<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: February 4, 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 audited and pro forma financial statements.
(a) Financial Statements of Businesses Acquired
See Pages 2 through 51
(b) Pro Forma Financial Information
See Pages 52 through 56
<PAGE> 3
INDEX TO FINANCIAL STATEMENTS
PAGE
----
PRIMO ELECTRIC COMPANY - FINANCIAL STATEMENTS FOR
THE YEAR ENDED APRIL 30, 1998 AND FOR PRIMO ELECTRIC COMPANY AND
PRIMENET, LLC FOR THE EIGHT MONTHS ENDED DECEMBER 31, 1998
AND 1997 (UNAUDITED)
Report of Independent Certified Public Accountants ........................ 2
Balance Sheets ............................................................ 3
Statements of Income and Retained Earnings/Member's Equity ................ 5
Statements of Cash Flows .................................................. 6
Notes to Financial Statements ............................................. 8
KAYTON ELECTRIC, INC. - FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1997 AND NINE MONTHS ENDED SEPTEMBER 30,
1998 AND 1997 (UNAUDITED)
Independent Auditors' Report .............................................. 15
Balance Sheets ............................................................ 16
Statements of Earnings and Retained Earnings .............................. 17
Statements of Cash Flows .................................................. 18
Notes to Financial Statements ............................................. 19
BACHOFNER ELECTRIC, INC. - FINANCIAL STATEMENTS FOR THE YEAR
ENDED DECEMBER 31, 1997 AND TEN MONTHS ENDED OCTOBER 31, 1997 AND
1998 (UNAUDITED)
Independent Auditors' Report .............................................. 24
Balance Sheets ............................................................ 25
Statements of Operations .................................................. 26
Statements of Changes in Stockholders' Equity ............................. 27
Statements of Cash Flows .................................................. 28
Notes to Financial Statements ............................................. 29
PCX CORPORATION - FINANCIAL STATEMENTS FOR THE YEAR ENDED
DECEMBER 31, 1997 AND NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1998
(UNAUDITED)
Report of Independent Public Accountants .................................. 39
Balance Sheets ............................................................ 40
Statements of Operations .................................................. 41
Statements of Stockholders' Equity ........................................ 42
Statements of Cash Flows .................................................. 43
Notes to Financial Statements ............................................. 44
INTEGRATED ELECTRIC SERVICES, INC. - UNAUDITED PRO FORMA
FINANCIAL STATEMENTS
Basis of Presentation ..................................................... 52
Unaudited Pro Forma Balance Sheet as of September 30, 1998 ................ 53
Unaudited Pro Forma Statement of Operations for the Year
ended September 30, 1998 ................................................ 54
Notes to Unaudited Pro Forma Financial Statements ......................... 55
<PAGE> 4
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
TO THE STOCKHOLDERS AND
BOARD OF DIRECTORS
PRIMO ELECTRIC COMPANY
2340 Monumental Avenue
Baltimore, Maryland 21227
We have audited the accompanying balance sheet of Primo Electric Company as
of April 30, 1998 and the related statements of income and retained
earnings 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 Primo Electric Company
as of April 30, 1998, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Hertzbach & Company P.A.
Certified Public Accountants
Baltimore, Maryland
July 14, 1998
2
<PAGE> 5
PRIMO ELECTRIC COMPANY - APRIL 30, 1998
PRIMO ELECTRIC COMPANY AND PRIMENET, LLC - DECEMBER 31, 1998 (COMBINED)
BALANCE SHEETS
<TABLE>
<CAPTION>
April 30, December 31,
1998 1998
(Audited) (Unaudited)
------------ ------------
<S> <C> <C>
Assets
CURRENT ASSETS
Cash $ 655,509 $ 1,334,557
Marketable Equity Securities And Investments 1,327,111 1,586,407
Accounts Receivable-Contracts 4,925,977 3,497,555
Accounts Receivable-Other 4,223 --
Inventory 18,670 54,165
Loans Receivable-Officers -- 495,300
Loans Receivable-Employees 38,693 --
Refundable Income Taxes 39,000 --
Incurred Direct Costs And Earned Projected Gross
Profit in Excess of Billings On Uncompleted
Contracts 399,903 1,032,232
Prepaid Expenses And Refundable Deposits 36,029 53,511
------------ ------------
Total Current Assets 7,445,115 8,053,727
------------ ------------
PROPERTY AND EQUIPMENT
Vehicles 840,435 1,197,990
Leasehold Improvements 59,188 69,406
Office Furniture And Fixtures 293,826 359,384
Equipment 205,331 338,130
------------ ------------
1,398,780 1,964,910
Less: Accumulated Depreciation 650,036 773,541
------------ ------------
Total Property and Equipment 738,744 1,191,369
------------ ------------
OTHER ASSETS
Cash Surrender Value-Life Insurance 140,772 140,772
------------ ------------
Total Other Assets 140,772 140,772
------------ ------------
TOTAL ASSETS $ 8,334,631 $ 9,385,868
============ ============
</TABLE>
3
<PAGE> 6
PRIMO ELECTRIC COMPANY - APRIL 30, 1998
PRIMO ELECTRIC COMPANY AND PRIMENET, LLC - DECEMBER 31, 1998 (COMBINED)
BALANCE SHEETS - CONTINUED
<TABLE>
<CAPTION>
April 30, December 31,
1998 1998
(Audited) (Unaudited)
------------ ------------
<S> <C> <C>
Liabilities, Stockholders' Equity,
And Members' Equity
CURRENT LIABILITIES
Accounts Payable $ 1,048,259 $ 1,150,296
Notes Payable - Line of Credit 1,059,012 709,750
Current Maturities Of Long-Term Debt -- 28,508
Loans Payable-Officers 213,920 19,264
Security Deposits -- --
Payroll Taxes Payable 238,496 88,566
Billings in Excess Of Incurred Direct Costs And Earned
Projected Gross Profit on Uncompleted Contracts 2,137,909 878,821
Accrued Income Taxes - Current And Deferred 412,920 1,464,560
Accrued Expenses 634,885 183,780
------------ ------------
Total Current Liabilities 5,745,401 4,523,545
------------ ------------
LONG TERM DEBT, LESS CURRENT MATURITIES -- 114,036
------------ ------------
STOCKHOLDERS AND MEMBERS' EQUITY
Common Stock 5,000 5,000
Retained Earnings 2,584,230 4,583,470
Members' Equity -- 159,817
------------ ------------
Total Stockholders' Equity and Members' Equity 2,589,230 4,748,287
------------ ------------
TOTAL LIABILITIES, STOCKHOLDERS EQUITY, AND
MEMBERS' EQUITY $ 8,334,631 $ 9,385,868
============ ============
</TABLE>
4
<PAGE> 7
PRIMO ELECTRIC COMPANY - APRIL 30, 1998
PRIMO ELECTRIC COMPANY AND PRIMENET, LLC - DECEMBER 31, 1998 (COMBINED)
Statements of Income and
Retained Earnings/Members' Equity
<TABLE>
<CAPTION>
For The For The
For The Eight Months Eight Months
Year Ended Ended Ended
April 30, December 31, December 31,
1998 1998 1997
(Audited) (Unaudited) (Unaudited)
------------ ------------ ------------
<S> <C> <C> <C>
Earned Construction Income $ 16,795,775 $ 17,156,356 $ 10,593,876
Applicable Direct Costs 13,387,357 11,628,002 6,970,490
------------ ------------ ------------
Gross Profit From Contracts 3,408,418 5,528,354 3,623,386
General And Administrative Expenses 2,907,221 2,364,215 1,966,960
------------ ------------ ------------
Operating Income 501,197 3,164,139 1,656,426
Other Income 201,491 175,062 126,167
------------ ------------ ------------
702,688 3,339,201 1,782,593
Other Expenses 187,416 70,111 76,765
------------ ------------ ------------
515,272 3,269,090 1,705,828
Net Unrealized Gain
On Marketable Equity Securities 173,083 -- --
------------ ------------ ------------
Income Before Income Taxes 688,355 3,269,090 1,705,828
------------ ------------ ------------
Provision For Income Taxes 282,124 1,210,033 658,791
------------ ------------ ------------
Net Income
Primo Electric Company 406,231 1,999,240 1,047,037
Primenet, LLC -- 59,817 --
------------ ------------ ------------
406,231 2,059,057 1,047,037
Retained Earnings-Beginning Of Year/Period
Primo Electric Company 2,177,999 2,584,230 2,177,999
Members' Equity-Beginning Of Period
Primenet, LLC -- 100,000 --
------------ ------------ ------------
$ 2,585,230 $ 2,684,230 $ 3,225,036
============ ============ ============
</TABLE>
5
<PAGE> 8
PRIMO ELECTRIC COMPANY - APRIL 30, 1998
PRIMO ELECTRIC COMPANY AND PRIMENET, LLC - DECEMBER 31, 1998 (COMBINED)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For The Eight Months Ended
December 31,
For The Year Ended ----------------------------------
April 30, 1998 1997
1998 -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES (Audited) (Unaudited) (Unaudited)
------------------ -------------- --------------
<S> <C> <C> <C>
Net Income $ 406,231 $ 2,059,057 $ 1,047,037
Adjustments To Reconcile Net Income To Net Cash
Provided By Operating Activities:
Depreciation 172,960 123,505 73,801
Deferred Income Taxes 156,531 -- --
Net Realized Loss On Sale Of Marketable Equity Securities 65,499 -- --
Net Unrealized (Gain) On Marketable Equity Securities (173,083) -- --
Purchases Of Marketable Equity Securities (804,596) (259,296) (199,739)
Proceeds From Sale Of Marketable Equity Securities 585,225 -- --
(Increase) Decrease in Operating Assets:
Accounts Receivable - Contracts (2,535,970) 1,428,422 (1,296,189)
Accounts Receivable - Other (2,343) 4,223 1,880
Inventory 26,617 (36,495) (16,396)
Loans Receivable - Employees (26,109) 38,693 12,584
Refundable Income Taxes (32,435) 39,000 6,565
Incurred Direct Costs And Earned Projected Gross Profit
In Excess Of Billings On Uncompleted Contracts (204,796) (632,329) 29,685
Prepaid Expenses And Refundable Deposits (4,487) (17,482) (39,146)
Increase (Decrease) In Operating Liabilities
Accounts Payable 573,887 102,037 480,984
Security Deposits -- -- (1,170)
Payroll Taxes Payable 234,928 (149,930) 62,649
Billings In Excess Of Incurred Direct Costs And Earned
Projected Gross Profit On Uncompleted Contracts 1,180,993 (1,259,088) (229,919)
Income Taxes Payable 16,928 1,051,640 569,626
Accrued Expenses 534,885 (451,105) 205,015
-------------- -------------- --------------
Net Cash Provided By Operating Activities 170,865 2,041,852 707,267
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES
Net Purchases Of Property And Equipment (464,191) (566,130) (188,156)
Cash Surrender Value - Life Insurance (17,456) -- --
Capital Investment In Primenet, LLC -- 100,000 --
Decrease (Increase) In Loan Receivable - Officers 161,079 (495,300) (200,346)
-------------- -------------- --------------
Net Cash Used In Investing Activities (320,568) (961,430) (388,502)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (Repayments) Proceeds Notes Payable - Line Of Credit 475,860 (349,262) (469,712)
Net Proceeds On Long-Term Debt -- 142,644 --
Net Proceeds (Repayments) From Loans Payable - Officers 167,156 (194,656) (7,500)
-------------- -------------- --------------
Net Cash Provided By (Used In) Financing Activities 643,016 (401,374) (477,212)
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH 493,313 679,048 (158,447)
CASH - BEGINNING OF YEAR/PERIOD 162,196 655,509 162,196
-------------- -------------- --------------
CASH - END OF YEAR/PERIOD $ 655,509 $ 1,334,557 $ 3,749
============== ============== ==============
</TABLE>
6
<PAGE> 9
PRIMO ELECTRIC COMPANY - APRIL 30, 1998
PRIMO ELECTRIC COMPANY AND PRIMENET, LLC - DECEMBER 31, 1998(COMBINED)
<TABLE>
<CAPTION>
Statements of Cash Flows - Continued For The Eight Months Ended
December 31,
For the Year Ended --------------------------
April 30, 1998 1997
1998 ----------- -----------
(Audited) (Unaudited) (Unaudited)
------------------ ----------- -----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES OF CASH
FLOW INFORMATION
Cash Paid During The Year For:
Interest $ 41,660 $ 29,557 $ 36,111
Income Taxes $ 141,100 $ 46,500 $ 29,598
</TABLE>
7
<PAGE> 10
================================================================================
PRIMO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
- --------------------------------------------------------------------------------
APRIL 30, 1998
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF BUSINESS - Primo Electric Company (Company) was incorporated in
the state of Maryland on May 1, 1968. The Company is engaged in commercial
electrical contracting, primarily in the greater Baltimore metropolitan
region. The accompanying financial statements include the operations of
PrimeNet, a division of the Company which began operations in August, 1996.
PrimeNet is engaged in the business of design, installation and servicing
of communication and data transmission systems, primarily for hospitals,
universities and colleges in the greater Baltimore Washington metropolitan
area. The PrimeNet division generated approximately 37% of the Company's
revenues for the year ended April 30, 1998.
LONG-TERM CONSTRUCTION CONTRACTS - For financial reporting purposes, the
Company records income on its long-term construction contracts on the
percentage-of-completion method of accounting. Contract costs and estimated
earnings are recognized as work on the contracts progresses, based upon the
percentage that direct costs to date bear to total estimated direct costs.
Billings on contracts not having sufficient progress are recognized to the
extent of direct costs incurred and direct costs incurred on contracts not
having sufficient progress to be billed are deferred. Cost and earnings
estimates are revised and reflected as of the accounting period in which
the facts which require the revision become known. Projected losses, if
any, are provided for in their entirety. Contract costs include direct
costs of construction and those indirect costs related to contract
performance. Selling, general and administrative costs are charged to
operations as incurred.
ACCOUNTS RECEIVABLE - Management is of the opinion that all of the
Company's accounts receivable are fully collectible and no allowance for
doubtful accounts is required.
PROPERTY AND EQUIPMENT - Property and equipment are stated at cost. The
cost of repairs and maintenance is charged to operations as incurred. Major
renewals, betterments, and additions are capitalized. When assets are sold
or otherwise disposed of, the cost of the assets and related accumulated
depreciation are removed from the accounts and any resulting gain or loss
is credited or charged to income.
Depreciation is computed using the following methods over the estimated
useful lives of the assets.
<TABLE>
<CAPTION>
Class Method
----- ------
<S> <C>
Vehicles Accelerated
Leasehold Improvements Straight-Line
Office Furniture And Fixtures Accelerated
Equipment Accelerated
</TABLE>
INCOME TAXES - The Company reports profits and losses on its long-term
construction contracts for income tax purposes on the completed contract
method of accounting. Under this method, income and related costs are
recognized only when a contract is fully completed, billed and accepted.
Provision is made on the financial statements for deferred income taxes
applicable to temporary differences between income recognized for financial
reporting purposes and income recognized for income tax purposes under the
asset/liability method. The principal sources of taxable and deductible
temporary differences are different reporting methods for long-term
construction contracts and marketable equity securities. Deferred income
taxes are classified as current or noncurrent depending upon the balance
sheet classification of the related asset or liability.
8
<PAGE> 11
================================================================================
PRIMO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
APRIL 30, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
INVENTORY - Inventory, primarily materials and supplies, is valued at cost.
Cost is determined by the first-in, first-out method.
ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires the use of management's
estimates.
CONCENTRATION OF CREDIT RISK - The Company maintains cash balances at
several area financial institutions. Accounts at each institution are
insured by agencies of the federal government up to $100,000. Cash balance
at April 30, 1998 exceeded insured limits by $445,177.
STATEMENTS OF CASH FLOWS - For the purpose of these statements, the Company
considers all highly liquid investments, including certificates of deposit
whose terms do not effectively restrict withdrawal, to be cash equivalents.
ADVERTISING - The Company expenses the cost of advertising the first time
the advertising takes place. Advertising costs amounted to $44,081 for the
year ended April 30, 1998.
2. MARKETABLE EQUITY SECURITIES
All of the Company's marketable equity securities have been classified as
trading securities and are being carried at fair value with unrealized
gains and losses included in earnings.
Sales of marketable equity securities resulted in a net realized loss of
$65,499 for the year ended April 30, 1998. Realized gains and losses are
determined using the first-in, first-out (FIFO) method.
3. LIFE INSURANCE
The Company is the owner and beneficiary of various life insurance policies
on the lives of key employees.
<TABLE>
<CAPTION>
Face Amount Cash Surrender
Insured Of Policy Value
------- ----------- --------------
<S> <C> <C>
Primo China $ 70,000 $ 82,068
Primo China 200,000 45,184
Richard China 500,000 7,132
R. Manns 100,000 1,838
C. Meadows 100,000 2,083
R. Eller 100,000 2,467
--------------
$140,772
==============
</TABLE>
9
<PAGE> 12
================================================================================
PRIMO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
APRIL 30, 1998
4. INCOME TAXES
CURRENT INCOME TAXES - For the year ended April 30, 1998, the Company
incurred a liability for federal and state income taxes as follows:
<TABLE>
<CAPTION>
1998
---------
<S> <C>
Federal Income Taxes $ --
Federal Alternative Minimum Tax 129,441
Alternative Minimum Tax Credit --
State Income Taxes --
---------
129,441
Reduction In Income Taxes:
Prior Year Over Accrual (3,848)
---------
Current Income Tax Expense 125,593
---------
Estimated Payments
Federal 78,000
State 39,000
Prior Year Over Accrual (3,848)
Prior Year Under Accrual --
---------
113,152
---------
Net Income Taxes Payable $ 12,441
=========
Federal Income Taxes Payable (Refundable) $ 51,441
State Income Taxes Payable (Refundable) (39,000)
---------
Net Income Taxes Payable $ 12,441
=========
</TABLE>
10
<PAGE> 13
================================================================================
PRIMO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
APRIL 30, 1998
4. INCOME TAXES (CONTINUED)
CARRYFORWARDS - The Company has available to reduce future federal income
tax liabilities an alternative minimum tax credit carryforward in the
amount of $150,521 at April 30, 1998, which may be utilized by the Company
in years in which it is not subject to alternative minimum tax. The Company
also has a capital loss carryover in the amount of $87,503 which may be
used to reduce future taxable income. These carryforwards are being used to
reduce deferred income taxes as shown below.
DEFERRED INCOME TAXES - Differences between income and costs recognized for
financial reporting and income tax purposes have generated deferred income
taxes as follows:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Total Deferred Tax Liabilities $545,793
--------
Deferred Tax Assets, Excluding Alternative
Minimum Tax Credit Carryforwards, Capital Loss
Carryforwards --
Capital Loss Carryforwards 33,793
Alternative Minimum Tax Credit Carryforward 150,521
--------
Total Deferred Tax Assets 184,314
Less: Valuation Allowance --
--------
184,314
--------
Net Deferred Tax Liabilities $361,479
========
Deferred Income Taxes - Beginning Of Year $204,948
(Benefit) Provision For Deferred Income Taxes 156,531
--------
Deferred Income Taxes - End Of Year $361,479
========
</TABLE>
5. NOTES PAYABLE - LINE OF CREDIT
The Company has available a $500,000 line of credit from Farmers' Bank.
Borrowings under the line bear interest at a varying rate and are secured
by accounts receivable and marketable equity securities. There was an
outstanding balance of $492,262 at April 30, 1998.
The Company has available at April 30, 1998 a $750,000 line of credit from
Mercantile Safe Deposit and Trust Company. The line bears interest at a
varying rate and is secured by a first lien on all accounts receivable and
the personal guaranty of Richard L. China. There was an outstanding balance
due of $566,750 at April 30, 1998.
Interest expense on all of the Company's obligations amounted to $41,650
for the year ended April 30, 1998.
11
<PAGE> 14
================================================================================
PRIMO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
APRIL 30, 1998
6. LEASE AGREEMENTS
The Company leases its premises on a monthly basis, currently $8,500 per
month, from Mr. Primo China. Rent and associated facilities costs for the
year ended April 30, 1998 amounted to $125,880.
7. PROFIT SHARING AND DEFERRED COMPENSATION PLANS
The Company maintains a profit sharing plan covering substantially all full
time employees. Contributions, if any, are at the sole discretion of
management. No contributions were made for the year ended April 30, 1998.
The Company adopted a deferred compensation plan (401(k)) covering
substantially all of its permanent employees during the year ended April
30, 1991. The arrangement is in the form of a salary reduction agreement
between eligible employees and the employer under which a contribution is
made by the employer if the employee chooses to participate. Company
contributions under the 401(k) arrangement for the year ended April 30,
1998 were $37,667.
8. LOANS PAYABLE - OFFICERS
The amount of $213,920 in the accompanying financial statements at April
30, 1998 represents unsecured non interest bearing loan due to the
Company's officers and stockholders.
12
<PAGE> 15
================================================================================
PRIMO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
APRIL 30, 1998
9. UNCOMPLETED CONTRACTS
Earned income on uncompleted contracts is based upon the Company's
projected estimated gross profit upon completion of the individual
contracts. The Company's uncompleted contracts at April 30, 1998 are
presented below based upon actual direct costs to date and estimated direct
costs to complete, as follows:
<TABLE>
<CAPTION>
1998
------------
<S> <C>
Costs Incurred To Date $ 10,568,905
Estimated Gross Profit Earned To Date 2,908,310
------------
13,477,215
Less: Billings To Date 15,215,221
------------
$ (1,738,006)
============
Included In Accompanying Balance Sheets Under
The Following Captions:
Incurred Direct Costs And Earned Projected
Gross Profit In Excess Of Billings On
Uncompleted Contracts $ 399,903
Billings In Excess Of Incurred Direct Costs
And Earned Projected Gross Profit On
Uncompleted Contracts (2,137,909)
------------
$ (1,738,006)
============
</TABLE>
10. SUBSEQUENT EVENTS
On May 6, 1998 a new entity was formed known as Primenet, LLC. This entity
purchased various assets from Primo Electric Company (Primenet Division)
and performs the same type of service previously contracted from Primo
Electric Company by its customers in the area of computer cabling and
networking. Primenet, LLC is owned by stockholders of Primo Electric
Company and former employees of Primo Electric Company's Primenet division.
11. AGREEMENT AND PLAN OF MERGER
The Stockholders of Primo Electric Company and the Members of Primenet, LLC
entered into a binding agreement to sell their ownership in both entities
to Integrated Electrical Services, Inc. The agreement is dated January 12,
1999.
13
<PAGE> 16
================================================================================
PRIMO ELECTRIC COMPANY
NOTES TO FINANCIAL STATEMENTS
(CONTINUED)
- --------------------------------------------------------------------------------
APRIL 30, 1998
12. INTERIM STATEMENTS
The interim financial statements for the eight months ended December 31,
1998 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.
13. COMBINATION OF ENTITIES FOR INTERIM STATEMENTS
The interim financial statements for the eight months ended December 31,
1998 represent the combined balance sheets and related statements of income
and retained earnings (Members' Equity) and combined cash flows for both
Primo Electric Company and Primenet, LLC.
14
<PAGE> 17
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Kayton Electric, Inc.:
We have audited the accompanying balance sheet of Kayton Electric, Inc. as
of December 31, 1997 and the related statements of earnings and retained
earnings 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 audits.
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 Kayton Electric, Inc.
as of December 31, 1997 and the results of its operations and its cash
flows for the year then ended, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
January 28, 1998
(November 19, 1998 as to Note 8)
15
<PAGE> 18
KAYTON ELECTRIC, INC.
Balance Sheets
September 30, 1998 (unaudited) and December 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
ASSETS 1998 1997
----------- -----------
(unaudited)
<S> <C> <C>
Current assets:
Cash $ 601,667 $ 830,628
Accounts receivable, including retainages of $621,799 (unaudited)
and $707,935 at September 30, 1998 and December 31, 1997, respectively 1,587,585 2,407,479
Materials for projects in progress 440,000 600,000
Costs and estimated earnings in excess of billings on uncompleted
contracts 625,529 428,756
Other current assets 191,000 179,000
----------- ---------
Total current assets 3,445,781 4,445,863
----------- ---------
Property and equipment, at cost 2,385,300 2,315,929
Less accumulated depreciation 1,482,115 1,417,895
----------- ---------
Net property, plant and equipment 903,185 898,034
----------- ---------
Other assets 26,881 7,997
----------- ---------
$ 4,375,847 $ 5,351,894
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 452,940 $ 627,762
Current installments of long-term debt 6,000 66,000
Billings in excess of costs and estimated earnings on uncompleted
contracts 614,697 1,030,465
Accrued expenses 473,740 461,938
Other current liabilities 243,937 235,683
----------- ---------
Total current liabilities 1,791,314 2,421,848
Long-term debt -- 546,000
----------- ---------
Total liabilities 1,791,314 2,967,848
----------- ---------
Stockholders' equity:
Common stock of $1 par value. Authorized 75,000 shares,
issued 60,000 shares 60,000 60,000
Paid-in capital in excess of par value 84,989 84,989
Retained earnings 2,439,544 2,239,057
----------- ---------
Total stockholders' equity 2,584,533 2,384,046
Commitments
----------- -----------
$ 4,375,847 $ 5,351,894
=========== ===========
</TABLE>
16
<PAGE> 19
KAYTON ELECTRIC, INC
Statements of Earnings and Retained Earnings
Nine-month periods ended September 30, 1998 and 1997 (unaudited)
and year ended December 31, 1997
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997 1997
------------ ---------- ----------
(unaudited)
<S> <C> <C> <C>
Contract revenues $ 10,193,439 $10,650,913 $14,991,171
------------ ----------- -----------
Cost of construction
Direct 8,082,121 8,706,306 12,368,485
Indirect 573,222 576,920 775,260
------------ ----------- -----------
Total cost of construction 8,655,343 9,283,226 13,143,745
------------ ----------- -----------
Gross profit 1,538,096 1,367,687 1,847,426
General and administrative expenses 711,438 738,029 1,016,369
------------ ----------- -----------
Operating income 826,658 629,658 831,057
------------ ----------- -----------
Other income (deductions):
Interest and dividend income 25,943 1,083 5,640
Interest expense (390) (11,594) (12,166)
Miscellaneous 17,276 22,458 27,624
------------ ----------- -----------
Total other income (deductions), net 42,829 11,947 21,098
------------ ----------- -----------
Net earnings 869,487 641,605 852,155
Retained earnings, beginning of year 2,239,057 2,009,652 2,009,652
Dividends paid (669,000) (622,750) (622,750)
------------ ----------- -----------
Retained earnings, end of year $ 2,439,544 $ 2,028,507 $ 2,239,057
============ =========== ===========
</TABLE>
See accompanying notes to financial statements.
17
<PAGE> 20
KAYTON ELECTRIC, INC.
Statements of Cash Flows
Nine-month periods ended September 30, 1998 and 1997 (unaudited)
and year ended December 31, 1997
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997 1997
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings $ 869,487 $ 641,605 $ 852,155
------------ ------------ ------------
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization 180,646 190,825 258,310
Gain from sale of equipment 2,574 4,941 4,941
Changes in assets and liabilities:
Accounts receivable 819,894 273,699 (334,935)
Materials for projects in progress 160,000 (80,000) 100,000
Costs and estimated earnings in excess of billings on (196,773) (77,198) 84,853
uncompleted contracts
Other current assets (12,000) (12,000) (16,000)
Other assets (18,884) 3,000 2,403
Accounts payable (174,822) (17,186) 40,312
Billings in excess of costs and estimated earnings on (415,768) 421,341 402,754
uncompleted contracts
Accrued expenses 11,801 19,004 55,302
Other current liabilities 8,254 14,801 28,180
------------ ------------ ------------
Total adjustments 364,922 741,227 626,120
------------ ------------ ------------
Net cash provided by operating activities 1,234,409 1,382,832 1,478,275
------------ ------------ ------------
Cash flows from investing activities:
Capital expenditures (201,745) (185,957) (247,379)
Proceeds from sale of equipment 13,375 5,250 5,250
------------ ------------ ------------
Net cash used by investing activities (188,370) (180,707) (242,129)
------------ ------------ ------------
Cash flows from financing activities:
Principal payments on long-term debt (606,000) (1,235,250) (765,250)
Proceeds from long-term debt -- 600,000 730,000
Dividends paid (669,000) (622,750) (622,750)
------------ ------------ ------------
Net cash used by financing activities (1,275,000) (1,258,000) (658,000)
------------ ------------ ------------
Net increase (decrease) in cash (228,961) (55,875) 578,146
Cash, beginning of year/period 830,628 252,482 252,482
------------ ------------ ------------
Cash, end of year/period $ 601,667 $ 196,607 $ 830,628
============ ============ ============
</TABLE>
18
<PAGE> 21
KAYTON ELECTRIC, INC.
Notes to Financial Statements
September 30, 1998 and 1997 and December 31, 1997
(Data as of and for the nine-months periods ended
September 30, 1998 and 1997 is unaudited)
(1) ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Kayton Electric, Inc. (the Company) is engaged in electrical contracting
in Nebraska and neighboring states. The length of the Company's
contracts is typically less than two years.
METHOD OF ACCOUNTING FOR CONTRACTS
The Company uses the percentage-of-completion method of accounting for
financial reporting and tax purposes. Revenues on contracts are recorded
on the basis of the Company's estimates of the percentage of completion
of individual contracts, commencing when progress reaches a point where
experience is sufficient to estimate final results with reasonable
accuracy. Provision for estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes in
estimated profitability are recognized in the period the revisions are
determined.
MATERIALS FOR PROJECTS IN PROGRESS
Materials are stated at the lower of cost or market and are charged to
job costs as they are utilized.
DEPRECIATION
Depreciation is provided by the use of the straight-line depreciation
method over the estimated useful lives of the respective assets.
INCOME TAXES
The Company has elected, under the S Corporation provisions of the
Internal Revenue Code, not to pay any income tax on its income and
instead, to have its stockholders pay taxes on such income, whether
distributed or not. Consequently, no provision has been made in the
accompanying financial statements for income taxes on earnings of the
Company.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure
of contingent assets and liabilities to prepare these financial
statements in conformity with generally accepted accounting principles.
Actual results could differ from those estimates.
19
<PAGE> 22
KAYTON ELECTRIC, INC.
Notes to Financial Statements
September 30, 1998 and 1997 and December 31, 1997
(Data as of and for the nine-months periods ended
September 30, 1998 and 1997 is unaudited)
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.
UNAUDITED INTERIM FINANCIAL INFORMATION
The interim financial statements for the nine months ended September 30,
1998 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.
(2) CONTRACTS IN PROGRESS
Costs incurred to date, estimated earnings and the related progress
billings to date of contracts in progress at September 30, 1998 and
December 31, 1997 are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Costs incurred to date $ 5,123,025 $5,112,997
Estimated earnings 873,459 739,808
----------- ----------
5,996,484 5,852,805
Less progress billings to date 5,985,652 6,454,514
----------- ----------
$ 10,832 $ (601,709)
=========== ==========
</TABLE>
20
<PAGE> 23
KAYTON ELECTRIC, INC.
Notes to Financial Statements
September 30, 1998 and 1997 and December 31, 1997
(Data as of and for the nine-months periods ended
September 30, 1998 and 1997 is unaudited)
Included in the accompanying balance sheets at September 30, 1998 and
December 31, 1997, under the following captions:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Costs and estimated earnings in excess of billings on
contracts in progress $ 625,529 $ 428,756
Billings in excess of costs and estimated earnings on
contracts in progress (614,697) (1,030,465)
------------- ------------
$ 10,832 $ (601,709)
============= ============
</TABLE>
(3) PROPERTY, PLANT AND EQUIPMENT
A summary of the major classifications of property, plant and equipment
at September 30, 1998 and December 31, 1997 is shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Land $ 51,556 $ 51,556
Vehicles and equipment 1,473,259 1,436,386
Tools 750,088 728,730
Office equipment 110,397 99,257
------------- ------------
$2,385,300 $2,315,929
============= ============
</TABLE>
21
<PAGE> 24
KAYTON ELECTRIC, INC.
Notes to Financial Statements
September 30, 1998 and 1997 and December 31, 1997
(Data as of and for the nine-months periods ended
September 30, 1998 and 1997 is unaudited)
(4) LONG-TERM DEBT AND NOTES PAYABLE
Long-term debt at September 30, 1998 and December 31, 1997 is shown
below:
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- ------------
<S> <C> <C>
Note payable to bank, due in monthly principal
installments of $5,000 through May 2008, interest at
a variable rate (9.5% at December 31, 1997), due
semiannually, by asset of the Company - paid in 1998 $ -- $ 600,000
Note payable to a corporation, due in annual principal
installments of $6,000 through April 1999, interest
a fixed rate of 6.00%, due annually, secured by 6,000 12,000
real estate property of the Company
------------- ------------
Total long-term debt 6,000 612,000
Less current installments 6,000 66,000
------------- ------------
Long-term debt, excluding current
installments $ -- $ 546,000
============= ============
</TABLE>
The Company has a $300,000 operating line of credit with a financial
institution with an interest rate of 8.95%. At September 30, 1998 and
December 31, 1997, there was no outstanding balance on the line of
credit. The operating line of credit expires on May 1, 1999 and is
secured by the assets of the Company.
(5) DEFERRED COMPENSATION
The Company has deferred compensation agreements with certain key
employees. The Company has elected to fund the agreements by purchasing
life insurance policies for each employee. The cash surrender value of
the policies is included in other current assets and the deferred
compensation liability is included in other current liabilities in the
financial statements.
(6) RELATED PARTY TRANSACTIONS
The Company has entered into lease agreements with a shareholder for the
use of certain land and buildings. The leases expire June 30, 1999. The
Company incurred $24,320 and $15,300 of lease expense related to this
property for each of the nine-month periods ended September 30, 1998 and
1997 and $20,400 for the year ended December 31, 1997.
22
<PAGE> 25
KAYTON ELECTRIC, INC.
Notes to Financial Statements
September 30, 1998 and 1997 and December 31, 1997
(Data as of and for the nine-months periods ended
September 30, 1998 and 1997 is unaudited)
(7) 401(K) PROFIT SHARING PLAN AND TRUST
The Company has a 401(k) plan covering substantially all employees with
one year of service and who have attained twenty-one years of age. Each
participant may elect to contribute a percentage of their total
compensation, not to exceed the Internal Revenue Service limitations.
The Company contributes matching funds at a rate of $.50 for each dollar
of the first 3% of the participant's contribution. The employer may also
make an additional discretionary matching contribution each year.
Company contributions to the plan are shown below:
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30 DECEMBER 31,
1998 1997 1997
------------- ------------ ------------
<S> <C> <C> <C>
Matching contributions $20,493 $ 23,010 $ 30,027
Discretionary contribution -- -- 8,000
------------- ------------ ------------
Total employer contributions $20,493 $ 23,010 $ 38,027
============= ============ ============
</TABLE>
(8) SUBSEQUENT EVENT
On November 19, 1998, all the Company's common stock was sold to an
unrelated purchaser, Integrated Electrical Services, Inc. and the
Company became a subsidiary of Integrated Electrical Services, Inc.
23
<PAGE> 26
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Bachofner Electric, Inc.
Portland, Oregon
We have audited the accompanying balance sheet of Bachofner Electric, Inc. as of
December 31, 1997 and the related statements of operations, changes in
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 Bachofner Electric, Inc. as of
December 31, 1997, and the results of operations and cash flows for the year
then ended, in conformity with generally accepted accounting principles.
PECK & KOPACEK, P.C.
Beaverton, Oregon
January 25, 1999
24
<PAGE> 27
BACHOFNER ELECTRIC, INC.
BALANCE SHEETS
--------
<TABLE>
<CAPTION>
December 31,1997 October 31,1998
---------------- ---------------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 648,929 $ 723,809
Marketable debt securities (Note 2) 697,525 --
Receivables (Notes 3 and 7) 548,842 815,494
Costs and estimated earnings in excess of
billings on contracts in progress (Notes
5 and 7) 221,818 158,394
Prepaid expenses 19,110 23,049
---------- ----------
TOTAL CURRENT ASSETS 2,136,224 1,720,746
Note receivable (Note 4) 41,311 43,277
Property and equipment, net (Notes 6 and 7) 217,536 177,521
---------- ----------
$2,395,071 $1,941,544
========== ==========
LIABILITIES
CURRENT LIABILITIES:
Notes payable, current portion (Note 7) $ 29,802 $ 51,752
Trade accounts payable 78,873 272,719
Accrued payroll and payroll taxes 14,629 --
Billings in excess of costs and estimated
earnings on contracts in progress (Note 5) 4,305 132,476
Accrued interest 370 --
Other accrued expenses 6,965 10,097
State income tax payable (Note 8) 10 --
---------- ----------
TOTAL CURRENT LIABILITIES 134,954 467,044
Notes payable, long-term portion (Note 7) 79,739 93,527
---------- ----------
214,693 560,571
---------- ----------
Commitments (Notes 5 and 14)
STOCKHOLDERS' EQUITY
Common stock, no par value; 100 shares
authorized, issued and outstanding (Note 9) 20,000 20,000
Retained earnings (Note 8) 2,160,378 1,360,973
---------- ----------
2,180,378 1,380,973
---------- ----------
$2,395,071 $1,941,544
========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
25
<PAGE> 28
BACHOFNER ELECTRIC, INC.
STATEMENTS OF OPERATIONS
--------
<TABLE>
<CAPTION>
For the
For the Ten Months Ended
Year Ended October 31,
December 31, -------------------------------
1997 1997 1998
------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
CONTRACT REVENUES $ 4,857,603 $ 4,014,954 $ 4,109,041
CONTRACT COSTS 3,032,704 2,654,381 2,982,703
----------- ----------- -----------
GROSS PROFIT 1,824,899 1,360,573 1,126,338
General and administrative expenses 837,045 637,029 720,583
----------- ----------- -----------
INCOME FROM OPERATIONS 987,854 723,544 405,755
----------- ----------- -----------
OTHER INCOME (Expense):
Interest income 54,076 40,481 38,051
Miscellaneous income 17,401 31,776 24,290
Gain on sale of equipment (Note 12) 30,132 -- --
Interest expense (11,320) (6,201) (7,479)
----------- ----------- -----------
90,289 66,056 54,862
----------- ----------- -----------
INCOME BEFORE PROVISION
FOR STATE INCOME TAX 1,078,143 789,600 460,617
Provision for state income tax (Note 8) 10 10 10
----------- ----------- -----------
NET INCOME $ 1,078,133 $ 789,590 $ 460,607
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
26
<PAGE> 29
BACHOFNER ELECTRIC, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
--------
For the Year Ended December 31, 1997:
<TABLE>
<CAPTION>
Common Stock Retained
Shares Amount Earnings Totals
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances, January
1, 1997 100 $ 20,000 $1,661,055 $1,681,055
Net income 1,078,133 1,078,133
Dividends
to Stockholders (578,810) (578,810)
------ ---------- ---------- ----------
Balances, December
31, 1997 100 $ 20,000 $2,160,378 $2,180,378
====== ========== ========== ==========
</TABLE>
For the Ten Months Ended October 31, 1998 (unaudited):
<TABLE>
<CAPTION>
Common Stock Retained
Shares Amount Earnings Totals
------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Balances, January
1, 1998 100 $ 20,000 $2,160,378 $2,180,378
Net income 460,607 460,607
Dividends
to Stockholders (1,260,012) (1,260,012)
------ ---------- ---------- ----------
Balances, October
31, 1998 100 $ 20,000 $1,360,973 $1,380,973
====== ========== ========== ==========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
27
<PAGE> 30
BACHOFNER ELECTRIC, INC.
STATEMENTS OF CASH FLOWS
--------
<TABLE>
<CAPTION>
For the
For the Ten Months Ended
Year Ended October 31,
December 31, ------------------------------
1997 1997 1998
------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,078,133 $ 789,590 $ 460,607
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation expense 65,036 54,200 43,324
Gain on sale of equipment (30,132) (30,132) (15,109)
Changes in operating assets
and liabilities:
Receivables 156,486 96,321 (277,668)
Costs and estimated earnings in excess
of billings on contracts in progress (144,921) 6,522 63,424
Other assets 24,131 31,597 (3,939)
Accounts payable and other liabilities (250,259) (89,300) 181,969
Billings over costs and
estimated earnings -- (95,663) 128,171
----------- ----------- -----------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 898,474 763,135 580,779
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES (Note 13):
Equipment additions (44,395) (39,760) (123,826)
Proceeds from sale of equipment -- -- 19,500
Repayments on notes receivable 59,475 58,800 9,050
Proceeds from (purchase of)
marketable debt securities (697,525) -- 697,525
----------- ----------- -----------
NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES (682,445) 19,040 602,249
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES (Note 13):
Proceeds from borrowings -- -- 65,540
Principal payments on notes payable (27,140) (7,979) (29,802)
Dividends paid to stockholders (578,810) (551,983) (1,143,886)
----------- ----------- -----------
NET CASH USED BY FINANCING ACTIVITIES (605,950) (559,962) (1,108,148)
----------- ----------- -----------
Increase (decrease) in cash (389,921) 222,213 74,880
Cash, beginning of period 1,038,850 1,038,850 648,929
----------- ----------- -----------
Cash, end of period $ 648,929 $ 1,261,063 $ 723,809
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES:
Cash paid for interest $ 12,500 $ 6,201 $ 7,479
=========== =========== ===========
Cash paid for income taxes $ 10 $ 10 $ 10
=========== =========== ===========
Land and building distributed to
stockholders as dividends $ -- $ -- $ 116,126
=========== =========== ===========
Equipment sold through increase in notes
receivable $ -- $ 44,593 $ --
=========== =========== ===========
</TABLE>
The accompanying notes are an integral
part of the financial statements.
28
<PAGE> 31
BACHOFNER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
--------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Bachofner Electric, Inc. was incorporated in the State of Oregon on
March 1, 1984. Company headquarters are located in Portland, Oregon.
The following is a summary of the Company's significant accounting
policies:
Company's Activities and Operating Cycle
The Company engages in commercial electrical contracting within the
Portland, Oregon metropolitan area. The Company's contracting is
performed under fixed-price, and time and material contracts. The
operating cycles of the Company's contracts vary but generally are less
than one year.
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 reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
Revenues and Cost Recognition
Revenues from fixed-price and modified fixed-price electrical contracts
are recognized using the percentage-of-completion method, measured by
the actual costs incurred to date to estimated total costs for each
contract. This method is used because management considers costs
incurred to be the best available measure of progress on these
contracts. Because of inherent uncertainties in estimating, it is at
least reasonably possible that the Company's estimates of revenues and
costs will change in the near term due to changes in job performance,
job conditions and estimated profitability, including those arising
from contract penalty provisions and final contract settlements.
Revisions are recognized in the period in which the related changes are
determined. Projected contract losses are provided for in their
entirety in the period first determined without reference to the
percent complete.
29
<PAGE> 32
BACHOFNER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
Revenues and Cost Recognition, Continued
Revenues from time and material contracts are recognized as work is
performed.
Contract costs include all direct material, labor and subcontractor
costs. Unallocated costs include shop and equipment expenses not
identified with a specific contract. Unallocated costs and general and
administrative expenses are charged to operations as incurred.
The asset, "costs and estimated earnings in excess of billings on
contracts in progress," represents revenues recognized in excess of
amounts billed. The liability, "billings in excess of costs and
estimated earnings on contracts in progress," represents billings in
excess of revenues recognized.
Property and Equipment
Property and equipment are stated at cost. Depreciation of buildings
and improvements is computed using the straight-line method.
Depreciation of equipment is computed using tax basis accelerated
methods, which result in amounts that are not materially different than
had a method allowed under generally accepted accounting principles
been applied. Maintenance and repairs are charged to operations as
incurred; expenditures for additions, improvements and replacements are
capitalized. Gains or losses from dispositions are reflected in
operations.
Advertising Costs
The Company expenses advertising costs the first time the advertising
takes place. Advertising expense was $45,779 for the year ended
December 31, 1997.
Income Taxes
The stockholders of the Company have elected to have the corporation
taxed as an S-corporation whereby taxable income or loss is included in
the personal income tax returns of the stockholders. Accordingly, the
provision for income taxes is limited to a $10 state income tax
required by the State of Oregon.
30
<PAGE> 33
BACHOFNER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, Continued:
Income Taxes, Continued
Certain revenues and costs are reported in different periods for income
tax reporting purposes than for financial reporting. These differences
arise from the use of the percentage-of-completion method of
recognizing revenues and costs on electrical contracts in progress for
financial reporting while using the completed contract method for tax
reporting.
Cash Flows
For purposes of the statement of cash flows, the Company considers cash
and short-term investments with maturities of three months or less to
be cash.
2. MARKETABLE DEBT SECURITIES:
Marketable debt securities consist of the following as of December 31,
1997:
<TABLE>
<CAPTION>
Gross
Unrealized
Amortized Gains Fair
Cost (losses) Value
--------- --------- ----------
<S> <C> <C> <C>
Held to maturity
U.S. Government
bonds $496,331 $ 2,419 $498,750
Municipal bonds 201,194 (374) 200,820
-------- --------- --------
$697,525 $ 2,045 $699,570
======== ========= ========
</TABLE>
The debt securities mature in 1998.
31
<PAGE> 34
BACHOFNER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
3. RECEIVABLES:
Receivables consist of the following as of December 31, 1997 (see Notes
4 and 7):
<TABLE>
<S> <C>
Current receivables on electrical
contracts $ 519,693
Retainages receivable on contracts 20,311
Officer receivables 11,357
Employee advances 874
Note receivable, amounts maturing
within one year 2,607
---------
554,842
Less: allowance for doubtful
accounts (6,000)
---------
$ 548,842
=========
</TABLE>
4. NOTES RECEIVABLE:
The note receivable consists of the following as of December 31, 1997
(see Notes 3 and 12):
<TABLE>
<S> <C>
Unsecured note receivable from an
affiliated corporation in monthly
installments of $538, including
interest at 9.0%; June 2008 maturity:
Amounts maturing within one year $ 2,607
Amounts maturing after one year 41,311
-------
$43,918
=======
</TABLE>
Interest income on the note aggregated $4,629 for the year ended
December 31, 1997.
32
<PAGE> 35
BACHOFNER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
5. ELECTRICAL CONTRACTS:
Activity on electrical contracts in progress consist of the following
as of December 31, 1997 (see Note 7):
<TABLE>
<S> <C>
Costs incurred to date $ 532,260
Estimated earnings on percentage-
of-completion basis 261,130
---------
Revenues recognized 793,390
Less: billings to date (575,877)
---------
$ 217,513
=========
</TABLE>
Included in the accompanying balance sheet as follows:
<TABLE>
<S> <C>
Costs and estimated earnings in
excess of billings on contracts
in progress $ 221,818
Billings in excess of costs and
estimated earnings on contracts
in progress (4,305)
---------
$ 217,513
=========
</TABLE>
The following schedule summarizes electrical contract backlog for the
year ended December 31, 1997:
<TABLE>
<S> <C>
Electrical contract backlog,
beginning of year $ 1,107,729
New contracts and contract
adjustments 5,454,697
-----------
6,562,426
Less: electrical contract
revenues recognized during
the year (4,857,603)
-----------
Electrical contract backlog,
end of year $ 1,704,823
===========
</TABLE>
Additionally, from December 31, 1997 through January 25, 1999 the
Company entered into electrical contracts with estimated revenues
aggregating $5,391,000.
33
<PAGE> 36
BACHOFNER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
6. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 1997
(see Notes 7 and 14):
<TABLE>
<S> <C>
Land $ 44,256
Buildings and improvements 97,105
Construction equipment and tools 81,255
Office furniture and equipment 134,808
Vehicles 221,593
---------
579,017
Less: accumulated depreciation (361,481)
---------
$ 217,536
=========
</TABLE>
Estimated service lives for depreciation purposes are as follows:
<TABLE>
<CAPTION>
Asset Category Years
-------------- -----
<S> <C>
Buildings and improvements 32 Years
Construction equipment and tools 5 Years
Office furniture and equipment 5-7 Years
Vehicles 3-7 Years
</TABLE>
Depreciation expense aggregated $65,036 for the year ended December 31,
1997.
7. NOTES PAYABLE:
Notes payable consist of the following as of December 31, 1997:
<TABLE>
<CAPTION>
Current Long-term
Portion Portion Totals
------- --------- --------
<S> <C> <C> <C>
Notes payable to U.S. National
Bank of Oregon in monthly
installments of $3,174,
including interest at 8.6%;
collateralized by vehicles
(Note 6); various maturities
to April 2001 $29,802 $79,739 $109,541
======= ======= ========
</TABLE>
34
<PAGE> 37
BACHOFNER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
7. NOTES PAYABLE, Continued:
Future principal maturities on the notes payable consist of the
following as of December 31, 1997:
<TABLE>
<CAPTION>
For the Year to
End December 31, Amounts
---------------- --------
<S> <C>
1998 $ 29,802
1999 32,476
2000 35,391
2001 11,872
--------
$109,541
========
</TABLE>
The Company has a line-of-credit agreement with U.S. National Bank of
Oregon for borrowings up to $200,000 with interest at 1.5% above the
bank's prime rate. Borrowings under the line-of-credit agreement are
collateralized by receivables, contracts in progress and equipment,
subject to prior encumbrances and are guaranteed by Company
stock-holders. There were no outstanding borrowings under the agreement
as of December 31, 1997. The agreement is renewed annually in May.
8. INCOME TAXES:
The provision for state income tax consists of the following for the
year ended December 31, 1997:
<TABLE>
<S> <C>
Currently payable provision:
State of Oregon tax $ 10
=========
</TABLE>
With the election of S-corporation tax reporting status the taxable
income or losses of the corporation are reported on the individual
income tax returns of the Company's stockholders with the Company
incurring only an annual tax of $10 to the State of Oregon. Temporary
differences between the Company's financial statements and tax returns
result in the following analysis of retained earnings as of December
31, 1997:
<TABLE>
<S> <C>
Retained earnings recognized for
federal income tax purposes through
December 31, 1997:
S-corporation accumulations $1,884,828
</TABLE>
35
<PAGE> 38
BACHOFNER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
8. INCOME TAXES, Continued:
<TABLE>
<S> <C>
Retained earnings representing income
not yet recognized for federal income
tax purposes due to temporary
reporting differences in the report-
ing of contracts in progress 275,550
----------
Retained earnings as of December 31,
1997, per the accompanying financial
statements $2,160,378
==========
</TABLE>
The Company has distributed $1,437,371 in dividends to its stockholders
from December 31, 1997 through January 25, 1999.
9. COMMON STOCK:
All of the Company's outstanding shares of common stock are subject to
a buy/sell agreement which places restrictions on the sale of shares
(see Note 14).
10. RETIREMENT PLANS:
Company employees with at least 1000 hours of service and not covered
by collective bargaining agreements may participate in a 401-K
retirement plan where the Company matches employee contributions up to
a maximum of 4% of gross pay. Company contributions to the plan
aggregated $6,265 for the year ended December 31, 1997.
The Company also maintains a defined contribution profit-sharing plan
which covers all employees not covered by a collective bargaining
agreement which have completed one year of service and attained the age
of 21. Contributions are determined by the Board of Directors.
Contributions to the plan for 1997 aggregated $50,000.
36
<PAGE> 39
BACHOFNER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
11. CONCENTRATIONS:
Financial instruments which potentially subject the Company to credit
risk consist of cash, marketable debt securities, and accounts
receivables. The Company's cash balances are concentrated at a regional
bank. The balances periodically exceed insured limits. Bank balances
exceeded insured amounts by $649,297 as of December 31, 1997. The
marketable debt securities are due from a federal agency and a city
government. The Company's receivables are highly concentrated in owners
and/or general contractors of construction projects in the states of
Oregon and Washington.
Five of the Company's customers accounted for approximately 55% of the
Company's revenues for 1997.
12. RELATED PARTY TRANSACTIONS:
The assets, liabilities and operations of the former telecommunications
division of the Company were transferred to Bachofner Datacom, Inc. in
1996. Bachofner Datacom, Inc., a corporation with headquarters in
Portland, Oregon, is owned by the stockholders of Bachofner Electric,
Inc. Vehicles were sold to Bachofner Datacom, Inc. during 1997 for a
gain of $30,132 (see Note 13). Interest income on a note receivable
from Bachofner Datacom, Inc. aggregated $4,629 during the year ended
December 31, 1997 (see Note 4 for note receivable balance).
13. SUPPLEMENTARY INFORMATION ON NONCASH INVESTING AND FINANCING
ACTIVITIES:
The Company transferred vehicles to an affiliated corporation in
exchange for a note receivable during the year ended December 31, 1997
as follows (see Notes 4 and 12):
<TABLE>
<S> <C>
Net book value of vehicles $14,461
Gain recognized 30,132
-------
Note receivable $44,593
=======
</TABLE>
37
<PAGE> 40
BACHOFNER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS, Continued
--------
14. SUBSEQUENT EVENTS:
The land and building assets held by the Company as of December 31,
1997 were distributed to the stockholders of the Company during 1998.
Effective November 1, 1998 the Company entered into a five year lease
agreement with the stockholders with monthly lease payments of $3,000.
The agreement requires an increase of 3% per annum. Future minimum
lease commitments are as follows as of December 31, 1997:
<TABLE>
<CAPTION>
For the Year to
End December 31, Amounts
---------------- --------
<S> <C>
1998 $ 6,000
1999 36,180
2000 37,266
2001 39,336
2002 40,512
2003 33,760
--------
$193,054
========
</TABLE>
The stockholders of the Company signed an agreement in principle in
December 1998 to sell their ownership in the Company. The sale was
completed in January 1999.
15. UNAUDITED INTERIM FINANCIAL STATEMENTS:
The accompanying interim financial statements as of October 31, 1998,
and for the ten months ended October 31, 1997 and 1998 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 year.
38
<PAGE> 41
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PCX Corporation:
We have audited the accompanying balance sheet of PCX Corporation (a Delaware
corporation) as of December 31, 1997, and the related statements of operations,
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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 PCX Corporation as of December
31, 1997, and the results of its operations and its cash flows for year then
ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Raleigh, North Carolina,
March 17, 1998.
39
<PAGE> 42
PCX CORPORATION
BALANCE SHEETS -- DECEMBER 31, 1997, AND SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
ASSETS 1997 1998
------ ------------ -------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 706,722 $ 78,375
Accounts receivable, net 1,711,577 2,651,641
Other receivables 217,071 29,532
Inventories 1,231,269 1,159,233
Other current assets 59,025 155,608
---------- ----------
Total current assets 3,925,664 4,074,389
DEFERRED TAX ASSETS 11,565 11,565
PROPERTY AND EQUIPMENT, net 989,982 982,461
OTHER ASSETS 20,000 20,000
---------- ----------
$4,947,211 $5,088,415
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
CURRENT LIABILITIES:
Line of credit $ 0 $ 164,000
Accounts payable 1,298,522 1,544,711
Accrued liabilities 995,293 308,268
Other current liabilities 206,848 115,790
---------- ----------
Total current liabilities 2,500,663 2,132,769
---------- ----------
DEFERRED TAX LIABILITY 8,000 8,000
---------- ----------
COMMITMENTS AND CONTINGENCIES (Notes 5, 7, 8 and 9)
STOCKHOLDERS' EQUITY:
Series A convertible preferred stock 1,356,422 1,099,422
Common stock, $.001 per share par value, 3,000,000 shares authorized;
961,000 and 1,650,000 issued and outstanding in 1997 and 1998 355 1,650
Additional paid-in capital, common stock 40,645 208,350
Accumulated earnings 1,041,126 1,638,224
---------- ----------
Total stockholders' equity 2,438,548 2,947,646
---------- ----------
$4,947,211 $5,088,415
========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
40
<PAGE> 43
PCX CORPORATION
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997, AND THE NINE-MONTH PERIODS ENDED
SEPTEMBER 30, 1997 (UNAUDITED), AND SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
NINE-MONTH PERIODS ENDED
YEAR ENDED --------------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(unaudited) (unaudited)
<S> <C> <C> <C>
GROSS SALES $12,596,434 $9,238,194 $10,650,615
SALES DISCOUNTS (156,823) (104,483) (302,948)
----------- ---------- -----------
NET SALES 12,439,611 9,133,711 10,347,667
COST OF SALES (8,961,366) (6,645,381) (7,688,288)
----------- ---------- -----------
Gross profit 3,478,245 2,488,330 2,659,379
SELLING EXPENSES (639,805) (467,977) (501,735)
ENGINEERING EXPENSES (489,035) (337,277) (464,322)
GENERAL AND ADMINISTRATIVE EXPENSES (749,389) (559,940) (422,227)
----------- ---------- -----------
Income from operations 1,600,016 1,123,136 1,271,095
INTEREST EXPENSE (52,180) (51,657) (345)
INTEREST INCOME 8,814 303 11,322
OTHER EXPENSES 0 0 (200,981)
----------- ---------- -----------
INCOME BEFORE INCOME TAX PROVISION 1,556,650 1,071,782 1,081,091
INCOME TAX PROVISION 566,546 404,578 408,092
----------- ---------- -----------
NET INCOME $ 990,104 $ 667,204 $ 672,999
=========== ========== ===========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
41
<PAGE> 44
PCX CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997, AND THE NINE-MONTH PERIOD ENDED
SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
SERIES A CONVERTIBLE ADDITIONAL
PREFERRED STOCK COMMON STOCK PAID-IN
--------------------- ---------------- CAPITAL ACCUMULATED
SHARES AMOUNT SHARES AMOUNT STOCK EARNINGS TOTAL
-------- ---------- ------- ------ ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996 1,256,481 $1,252,922 165,000 $ 165 $ 18,035 $ 154,522 $1,425,644
Exercise of common stock options 0 0 796,000 190 22,610 0 22,800
Cumulative preferred stock
dividend accrual 0 103,500 0 0 0 (103,500) 0
Net income 0 0 0 0 0 990,104 990,104
--------- ---------- --------- ------ -------- ---------- ----------
BALANCE, December 31, 1997 1,256,481 1,356,422 961,000 355 40,645 1,041,126 2,438,548
Exercise of common stock options
(unaudited) 0 0 689,000 1,295 167,705 0 169,000
Cumulative preferred stock
dividend accrual (unaudited) 0 75,901 0 0 0 (75,901) 0
Payment of cumulative preferred stock
dividends (unaudited) 0 (332,901) 0 0 0 0 (332,901)
Net income (unaudited) 0 0 0 0 0 672,999 672,999
--------- ---------- --------- ------ -------- ---------- ----------
BALANCE, September 30, 1998 (unaudited) 1,256,481 $1,099,422 1,650,000 $1,650 $208,350 $1,638,224 $2,947,646
========= ========== ========= ====== ======== ========== ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
42
<PAGE> 45
PCX CORPORATION
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997, AND THE NINE-MONTH PERIODS
ENDED SEPTEMBER 30, 1997 (UNAUDITED), AND SEPTEMBER 30, 1998 (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1997 1997 1998
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 990,104 $ 667,204 $ 672,999
Adjustments to reconcile net income to net cash
provided by (used in) operating activities-
Benefit from deferred taxes 60,226 0 0
Depreciation and amortization 170,000 125,000 176,679
Gain (loss) on sale of property and equipment (60,188) (61,440) 793
Increase (decrease) in net cash from changes in
operating assets and liabilities:
Increase in accounts receivable and other
receivables (65,718) (635,994) (752,525)
(Increase) decrease in inventories 39,018 177,774 72,036
(Increase) decrease in other current assets (43,888) (20,534) (96,583)
Increase in accounts payable 337,236 89,027 246,189
Increase (decrease) in accrued liabilities 451,150 163,323 (687,025)
Decrease in other current liabilities (335,056) (354,016) (91,058)
--------- --------- ----------
Net cash provided by (used in) operating
activities 1,542,884 150,344 (458,495)
--------- --------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (837,155) (101,292) (172,451)
Proceeds from sale of property and equipment 708,492 695,992 2,500
--------- --------- ----------
Net cash (used in) provided by investing
activities (128,663) 594,700 (169,951)
--------- --------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from line of credit 4,287,000 4,287,000 626,000
Payment of line of credit (4,634,000) (4,634,000) (462,000)
Payment of long-term debt (448,617) (448,617) 0
Payment of preferred dividends 0 0 (332,901)
Proceeds from the exercise of common stock options 22,800 22,800 169,000
--------- --------- ----------
Net cash (used in) provided by financing
activities (772,817) (772,817) 99
--------- --------- ----------
NET INCREASE (DECREASE) IN CASH 641,404 (27,773) (628,347)
CASH, beginning of period 65,318 65,318 706,722
--------- --------- ----------
CASH, end of period $ 706,722 $ 37,545 $ 78,375
========= ========= ==========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES - Cumulative preferred dividend accrual $ 103,500 $ 77,625 $ 75,901
========= ========= ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for interest $ 57,089 $ 56,566 $ 345
Cash paid during the year for income taxes 438,900 386,600 899,379
========= ========= ==========
</TABLE>
The accompanying notes to financial statements
are an integral part of these statements.
43
<PAGE> 46
PCX CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1997, SEPTEMBER 30, 1997 (UNAUDITED)
AND SEPTEMBER 30, 1998 (UNAUDITED)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS:
PCX Corporation (the Company) is engaged in the design, manufacture and sale of
electrical power distribution centers (Electrical Centers) and electrical
generator houses (Power Centers) for industrial and commercial facilities,
typically large retail chains. The Company was incorporated on June 10, 1993, in
the state of Delaware.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
INTERIM FINANCIAL STATEMENTS
The accompanying interim financial statements and related disclosures for the
nine months ended September 30, 1997 and 1998, have not been audited by
independent accountants. However, the financial statements for all interim
periods have been prepared in conformity with the accounting principles stated
in the audited financial statements for the year ended December 31, 1997, and
include all adjustments (which were of a normal, recurring nature) which, in the
opinion of management, are necessary to present fairly the financial position of
the Company and the results of operations and cash flows for each of the periods
presented. The operating results for the interim periods presented are not
necessarily indicative of results for the full year.
CASH
The Company records as cash and cash equivalents all cash and short-term
investments with original maturities of three months or less.
44
<PAGE> 47
CONCENTRATION OF CREDIT RISK
The Company's sales are highly concentrated in a single customer. This
customer accounted for approximately 46% of sales in the year ended December 31,
1997, and 43% and 51% of sales for the nine months ended September 30, 1997 and
1998 (unaudited), respectively. The associated accounts receivable from this
customer represented approximately 34% and 13% of total accounts receivable at
December 31, 1997, and September 30, 1998 (unaudited), respectively. Sales to
two other major customers accounted for approximately 28% of sales in the year
ended December 31, 1997, and 29% and 21% of sales for the nine months ended
September 30, 1997 and 1998 (unaudited), respectively. The associated accounts
receivable for these customers represented approximately 40% and 41% of total
accounts receivable at December 31, 1997, and September 30, 1998 (unaudited),
respectively. 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 Centers and Power Centers to a limited number of retail
chains for new store construction and remodeling. The Company has recorded an
allowance for doubtful accounts of approximately $7,000 and $27,800 as of
December 31, 1997, and September 30, 1998 (unaudited), respectively. Management
believes that these allowances are adequate.
INVENTORIES
Inventories are valued at the lower of cost (first-in, first-out method) or
market. Inventory costs include raw materials, labor and manufacturing overhead.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost. Depreciation is calculated on a
straight-line basis over the estimated useful life of the asset. On September
15, 1997, PCX sold their then existing land and building for $688,492 resulting
in a gain of $60,058 and relocated to a leased facility. The building was
depreciated over 20 years. Machinery and equipment and furniture and fixtures
are depreciated between three and five years. Leasehold improvements are
depreciated between five and 10 years.
At December 31, 1997, and September 30, 1998, property and equipment consisted
of:
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ ------------
(unaudited)
Furniture and fixtures $ 499,361 $ 620,512
Machinery and equipment 433,123 463,636
Leasehold improvements 343,336 357,415
----------- -----------
1,275,820 1,441,563
Less - Accumulated depreciation (285,838) (459,102)
----------- -----------
Property and equipment, net $ 989,982 $ 982,461
=========== ===========
45
<PAGE> 48
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash, accounts receivable and
accounts payable. Estimates of the fair value of these instruments are based on
interest rates available to the Company. At December 31, 1997, and September 30,
1998, the carrying value of the Company's financial instruments approximated the
fair value.
3. INVENTORIES:
At December 31, 1997, and September 30, 1998, inventories consisted of the
following:
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(unaudited)
Finished goods $ 117,653 $ 0
Work in process 389,588 830,624
Raw materials 724,028 328,609
---------- ----------
$1,231,269 $1,159,233
========== ==========
4. LINE OF CREDIT:
During 1997, the Company renegotiated its line-of-credit facility (LOC) with
Wachovia Bank. Advances on the LOC are limited to 70% of eligible accounts
receivable as defined and 50% of raw and finished inventory. As of September 30,
1998, the maximum amount available under the LOC is approximately $1,000,000
with interest due at prime (8.25% at September 30, 1998), plus .375%. As of
September 30, 1998, a total of $164,000 was outstanding. This line of credit,
which expires March 15, 1999, is collateralized by the Company's accounts
receivable, inventory and equipment.
5. LEASE COMMITMENTS:
FACILITY LEASE
On February 3, 1997, the Company entered into a facility lease. During the
initial lease term of 10 years, the annual commitment is $236,750, to be
escalated by 2.5% annually. The Company began paying rent under this lease in
September 1997. Total rental expense under this lease was approximately $53,000
for the year ended December 31, 1997, and $14,500 and $178,000 for the nine
months ended September 30, 1997 and 1998 (unaudited), respectively.
46
<PAGE> 49
Future minimum rental payments under the facility lease, are as follows:
YEARS ENDING
-------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
(unaudited)
1998 $ 237,736
1999 243,680 247,724
2000 249,772 253,917
2001 256,016 260,265
2002 262,417 266,772
2003 268,977 273,441
Thereafter 1,094,344 1,214,366
---------- ----------
$2,612,942 $2,516,485
========== ==========
6. INCOME TAXES:
The Company has adopted Statement of Financial Accounting Standards No. 109
(SFAS No. 109). The primary objective of SFAS No. 109 is to recognize deferred
tax assets and liabilities for the expected future tax consequences of existing
differences between the financial reporting and tax reporting basis of assets
and liabilities, and of net operating loss and tax credit carryforwards for tax
purposes.
Deferred tax assets and liabilities arise from net operating loss carryforwards
and temporary differences resulting from income and expense items reported for
financial accounting and tax purposes in different periods. The Company's
primary differences relate to the reporting of certain reserves and expenses
that are capitalized for income tax purposes.
47
<PAGE> 50
Under SFAS No. 109, a deferred tax asset is established for the complete amount
of tax benefits available in future periods from the assumed realization of tax
net operating loss carryforwards. In addition, a deferred tax asset or liability
is established for the complete amount of tax benefits or liabilities from the
assumed effect of temporary differences. A valuation allowance is established to
adjust the deferred asset to its estimated net realizable value. The components
of the net deferred tax assets and liabilities as of December 31, 1997, and
September 30, 1998, were as follows:
DECEMBER 31,
1997
-----------
Deferred tax assets-
Net operating loss carryforwards $50,000
Temporary differences 18,000
-------
68,000
Less - Valuation allowance (24,260)
-------
$43,740
=======
Deferred tax liabilities related to temporary
differences $(8,000)
=======
The Company's 1998 income tax provision differs from the amount computed by
applying the federal statutory rate to income before income taxes, due primarily
to the impact of permanent differences between book and taxable income and the
impact of state income taxes.
As of December 31, 1997, the Company had available approximately $50,000 of net
operating loss carryforwards for federal income tax reporting purposes which
will expire in 2010. Due to the change in ownership occurring upon the issuance
of convertible preferred stock in July 1994, the Company's ability to utilize
such loss carryforwards in any one year generated prior to the change in
ownership is limited. This annual limitation is equal to the value of the
Company prior to the redemption multiplied by an interest rate determined by the
Internal Revenue Service. To the extent that the Company is unable to utilize
any of the net operating loss prior to the change in ownership, in a given year
due to insufficient taxable income, that year's annual limitation may be carried
forward to increase the subsequent year's limitation.
Under SFAS No. 109, the criteria for recording a deferred tax asset is "more
likely than not" that such an asset will be realized. Since there are certain
limitations on the utilization of the above net operating loss carryforwards in
future years, management provided a valuation allowance for the above deferred
tax asset generated by the net operating loss carryforward.
48
<PAGE> 51
7. SERIES A CONVERTIBLE PREFERRED STOCK:
The Company has authorized 1,256,481 shares of Series A convertible preferred
stock. In 1994, the Company changed its preferred stock from no par to $.001
par value per share along with various other rights.
The terms of the Series A convertible preferred stock (Series A shares) include,
among other things, the following, as defined in the Series A preferred stock
purchase agreement:
- The Series A shares are entitled to cumulative dividends, when and if
declared by the Board of Directors from and after July 8, 1995.
Dividends when and if declared will be calculated at an annual rate of
approximately $.08 per share. As of December 31, 1997, the Company had
accrued $257,000 of cumulative dividends due to preferred stockholders.
In September 1998, the Company paid in full all accrued dividends due
to preferred stockholders in the amount of approximately $333,000.
- The Series A shares are entitled to a liquidation preference, as
defined by the certificate of incorporation. This amount is payable
prior to and in preference of any distribution on common stock. The
liquidation preference was approximately $3,003,000 at September 30,
1998.
- Each Series A share issued and outstanding has the right to vote, as
defined. The number of votes correspond to the number of shares of
common stock into which the shares would be convertible.
- Each share is convertible into one share of common stock at any time at
the option of its holder or automatically upon the closing of the sale
of the Company's common stock in a firm commitment or underwritten
public offering of the Company's securities resulting in net proceeds
of not less than $7,000,000 (see Note 10). The conversion ratio is
subject to adjustment, as defined.
- Holders of the shares have the right of first participation to purchase
up to its pro rata share, as defined, of all new securities which the
Company proposes to sell and issue.
- At any time after June 15, 1999, each preferred stockholder shall have
the option to put all or any portion of its Series A shares to the
Company, and the Company shall thereby be obligated to purchase said
shares. The purchase price for the shares of preferred stock is based
pro rata upon the higher of a multiple of earnings or the appraised
value of the Company as defined. Due to the volatility of the Company's
operations since its inception, the Company was not able to reasonably
estimate the put price of such Series A preferred stock.
49
<PAGE> 52
8. COMMON STOCK AND STOCK PLAN:
In 1994, the Company adopted a stock option plan (the Plan) which authorizes the
issuance of options to purchase shares of common stock. The Company applies APB
Opinion No. 25 and related interpretations in accounting for the Plan. The fair
value of options granted in 1997 was equal to the exercise price at the date of
grant. Accordingly, no compensation cost has been recorded. Had compensation
cost for the Plan been determined based on the fair value of options at the
grant dates consistent with the method of SFAS No. 123, the effect on net income
in 1997 would not be material. Options issued under the Plan vest over a
five-year period and may be exercised within 10 years of the grant date. In
1996, the Board of Directors authorized an additional 70,000 shares available
for grant under the Plan. As of December 31, 1997, all but 70,000 available
shares had been granted.
The following table summarizes the activity under the Plan:
OPTIONS EXERCISE
OUTSTANDING PRICE RANGE
----------- -----------
Balances, December 31, 1997 639,000 $.12 - .20
Granted (unaudited) 50,000 .20
Exercised (unaudited) (689,000) .12 - .20
Forfeited (unaudited) 0 .20
--------- -----------
Balances, September 30, 1998 (unaudited) 0 $.12 - $.20
========= ===========
In 1997, 606,000 options were exercised. In lieu of cash proceeds, a
promissory note of $75,600 was issued to the Company and netted against
common stock and additional paid in capital at December 31, 1997. The
promissory note was paid in 1998 and the equity accounts were adjusted
accordingly to reflect the net proceeds related to the options exercised.
In 1998, the Company accelerated the vesting of all outstanding options,
including those granted in the current year. All outstanding options were
exercised prior to September 30, 1998, resulting in net proceeds of $93,400.
The Company has reserved common stock in connection with the following:
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -------------
Conversion of preferred stock 1,256,481 1,256,481
Employee stock option plan 639,000 0
--------- ---------
1,895,481 1,256,481
========= =========
50
<PAGE> 53
9. BENEFIT PLANS:
On January 1, 1996, the Company established a defined contribution 401(k) plan
that covers all eligible employees. The plan provides for the Company to match
voluntary employee contributions at a rate of 50%. The maximum employee
contribution the Company will match is 4% which equates to a maximum of 2% of
annual compensation. Such matching rate can be changed at the Company's
discretion. All contributions by the Company are funded currently and vest over
four years. All employee contributions are immediately vested. Company matching
contributions to the plan were $29,319 for the year ended December 31, 1997, and
$20,762 and $25,248 for the nine months ended September 30, 1997 and 1998,
respectively (unaudited).
10. SUBSEQUENT EVENT:
On January 29, 1999, the Company completed the sale of all of its outstanding
common stock to Integrated Electrical Services (IES). Concurrent with the sale
transaction, all outstanding Series A preferred stock was converted into common
stock consistent with the terms of the Series A preferred stock purchase
agreement (Note 7). The sale proceeds were distributed to stockholders in
accordance with the aforementioned agreement.
51
<PAGE> 54
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma financial statements give effect to
(i) the acquisitions by Integrated Electrical Services, Inc. ("IES"), of 16
companies and related entities engaged in all facets of electrical contracting
and maintenance services on January 30, 1998 (together, the "Founding
Companies"), and related transactions, (ii) the acquisitions of 32 additional
electrical contracting and maintenance businesses from April 1998 through
January 31, 1999 (the "Acquired Companies") and (iii) the issuance in January
1999, of Senior Subordinated Notes due 2009 (the "Notes") and the application of
the net proceeds therefrom. The unaudited pro forma balance sheet reflects the
acquisition of 11 of the Acquired Companies which were acquired subsequent to
September 30, 1998 (the "Fiscal 1999 Acquisitions"), and the issuance of the
Notes and the application of the net proceeds therefrom as if they had occurred
on September 30, 1998. The unaudited pro forma combined statements of operations
present the statement of operations data from the consolidated financial
statements of IES for the fiscal year ended September 30, 1998, combined with
the pre-acquisition results of operations for the Founding Companies and the
Acquired Companies and give effect to the pro forma adjustments related to these
transactions as if they 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 the Founding Companies and the Acquired Companies have contractually
agreed to changes in salary, bonuses, benefits and lease payments, these changes
have been reflected in the unaudited pro forma combined statement of operations.
Certain pro forma adjustments are based on preliminary estimates,
available information and certain assumptions that Company management deems
appropriate and may be revised as additional information becomes available. The
pro forma financial data do not purport to represent what IES's 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 financial position or results of operations for any future period. Since
the acquired entities were not under common control or management prior to their
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 IES's Annual Report on Form 10-K for
the fiscal year ended September 30, 1998.
52
<PAGE> 55
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
IES AND FISCAL 1999 PRO FORMA OFFERING PRO FORMA
SUBSIDIARIES ACQUISITIONS ADJUSTMENTS ADJUSTMENT AS ADJUSTED
------------ ------------ ----------- ---------- ----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash .......................................... $ 14,583 $ 5,865 $ (34,521) $ 54,300 $ 40,227
Receivables, net .............................. 146,327 17,334 (414) -- 163,247
Inventories, net .............................. 6,440 1,796 (10) -- 8,226
Cost and estimated earnings in excess of
billings on uncompleted contracts ......... 12,502 3,223 -- -- 15,725
Prepaid expenses and other current assets ..... 3,198 1,855 -- -- 5,053
---------- ---------- ---------- ---------- ----------
Total current assets ...................... 183,050 30,073 (34,945) 54,300 232,478
RECEIVABLES FROM RELATED PARTIES ................. 142 -- -- -- 142
GOODWILL, NET .................................... 293,066 -- 46,494 -- 339,560
PROPERTY AND EQUIPMENT, NET ...................... 23,436 4,893 -- -- 28,329
OTHER NONCURRENT ASSETS .......................... 2,774 295 -- 5,000 8,069
---------- ---------- ---------- ---------- ----------
Total assets .............................. $ 502,468 $ 35,261 $ 11,549 $ 59,300 $ 608,578
========== ========== ========== ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt and current
maturities of long-term debt .............. $ 3,823 $ 2,365 $ (2,365) $ -- $ 3,823
Accounts payable and accrued expense .......... 69,225 7,987 1,233 -- 78,445
Billings in excess of costs and estimated
earnings on uncompleted contracts ......... 27,807 3,639 -- -- 31,446
Income taxes payable .......................... 6,686 3,015 -- -- 9,701
Other current liabilities ..................... 489 874 -- -- 1,363
---------- ---------- ---------- ---------- ----------
Total current liabilities .................. 108,030 17,880 (1,132) -- 124,778
---------- ---------- ---------- ---------- ----------
LONG-TERM BANK DEBT .............................. 89,500 -- -- (89,500) --
OTHER LONG-TERM DEBT, NET ........................ 854 886 (886) -- 854
SENIOR SUBORDINATED NOTES,
net of $1,200 discount ........................ -- -- -- 148,800 148,800
OTHER NON-CURRENT LIABILITIES .................... 1,380 -- -- -- 1,380
---------- ---------- ---------- ---------- ----------
Total liabilities .......................... 199,764 18,766 (2,018) 59,300 275,812
STOCKHOLDERS' EQUITY:
Preferred stock ............................... -- 1,099 (1,099) -- --
Common stock .................................. 281 926 (926) -- 281
Restricted common stock ....................... 27 -- -- -- 27
Additional paid-in capital .................... 291,650 205 29,857 -- 321,712
Retained earnings ............................. 10,746 14,265 (14,265) -- 10,746
---------- ---------- ---------- ---------- ----------
Total stockholders' equity ................. 302,704 16,495 13,567 -- 332,766
---------- ---------- ---------- ---------- ----------
Total liabilities and stockholders' equity .... $ 502,468 $ 35,261 $ 11,549 $ 59,300 $ 608,578
========== ========== ========== ========== ==========
</TABLE>
53
<PAGE> 56
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
IES AND FISCAL 1998 FISCAL 1999 PRO FORMA OFFERING PRO FORMA
SUBSIDIARIES ACQUISITIONS ACQUISITIONS ADJUSTMENTS ADJUSTMENTS AS ADJUSTED
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
REVENUES ..................... $ 386,721 $ 363,728 $ 105,651 $ -- $ -- $ 856,100
COST OF SERVICES ............. 306,052 295,349 82,286 (564) -- 683,123
------------ ------------ ------------ ------------ ------------ ------------
GROSS PROFIT .............. 80,669 68,379 23,365 564 -- 172,977
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES ... 47,390 62,621 16,039 (35,819) -- 90,231
NON-CASH, NON-RECURRING
COMPENSATION CHARGE ....... 17,036 -- -- (17,036) -- --
GOODWILL AMORTIZATION ........ 3,212 -- -- 5,357 -- 8,569
------------ ------------ ------------ ------------ ------------ ------------
INCOME FROM OPERATIONS .... 13,031 5,758 7,326 48,062 -- 74,177
OTHER INCOME (EXPENSE):
Interest expense .......... (1,161) -- (141) (2,951) (11,237) (15,490)
Interest income ........... 433 730 268 (1,133) -- 298
Other, net ................ 335 404 (34) (462) -- 243
------------ ------------ ------------ ------------ ------------ ------------
OTHER INCOME (EXPENSE), NET .. (393) 1,134 93 (4,546) (11,237) (14,949)
INCOME BEFORE INCOME TAXES ... 12,638 6,892 7,419 43,516 (11,237) 59,228
PROVISION FOR INCOME TAXES ... 12,690 5,473 1,871 10,030 (4,326) 25,738
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) ............ $ (52) $ 1,419 $ 5,548 $ 33,486 $ (6,911) $ 33,490
============ ============ ============ ============ ============ ============
EARNING (LOSS) PER SHARE -
BASIC - $ -- $ 1.03
============ ============
DILUTED - $ -- $ 1.01
============ ============
SHARES USED IN THE
COMPUTATION OF
EARNINGS (LOSS)
PER SHARE
BASIC - 19,753,060 32,630,538
============ ============
DILUTED - 19,753,060 33,030,371
============ ============
</TABLE>
54
<PAGE> 57
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA BALANCE SHEET:
The Pro Forma Adjustments reflects the acquisition of 11 of the Fiscal
1999 Acquisitions which were acquired subsequent to September 30, 1998, and the
application of the cash proceeds from the issuance of the Notes, net of
estimated offering costs of $5.0 million, to reduce amounts outstanding under
the Credit Facility.
2. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS:
The Unaudited Pro Forma Statement of Operations for the year ended
September 30, 1998 for IES and Subsidiaries reflects the historical results of
Houston-Stafford Electric, Inc. ("Houston-Stafford") as the accounting acquirer
(restated for the effect of an acquisition accounted for as a
pooling-of-interest combined) the other Founding Companies beginning February 1,
1998, and the Acquired Companies beginning on their respective dates of
acquisition.
The Fiscal 1998 Acquisitions reflects the historical results of the
Founding Companies other than Houston-Stafford for the period prior to February
1, 1998, and the Acquired Companies through their date of acquisition. The
Fiscal 1999 Acquisitions reflects the historical results of operations for 1998
of the 12 Acquired Companies which were acquired subsequent to September 30,
1998.
The following table summarizes the Pro Forma Adjustments (in
thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS
-------------------------------------------------- PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Cost of services ............................... $ (564) $ -- $ -- $ -- $ (564)
Selling, general and administrative expenses ... (35,819) -- -- -- (35,819)
Non-cash, non-recurring compensation charge .... (17,036) -- -- -- (17,036)
Goodwill amortization .......................... -- 5,357 -- -- 5,357
-------- -------- -------- -------- --------
Income (loss) from operations ............... 53,419 (5,357) -- -- 48,062
Other income (expense):
Interest expense ............................ -- -- (2,951) -- (2,951)
Interest income ............................. -- -- (1,133) -- (1,133)
Other, net .................................. -- 316 (778) -- (462)
-------- -------- -------- -------- --------
Other income (expense), net ................. -- 316 (4,862) -- (4,546)
-------- -------- -------- -------- --------
Income (loss) before income taxes ........... 53,419 (5,041) (4,862) -- 43,516
Provision for income taxes ..................... -- -- -- 10,030 10,030
-------- -------- -------- -------- --------
Net income (loss) .............................. $ 53,419 $ (5,041) $ (4,862) $(10,030) $ 33,486
======== ======== ======== ======== ========
</TABLE>
(a) Reflects the reduction in salaries, bonuses and benefits and lease
payments to the owners of the Founding Companies and the Acquired
Companies. These reductions in salaries, bonuses and benefits and lease
payments have been agreed to in accordance with the terms of employment
agreements executed as part of the acquisitions. Such employment
agreements are primarily for five years, contain restrictions related
to competition and provide severance for termination of employment in
certain circumstances. Also, includes the reversal of the $17.0 million
non-cash, non-recurring compensation charge in connection with the
acquisition of the Founding Companies.
55
<PAGE> 58
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
(b) Reflects the amortization of goodwill recorded as a result of these
acquisitions over a 40-year estimated life, as well as a reduction in
historical minority interest expense attributable to minority interests
that were acquired as part of the related acquisitions.
(c) Reflects additional interest expense on borrowings to fund the cash
portion of the consideration paid, net of reduction of interest expense
attributable to historical debt repaid using proceeds from the
Company's initial public offering or 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%. Also, reflects elimination of interest income recognized by the
Founding Companies and the Acquired Companies.
(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.
The Offering Adjustments reflect the incremental interest expense of
$10.3 million using an interest rate of 9.375%, amortization of deferred
financing cost and amortization of the note discount of $0.5 million and $0.1
million, respectively, incurred as a result of the issuance of the notes and
incremental amortization of deferred financing cost of $0.3 million related to
the Credit Facility. Additionally, reflects the incremental provision for
federal and state income taxes at an assumed effective tax rate of 38.5% for the
offering adjustments.
56
<PAGE> 59
ITEM 7. EXHIBITS.
(c) Exhibits.
23.1 Consent of Hertzbach & Company P.A.
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Peck & Kopacek, P.C.
23.4 Consent of Arthur Andersen LLP
<PAGE> 60
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. WOMBWELL
JOHN F. WOMBWELL
SENIOR VICE PRESIDENT
AND GENERAL COUNSEL
Dated: February 4, 1999
<PAGE> 61
EXHIBIT INDEX
Exhibit Description
------- -----------
23.1 Consent of Hertzbach & Company P.A.
23.2 Consent of KPMG Peat Marwick LLP
23.3 Consent of Peck & Kopacek, P.C.
23.4 Consent of Arthur Andersen LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, dated July 14, 1998, on the financial statements of Primo
Electric Company included in this Form 8-K, into Integrated Electrical Services,
Inc.'s previously filed Registration Statements on Form S-8 (File Nos.
333-67113, 333-45447 and 333-45449).
HERTZBACH & COMPANY, P.A.
Owings Mills, Maryland
January 29, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
Board of Directors
Kayton Electric, Inc.
As independent public accountants, we hereby consent to the incorporation of our
report dated January 28, 1998 (November 19, 1998 as to note 8) on the financial
statements of Kayton Electric, Inc. included in this Form 8-K, into Integrated
Electrical Services, Inc.'s previously filed Registration Statements on Form
S-8 (File Nos. 333-67113, 333-45447 and 333-45449).
KPMG Peat Marwick LLP
Lincoln, Nebraska
February 2, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report, dated January 25, 1999, on the financial statements of Bachofner
Electric, Inc. included in this Form 8-K, into Integrated Electrical Services,
Inc.'s previously filed Registration Statements on Form S-8 (File Nos.
333-67113, 333-45447 and 333-45449).
Peck & Kopacek, P.C.
Beaverton, Oregon
February 3, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation
of our report, dated March 17, 1998, on the balance sheet of PCX Corporation as
of December 31, 1997, and the related statements of operations, stockholders'
equity and cash flows for the year then ended included in this Form 8-K, into
Integrated Electrical Services, Inc.'s previously filed Registration Statements
on Form S-8 (File Nos. 333-67113, 333-45447 and 333-45449).
ARTHUR ANDERSEN LLP
Raleigh, North Carolina
February 4, 1999
