICES...................................... 3,309 3,059 2,531 1,653 2,181 528 533
------ ------ ------ ------ ------ ---- ----
Gross profit................................. 1,420 1,492 1,210 1,586 1,868 282 426
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......... 512 503 397 397 503 106 128
------ ------ ------ ------ ------ ---- ----
Income from operations....................... 908 989 813 1,189 1,365 176 298
------ ------ ------ ------ ------ ---- ----
OTHER INCOME (EXPENSE):
Interest expense.................................... (13) (8) (6) (4) (6) (2) (3)
Other............................................... 36 65 46 51 70 19 15
------ ------ ------ ------ ------ ---- ----
Other income (expense), net.................. 23 57 40 47 64 17 12
------ ------ ------ ------ ------ ---- ----
INCOME BEFORE INCOME TAX EXPENSE...................... 931 1,046 853 1,236 1,429 193 310
INCOME TAX EXPENSE.................................... 19 36 24 34 46 12 5
------ ------ ------ ------ ------ ---- ----
NET INCOME............................................ $ 912 $1,010 $ 829 $1,202 $1,383 $181 $305
====== ====== ====== ====== ====== ==== ====
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-133
<PAGE> 211
THURMAN & O'CONNELL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS THREE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, YEAR ENDED DECEMBER 31,
---------------- ---------------- SEPTEMBER 30, ----------------
1995 1996 1996 1997 1997 1996 1997
------ ------- ------ ------- ------------- ------ -------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................. $ 912 $ 1,010 $ 829 $ 1,202 $ 1,383 $ 181 $ 305
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation and amortization........ 53 49 37 39 51 12 14
Provision to (reduction in) allowance
for doubtful accounts.............. 13 10 (19) 7 36 29 --
Loss (gain) on sale of property and
equipment.......................... (1) -- -- (1) (1) -- --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Receivables........................ (506) 1,018 756 (268) (6) 262 (76)
Inventories........................ (405) 799 678 60 181 121 (26)
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... 68 (22) (24) (30) (28) 2 42
Prepaid expenses and other current
assets.......................... 25 (9) (2) (2) (9) (7) (3)
Increase (decrease) in --
Accounts payable and accrued
expenses........................ (1) (421) (236) 20 (165) (185) (33)
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... 916 (1,173) (785) (118) (506) (388) (57)
------ ------- ------ ------- ------- ------ -------
Net cash provided by operating
activities.................... 1,074 1,261 1,234 909 936 27 166
------ ------- ------ ------- ------- ------ -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment............................ 1 -- -- 23 23 -- --
Additions of property and equipment.... (42) (13) (7) (56) (62) (6) (1)
------ ------- ------ ------- ------- ------ -------
Net cash used in investing
activities.................... (41) (13) (7) (33) (39) (6) (1)
------ ------- ------ ------- ------- ------ -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt........... -- 103 -- -- 103 103 --
Payments of long-term debt............. (63) (113) (7) (4) (110) (106) (1)
Distributions to stockholders.......... (620) (610) (610) (1,200) (1,200) -- (1,000)
------ ------- ------ ------- ------- ------ -------
Net cash used in financing
activities.................... (683) (620) (617) (1,204) (1,207) (3) (1,001)
------ ------- ------ ------- ------- ------ -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................ 350 628 610 (328) (310) 18 (836)
CASH AND CASH EQUIVALENTS, beginning of
period................................. 510 860 860 1,488 1,470 1,470 1,160
------ ------- ------ ------- ------- ------ -------
CASH AND CASH EQUIVALENTS, end of
period................................. $ 860 $ 1,488 $1,470 $ 1,160 $ 1,160 $1,488 $ 322
====== ======= ====== ======= ======= ====== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest........................... $ 10 $ 8 $ 5 $ 4 $ 7 $ 2 $ 3
Taxes.............................. $ 6 $ 26 $ 23 $ 47 $ 50 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-134
<PAGE> 212
THURMAN & O'CONNELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994.......................... 200 $300 $ 580 $ 880
Distributions to stockholders..................... -- -- (660) (660)
Net income........................................ -- -- 912 912
--- ---- ------ ------
BALANCE, December 31, 1995.......................... 200 300 832 1,132
Distributions to stockholders..................... -- -- (650) (650)
Net income........................................ -- -- 1,010 1,010
--- ---- ------ ------
BALANCE, December 31, 1996.......................... 200 300 1,192 1,492
Distributions to stockholders..................... -- -- (1,000) (1,000)
Net income........................................ -- -- 1,202 1,202
--- ---- ------ ------
BALANCE, September 30, 1997......................... 200 $300 $1,394 $1,694
Distribution to stockholders (unaudited).......... -- -- (1,000) (1,000)
Net Income (unaudited)............................ -- -- 305 305
BALANCE, December 31, 1997 (unaudited).............. 200 $300 $ 699 $ 999
=== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-135
<PAGE> 213
THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Thurman & O'Connell Corporation (the Company), a Kentucky corporation,
focuses on providing electrical system installation and repair services
primarily to large commercial facilities. The Company performs the majority of
its contract work under fixed price contracts, with contract terms generally
ranging from 12 to 24 months. The Company performs the majority of its work in
Kentucky.
In October 1997, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment. The Company has changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1997 and 1996, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. The Company
maintains its principal cash balances in one financial institution. The balances
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Depreciation expense was approximately $53,000, $49,000 and $51,000 for the
years ended December 31, 1995 and 1996 and September 30, 1997, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-136
<PAGE> 214
THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
their effects are recognized in the period in which the revisions are
determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems.
Income Taxes
The stockholders of the Company have elected S Corporation status as
defined by the Internal Revenue Code, whereby the Company itself is not subject
to taxation for federal purposes. Under S Corporation status, the stockholders
report their share of the Company's taxable earnings or losses in their personal
tax returns. The provision for income taxes in the accompanying financial
statements relates to income and other taxes incurred by the Company in those
localities that do not permit the Company to report its net income with that of
its stockholders (S Corporation treatment). The Company intends to terminate its
S Corporation status concurrently with the effective date of the Offerings (as
defined in Note 1).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote for discussion of significant
estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to
F-137
<PAGE> 215
THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
expense the difference between the fair value of such property and its carrying
value. Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ----- ----- -------------
<S> <C> <C> <C> <C>
Land..................................... -- $ 25 $ 25 $ 25
Building................................. 30 206 206 206
Machinery and equipment.................. 7 39 39 42
Transportation equipment................. 5 239 241 257
Computer and telephone equipment......... 7 19 24 26
Furniture and fixtures................... 7 20 23 21
----- ----- ------
548 558 577
Less -- Accumulated depreciation and
amortization........................... (206) (252) (276)
----- ----- ------
$ 342 $ 306 $ 301
===== ===== ======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
<S> <C> <C> <C>
Balance at beginning of period........................... $24 $ 37 $ 18
Additions to costs and expenses.......................... 13 10 36
Deductions for uncollectible receivables
written off and recoveries............................. -- (37) (37)
--- ---- ----
Balance at end of period................................. $37 $ 10 $ 17
=== ==== ====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------ SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
<S> <C> <C> <C>
Accounts payable, trade................................. $516 $130 $150
Accrued compensation and benefits....................... 50 60 64
Accrued cost overruns................................... 78 21 20
Accrued warranty costs.................................. 10 10 10
Other accrued expenses.................................. 9 21 18
---- ---- ----
$663 $242 $262
==== ==== ====
</TABLE>
F-138
<PAGE> 216
THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress............ $ 2,159 $ 623 $1,844
Estimated earnings, net of losses.................. 721 229 1,466
------- ------- ------
2,880 852 3,310
Less -- Billings to date........................... (4,532) (1,309) (3,619)
------- ------- ------
$(1,652) $ (457) $ (309)
======= ======= ======
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... $ -- $ 22 $ 52
Less -- Billings in excess of costs and estimated
earnings on uncompleted contracts............. (1,652) (479) (361)
------- ------- ------
$(1,652) $ (457) $ (309)
======= ======= ======
</TABLE>
5. LONG-TERM DEBT:
During 1996, the Company refinanced the note payable to a bank which was in
place at December 31, 1995, with a variable rate note payable. The note is
payable in monthly principal and interest payments of $1,051 through October
2004, at which time any unpaid principal and interest is due. The note is
collateralized by a cash account at the bank, and the Company has agreed not to
pay dividends in excess of the Company's net income for any fiscal year.
Interest is based upon a variable rate of 1% above the rate being offered on the
sweep account (6% as of December 31, 1996 and September 30, 1997).
At December 31, 1995, the Company had a note payable to a bank which
required monthly principal payments of $1,051 plus interest at the prime rate
(8.25% at December 31, 1995) through July 2008. Under the agreement, the Company
agreed not to pay dividends in excess of the Company's net income for the year.
The note was collateralized by the Company's land and building.
The approximate aggregate maturities of long-term debt as of September 30,
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 --
- --------------------------
<S> <C>
1997................................................... $ 2
1998................................................... 7
1999................................................... 8
2000................................................... 8
2001................................................... 9
Thereafter............................................. 61
---
$95
===
</TABLE>
The Company has a $1,000,000 line of credit with a bank. The line of credit
expires in April 1998 and bears interest at the prime lending rate. All
receivables are pledged as collateral under the agreement, and the Company has
agreed not to pay dividends in excess of net income for the year and to maintain
its deposit accounts with the bank. There were no borrowings under this
agreement at December 31, 1996 or September 30, 1997. In 1995, the Company had a
$500,000 unsecured line of credit at prime with a bank, which expired in April
1996. There were no borrowings under this agreement during 1995 or 1996.
F-139
<PAGE> 217
THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED-PARTY TRANSACTIONS:
The Company earned revenue for electrical contracting services from
companies owned by a stockholder of approximately $47,000, $40,000 and $25,000
for the years ended December 31, 1995 and 1996, and September 30, 1997,
respectively, with approximately $1,000, $2,000 and $4,000 of the revenue being
recorded as receivables at the respective balance sheet dates. In addition, the
Company had a receivable from another stockholder in the amount of approximately
$1,000, $2,000 and $5,000 as of December 31, 1995 and 1996 and September 30,
1997, respectively, related to travel expense advances.
7. EMPLOYEE BENEFIT PLAN:
During 1995, the Company adopted a defined contribution 401(k) savings plan
covering employees meeting certain minimum service and age requirements, as
defined. The plan provides for discretionary contributions on the part of the
Company. For the years ended December 31, 1995 and 1996 and September 30, 1997,
the Company elected to match 100% of the first 2 percent contributed by each
employee. The contributions paid by the Company totaled approximately $9,000,
$12,000 and $8,000 for the years ended December 31, 1995 and 1996 and September
30, 1997, respectively.
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit, and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
9. STOCKHOLDERS' AGREEMENT:
The Company has a right of first refusal on any stock voluntarily offered
for sale by a stockholder subject to certain terms and conditions. The
redemption price shall be as determined by the stockholders on an annual basis
or by formula which is contained in the agreement if a value has not been
established by the stockholders. Such redemption price is payable in not more
than 10 equal quarterly installments with interest at the prime rate. As of
September 30, 1997 and December 31, 1996, the redemption price was determined to
be $5.141 per share.
Upon the death of any stockholder, the Company shall redeem the stock held
by such stockholder provided that the redemption is requested in writing by the
personal representative of the deceased stockholder within two months of the
appointment of such representative or the Company elects to redeem such stock
within the same two-month period. The redemption price pursuant to this
paragraph is the same as described above. Such redemption price may be paid in
full at the closing or in installments, the down payment being the greater of
one-fifth of redemption price or any life insurance proceeds received by the
Company resulting from the death of the stockholder with the balance payable in
quarterly installments over not more than five years with interest at the prime
rate. Coverage under the key-man term life insurance purchased by the Company
totaled $1,000,000 as of December 31, 1995 and 1996 and September 30, 1997.
10. DIVIDENDS:
As long as the election made by the stockholders to report the operations
of the Company on their individual federal and state income tax returns remains
in effect, the board of directors of the Company is required to declare a
dividend, subsequent to the close of the Company's tax year and prior to the
date when payment of individual income taxes is required, to provide the
stockholders sufficient cash to pay any applicable individual income taxes
resulting from the inclusion of the Company's taxable income on their individual
income tax returns. In addition, at the discretion of the Company's board of
directors, an additional
F-140
<PAGE> 218
THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
minimum dividend shall be authorized which, when combined with the dividend
required to meet the tax obligations of the shareholders, shall equal not less
than 50 percent of the net pretax income of the Company.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is not currently involved in any significant disputes or legal
actions, however, such actions could arise in the ordinary course of business.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 25, 18, 12, 12 and 11 percent of
total sales to five major customers during 1995, sales of approximately 48, 11
and 10 percent of total sales to three major customers during 1996 and sales of
approximately 26, 12 and 12 percent of total sales to three major customers
during the year ended September 30, 1997.
In addition, the Company grants credit, generally without collateral, to
its customers, which are general contractors in the commercial and industrial
construction markets in Kentucky. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors within
the commercial and industrial construction markets in this state. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
F-141
<PAGE> 219
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rodgers Electric Company, Inc.:
We have audited the accompanying balance sheet of Rodgers Electric Company,
Inc., a Washington corporation, as of September 30, 1997, and the related
statement of operations, cash flows and stockholders' equity for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rodgers Electric Company,
Inc. as of September 30, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-142
<PAGE> 220
RODGERS ELECTRIC COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1997 1997
------------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 818 $ 331
Accounts receivable --
Trade, net of allowance of $15 and $24, respectively... 571 922
Retainage.............................................. 37 58
Other receivables...................................... 5 --
Costs and estimated earnings in excess of billings on
uncompleted contracts................................. 20 --
Deferred tax asset........................................ 39 39
Prepaid expenses and other current assets................. 29 29
------ ------
Total current assets.............................. 1,519 1,379
PROPERTY AND EQUIPMENT, net................................. 393 351
OTHER ASSETS................................................ 175 171
------ ------
Total assets...................................... $2,087 $1,901
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt, including current maturities of long-term
debt................................................... $ 36 $ 28
Accounts payable and accrued expenses..................... 488 317
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 109 76
Other liabilities......................................... 213 71
------ ------
Total current liabilities......................... 846 492
------ ------
LONG-TERM DEBT, net of current maturities................... 58 56
DEFERRED TAX LIABILITY...................................... 75 75
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 500 shares authorized, 150
shares issued and outstanding.......................... 15 15
Retained earnings......................................... 1,093 1,263
------ ------
Total stockholders' equity........................ 1,108 1,278
------ ------
Total liabilities and stockholders' equity........ $2,087 $1,901
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-143
<PAGE> 221
RODGERS ELECTRIC COMPANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, --------------
1997 1996 1997
------------- ---- ------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................................... $3,325 $548 $1,175
COST OF SERVICES (including depreciation)................... 1,621 293 779
------ ---- ------
Gross profit...................................... 1,704 255 396
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 1,238 154 196
------ ---- ------
Income from operations............................ 466 101 200
------ ---- ------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (7) (1) (2)
Other..................................................... 36 18 6
------ ---- ------
Other income, net................................. 29 17 4
------ ---- ------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 495 118 204
PROVISION FOR INCOME TAXES.................................. 178 36 34
------ ---- ------
NET INCOME.................................................. $ 317 $ 82 $ 170
====== ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-144
<PAGE> 222
RODGERS ELECTRIC COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31,
SEPTEMBER 30, -------------------
1997 1996 1997
------------- ------ -------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 317 $ 82 $ 170
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 47 12 13
Provision for doubtful accounts........................ 11
Changes in operating assets and liabilities --
(Increase) decrease in -- -- --
Accounts receivable............................... (275) (22) (367)
Costs and estimated earnings in excess of billings
on uncompleted contracts........................ (20) -- 20
Deferred taxes, net............................... (34) --
Other............................................. 14 25 4
Increase (decrease) in --
Accounts payable and accrued expenses............. 355 (59) (172)
Other liabilities................................. 211 114 (141)
Billings in excess of costs and estimated earnings
on uncompleted contracts........................ 109 -- (33)
----- ---- -----
Net cash provided by (used in) operating
activities...................................... 735 152 (506)
----- ---- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on notes receivable from related parties......... 2 -- --
Additions to property and equipment....................... (170) (10) --
Proceeds from disposal of property and equipment.......... -- -- 29
----- ---- -----
Net cash provided by (used in) investing
activities...................................... (168) (10) 29
----- ---- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt and notes payable............ 70 -- --
Payments of long-term debt................................ (23) (17) (10)
----- ---- -----
Net cash provided by (used in) financing
activities...................................... 47 (17) (10)
----- ---- -----
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 614 125 (487)
CASH AND CASH EQUIVALENTS, beginning of period.............. 204 204 818
----- ---- -----
CASH AND CASH EQUIVALENTS, end of period.................... $ 818 $329 $ 331
===== ==== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest............................................... $ 7 $ 1 $ 2
Income taxes........................................... 180 40 40
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-145
<PAGE> 223
RODGERS ELECTRIC COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1996.......................... 150 $15 $ 776 $ 791
Net income......................................... -- -- 317 317
--- --- ------ ------
BALANCE, September 30, 1997.......................... 150 $15 $1,093 $1,108
Net Income (unaudited)............................. -- -- 170 170
--- --- ------ ------
BALANCE, December 31, 1997 (unaudited)............... 150 $15 $1,263 $1,278
=== === ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-146
<PAGE> 224
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Principles of Presentation
Rodgers Electric Company, Inc. is a Washington corporation. The Company
provides electrical contracting services to commercial and industrial customers
in Western Washington. Most of the Company's revenue is from partnering with
customers and providing engineering services for design-build projects on a time
and material basis with a guaranteed not-to-exceed price.
In October 1997, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of additional common stock by IES. In addition, the
key executives of the Company entered into employment agreements with the
Company and IES which have an initial term of five years, and generally restrict
the disclosure of confidential information as well as restrict competition with
the Company and IES for a period of two years following termination of
employment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using a straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $47,000 for the year ended September 30, 1997.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
Contract costs include all direct material and labor costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income, and
their effects are recognized in the period in which the revisions are
determined. An amount equal to contract costs attributable to claims is included
in revenues when realization is probable and the amount can be reliably
estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
F-147
<PAGE> 225
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates and
laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 11 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
F-148
<PAGE> 226
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES SEPTEMBER 30,
IN YEARS 1997
------------ -------------
<S> <C> <C>
Transportation equipment.................................... 10 $ 434
Machinery and equipment..................................... 10 53
Leasehold improvements...................................... 10-25 33
Furniture and fixtures...................................... 10 96
-----
616
Less -- Accumulated depreciation and amortization........... (223)
-----
Property and equipment, net....................... $ 393
=====
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Accounts payable, trade..................................... $106
Payroll, profit sharing and related items................... 363
Other accrued expenses...................................... 19
----
$488
====
</TABLE>
Contracts in progress (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Costs incurred on contracts in progress..................... $321
Estimated earnings, net of losses........................... 472
----
793
Less-Billings to date....................................... (882)
----
$(89)
====
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 20
Less-Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (109)
----
Net liability..................................... $(89)
====
</TABLE>
F-149
<PAGE> 227
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Notes payable to financing companies with interest rates
ranging from 3.9% to 9.75%, payable in monthly
installments of principal and interest through March 2002,
secured by transportation equipment....................... 94
Less -- Current portion..................................... (36)
----
Long-term debt............................................ $ 58
====
</TABLE>
The maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED SEPTEMBER 30 --
--------------------------
<S> <C>
1998................................................... $ 36
1999................................................... 27
2000................................................... 18
2001................................................... 10
2002................................................... 3
----
$ 94
====
</TABLE>
6. RELATED PARTY TRANSACTIONS:
The Company is located in a building owned by the sole stockholder which is
leased to the Company with monthly lease payments of $2,200 per month.
7. INCOME TAXES:
Federal income taxes are $178,000 for the fiscal year ended September 30,
1997.
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
before provision for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Provision at the statutory rate............................. $173
Increase resulting from --
Permanent differences, mainly meals and entertainment..... 5
----
$178
====
</TABLE>
F-150
<PAGE> 228
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets result principally from the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Allowance for doubtful accounts and other................... $ 39
Bases difference on property and equipment.................. (75)
----
Net deferred tax liabilities...................... $(36)
====
</TABLE>
9. EMPLOYEE BENEFIT PLAN:
The Company has a profit sharing plan which covers substantially all
qualified employees. The profit sharing contribution is made at the discretion
of the Directors. Benefits payable under the profit sharing plan are limited to
contributions made and earnings therein. Company contributions for the year
ended September 30, 1997 were $192,000.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, and short and long-term debt. The Company
believes that the carrying values of these instruments on the accompanying
balance sheets approximate their fair values.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is periodically involved in disputes or legal actions arising
in the ordinary course of business. Management does not believe the outcome of
such legal actions will have a material adverse effect on the Company's
financial position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10% of total sales to three major
customers, comprising approximately 25%, 22% and 13% of sales during the year
ended September 30, 1997.
In addition, the Company grants credit, generally without collateral, to
its customers, which are primarily commercial and industrial companies located
in the North Puget Sound area of Western Washington. Consequently, the Company
is subject to potential credit risk related to changes in business and economic
factors in that area, including cyclical changes in the aerospace industry.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
F-151
<PAGE> 229
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
The Company........................... 11
Use of Proceeds....................... 13
Price Range of Common Stock and
Dividend Policy..................... 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 52
Management............................ 60
Certain Transactions.................. 65
Principal Stockholders................ 68
Description of Capital Stock.......... 69
Shares Eligible for Future Sale....... 72
Plan of Distribution.................. 74
Legal Matters......................... 74
Experts............................... 74
Additional Information................ 74
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
21,000,000 SHARES
[INTEGRATED LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1998
======================================================
<PAGE> 230
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED APRIL 14, 1998
PROSPECTUS
21,000,000 SHARES
[IES LOGO]
COMMON STOCK
This Prospectus, as appropriately amended or supplemented, may be used from
time to time principally by persons (the "Selling Stockholders") who have
received shares of common stock, par value $0.01 per share (the "Common Stock"),
of Integrated Electrical Services, Inc. (the "Company") in connection with the
acquisition by the Company of securities or assets held by such persons, or
their transferees, and who wish to offer and sell such shares of Common Stock in
transactions in which they and any broker-dealer through whom such shares are
sold may be deemed to be Underwriters within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"), as more fully described herein. The
Company will receive none of the proceeds from any such sale. Any commissions
paid or concessions allowed to any broker-dealer, and, if any broker-dealer
purchases such shares as principal, any profits received on the resale of such
shares, may be deemed to be underwriting discounts and commissions under the
Securities Act. Printing, certain legal and accounting, filing and other similar
expenses of this offering will be paid by the Company. The Selling Stockholders
will generally bear all other expenses of this offering, including brokerage
fees and any underwriting discounts or commissions.
The Registration Statement of which this Prospectus is a part also relates
to the offer and issuance by the Company from time to time of 21,000,000 shares
of Common Stock in connection with its acquisition of the securities and assets
of other businesses.
The Common Stock trades on The New York Stock Exchange (the "NYSE") under
the symbol "IEE." Application will be made to list the shares of Common Stock
offered hereby on the NYSE. The last reported sale price of the Common Stock on
the NYSE on April 13, 1998 was $19 9/16 per share.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS , 1998.
<PAGE> 231
[ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS]
PLAN OF DISTRIBUTION
This Prospectus, as appropriately amended or supplemented, may be used from
time to time principally by persons who have received shares of Common Stock in
connection with acquisitions by the Company of securities and assets held by
such persons, or their transferees, and who wish to offer and sell such shares
of Common Stock (such persons are herein referred to as "Selling Stockholders")
in transactions in which they and any broker-dealer through whom such shares are
sold may be deemed to be Underwriters within the meaning of the Securities Act.
The Company will receive none of the proceeds from any such sales. There
presently are no arrangements or understandings, formal or informal, pertaining
to the distribution of the shares of Common Stock described herein. Upon the
Company being notified by a Selling Stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of shares of Common
Stock bought through a block trade, special offering, exchange distribution or
secondary distribution, a supplemented Prospectus will be filed, pursuant to
Rule 424(b) under the Securities Act, setting forth (i) the name of each Selling
Stockholder and the participating broker-dealer(s), (ii) the number of shares
involved, (iii) the price at which the shares were sold, (iv) the commissions
paid or the discounts allowed to such broker-dealer(s), where applicable, (v)
that such broker-dealer(s) did not conduct any investigation to verify the
information set out in this Prospectus and (vi) other facts material to the
transaction.
Selling Stockholders may sell the shares being offered hereby from time to
time in transactions (which may involve crosses and block transactions) on the
NYSE, in negotiated transactions or otherwise, at market prices prevailing at
the time of the sale or at negotiated prices. Selling Stockholders may sell some
or all of the shares in transactions involving broker-dealers, who may act
solely as agent and/or may acquire shares as principal. Broker-dealers
participating in such transactions as agent may receive commissions from Selling
Stockholders (and, if they act as agent for the purchaser of such shares, from
such purchaser), such commissions computed in appropriate cases in accordance
with the applicable rules of the NYSE, which commissions may be at negotiated
rates where permissible under such rules. Participating broker-dealers may agree
with Selling Stockholders to sell a specified number of shares at a stipulated
price per share and, to the extent such broker-dealer is unable to do so acting
as an agent for the Selling Stockholder, to purchase as principal any unsold
shares at the price required to fulfill the broker-dealer's commitment to
Selling Stockholders. In addition or alternatively, shares may be sold by
Selling Stockholders and/or by or through other broker-dealers in special
offerings, exchange distributions or secondary distributions pursuant to and in
compliance with the governing rules of the NYSE, and in connection therewith
commissions in excess of the customary commission prescribed by such governing
rules may be paid to participating broker-dealers, or, in the case of certain
secondary distributions, a discount or concession from the offering price may be
allowed to participating broker-dealers in excess of the customary commission.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions (which may involve crosses and block
transactions and which may involve sales to or through other broker-dealers,
including transactions of the nature described in the preceding two sentences)
on the NYSE, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale or at negotiated prices, and in connection with
such resales may pay to or receive commissions from the purchaser of such
shares.
The Company may agree to indemnify each Selling Stockholder as an
Underwriter under the Securities Act against certain liabilities, including
liabilities arising under the Securities Act. Each Selling Stockholder may
indemnify any broker-dealer that participates in transactions involving sales of
the shares against certain liabilities, including liabilities arising under the
Securities Act.
The Selling Stockholders may resell the shares offered hereby only if such
securities are qualified for sale under applicable state securities or "blue
sky" laws or exemptions from such registration and qualification requirements
are available.
74
<PAGE> 232
[ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS]
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 1
Risk Factors.......................... 7
The Company........................... 11
Use of Proceeds....................... 13
Price Range of Common Stock and
Dividend Policy..................... 13
Selected Financial Data............... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 17
Business.............................. 52
Management............................ 60
Certain Transactions.................. 65
Principal Stockholders................ 68
Description of Capital Stock.......... 69
Shares Eligible for Future Sale....... 72
Plan of Distribution.................. 74
Legal Matters......................... 74
Experts............................... 74
Additional Information................ 74
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
21,000,000 SHARES
[INTEGRATED LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
, 1998
======================================================
<PAGE> 233
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(A)
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 84,473
Accounting Fees and Expenses................................ 5,000
Legal Fees and Expenses..................................... 5,000
Printing Expenses........................................... 30,000
Transfer Agent's Fees....................................... 1,000
Miscellaneous............................................... 3,556
--------
Total..................................................... $129,029
========
</TABLE>
- ---------------
(a) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
II-1
<PAGE> 234
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit.
Article Eighth of the Company's Amended and Restated Certificate of
Incorporation states that:
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article Eighth
shall not eliminate or limit the liability of a director to the extent provided
by applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. No amendment to or repeal of this Article
Eighth shall apply to, or have any effect on, the liability or alleged liability
of any director of the Corporation for or with respect to any acts or omissions
of such director occurring prior to such amendment or repeal. If the DGCL is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
In addition, Article VI of the Company's Bylaws further provides that the
Company shall indemnify its officers, directors and employees to the fullest
extent permitted by law.
The Company intends to enter into indemnification agreements with each of
its executive officers and directors.
Under Section 6 of the U.S. and International Purchase Agreements filed as
Exhibits 1.1 and 1.2 to this Registration Statement, the Underwriters have
agreed to indemnify, under certain conditions, the Company, its officers and
directors, and persons who control the Company within the meaning of the
Securities Act of 1933, as amended, against certain liabilities.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company during the past three years that were not registered under the
Securities Act of 1933. The description presented below gives effect to the
Company's 2,329.6-for-one stock split effected in October, 1997.
(a) On June 26, 1997, the Company issued 2,329,600 shares of its
Common Stock at an aggregate price of $1,000 to C. Byron Snyder, the Snyder
Children's Trust and D. Merril Cummings.
(b) On September 5, 1997, the Company issued 1,672,711 shares of its
Common Stock to C. Byron Snyder, the Snyder Children's Trust, and to
certain executive officers and key employees at an aggregate price of $718.
(c) On October 17, 1997, the Company issued 50,000 shares of its
Common Stock to certain executive officers and key employees at an
aggregate price of $21.
(d) See "Certain Transactions" for a discussion of the issuance of
shares of Common Stock in connection with the Acquisitions.
These transactions were completed without registration under the Securities
Act of 1933 in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933.
II-2
<PAGE> 235
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. Except as indicated, all exhibits have been previously filed.
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
2.1 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Ace
Electric, Inc., and all of the Stockholders of Ace
Electric, Inc. (Incorporated by reference to 2.1 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.2 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Amber
Electric, Inc., and all of the Stockholders of Amber
Electric, Inc. (Incorporated by reference to 2.2 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.3 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., BW
Consolidated, Inc., all of the Stockholders of BW
Consolidated, Inc., Bexar Electric Company, Ltd., Calhoun
Electric Company, Ltd. and the Employee Partners of such
partnerships. (Incorporated by reference to 2.3 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.4 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Daniel
Electrical Contractors, Inc., Daniel Electrical of
Treasure Coast Inc. and all of the Stockholders of Daniel
Electrical Contractors, Inc. and Daniel Electrical of
Treasure Coast Inc. (Incorporated by reference to 2.4 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.5 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Stark
Investments, Inc., and all of the Stockholders of Stark
Investments, Inc. (Incorporated by reference to 2.5 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.6 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Hatfield
Electric, Inc., and all of the Stockholders of Hatfield
Electric, Inc. (Incorporated by reference to 2.6 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.7 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., General
Partner, Inc., Charles P. Bagby Company, Inc. and all of
the Stockholders of General Partner, Inc., and Charles P.
Bagby Company, Inc. (Incorporated by reference to 2.7 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.8 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc.,
Houston-Stafford Electric, Inc., and all of the
Stockholders of Houston-Stafford Electric, Inc.
(Incorporated by reference to 2.8 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
2.9 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Mills
Electrical Contractors, Inc., and all of the Stockholders
of Mills Electrical Contractors, Inc. (Incorporated by
reference to 2.9 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
2.10 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Muth
Electric, Inc., and all of the Stockholders of Muth
Electric, Inc. (Incorporated by reference to 2.10 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
</TABLE>
II-3
<PAGE> 236
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
2.11 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Pollock
Electric Inc., and all of the Stockholders of Pollock
Electric Inc. (Incorporated by reference to 2.11 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.12 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Thomas
Popp & Company and all of the Stockholders of Thomas Popp
& Company. (Incorporated by reference to 2.12 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.13 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Reynolds
Electric Corp., and all of the Stockholders of Reynolds
Electric Corp. (Incorporated by reference to 2.13 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.14 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Rodgers
Electric Company, Inc., and all of the Stockholders of
Rodgers Electric Company, Inc. (Incorporated by reference
to 2.14 to the Registration Statement on Form S-1 (File
No. 333-38715) of the Company)
2.15 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Summit
Electric of Texas, Incorporated, and all of the
Stockholders of Summit Electric of Texas, Incorporated.
(Incorporated by reference to 2.15 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
2.16 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Thurman &
O'Connell Corporation, and all of the Stockholders of
Thurman & O'Connell Corporation. (Incorporated by
reference to 2.16 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
3.1 -- Amended and Restated Certificate of Incorporation as
amended. (Incorporated by reference to 3.1 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
3.2 -- Bylaws. (Incorporated by reference to 3.2 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
4.1 -- Specimen Common Stock Certificate. (Incorporated by
reference to 4.1 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
5.1 -- Opinion of John F. Wombwell, Esq. as to the legality of
the securities being registered.
10.1 -- Form of Employment Agreement (Incorporated by reference
to 10.1 to the Registration Statement on Form S-1 (File
No. 333-38715) of the Company)
10.2 -- Form of Officer and Director Indemnification Agreement.
(Incorporated by reference to 10.2 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.3 -- Integrated Electrical Services, Inc. 1997 Stock Plan.
(Incorporated by reference to 10.3 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.4 -- Integrated Electrical Services, Inc. 1997 Directors Stock
Plan. (Incorporated by reference to 10.4 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
10.5 -- Form of Credit Agreement among the Company, the Financial
Institutions named therein and NationsBank of Texas,
N.A., including form of Subsidiary Guaranty Agreement,
form of Pledge Agreement, form of promissory note, and
form of swing line note. Incorporated by reference to
10.5 to the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
</TABLE>
II-4
<PAGE> 237
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
10.6 -- Form of Agreement to be entered into by the Company and
the stockholders set forth on Schedule A thereto.
(Incorporated by reference to 10.6 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
*10.7 -- First Amendment to Credit Agreement among the Company,
the Financial Institutions named herein and NationsBank
of Texas, N.A.
21.1 -- List of Subsidiaries (Incorporated by reference to 21.1
to the Registration Statement on Form S-1 (File No.
333-38715) of the Company) .
*23.1 -- Consent of John F. Wombwell, Esq. (included in Exhibit
5.1).
*23.2 -- Consent of Arthur Andersen LLP.
*24.1 -- Power of Attorney (included in signature page set forth
on page II-7).
</TABLE>
- ---------------
* Filed herewith.
(b) Financial statement schedules
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
II-5
<PAGE> 238
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 239
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on April 14, 1998.
Integrated Electrical Services, Inc.
By: /s/ JON POLLOCK
-------------------------------------
Jon Pollock
President, Chief Executive Officer
and Director
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature
appears below constitutes and appoints Jon Pollock, Jim P. Wise and John F.
Wombwell, and each of them, his true and lawful attorney-in-fact and agents with
full power of substitution, for him and in his name, place and stead, in any and
all capacities, to sign any and all amendments (including post-effective
amendments) to this Registration Statement and any subsequent registration
statements filed by the Registrant pursuant to Rule 462(b) of the Securities Act
of 1933, which relates to this Registration Statement, and to file same, with
all exhibits thereto, and all documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents full power and authority to do and perform each and every act and thing
requisite and necessary to be done in and about the premises, as fully to all
intents and purposes as he might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or his or their
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on April 14, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JON POLLOCK President, Chief Executive
- ----------------------------------------------------- Officer and Director
Jon Pollock (Principal Executive Officer)
/s/ JIM P. WISE Senior Vice President and Chief
- ----------------------------------------------------- Financial Officer (Principal
Jim P. Wise Financial Officer
/s/ J. PAUL WITHROW Vice President and Chief
- ----------------------------------------------------- Accounting Officer (Principal
J. Paul Withrow Accounting Officer)
/s/ JERRY MILLS Senior Vice President, Chief
- ----------------------------------------------------- Operating
Jerry Mills Officer -- Commercial and
Industrial and Director
/s/ BEN L. MUELLER Senior Vice President, Chief
- ----------------------------------------------------- Operating
Ben E. Mueller Officer -- Residential and
Director
</TABLE>
II-7
<PAGE> 240
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ C. BYRON SNYDER Chairman of the Board of
- ----------------------------------------------------- Directors
C. Byron Snyder
/s/ RICHARD MUTH Director
- -----------------------------------------------------
Richard Muth
/s/ ALAN R. SIELBECK Director
- -----------------------------------------------------
Alan R. Sielbeck
/s/ ROBERT STALVEY Director
- -----------------------------------------------------
Robert Stalvey
/s/ RICHARD L. TUCKER Director
- -----------------------------------------------------
Richard L. Tucker
/s/ BOB WEIK Director
- -----------------------------------------------------
Bob Weik
Director
- -----------------------------------------------------
Thomas E. White, Jr.
</TABLE>
II-8
<PAGE> 241
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
2.1 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Ace
Electric, Inc., and all of the Stockholders of Ace
Electric, Inc. (Incorporated by reference to 2.1 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.2 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Amber
Electric, Inc., and all of the Stockholders of Amber
Electric, Inc. (Incorporated by reference to 2.2 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.3 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., BW
Consolidated, Inc., all of the Stockholders of BW
Consolidated, Inc., Bexar Electric Company, Ltd., Calhoun
Electric Company, Ltd. and the Employee Partners of such
partnerships. (Incorporated by reference to 2.3 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.4 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Daniel
Electrical Contractors, Inc., Daniel Electrical of
Treasure Coast Inc. and all of the Stockholders of Daniel
Electrical Contractors, Inc. and Daniel Electrical of
Treasure Coast Inc. (Incorporated by reference to 2.4 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.5 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Stark
Investments, Inc., and all of the Stockholders of Stark
Investments, Inc. (Incorporated by reference to 2.5 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.6 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Hatfield
Electric, Inc., and all of the Stockholders of Hatfield
Electric, Inc. (Incorporated by reference to 2.6 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.7 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., General
Partner, Inc., Charles P. Bagby Company, Inc. and all of
the Stockholders of General Partner, Inc., and Charles P.
Bagby Company, Inc. (Incorporated by reference to 2.7 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.8 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc.,
Houston-Stafford Electric, Inc., and all of the
Stockholders of Houston-Stafford Electric, Inc.
(Incorporated by reference to 2.8 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
2.9 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Mills
Electrical Contractors, Inc., and all of the Stockholders
of Mills Electrical Contractors, Inc. (Incorporated by
reference to 2.9 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
2.10 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Muth
Electric, Inc., and all of the Stockholders of Muth
Electric, Inc. (Incorporated by reference to 2.10 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.11 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Pollock
Electric Inc., and all of the Stockholders of Pollock
Electric Inc. (Incorporated by reference to 2.11 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
</TABLE>
<PAGE> 242
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
2.12 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Thomas
Popp & Company and all of the Stockholders of Thomas Popp
& Company. (Incorporated by reference to 2.12 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.13 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Reynolds
Electric Corp., and all of the Stockholders of Reynolds
Electric Corp. (Incorporated by reference to 2.13 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.14 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Rodgers
Electric Company, Inc., and all of the Stockholders of
Rodgers Electric Company, Inc. (Incorporated by reference
to 2.14 to the Registration Statement on Form S-1 (File
No. 333-38715) of the Company)
2.15 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Summit
Electric of Texas, Incorporated, and all of the
Stockholders of Summit Electric of Texas, Incorporated.
(Incorporated by reference to 2.15 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
2.16 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Thurman &
O'Connell Corporation, and all of the Stockholders of
Thurman & O'Connell Corporation. (Incorporated by
reference to 2.16 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
3.1 -- Amended and Restated Certificate of Incorporation as
amended. (Incorporated by reference to 3.1 to the
Registration Statement on Form S1 (File No. 333-38715) of
the Company)
3.2 -- Bylaws. (Incorporated by reference to 3.2 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
4.1 -- Specimen Common Stock Certificate. (Incorporated by
reference to 4.1 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
5.1 -- Opinion of John F. Wombwell, Esq. as to the legality of
the securities being registered.
10.1 -- Form of Employment Agreement (Incorporated by reference
to 10.1 to the Registration Statement on Form S-1 (File
No. 333-38715) of the Company)
10.2 -- Form of Officer and Director Indemnification Agreement.
(Incorporated by reference to 10.2 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.3 -- Integrated Electrical Services, Inc. 1997 Stock Plan.
(Incorporated by reference to 10.3 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.4 -- Integrated Electrical Services, Inc. 1997 Directors Stock
Plan. (Incorporated by reference to 10.4 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
10.5 -- Form of Credit Agreement among the Company, the Financial
Institutions named therein and NationsBank of Texas,
N.A., including form of Subsidiary Guaranty Agreement,
form of Pledge Agreement, form of promissory note, and
form of swing line note. Incorporated by reference to
10.5 to the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
10.6 -- Form of Agreement to be entered into by the Company and
the stockholders set forth on Schedule A thereto.
(Incorporated by reference to 10.6 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
</TABLE>
<PAGE> 243
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
*10.7 -- First Amendment to Credit Agreement among the Company,
the Financial Institutions named herein and NationsBank
of Texas, N.A.
21.1 -- List of Subsidiaries (Incorporated by reference to 21.1
to the Registration Statement on Form S-1 (File No.
333-38715) of the Company).
*23.1 -- Consent of John F. Wombwell, Esq. (included in Exhibit
5.1).
*23.2 -- Consent of Arthur Andersen LLP.
*24.1 -- Power of Attorney (included in signature page set forth
on page II-7).
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
[INTEGRATED ELECTRICAL SERVICES, INC. LETTERHEAD]
Exhibit 5.1
April 14, 1998
Board of Directors
Integrated Electrical Services, Inc.
515 Post Oak Boulevard
Suite 450
Houston, Texas 77027
Gentlemen:
I am Senior Vice President, General Counsel and Secretary of
Integrated Electrical Services, Inc. (the "Company") in connection with the
Company's Registration Statement on Form S-1 (the "Registration Statement")
relating to the registration under the Securities Act of 1933, as amended, of
the offering from time to time of up to 15,000,000 shares (the "Shares") of the
Company's common stock, $0.01 par value.
In connection herewith, I have examined copies of such
statutes, regulations, corporate records and documents, certificates of public
and corporate officials and other agreements, contracts, documents and
instruments as I have deemed necessary as a basis for the opinion hereinafter
expressed. In such examination, I have assumed the genuineness of all
signatures, the authenticity of all documents submitted to me as originals and
the conformity with the original documents of all documents submitted to me as
copies. I have also relied, to the extent I deem such reliance proper, upon
information supplied by officers and employees of the Company with respect to
various factual matters material to my opinion.
Based upon the foregoing and having due regard for such legal
considerations as I deem relevant, I am of the opinion that the Shares have
been duly authorized, and that such Shares will, when issued and paid for as
described in the Registration Statement, be legally issued, fully paid and
nonassessable.
I hereby consent to the use of this opinion as an exhibit to
the Registration Statement and to the reference to me under the caption "Legal
Matters" in the prospectus filed as a part of the Registration Statement.
Very truly yours,
/s/ JOHN F. WOMBWELL
<PAGE> 1
EXHIBIT 10.7
AMENDMENT NO. 1
This Amendment No. 1 dated as of March 6, 1998 (this "Agreement"), is
among Integrated Electrical Services, Inc., a Delaware corporation (the
"Borrower"), the undersigned financial institutions parties to the Credit
Agreement referred to below (the "Banks"), and NationsBank of Texas, N.A., as
agent (the "Agent") for the financial institutions that are parties to the
Credit Agreement.
INTRODUCTION
Reference is made to the Credit Agreement dated as of January 30, 1998
(as modified, the "Credit Agreement"), among the Borrower, the Banks, and the
Agent, the defined terms of which are used herein unless otherwise defined
herein. The Borrower, the Banks, and the Agent have agreed to increase the
amount of the Revolving Loan Commitments under the Credit Agreement to
$70,000,000 and make other amendments to the Credit Agreement as set forth
herein in connection therewith.
THEREFORE, in connection with the foregoing and for other good and
valuable consideration, the Borrower, the Banks, and the Agent hereby agree as
follows:
Section 1. Amendment.
1.1 NationsBank of Texas, N.A., as the sole Bank party to the
Credit Agreement prior to the execution of this Agreement, is retaining a
portion of its existing Revolving Loan Commitment and each of Bank of Scotland,
Comerica Bank - Texas, and National City Bank of Kentucky are committing to
respective Revolving Loan Commitments such that upon the effectiveness of this
Agreement, the Revolving Loan Commitments of each Bank shall be those set forth
for such Bank on the signature pages of this Agreement, and the aggregate
amount of such Revolving Loan Commitments shall be $70,000,000. The effective
date for this increase shall be the date of this Agreement, and following the
effectiveness of this Agreement and as of such date, (a) the Agent shall record
the new Revolving Loan Commitments in the Register, (b) the Agent shall
reallocate all outstanding Revolving Loan Advances and all participation
interests in Letters of Credit, if any, so that the Banks hold such Revolving
Loan Advances and participation interests in Letters of Credit ratably in
accordance with their Revolving Loan Commitments, and (c) each of Bank of
Scotland,
<PAGE> 2
Comerica Bank - Texas, and National City Bank of Kentucky shall be a party to
the Credit Agreement for all purposes and have all of the rights and
obligations of a Bank thereunder.
1.2 A new definition of "Amendment No. 1" is added to Section 1.1
of the Credit Agreement in the appropriate alphabetical order and the
definition of "Revolving Loan Commitment" in Section 1.1 of the Credit
Agreement is amended by replacing such definition in its entirety, both as set
forth below:
"Amendment No. 1" means the Amendment No. 1 dated as of March
6, 1998, among the Borrower, the Agent, and the Banks amending and
waiving the terms of this Agreement.
"Revolving Loan Commitment" means, for any Bank, the amount
set forth below such Bank's name on the signature pages of the
Amendment No. 1 as its Revolving Loan Commitment, or if such Bank has
entered into any Assignment and Acceptance since the date of the
Amendment No. 1, as set forth for such Bank as its Revolving Loan
Commitment in the Register maintained by the Agent pursuant to Section
8.5(c), in each case as such amount may be terminated pursuant to
Section 6.2.
1.3 The Schedules to the Credit Agreement are amended by replacing
Schedule I to the Credit Agreement with Schedule I attached to this Agreement.
Section 2. Effectiveness. The effectiveness of the amendments in
Section 1 of this Agreement are subject to the satisfaction of the condition
precedent that the Borrower shall have delivered or shall have caused to be
delivered the documents and other items listed on the Closing Documents List
dated as of even date with this Agreement, each in form and with substance
satisfactory to the Agent and where applicable executed by the appropriate
parties thereto.
Section 3. Representations and Warranties. The Borrower represents
and warrants that (a) the execution, delivery, and performance of this
Agreement are within the corporate power and authority of the Borrower and have
been duly authorized by appropriate proceedings, (b) this Agreement constitutes
legal, valid, and binding obligations of the Borrower enforceable in accordance
with its terms, except as limited by applicable bankruptcy, insolvency,
reorganization, moratorium, or similar laws affecting the rights of creditors
generally and general principles of equity, and (c) upon the effectiveness of
this Agreement and the amendment of the Credit Documents as provided for
herein, the representations and warranties contained in each Credit Document
are true and correct in all material respects,
-2-
<PAGE> 3
no Event of Default exists under the Credit Documents, and there shall have
occurred no event which with notice or lapse of time would become an Event of
Default under the Credit Documents.
Section 4. Effect on Credit Documents. As amended herein, the
Credit Documents remain in full force and effect. Except as specifically set
forth herein, nothing herein shall act as a waiver of any of the Agent's or the
Banks' rights under the Credit Documents as amended, including the waiver of
any default or event of default, however denominated. The Borrower must
continue to comply with the terms of the Credit Documents, as amended. This
Agreement is a Credit Document for the purposes of the provisions of the other
Credit Documents. Without limiting the foregoing, any breach of
representations, warranties, and covenants under this Agreement may be a
default or event of default under other Credit Documents.
Section 5. Effectiveness. This Agreement shall be effective as of
the date hereof when the Agent shall have received duly executed counterparts
hereof signed by the Borrower, the Agent, and the Banks.
Section 6. Miscellaneous. The miscellaneous provisions of the
Credit Agreement apply to this Agreement. This Agreement shall be governed by
and construed and enforced in accordance with the laws of the State of Texas.
This Agreement may be signed in any number of counterparts, each of which shall
be an original, and may be executed and delivered by telecopier.
THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS REPRESENT THE FINAL
AGREEMENT AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
-3-
<PAGE> 4
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
EXECUTED as of the date first above written.
BORROWER:
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ JAMES P. WISE
--------------------------------
Jim P. Wise
Senior Vice President and
Chief Financial Officer
AGENT:
NATIONSBANK OF TEXAS, N.A., as Agent
By: /s/ ALBERT L. WELCH
--------------------------------
Albert L. Welch
Vice President
BANKS:
NATIONSBANK OF TEXAS, N.A.
Revolving Loan Commitment: By: /s/ ALBERT L. WELCH
$25,000,000 --------------------------------
Albert L. Welch
Vice President
-4-
<PAGE> 5
BANK OF SCOTLAND
Revolving Loan Commitment: By: /s/ ANNIE CHIN TAT
$15,000,000 ---------------------------------
Annie Chin Tat
Vice President
COMERICA BANK - TEXAS
Revolving Loan Commitment: By: /s/ BART BEARDEN
$15,000,000 ---------------------------------
Bart Bearden
Vice President
NATIONAL CITY BANK OF KENTUCKY
Revolving Loan Commitment: By: /s/ TOM GURBACH
$15,000,000 ---------------------------------
Tom Gurbach
Vice President
-5-
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated November 14, 1997 on the financial statements of the following
businesses included in or made a part of this registration statement: Integrated
Electrical Services, Inc.; BW Consolidated, Inc. and Subsidiaries;
Houston-Stafford Electric, Inc. and Consolidated Entity; Mills Electrical
Contractors, Inc. and Subsidiary; Muth Electric, Inc.; Amber Electric, Inc.;
Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure Coast
Inc.; Pollock Electric Inc.; Thurman & O'Connell Corporation; Charles P. Bagby,
Co., Inc.; Summit Electric of Texas, Incorporated; and Rodgers Electric Company,
Inc.; and to all references to our firm included in this registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
April 14, 1998
