<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: April 29, 1999
Commission File No. 001-13783
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0542208
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
515 Post Oak Boulevard
Suite 450
Houston, Texas 77027-9408
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 860-1500
<PAGE> 2
ITEM 5. OTHER EVENTS
Integrated Electrical Services, Inc., a Delaware corporation (the
"Company") is a leading national provider and consolidator of electrical
contracting and maintenance services, focusing primarily on the commercial,
industrial, residential, powerline and data communication markets. In connection
with its business acquisitions, the Company plans to offer shares of the
Company's Common Stock, $.01 par value per share (the "Common Stock") pursuant
to its Registration Statement on Form S-1 (Registration No. 333-45479). In order
to comply with the disclosure requirements of the Securities and Exchange
Commission regarding the financial statements of businesses acquired or to be
acquired, the Company is filing this Current Report containing the following
unaudited pro forma financial statements and audited financial statements of a
business acquired.
(a) Pro Forma Financial Information
See Pages 1 through 6
(b) Financial Statements of Business Acquired
See Pages 7 through 18
<PAGE> 3
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited pro forma balance sheet reflects the acquisition by
Integrated Electrical Services, Inc. ("IES"), of Tesla Power and Automation,
Inc. ("Tesla") which was acquired subsequent to December 31, 1998 as if it had
occurred on December 31, 1998. The unaudited pro forma statements of operations
give effect to the Tesla acquisition and the related pro forma adjustments as if
it had occurred on October 1, 1997.
IES has analyzed the savings that it expects to realize from reductions
in salaries, bonuses and certain benefits to the owners. To the extent the
owners of Tesla have contractually agreed to changes in salary, bonuses,
benefits and lease payments, these changes have been reflected in the unaudited
pro forma statement of operations.
Certain pro forma adjustments are based on preliminary estimates,
available information and certain assumptions that Company management deems
appropriate and may be revised as additional information becomes available. The
pro forma financial data do not purport to represent what IES's combined
financial position or results of operations would actually have been if such
transaction in fact had occurred on these dates and are not necessarily
representative of IES's combined financial position or results of operations for
any future period. Since the acquired entity was not under common control or
management prior to its acquisition by IES, historical combined results may not
be comparable to, or indicative of, future performance. The unaudited pro forma
financial statements should be read in conjunction with the historical
consolidated financial statements and notes thereto included in the company's
Annual Report for the year ended September 30, 1998 filed on Form 10-K. See also
"Risk Factors" included elsewhere therein.
1
<PAGE> 4
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA BALANCE SHEET
DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
IES AND TESLA PRO FORMA PRO FORMA
SUBSIDIARIES ACQUISITION ADJUSTMENTS AS ADJUSTED
------------- ------------- ------------- ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................. $ 4,044 $ 16 $ (1,960) $ 2,100
Receivables, net................................. 153,380 2,257 -- 155,637
Inventories, net................................. 7,756 -- -- 7,756
Marketable securities............................ -- 1,373 (1,373) --
Cost and estimated earnings in excess of
billings on uncompleted contracts............ 14,445 344 -- 14,789
Prepaid expenses and other current assets....... 3,380 17 -- 3,397
------------- ------------- ------------- ------------
Total current assets.......................... 183,005 4,007 (3,333) 183,679
GOODWILL, NET....................................... 305,972 -- 4,986 310,958
PROPERTY AND EQUIPMENT, NET......................... 25,872 1,379 -- 27,251
OTHER NONCURRENT ASSETS............................. 3,157 2 -- 3,159
------------- ------------- ------------- ------------
Total assets.................................. $ 518,006 $ 5,388 $ 1,653 $ 525,047
============= ============= ============= ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current
maturities of long-term debt................. $ 3,637 $ 414 $ (414) $ 3,637
Accounts payable and accrued expense............. 71,017 988 -- 72,005
Billings in excess of costs and estimated
earnings on uncompleted contracts............ 27,175 293 -- 27,468
Income taxes payable............................. 2,809 55 -- 2,864
Other current liabilities........................ 436 -- -- 436
------------- ------------- ------------- ------------
Total current liabilities..................... 105,074 1,750 (414) 106,410
------------- ------------- -------------- ------------
LONG-TERM BANK DEBT................................. 89,000 -- -- 89,000
OTHER LONG-TERM DEBT, NET........................... 880 39 (39) 880
OTHER NON-CURRENT LIABILITIES....................... 1,514 -- -- 1,514
------------- ------------- ------------- ------------
Total liabilities............................. 196,468 1,789 (453) 197,804
STOCKHOLDERS' EQUITY:
Preferred stock.................................. -- -- -- --
Common stock..................................... 289 50 (46) 293
Restricted common stock.......................... 27 -- -- 27
Additional paid-in capital....................... 301,384 54 5,647 307,085
Retained earnings................................ 19,838 3,495 (3,495) 19,838
------------- ------------- -------------- ------------
Total stockholders' equity.................... 321,538 3,599 2,106 327,243
------------- ------------- ------------- ------------
Total liabilities and stockholders' equity..... $ 518,006 $ 5,388 $ 1,653 $ 525,047
============= ============= ============= ============
</TABLE>
The accompanying notes are an integral part of these
pro forma financial statements.
2
<PAGE> 5
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
IES AND TESLA PRO FORMA PRO FORMA
SUBSIDIARIES ACQUISITION ADJUSTMENTS TOTAL
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
REVENUES.................................. $ 386,721 $ 10,330 $ -- $ 397,051
COST OF SERVICES.......................... 306,052 8,151 -- 314,203
------------ ------------ ------------- --------------
GROSS PROFIT........................... 80,669 2,179 -- 82,848
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES............... 47,390 1,322 (149) 48,563
NON-CASH, NON-RECURRING
COMPENSATION CHARGE.................. 17,036 -- -- 17,036
GOODWILL AMORTIZATION..................... 3,212 -- 125 3,337
------------ ------------ ------------- --------------
INCOME FROM OPERATIONS................. 13,031 857 24 13,912
OTHER INCOME (EXPENSE):
Interest expense....................... (1,161) (78) 78 (1,161)
Interest income........................ 433 101 (101) 433
Other, net............................. 335 95 (30) 400
------------ ------------ -------------- --------------
OTHER INCOME (EXPENSE), NET............... (393) 118 (53) (328)
INCOME BEFORE INCOME TAXES................ 12,638 975 (29) 13,584
PROVISION FOR INCOME TAXES................ 12,690 51 361 13,102
------------ ------------ ------------- --------------
NET INCOME (LOSS)......................... $ (52) $ 924 $ (390) $ 482
============= ============= ============== ==============
EARNING (LOSS) PER SHARE -
BASIC - $ 0.00 $ 0.02
============ ==============
DILUTED - $ 0.00 $ 0.02
============ ==============
SHARES USED IN THE
COMPUTATION OF
EARNINGS (LOSS)
PER SHARE
BASIC - 19,753,060 20,113,060
============ ==============
DILUTED - 19,753,060 20,512,893
============ ==============
</TABLE>
The accompanying notes are an integral part of these
pro forma financial statements.
3
<PAGE> 6
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE QUARTER ENDED DECEMBER 31, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
IES AND TESLA PRO FORMA PRO FORMA
SUBSIDIARIES ACQUISITION ADJUSTMENTS TOTAL
------------ ------------ ------------- --------------
<S> <C> <C> <C> <C>
REVENUES.................................. $ 197,712 $ 2,132 $ -- $ 199,844
COST OF SERVICES.......................... 156,745 1,772 -- 158,517
------------ ------------ ------------- --------------
GROSS PROFIT........................... 40,967 360 -- 41,327
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES............... 21,841 512 (193) 22,160
GOODWILL AMORTIZATION..................... 1,848 -- 31 1,879
------------ ------------ ------------- --------------
INCOME FROM OPERATIONS................. 17,278 (152) 162 17,288
OTHER INCOME (EXPENSE):
Interest expense....................... (1,695) (8) 8 (1,695)
Interest income........................ 151 57 (57) 151
Other, net............................. 58 74 (18) 114
------------ ------------ -------------- --------------
OTHER INCOME (EXPENSE), NET............... (1,486) 123 (67) (1,430)
INCOME BEFORE INCOME TAXES................ 15,792 (29) 95 15,858
PROVISION FOR INCOME TAXES................ 6,700 -- 37 6,737
------------ ------------ ------------- --------------
NET INCOME (LOSS)......................... $ 9,092 $ (29) $ 58 $ 9,121
============ ============== ============= ==============
EARNING (LOSS) PER SHARE -
BASIC - $ 0.29 $ 0.29
============ ==============
DILUTED - $ 0.29 $ 0.28
============ ==============
SHARES USED IN THE
COMPUTATION OF
EARNINGS (LOSS)
PER SHARE
BASIC - 31,134,718 31,494,718
============ ==============
DILUTED - 31,668,316 32,028,316
============ ==============
</TABLE>
The accompanying notes are an integral part of these
pro forma financial statements.
4
<PAGE> 7
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA BALANCE SHEET:
The Pro Forma Adjustments reflect the acquisition of Tesla which was
acquired subsequent to December 31, 1998.
2. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS:
The Tesla Acquisition columns reflect the historical results of Tesla
as if it had been acquired on October 1, 1997.
The following table summarizes the Pro Forma Adjustments for the Year
Ended September 30, 1998 (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS
------------------------------------------------------- PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative expenses..... $ (149) $ -- $ -- $ -- $ (149)
Goodwill amortization............................ -- 125 -- -- 125
------------ ----------- ----------- ----------- ------------
Income (loss) from operations................. 149 (125) -- -- 24
Other income (expense):
Interest expense.............................. -- -- 78 -- 78
Interest income............................... -- -- (101) -- (101)
Other, net.................................... -- -- (30) -- (30)
------------ ----------- ------------ ----------- -------------
Other income (expense), net................... -- -- (53) -- (53)
------------ ----------- ------------ ----------- -------------
Income (loss) before income taxes............. 149 (125) (53) -- (29)
Provision for income taxes....................... -- -- -- 361 361
------------ ----------- ----------- ----------- ------------
Net income (loss)................................ $ 149 $ (125) $ (53) $ (361) $ (390)
============ ============ ============ =========== =============
</TABLE>
The following table summarizes the Pro Forma Adjustments for the
Quarter Ended December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS
------------------------------------------------------- PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
------------ ----------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative expenses..... $ (193) $ -- $ -- $ -- $ (193)
Goodwill amortization............................ -- 31 -- -- 31
------------ ----------- ----------- ----------- ------------
Income (loss) from operations................. 193 (31) -- -- 162
Other income (expense):
Interest expense.............................. -- -- 8 -- 8
Interest income............................... -- -- (57) -- (57)
Other, net.................................... -- -- (18) -- (18)
------------ ----------- ------------ ----------- -------------
Other income (expense), net................... -- -- (67) -- (67)
------------ ----------- ------------ ----------- -------------
Income (loss) before income taxes............. 193 (31) (67) -- 95
Provision for income taxes....................... -- -- -- 37 37
------------ ----------- ----------- ----------- ------------
Net income (loss)................................ $ 193 $ (31) $ (67) $ (37) $ 58
============ ============ ============ ============ ============
</TABLE>
5
<PAGE> 8
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(a) Reflects the reduction in salaries, bonuses and benefits to the owners
of Tesla. These reductions in salaries, bonuses and benefits have been
agreed to in accordance with the terms of employment agreements
executed as part of the acquisition. Such employment agreements are for
five years, contain restrictions related to competition and provide
severance for termination of employment in certain circumstances.
(b) Reflects the amortization of goodwill recorded as a result of these
acquisitions over a 40-year estimated life.
(c) Reflects the reduction of additional interest expense and income on
borrowings which will be repaid and collected, respectively, subsequent
to the acquisition and the reduction of certain non-recurring other
income.
(d) Reflects the incremental provision for federal and state income taxes
at a 38.5% overall tax rate, before non-deductible goodwill and other
permanent items related to the other statements of operations
adjustments and for income taxes on the pretax income of acquired
companies that have historically elected S Corporation tax status.
6
<PAGE> 9
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Tesla Power and Automation, Inc.
Houston, Texas
We have audited the accompanying balance sheet of Tesla Power and Automation,
Inc. (a Texas corporation) as of December 31, 1998, and the related statements
of operations and comprehensive income, stockholders' equity and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tesla Power and Automation,
Inc. as of December 31, 1998, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
BROCKMANN, ARMOUR & CO. LLC
Denver, Colorado
April 23, 1999
7
<PAGE> 10
TESLA POWER AND AUTOMATION, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 16,171
Accounts receivable:
Uncompleted contracts 1,055,864
Completed contracts, net of allowance for 50,000 1,196,431
Other 5,310
Marketable securities 1,373,206
Cost and estimated earnings in excess of billings
on uncompleted contracts 343,830
Prepaid expenses and other current assets 16,628
-----------
Total current assets 4,007,440
Property and equipment, at cost, net of accumulated
depreciation and amortization 1,378,935
Other assets 1,420
-----------
Total assets $ 5,387,795
===========
LIABILITIES
Current liabilities:
Line of credit and margin securities account $ 301,849
Accounts payable 892,935
Current portion of long-term debt 15,412
Current portion of notes payable to stockholders 96,674
Provision for product warranty 42,732
Billings in excess of costs and estimated earnings
on uncompleted contracts 292,738
Income taxes payable 54,512
Accrued 401(k)/profit sharing and payroll related expenses 53,301
-----------
Total current liabilities 1,750,153
Long-term debt, net of current portion 30,534
Notes payable to stockholders 8,409
STOCKHOLDERS' EQUITY
Common stock, $1 par value, 100,000 shares authorized,
50,000 shares issued and outstanding 50,000
Additional paid-in capital 53,900
Retained earnings 3,576,669
Unrealized loss on marketable securities (81,870)
-----------
3,598,699
-----------
$ 5,387,795
===========
</TABLE>
See independent auditor's report and accompanying notes to financial statements.
8
<PAGE> 11
TESLA POWER AND AUTOMATION, INC.
STATEMENT OF OPERATIONS AND COMPREHENSIVE INCOME
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Contract revenue $ 10,330,238
Cost of contract revenue 8,150,867
------------
Gross profit 2,179,371
General and administrative expenses 1,322,085
------------
Income from operations 857,286
Other income (expense):
Interest expense (77,678)
Interest income 101,331
Realized gain on sale of marketable securities 28,708
Gain on sale of property and equipment 1,626
Rental income 63,841
------------
117,828
------------
Income before state income taxes 975,114
Provision for state income taxes 50,825
------------
Net income 924,289
Other comprehensive income:
Unrealized holding losses recognized during the period (121,498)
Previously recognized unrealized gain on marketable
securities 39,628
------------
Comprehensive income $ 842,419
============
</TABLE>
See independent auditor's report and accompanying notes to financial statements.
9
<PAGE> 12
TESLA POWER AND AUTOMATION, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ADDITIONAL UNREALIZED
PAID-IN GAIN (LOSSES)
COMMON STOCK CAPITAL RETAINED ON MARKETABLE
SHARES AMOUNT STOCK EARNINGS SECURITIES TOTAL
------ -------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 50,000 $ 50,000 $ 53,900 $ 2,977,380 $ 39,628 $ 3,120,908
Distributions to stockholders -- -- -- (325,000) -- (325,000)
Accumulated other comprehensive income -- -- -- -- (121,498) (121,498)
Net income -- -- -- 924,289 -- 924,289
------ -------- -------- ----------- ---------- -----------
Balance, December 31, 1998 50,000 $ 50,000 $ 53,900 $ 3,576,669 $ (81,870) $ 3,598,699
====== ======== ======== =========== ========== ===========
</TABLE>
See independent auditor's report and accompanying notes to financial statements.
10
<PAGE> 13
TESLA POWER AND AUTOMATION, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities:
Net income $ 924,289
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization 142,224
Realized gain on sale of marketable securities (1,626)
Gain on sale of property and equipment 28,708
(Increase) decrease in--
Accounts receivable (132,905)
Costs and estimated earnings in excess of billings
on uncompleted contracts 516,317
Other current assets 13,003
Increase (decrease) in--
Accounts payable 181,396
Billings in excess of costs and estimated earnings
on uncompleted contracts 262,118
Accrued expenses (23,514)
Other current liabilities 38,790
-----------
Net cash provided by operating activities 1,948,800
Cash flows from investing activities:
Purchase of property and equipment (260,684)
Purchase of marketable securities (157,759)
Proceeds from sale of property and equipment 17,500
-----------
Net cash used by investing activities (400,943)
Cash flows from financing activities:
Payments of margin securities account (604,690)
Distributions to stockholders (325,000)
Borrowings on line of credit 3,755,730
Payments on line of credit (3,734,922)
Net payment on long-term debt (642,350)
-----------
Net cash used by financing activities (1,551,232)
-----------
Net increase in cash and cash equivalents (3,375)
Cash and cash equivalents, beginning of year 19,546
-----------
Cash and cash equivalents, end of year $ 16,171
===========
</TABLE>
See independent auditor's report and accompanying notes to financial statements.
11
<PAGE> 14
TESLA POWER AND AUTOMATION, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. Organization and description of business:
Tesla Power and Automation, Inc. (the Company) is an engineering and
manufacturing company specializing in the construction of electrical
power control units. The Company was incorporated on January 18, 1988,
in the state of Texas. The Company's long-term construction contracts
are primarily comprised of fixed-price contracts.
2. Summary of significant accounting policies:
Use of estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ
from those estimates.
Accounting for construction contracts
Revenues from long-term construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of total
costs incurred to date to estimated total costs for each contract.
Contract costs include all direct job costs and those indirect costs
related to contract performance, such as indirect labor, supplies,
insurance, equipment repairs, and depreciation costs. General and
administrative costs are charged to expense as incurred.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenue recognized in excess of
billings. The liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts", represents billings in excess of
revenues recognized. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
Cash and cash equivalents
The Company records as cash and cash equivalents all cash and
short-term investments with original maturities of three months or
less.
12
<PAGE> 15
Concentrations of risk
Financial instruments that potentially subject the Company to credit
risk consist principally of cash and cash equivalents and contract
receivables.
The Company maintains cash balances at a single financial institution.
Accounts at this institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. At times, the balances in the
Company's accounts may exceed this limit.
The Company's contract revenues are highly concentrated with two
individual customers. These customers accounted for approximately
$3,003,000 or 29% of contract revenues for the year ended December 31,
1998. The associated accounts receivable from these customers total
approximately $375,000 or 17% of total accounts receivable at December
31, 1998. The loss of a significant customer could have a material
impact on the Company's future earnings results. These sales are
primarily derived from sales of electrical power control units
concentrated with customers in the petroleum industry. The Company has
recorded an allowance for doubtful accounts of approximately $50,000 as
of December 31, 1998. Management believes that this allowance is
adequate.
The Company purchases materials, parts and supplies from four unrelated
third party vendors and one vendor under common control as more further
discussed in Note 10. These vendors accounted for approximately
$4,299,000 or 68% of material, part and supply purchases during the
year ended December 31, 1998. Management believes there are alternative
sources of supply should a loss of one of these vendors occur, however,
the loss may result in a short-term impact to the Company.
Advertising
Advertising expenses are charged to expense as incurred and are
included in general and administrative expenses. Advertising expense
totaled $22,234 for the year ended December 31, 1998.
Property, plant and equipment
Property, plant and equipment is stated at cost. Depreciation and
amortization is provided on a straight-line basis over the estimated
useful life of the asset. Machinery and equipment, vehicles and
furniture and fixtures are depreciated between 5 and 7 years. Building
and improvements are depreciated and amortized between 31 and 39 years.
Repairs and maintenance of a routine nature are charged to expense as
incurred, while those that improve or extend the life of existing
assets are capitalized.
13
<PAGE> 16
At December 31, 1998, property, plant and equipment consist of the
following:
<TABLE>
<S> <C>
Furniture and fixtures $ 22,056
Machinery and equipment 564,428
Vehicles 197,682
Building and improvements 716,204
Land 445,349
-----------
1,945,719
Less--accumulated depreciation
and amortization (566,784)
-----------
Property, plant and equipment, net $ 1,378,935
</TABLE>
Depreciation expense of $38,988 has been included in selling, general
and administrative expenses and $103,236 has been included in cost of
sales for the year ended December 31, 1998.
Accrued Product Warranty
The Company provides limited warranties through its original equipment
manufacturers (OEM) for the products it sells. Generally, warranty
costs during the basic warranty period, which varies based on the OEM,
are reimbursed by the OEM. The accrued product warranty in the
accompanying financial statements is based on management's estimate of
future warranty costs for warranties provided by the Company outside of
the OEM warranty period.
Income taxes
The Company, with the consent of its stockholders, elected under the
Internal Revenue Code to be taxed as an S Corporation. In lieu of
corporate income taxes, the stockholders of an S Corporation are taxed
individually on the Company's taxable income. As a result of the
Company being a non-taxpaying entity, no provision for income taxes has
been provided for Federal income tax reporting purposes.
The Company reports income for both financial and tax reporting using
the percentage-of-completion method on its long-term contracts.
The provision for income taxes relates to State of Texas franchise
taxes owed by the Company.
Upon completion of the acquisition of the Company's outstanding stock
as discussed in Note 12, the Company's S Corporation tax status will be
terminated.
Fair value of financial instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
14
<PAGE> 17
Cash and cash equivalents
The carrying amount approximates fair value because of the short
maturity of those instruments.
Marketable securities
The fair values of marketable securities are estimated based on quoted
market prices for those or similar investments. The carrying amount
approximates fair value.
Long-term debt
The fair value of the Company's long-term debt is estimated based on
the quoted market prices for the same or similar issues or on the
current rates offered to the Corporation for debt of the same remaining
maturities. The carrying amount approximates fair value.
3. Change in accounting principle
The Company has adopted the provisions of Statement of Financial
Accounting Standards No. 130, Reporting Comprehensive Income. This
statement requires the disclosure of comprehensive income as well as
net income. The only element of comprehensive income that the Company
has that is not part of net income is unrealized gains on marketable
securities. The Company has reclassified its 1997 financial statements
in conjunction with the adoption of this statement. Other comprehensive
income is shown of net realized gains on the sale of marketable
securities.
4. Marketable securities
The Company records its investment in marketable securities in
accordance with Statement of Financial Accounting Standards (SFAS) No.
115, "Accounting for Certain Investments in Debt and Equity
Securities." The Company's marketable securities consist of mutual
funds and are classified as "available-for-sale." Accordingly,
unrealized gains and losses are excluded from earnings and reported as
a separate component of stockholders' equity. Realized gains or losses
are computed based on specific identification of the securities sold.
The following is an analysis of marketable securities available for
sale at December 31, 1998:
<TABLE>
<S> <C>
Balance at cost $1,455,076
Gross unrealized losses (81,870)
----------
$1,373,206
==========
</TABLE>
On April 13, 1999, the marketable securities were sold and the net
proceeds were distributed to the stockholders.
15
<PAGE> 18
5. Contracts in progress
Contracts in progress at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Total contracts $ 5,528,445
Estimated costs
Costs to date 944,576
Costs to complete 3,288,872
-----------
Total estimated costs 4,233,448
-----------
Estimated gross profit $ 1,294,997
===========
Amount billed to date $ 1,214,594
Costs and estimated earnings in excess of billings 343,830
Billings in excess of costs and estimated earnings (292,738)
-----------
Contract revenue earned 1,265,686
Costs to date (944,576)
-----------
Gross profit earned $ 321,110
===========
</TABLE>
6. Line of credit and margin securities account
The Company has a $750,000 revolving line of credit with a financial
services company. Advances on the LOC are limited to 80% of eligible
accounts receivable. As of December 31, 1998, the maximum amount
available under the LOC is approximately $448,000, with interest due
monthly at 30-day commercial paper rate plus 2.9% per annum (totaling
8.0% at December 31, 1998). As of December 31, 1998, a total of
$301,849 was outstanding. The line of credit is collateralized by the
Company's accounts receivable, property, plant and equipment, and is
guaranteed by the Company's stockholders and requires the Company to
maintain a minimum tangible net worth of $1,500,000. Subsequent to
December 31, 1998, the Company repaid the amounts on the line of credit
prior to its expiration on January 31, 1999.
The Company has a margin securities account with a financial services
company to provide borrowings up to 50% of the marketable securities
balance with interest at a 30-day commercial paper rate plus 2.9%
payable monthly. Outstanding balances under the margin securities
account are collaterialized by marketable securities. No balance was
outstanding under the margin securities account at December 31, 1998.
As a result of the acquisition of the Company's outstanding stock as
discussed in Note 12, the line of credit agreement was not renewed and
the margin securities account was cancelled.
16
<PAGE> 19
7. Long-term debt and notes payable to stockholders
<TABLE>
<S> <C>
Term note payable to a financial service company
with monthly payments of $7,679, including
interest at 30 day commercial paper rate plus
2.9% (totaling 8.0% at December 31, 1998)
through January 31, 2003 when any outstanding
principal and interest is due. Cross-collateralized
with line of credit and secured by accounts
receivable, fixtures and equipment. Guaranteed
by the Company's stockholders. $ 8,410
Term note payable to financial institution with
monthly payments of $767.71 including interest
at 9.9% per annum through May 15, 2001, with a
balloon payment of $18,507 due at maturity;
collaterialized by a vehicle and guaranty by the
Company's stockholders 37,536
--------
45,946
Less current portion (15,412)
--------
$ 30,534
========
Unsecured notes payable to stockholders;
monthly payments of $8,465 including interest at
8% per annum; due January 12, 2000. $105,083
Less current portion (96,674)
--------
$ 8,409
========
</TABLE>
8. Operating leases
The Company is obligated under several non-cancelable operating leases
for office equipment and machinery that expire at various dates through
the year 2002.
The annual minimum lease payments under non-cancelable operating leases
as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------
<S> <C>
1999 $ 49,645
2000 48,645
2001 26,631
2002 68,371
---------
$ 193,292
</TABLE>
Rent expense totaled $76,647 for the year ended December 31, 1998.
17
<PAGE> 20
9. Benefit plans
On January 1, 1994, the Company adopted a salary
reduction/profit-sharing plan under the provision of Section 401(k) of
the Internal Revenue Code which covers substantially all full-time
employees who have completed one year of service. The plan provides for
the Company to match voluntary employee contributions at a rate of 25%.
Such matching rate can be changed at the Company's discretion. All
contributions by the Company are funded annually and vest over six
years. All employee contributions are immediately vested. Company
matching contributions to the plan were $52,601 for the year ended
December 31, 1998.
10. Related party transactions
The Company purchases substantially all of its fabricated sheet metal
products from Unlimited Controls, Inc. (UCI), a Texas corporation
controlled by the stockholders of the Company. Total purchases from
this entity during the year ended December 31, 1998 totaled $2,283,486.
The Company also rents manufacturing space to UCI. Rent received from
UCI totaled $63,841 for the year ended December 31, 1998.
Interest expense related to notes payable to stockholders as discussed
in Note 7 totaled $12,322 for the year ended December 31, 1998.
11. Cash flows
During the year ended December 31, 1998, interest paid was $77,698.
During the year ended December 31, 1998, the Company had non-cash
investing activities related to unrealized holding losses on marketable
securities of $121,498.
12. Subsequent events
On January 13, 1999, the Company completed a corporate reorganization
whereby the Company merged with Unlimited Controls, Inc into a newly
formed entity, Tesla Power and Automation (Nevada), Inc. a Nevada
corporation (TPAN). TPAN contributed its operating assets to Tesla
Power and Automation, LLP (TPALLP) in exchange for a 99% limited
partnership interest and contributed real estate to Tesla Properties,
LLP (TPLLP) in exchange for a 99% limited partnership interest. The
ownership of TPAN and the 1% general partnership interests in TPALLP
and TPLLP are in direct proportion to the ownership of the Company.
On April 23, 1999, the stockholders of TPAN and the general partners of
TPALLP and TPLLP completed the sale of 100% of their ownership
interests in TPAN, TPALLP and TPLLP to Integrated Electrical Services
(IES).
18
<PAGE> 21
ITEM 7. EXHIBITS
(c) Exhibits.
23.1 Consent of Brockmann, Armour & Co. LLC
19
<PAGE> 22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Current Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ JOHN F. WOMBELL
JOHN F. WOMBELL
SENIOR VICE PRESIDENT
AND GENERAL COUNSEL
Dated: April 29, 1999
20
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
23.1 Consent of Brockmann, Armour & Co. LLC
</TABLE>
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the use of our report, dated April 23, 1999, on the
financial statements of Tesla Power and Automation, Inc. included in this
Form 8-K and to its incorporation by reference into Integrated Electrical
Services, Inc.'s previously filed Registration Statements on Form S-8
(File Nos. 333-67113, 333-45447 and 333-45449), previously filed Registration
Statement on Form S-4 (File No. 333-75139) and on previously filed Post
Effective Amendment No. 5 to Form S-1 on Form S-4 (File No. 333-50031).
/s/ BROCKMANN, ARMOUR & CO. LLC
--------------------------------
BROCKMANN, ARMOUR & CO. LLC
Denver, Colorado
April 29, 1999
