<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: May 7, 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
ITEM 5. OTHER EVENTS
Integrated Electrical Services, Inc., a Delaware corporation (the
"Company") is a leading national provider and consolidator of electrical
contracting and maintenance services, focusing primarily on the commercial,
industrial, residential, powerline and data communication markets. In order to
comply with the disclosure requirements of the Securities and Exchange
Commission regarding the financial statements of significant recently acquired
subsidiaries who serve as guarantors of the Company's 9 3/8% Senior Subordinated
Notes due 2009, the Company is filing this Current Report containing the
following audited financial statements.
(a) Financial Statements of Significant Guarantor Subsidiaries
See Pages 1 through 23
<PAGE> 2
INDEX TO FINANCIAL STATEMENTS OF SIGNIFICANT
GUARANTOR SUBSIDIARIES
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
Report of Independent Public Accountants............................................. 2
Consolidated Balance Sheets.......................................................... 3
Consolidated Statements of Operations................................................ 4
Consolidated Statements of Cash Flows................................................ 5
Consolidated Statements of Stockholders' Equity...................................... 6
Notes to Consolidated Financial Statements........................................... 7
DAVIS ELECTRICAL CONSTRUCTORS, INC.
Report of Independent Public Accountants............................................. 15
Balance Sheets....................................................................... 16
Statements of Income and Retained Earnings........................................... 17
Statements of Cash Flows............................................................. 18
Notes to Financial Statements........................................................ 19
</TABLE>
1
<PAGE> 3
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mills Electrical Contractors, Inc.:
We have audited the accompanying consolidated balance sheets of Mills Electrical
Contractors, Inc., a Texas corporation, and Subsidiary as of December 31, 1995
and 1996 and September 30, 1997, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1996 and for the year ended September 30, 1997 and
for the period from October 1, 1997 through January 30, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Mills Electrical Contractors,
Inc. and Subsidiary as of December 31, 1995 and 1996 and September 30, 1997, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 1996 and for the year ended September 30, 1997
and for the period from October 1, 1997 through January 30, 1998, in conformity
with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
2
<PAGE> 4
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................................. $ 1,808 $ 5,239 $ 833
Accounts receivable--
Trade, net of allowance of $148, $252 and $353, respectively ............ 6,251 10,121 13,137
Retainage, net of allowance of $20, $74, $42 and $42, respectively ...... 796 2,669 1,621
Related parties ......................................................... 3 208 632
Other receivables ....................................................... 307 1,055 27
Inventories, net ........................................................... 69 49 93
Costs and estimated earnings in excess of
billings on uncompleted contracts ....................................... 131 329 1,584
Prepaid expenses and other current assets .................................. 29 118 120
-------- -------- --------
Total current assets ............................................... 9,394 19,788 18,047
PROPERTY AND EQUIPMENT, net .................................................. 912 1,675 2,397
GOODWILL, net ................................................................ -- 180 173
OTHER ASSETS ................................................................. 340 394 443
-------- -------- --------
Total assets ....................................................... $ 10,646 $ 22,037 $ 21,060
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Line-of-Credit and current maturities of long-term debt .................... $ 131 $ 294 $ 643
Accounts payable and accrued expenses--
Trade ................................................................... 4,439 8,886 7,672
Related parties ......................................................... 23 633 --
Billings in excess of costs and estimated earnings on uncompleted contracts. 1,746 4,523 1,966
Unearned revenue and other current liabilities ............................. 98 -- --
-------- -------- --------
Total current liabilities .......................................... 6,437 14,336 10,281
-------- -------- --------
LONG-TERM DEBT, net of current maturities .................................... 260 333 169
MINORITY INTEREST ............................................................ -- 3 75
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares authorized, 855 shares
issued and 727 shares outstanding ....................................... 1 1 1
Additional paid-in capital ................................................. 175 175 175
Retained earnings .......................................................... 3,824 7,240 10,410
Treasury stock, 128 shares, at cost ........................................ (51) (51) (51)
-------- -------- --------
Total stockholders' equity ......................................... 3,949 7,365 10,535
-------- -------- --------
Total liabilities and stockholders' equity ......................... $ 10,646 $ 22,037 $ 21,060
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
3
<PAGE> 5
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -------------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES ................................... $ 25,544 $ 35,250 $ 65,439 $ 43,684 $ 52,644
COST OF SERVICES (including
depreciation and amortization) ........... 20,937 27,372 50,535 33,998 44,035
-------- -------- -------- -------- --------
Gross profit ..................... 4,607 7,878 14,904 9,686 8,609
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .................. 3,391 4,741 7,643 3,837 4,972
-------- -------- -------- -------- --------
Income (loss) from operations .... 1,216 3,137 7,261 5,849 3,637
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense ......................... (22) (56) (61) (34) (19)
Other .................................... 92 195 215 153 215
-------- -------- -------- -------- --------
Other income (expense), net ...... 70 139 154 119 196
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND PROVISION FOR
STATE INCOME TAXES ....................... 1,286 3,276 7,415 5,968 3,833
Minority interest in net
(income) loss of subsidiary .............. -- -- (3) (5) --
-------- -------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION
FOR STATE INCOME TAXES ................... 1,286 3,276 7,412 5,963 3,833
Provision for state income taxes ........... 52 131 309 182 147
-------- -------- -------- -------- --------
NET INCOME (LOSS) .......................... $ 1,234 $ 3,145 $ 7,103 $ 5,781 $ 3,686
======== ======== ======== ======== ========
<CAPTION>
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
-------- --------
<S> <C> <C>
REVENUES ................................... $ 74,399 $ 20,882
COST OF SERVICES (including
depreciation and amortization) ........... 60,572 16,244
-------- --------
Gross profit ..................... 13,827 4,638
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES .................. 8,778 5,385
-------- --------
Income (loss) from operations .... 5,049 (747)
-------- --------
OTHER INCOME (EXPENSE):
Interest expense ......................... (46) (57)
Other .................................... 277 44
-------- --------
Other income (expense), net ...... 231 (13)
-------- --------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND PROVISION FOR
STATE INCOME TAXES ....................... 5,280 (760)
Minority interest in net
(income) loss of subsidiary .............. 2 --
-------- --------
INCOME (LOSS) BEFORE PROVISION
FOR STATE INCOME TAXES ................... 5,282 (760)
Provision for state income taxes ........... 274 84
-------- --------
NET INCOME (LOSS) .......................... $ 5,008 $ (844)
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
4
<PAGE> 6
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
--------------------------------------- -----------------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................... $ 1,234 $ 3,145 $ 7,103 $ 5,781 $ 3,686
Adjustments to reconcile net income
To net cash provided by (used in)
Operating activities --
Depreciation and amortization ..................... 179 253 385 197 449
Loss (gain) on sale of property and equipment ..... (2) -- (20) (21) 5
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable ........................... (2,107) (1,894) (6,997) (9,998) (1,364)
Inventories, net .............................. 10 1 20 2 (45)
Costs and estimated earnings in
excess of billings on uncompleted contracts.. (402) 386 (198) (307) (1,255)
Prepaid expenses and other current assets ..... (46) 105 (89) (149) (2)
Increase (decrease) in --
Accounts payable and accrued expenses ......... 1,780 1,178 5,057 3,090 (1,846)
Billings in excess of costs and
estimated earnings on uncompleted contracts.. (353) 1,159 2,777 3,926 (2,556)
Unearned revenue and other current liabilities. -- 98 (98) (98) --
Other, net ........................................ (64) (29) (52) (130) 22
------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities ..................................... 229 4,402 7,888 2,293 (2,906)
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable ........................ (12) (291) (75) (75) --
Collection of notes receivable ...................... 140 141 377 377 --
Proceeds from sale of property and equipment ........ 8 15 44 44 8
Additions of property and equipment ................. (279) (255) (912) (538) (1,177)
------- ------- ------- ------- -------
Net cash used in investing activities ......... (143) (390) (566) (192) (1,169)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt ........................ -- -- -- -- 1,000
Payments of long-term debt .......................... (19) (136) (204) (117) (815)
Distributions to stockholders ....................... (147) (2,216) (3,687) (426) (516)
Sale of treasury stock .............................. 181 -- -- -- --
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities ........................ 15 (2,352) (3,891) (543) (331)
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................... 101 1,660 3,431 1,558 (4,406)
CASH AND CASH EQUIVALENTS, beginning of Period ........ 47 148 1,808 1,808 5,239
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of Period .............. $ 148 $ 1,808 $ 5,239 $ 3,366 $ 833
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest .......................................... $ 22 $ 56 $ 61 $ 34 $ 19
Income Taxes ...................................... $ -- $ 55 $ 93 $ 93 $ 105
<CAPTION>
PERIOD
FROM
OCTOBER 1,
1997
YEAR ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
------------ -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................... $ 5,008 $ (844)
Adjustments to reconcile net income
To net cash provided by (used in)
Operating activities --
Depreciation and amortization ..................... 637 245
Loss (gain) on sale of property and equipment ..... 6 3
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable ........................... 1,637 2,157
Inventories, net .............................. (27) 47
Costs and estimated earnings in
excess of billings on uncompleted contracts.. (1,146) (319)
Prepaid expenses and other current assets ..... 58 35
Increase (decrease) in --
Accounts payable and accrued expenses ......... 121 25
Billings in excess of costs and
estimated earnings on uncompleted contracts.. (3,705) 415
Unearned revenue and other current liabilities. -- --
Other, net ........................................ 100 3
------- -------
Net cash provided by (used in)
operating activities ............................ 2,689 1,767
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable ........................ -- --
Collection of notes receivable ...................... -- --
Proceeds from sale of property and equipment ........ 8 5
Additions of property and equipment ................. (1,551) (339)
------- -------
Net cash used in investing activities ......... (1,543) (334)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt ........................ 1,000 7,569
Payments of long-term debt .......................... (902) (90)
Distributions to stockholders ....................... (3,777) (8,844)
(2,216)
Sale of treasury stock .............................. -- --
------- -------
Net cash provided by (used in)
financing activities ........................ (3,679) (1,365)
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .................................... (2,533) 68
CASH AND CASH EQUIVALENTS, beginning of Period ........ 3,366 833
------- -------
CASH AND CASH EQUIVALENTS, end of Period .............. $ 833 $ 901
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest .......................................... $ 46 $ 48
Income Taxes ...................................... $ 105 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
5
<PAGE> 7
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------------------ PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 ............. 855 $ 1 $ 11 $ 1,808 $ (68) $ 1,752
Sale of 42 shares of treasury
stock ........................... -- -- 164 -- 17 181
Distributions to stockholders ..... -- -- -- (147) -- (147)
Net income ........................ -- -- -- 1,234 -- 1,234
-------- -------- -------- -------- -------- --------
BALANCE, December 31, 1994 ............. 855 1 175 2,895 (51) 3,020
Distributions to stockholders ..... -- -- -- (2,216) -- (2,216)
Net income ........................ -- -- -- 3,145 -- 3,145
-------- -------- -------- -------- -------- --------
BALANCE, December 31, 1995 ............. 855 1 175 3,824 (51) 3,949
Distributions to stockholders ..... -- -- -- (3,687) -- (3,687)
Net income ........................ -- -- -- 7,103 -- 7,103
-------- -------- -------- -------- -------- --------
BALANCE, December 31, 1996 ............. 855 1 175 7,240 (51) 7,365
Distributions to stockholders
(Unaudited) ....................... -- -- -- (516) -- (516)
Net income (Unaudited) ............ -- -- -- 3,686 -- 3,686
-------- -------- -------- -------- -------- --------
BALANCE, September 30, 1997 ............ 855 1 175 10,410 (51) 10,535
Distributions to stockholders...... -- -- -- (8,844) -- (8,844)
Net loss .......................... -- -- -- (844) -- (844)
-------- -------- -------- -------- -------- --------
BALANCE, January 30, 1998 .............. 855 $ 1 $ 175 $ 722 $ (51) $ 847
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
6
<PAGE> 8
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying consolidated financial statements include the accounts of
Mills Electrical Contractors, Inc. (Mills), a Texas corporation, and its 89%
owned subsidiary, Fort Worth Regional Electrical Systems, L.L.C. (RES), a Texas
limited liability company (collectively, the Company). The subsidiary was
formed during 1996. In September 1997, Mills sold 10% of the capital stock of
RES to an officer of RES at net book value per share resulting in proceeds to
the Company of $71,000. Financial statements prior to 1996 reflect only the
accounts of Mills. All significant intercompany transactions have been
eliminated in consolidation.
The Company focuses on providing electrical system installation and repair
services primarily for mid-sized to large commercial facilities as well as
residential facilities. The Company performs the majority of its contract work
under fixed price contracts, with contract terms generally ranging from 12 to
36 months. The Company performs the majority of its work in the Dallas-Fort
Worth, Texas, area.
On January 30, 1998, concurrent with the closing of the initial public
offerings in the United States and Canada and outside the United States and
Canada (the Offerings) of additional common stock by Integrated Electrical
Services, Inc. (IES), the Company was acquired by IES. All outstanding shares
of the Company's common stock were exchanged for cash and shares of IES common
stock. In addition, the key executives of the Company entered into employment
agreements with the Company and IES which have an initial term of five years,
and generally restrict the disclosure of confidential information as well as
restrict competition with the Company and IES for a period of two years
following termination of employment. The Company has changed from a calendar to
a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim consolidated financial statements for the nine months ended
September 30, 1996 and 1997, are unaudited and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, the unaudited interim consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the
results for the entire fiscal year.
The financial statements for the period from October 1, 1997 through
January 30, 1998 are presented for purposes of complying with certain reporting
requirements of Securities and Exchange Commission's Staff Accounting Bulletin
No. 80 and are not necessarily indicative of the results to be expected for the
entire year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
7
<PAGE> 9
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities
for the years ended December 31, 1994, 1995, 1996 and September 1997 and the
nine months ended September 30, 1996 and 1997 and the period from October 1,
1997 through January 30, 1998:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED NINE MONTHS 1997
SEPTEMBER 30, ENDED THROUGH
------------- SEPTEMBER 30, JANUARY 30,
1994 1995 1996 1997 1996 1997 1998
------ ------ ------ ------ ------ ------- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Property acquired in capital
lease transactions ................ $ 290 $ 195 $ 254 $ 17 $ 237 $ -- $ --
Goodwill recognized in purchase
transactions .................... $ -- $ -- $ 185 $ -- $ 185 $ -- $ --
</TABLE>
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost, net of an allowance for
obsolescence, or market using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
life of the lease or the estimated useful life of the asset. Depreciation and
amortization expense was $179,000, $253,000, $385,000, $637,000 and $245,000
for the years ended December 31, 1994, 1995 and 1996 and September 30, 1997 and
for the period from October 1, 1997 through January 30, 1998, respectively.
In June 1996, RES agreed to purchase a business, consisting of equipment in
a capital lease transaction and an agreement to lease a building under an
operating lease, as well as the purchase of the rights to the name "Regional
Electric Systems" from an individual who became an officer of RES. The acquired
assets were recorded at their estimated fair market value using the purchase
method of accounting. The transaction resulted in the recognition of goodwill
of approximately $185,000 which is being amortized over a 20 year period.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each
contract. Such contracts generally provide that the customers accept completion
of progress to date and compensate the Company for services rendered measured
in terms of hours expensed or some other measure of progress. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools and repairs.
Provisions for the total estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance, job
conditions, estimated profitability and final contract settlements may result
in revisions to costs and income and their effects are recognized in the period
in which the revisions are determined. An amount equal to contract costs
attributable to claims is included in revenues when
8
<PAGE> 10
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience
with similar contracts in recent years, the retention balance at each balance
sheet date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor
for 30 days after servicing of existing electrical systems. A reserve for
warranty costs is recorded based upon the historical level of warranty claims
and management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable and a general reserve based upon the total trade and retainage
accounts receivable balances.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company itself is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their share of
the Company's taxable earnings or losses in their personal tax returns.
Consequently, the accompanying consolidated financial statements of the Company
include only a provision for state income taxes and do not include a provision
for current or deferred federal income taxes. The Company intends to terminate
its S Corporation status concurrently with the effective date of the Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's consolidated financial
statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the consolidated financial position or results of operations
of the Company.
9
<PAGE> 11
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
-------- ------- ------- -------
<S> <C> <C> <C> <C>
Transportation equipment .............. 3-5 $ 788 $ 1,031 $ 1,346
Machinery and equipment ............... 5 785 1,071 1,266
Leasehold improvements ................ 5-10 170 330 421
Furniture and fixtures ................ 5 591 901 1,439
Less -- Accumulated depreciation
and amortization ...................... (1,422) (1,658) (2,075)
------- ------- -------
Property and equipment, net ...... $ 912 $ 1,675 $ 2,397
======= ======= =======
</TABLE>
10
<PAGE> 12
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------------------------------
DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------
1994 1995 1996 1997
----- ----- ----- -------------
<S> <C> <C> <C> <C>
Balance at beginning of period ........... $ 77 $ 128 $ 168 $ 432
Additions to/(reduction of) costs and
expenses ................................. 51 40 158 (37)
----- ----- ----- -----
Balance at end of period ................. $ 128 $ 168 $ 326 $ 395
===== ===== ===== =====
</TABLE>
Included as a component of other receivables at December 31, 1995, is a
note receivable from a corporation of $291,000 with interest at 10 percent per
annum. This note was collected during 1996.
Accounts payable and accrued expenses, trade consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ ------
<S> <C> <C> <C>
Accounts payable, trade .............. $2,236 $4,922 $6,275
Accrued compensation and benefits .... 1,608 3,423 1,017
Other accrued expenses ............... 595 541 380
------ ------ ------
$4,439 $8,886 $7,672
====== ====== ======
</TABLE>
Electrical system installation contracts in progress are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- --------
<S> <C> <C> <C>
Costs incurred on contracts in progress ....... $ 33,016 $ 55,954 $ 80,236
Estimated earnings, net of losses ............. 7,090 15,879 16,534
-------- -------- --------
40,106 71,833 96,770
Less -- Billings to date ...................... (41,721) (76,027) (97,152)
-------- -------- --------
$ (1,615) $ (4,194) $ (382)
======== ======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts ........... $ 131 $ 329 $ 1,584
Less -- Billings in excess of costs and
estimated earnings on uncompleted ......... (1,746) (4,523) (1,966)
-------- -------- --------
contracts
$ (1,615) $ (4,194) $ (382)
======== ======== ========
</TABLE>
5. LINE-OF-CREDIT DEBT:
The Company has a $2,000,000 line-of-credit agreement with a bank to be
drawn upon as needed, with variable interest at the bank's prime rate, as
defined, secured by accounts receivable, furniture, fixtures and equipment, an
assignment of a $500,000 life insurance policy on the president and the
president's personal guaranty. In June 1997, the line-of-credit agreement was
extended to June of 1999. At September 30, 1997, there was an outstanding draw
against this line of credit in the amount of $400,000, which is due and payable
within one year.
The line-of-credit agreement with the bank contains various covenants
pertaining to working capital, certain financial ratios and net worth. At
September 30, 1997, the Company was in compliance with all such covenants.
Long-Term Debt
Long-term debt consists primarily of capital leases for the purchase of
vehicles and construction equipment as discussed in Note 6.
The Company has a term note payable with a bank, secured by a Company
vehicle. The principal is payable monthly in the amount of $1,000 plus interest
at 9.75 percent. At December 31, 1996 and September 30, 1997, a balance of
$5,000 and $0 was due and payable within one year, respectively.
11
<PAGE> 13
The Company has an obligation to a related party for the purchase of the
rights to the name "Regional Electric Systems" requiring monthly payments of
principal and interest, at 8.25 percent, of $6,000 through May 1999. At
December 31, 1996 and September 30, 1997, a balance of $60,000 and $63,000 was
due and payable within one year, respectively.
The maturities of the line of credit and long-term debt as of September 30,
1997, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending September 30--
1998................................................ $ 643
1999................................................ 143
2000................................................ 26
-----
$ 812
=====
</TABLE>
6. LEASES:
Obligations Under Capital Leases
The Company leases certain vehicles and construction equipment under leases
classified as capital leases. The construction equipment lease is with an
officer of the Company. The following is a schedule showing the future minimum
lease payments under capital leases by years and the present value of the
minimum lease payments as of September 30, 1997 (in thousands):
<TABLE>
<S> <C>
Year ending September 30--
1998............................................... $ 212
1999............................................... 103
2000............................................... 5
------
Total minimum lease payments............... 320
Less -- Amounts representing interest................ 17
------
Present value of minimum lease payments.... $ 303
======
</TABLE>
Operating Leases
The Company leases a building which is owned by the principal stockholder
of the Company. The lease is classified as an operating lease and expires on
October 31, 1997. The rent paid under this related-party lease was
approximately $156,000, $156,000, $156,000 and $57,000 for the years ended
December 31, 1995, 1996 and September 30, 1997 and for the period from October
1, 1997 through January 30, 1998, respectively. The Company also leases a
building which is owned by an officer of the Company. This lease commenced
during 1996. The lease is classified as an operating lease and expires on May
31, 1999. The Company has an option to renew the lease for one additional
two-year term at a reduced lease rate. The rent paid under this related-party
lease was approximately $60,000 for the year ended September 30, 1997. The
Company also rents certain office equipment and warehouse space under several
operating lease agreements which vary in length and terms. The rent paid under
these lease agreements was approximately $8,000, $45,000, $49,000 and $20,000
for the years ended December 31, 1995, 1996 and September 30, 1997 and for the
period from October 1, 1997 through January 30, 1998, respectively.
Future minimum lease payments under these noncancelable operating leases
are as follows (in thousands):
<TABLE>
<S> <C>
Year Ended September 30--
1998............................................ $ 138
1999............................................ 67
2000............................................ 38
Thereafter...................................... 71
-----
$ 314
=====
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
The Company has entered into operating and capital lease transactions with
related parties as discussed
12
<PAGE> 14
in Note 6.
CIMA Services, Inc. (CIMA) and RES are related parties due to the ownership
by the Company's president of 49% and 1%, respectively, of these companies'
capital stock.
The related-party transactions and balances are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
Accounts receivable from CIMA ....................... $ 2 $ 208 $ 632
Accounts receivable from sale of subsidiary stock.... -- -- 71
Interest receivable from CIMA and officer ........... 1 -- --
Accounts payable to CIMA ............................ 23 633 --
Contract revenues from CIMA ......................... 1,116 1,257 1,368
Purchases of material from CIMA ..................... 812 1,080 2,062
Interest income received from CIMA and officers...... 38 14 1
Minority interest in net income of RES .............. -- 3 (2)
Liability attributable to minority interest ......... -- 3 75
Capital lease obligation to an officer of RES ....... -- 116 82
Payments under capital lease obligation with
an officer of RES .................................. -- 31 54
Payments under operating leases with officers
of the Company ...................................... 26 232 270
</TABLE>
Contract revenues from CIMA were approximately $250,000 and payments under
operating leases with officers of the Company were approximately $78,000 for
the period from October 1, 1997 through January 30, 1998. Additionally, the
Company has guaranteed an officer note at a bank with an outstanding balance of
approximately $125,000 at September 30, 1997. The Company's property and
equipment has been cross-pledged as collateral.
8. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit-sharing plan that covers all
employees meeting certain age and service requirements. Company contributions
to the plan are at the discretion of the board of directors. Contributions to
the plan charged to operations in 1994, 1995, 1996 and the year ended September
30, 1997 and for the period from October 1, 1997 through January 30, 1998 were
$186,000, $450,000, $789,000, $789,000 and $275,000, respectively.
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit, notes payable and
long-term debt. The Company believes that the carrying values of these
instruments on the accompanying consolidated balance sheets approximates their
fair values.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's consolidated
financial position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including workers'
compensation, business auto liability, commercial general liability, property
and an umbrella policy. The Company has not incurred significant uninsured
losses on any of these items.
11. MAJOR CUSTOMERS AND RISK CONCENTRATION:
13
<PAGE> 15
The Company had sales greater than 10 percent of total sales to three major
customers (comprising approximately 20%, 12% and 11% of total sales), two major
customers (comprising approximately 15% and 13% of total sales), two major
customers (comprising approximately 20% and 18% of total sales) and one major
customer (comprising approximately 32% of total sales) during the years ended
December 31, 1994, 1995, 1996 and September 1997, respectively. The Company did
not have sales greater than 10 percent of total sales to any one customer
during the period from October 1, 1997 through January 30, 1998.
In addition, the Company grants credit, generally without collateral, to
its customers, which are usually general contractors located primarily in the
Dallas-Fort Worth, Texas area. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors
within the Dallas-Fort Worth, Texas, area. However, management believes that
its contract acceptance, billing and collection policies are adequate to
minimize the potential credit risk.
Cash and Cash Equivalents
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
12. BACKCHARGE CLAIMS:
It is the Company's policy to recognize income from backcharge claims only
when a definitive agreement has been reached and collection is reasonably
assured. In December 1996, the Company reached a settlement on one of its
backcharge claims related to prior periods for approximately $856,000 which is
reflected in the accompanying consolidated statement of operations for the year
ended December 31, 1996, as an increase in revenues and as a component of other
receivables in the accompanying consolidated balance sheet at December 31,
1996. This amount was collected in 1997.
14
<PAGE> 16
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
DAVIS ELECTRICAL CONSTRUCTORS, INC.
Greenville, South Carolina
We have audited the accompanying balance sheet of DAVIS ELECTRICAL
CONSTRUCTORS, INC. as of September 30, 1997 and 1996, and the related
statements of income and retained earnings and cash flows for each of the three
years in the period ended September 30, 1997. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits 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 DAVIS ELECTRICAL
CONSTRUCTORS, INC. as of September 30, 1997 and 1996, and the results of its
operations and its cash flows for each of the three years in the period ended
September 30, 1997, in conformity with generally accepted accounting
principles.
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
December 2, 1997
15
<PAGE> 17
DAVIS ELECTRICAL CONSTRUCTORS, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
1996 1997 1998
-------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 5,338 $ 6,203 $ 3,652
Accounts receivable 14,139 11,079 10,240
Costs and estimated earnings in excess of billings
on uncompleted contracts 581 769 2,459
Other assets 71 86 54
-------- -------- --------
Total current assets 20,129 18,137 16,405
PROPERTY AND EQUIPMENT 1,496 1,320 1,171
OTHER ASSETS
Cash value of life insurance 2,119 2,373 2,529
Deposit 393 771 771
Other assets 328 312 312
-------- -------- --------
2,840 3,456 3,612
-------- -------- --------
$ 24,465 $ 22,913 $ 21,188
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,450 $ 872 $ 1,434
Dividends payable 2,598 3,572 --
Accrued salaries and wages 1,324 2,142 1,089
Billings in excess of costs and estimated earnings
on uncompleted contracts 3,711 1,130 360
Accrued expenses and other liabilities 1,853 1,851 1,843
-------- -------- --------
Total current liabilities 10,936 9,567 4,726
DEFERRED COMPENSATION 2,539 2,742 2,907
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share; authorized
500,000 shares; issued and outstanding 62,500 shares 62 62 62
Additional paid-in capital 130 130 130
Retained earnings 10,798 10,412 13,363
-------- -------- --------
10,990 10,604 13,555
-------- -------- --------
$ 24,465 $ 22,913 $ 21,188
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
16
<PAGE> 18
DAVIS ELECTRICAL CONSTRUCTORS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
--------------------------------------------- ---------------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUE EARNED $ 81,065 $ 92,974 $ 100,020 $ 78,808 $ 64,756
COSTS OF EARNED REVENUE 69,003 76,923 82,101 64,982 56,653
--------- --------- --------- --------- ---------
Gross profit 12,062 16,051 17,919 13,826 8,103
GENERAL AND ADMINISTRATIVE EXPENSES 8,677 12,890 14,196 5,962 5,254
--------- --------- --------- --------- ---------
Income from operation 3,385 3,161 3,723 7,864 2,849
OTHER INCOME:
Interest Income 49 166 290 179 102
Interest Expense (24) (22) (2) (1) --
--------- --------- --------- --------- ---------
Pretax Income 3,410 3,305 4,011 8,042 2,951
INCOME TAX PROVISION (Note 9) 1,345 1,010 -- -- --
--------- --------- --------- --------- ---------
Net Income 2,065 2,295 4,011 8,042 2,951
RETAINED EARNINGS, BEGINNING OF YEAR 10,016 12,081 10,798 10,798 10,412
DIVIDENDS -- (3,578) (4,397) (600) --
--------- --------- --------- --------- ---------
RETAINED EARNINGS, END OF YEAR $ 12,081 $ 10,798 $ 10,412 $ 18,240 $ 13,363
========= ========= ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE> 19
DAVIS ELECTRICAL CONSTRUCTORS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 2,065 $ 2,295 $ 4,011
Adjustments to reconcile net income to net cash provided by
operating activities
(Gain) loss on sale of equipment (19) (16) 29
Deferred tax (270) 879
Depreciation 466 590 532
Changes in deferred and accrued amounts
Accounts receivable (2,804) 332 3,061
Costs and estimated earnings in excess of billings on uncompleted (235) 1,053 (188)
contracts
Deposits -- (393) (378)
Other assets 26 (17) --
Accounts payable 299 (1,084) (578)
Dividends payable -- -- (2,598)
Accrued salaries and wages 271 (591) 818
Billings in excess of costs and estimated earnings on uncompleted 32 2,763 (2,581)
contracts
Accrued expenses and other liabilities (120) 209 (2)
Income taxes 285 --
Deferred compensation 713 188 203
------- ------- -------
Net cash provided by operating activities 709 6,208 2,329
------- ------- -------
INVESTING ACTIVITIES
Proceeds from sale of equipment 20 15 18
Purchase of equipment (857) (526) (403)
Increase in cash value of life insurance (224) (240) (254)
Increase in investments and other assets 25 -- --
------- ------- -------
Net cash used for investing activities (1,036) (751) (639)
------- ------- -------
FINANCING ACTIVITIES
Payment of note payable (200) -- --
Dividends -- (980) (825)
------- ------- -------
Net cash used for financing activities (200) (980) (825)
------- ------- -------
Net increase in cash and cash equivalents (527) 4,477 865
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 1,388 861 5,338
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR 861 5,338 6,203
======= ======= =======
CASH PAID FOR
Interest $ 24 $ 22 $ 2
======= ======= =======
Income taxes $ 1,338 $ 365 $ --
======= ======= =======
<CAPTION>
NINE MONTHS ENDED
JUNE 30,
-----------------------
1997 1998
------- -------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 8,042 $ 2,951
Adjustments to reconcile net income to net cash provided by
operating activities
(Gain) loss on sale of equipment -- --
Deferred tax
Depreciation 266 267
Changes in deferred and accrued amounts
Accounts receivable 3,033 839
Costs and estimated earnings in excess of billings on uncompleted (834) (1,690)
contracts
Deposits 20 32
Other assets (378) --
Accounts payable (937) 562
Dividends payable (2,598) (3,572)
Accrued salaries and wages (183) (1,053)
Billings in excess of costs and estimated earnings on uncompleted (2,469) (770)
contracts
Accrued expenses and other liabilities 221 (8)
Income taxes
Deferred compensation 152 165
------- -------
Net cash provided by operating activities 4,335 (2,277)
------- -------
INVESTING ACTIVITIES
Proceeds from sale of equipment -- --
Purchase of equipment (269) (118)
Increase in cash value of life insurance (166) (156)
Increase in investments and other assets -- --
------- -------
Net cash used for investing activities (435) (274)
------- -------
FINANCING ACTIVITIES
Payment of note payable -- --
Dividends (600) --
------- -------
Net cash used for financing activities (600) --
------- -------
Net increase in cash and cash equivalents 3,300 (2,551)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,338 6,203
------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR 8,638 3,652
======= =======
CASH PAID FOR
Interest $ 1 $ --
======= =======
Income taxes $ -- $ --
======= =======
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES
The Company accrued $3,571,483 in 1997 and $2,598,000 in 1996,
for dividends on common stock.
The accompanying notes are an integral part of these
financial statements.
18
<PAGE> 20
DAVIS ELECTRICAL CONSTRUCTORS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND ACTIVITIES
The Company is a national industrial electrical contractor. The Company
extends credit to its customers who are concentrated primarily in the
Southeastern region of the United States. The home office is located in
Greenville, South Carolina with branch offices in Midland, Michigan operating
as Davis Constructors Division and in Baton Rouge, Louisiana operating as Davis
International Division.
In September, 1998, the Company and its stockholders entered into a
definitive agreement with Integrated Electrical Services, Inc. (IES), pursuant
to which all outstanding shares of Company's common stock was exchanged for
cash and shares of IES common stock. In addition, the key executives of the
Company entered into employment agreements with the Company and IES which have
an initial term of three to five years, and generally restrict the disclosure
of confidential information as well as restrict competition with the Company
and IES for a period of two years following termination of employment.
Interim Financial Information
The interim financial statements for the nine months ended June 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.
Revenue And Cost Recognition
The Company reports contract revenues from firm-price and guaranteed
maximum contracts on the percentage-of-completion method, measured by
the percentage of costs incurred to date, to the total estimated costs
for each contract. Revisions in contract revenues and cost estimates
are reflected in the period in which the facts that require the
revisions become known. Revenues from cost-plus-percentage and
cost-plus-fixed fee contracts are reported as the costs are incurred.
Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses become known.
Contract costs include all direct material, labor and sub-contract costs
and those indirect costs related to contract performance, such as
indirect labor, equipment repairs, equipment rent, tools and supplies.
General and administrative costs are charged to expense as incurred.
Property And Equipment
Property and equipment, including permanent improvements to existing
facilities, are carried at cost. Maintenance, repairs and other
expenses not resulting in improvements are charged to expense as
incurred. Depreciation is calculated using accelerated methods over the
estimated useful lives of the respective assets.
Income Taxes
The Company, with the consent of its stockholders, has elected to be
taxed as an S corporation effective October 1, 1995. Earnings and
losses after that date are included in the personal income tax returns
of the stockholders. Accordingly, the Company will not incur income tax
obligations, and
19
<PAGE> 21
the financial statements will not include a provision for income taxes,
except for provision of taxes in those states that do not recognize the
S corporation election.
Cash And Cash Equivalents
For purposes of reporting cash flows, the Company considers all liquid,
nonequity investments with an original maturity of three months or less
to be cash equivalents. The Company places its temporary cash
investments with high credit quality financial institutions. At times
such investments may be in excess of the FDIC insurance limits.
Estimates
The financial statements include estimates and assumptions that affect
the Company's financial position and results of operations and
disclosure of contingent assets and liabilities. Actual results could
differ from these estimates.
NOTE 2 - ACCOUNTS RECEIVABLE
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
------ ------
<S> <C> <C>
The following summarizes accounts receivable:
Contract receivables 12,920 9,517
Contract retainages 1,081 1,432
Officers and employees 138 130
------ ------
14,139 11,079
====== ======
</TABLE>
NOTE 3 - CONTRACTS IN PROGRESS
<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------------
1996 1997
-------- --------
<S> <C> <C>
The following summarizes uncompleted contracts:
Firm price contracts
Costs $ 8,414 $ 23,159
Estimated earnings 2,127 6,322
-------- --------
10,541 29,481
Less billings 14,118 30,213
-------- --------
(3,577) (732)
Unbilled costs on cost-plus contracts 447 371
-------- --------
$ (3,130) $ (361)
======== ========
Included in current assets as:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 581 $ 769
Included in current liabilities as:
Billings in excess of costs and estimated
earnings on uncompleted contracts 3,711 1,130
-------- --------
$ (3,130) $ (361)
======== ========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at September 30 consists of the following:
<TABLE>
<CAPTION>
1996 1997
------------------------------- -------------------------------
ACCUMULATED ACCUMULATED
COST DEPRECIATION NET COST DEPRECIATION NET
----- ------------ --- ----- ------------ ---
<S> <C> <C> <C> <C> <C> <C>
Automobiles and trucks 1,170 562 608 1,359 739 620
Construction and related equipment 2,260 1,594 666 2,357 1,828 529
Office furniture and equipment 795 612 183 818 689 129
Leasehold improvements 255 216 39 273 231 42
----- ----- ----- ----- ----- -----
4,480 2,984 1,496 4,807 3,487 1,320
===== ===== ===== ===== ===== =====
</TABLE>
NOTE 5 - NOTE PAYABLE
The Company has an unsecured $4,000,000 line of credit with a bank which is
partially guaranteed by
20
<PAGE> 22
the majority stockholder of the Company with his guaranty limited to
$2,000,000. The line bears interest at Libor plus 185 basis points and expires
January 28, 1998. At September 30, 1997, $1,300,000 of the line has been used
under letters of credit which expire March 1, 1998 and April 1, 1998, leaving
$2,700,000 available for additional draws. At September 30, 1996, $1,250,000 of
the line has been used under letters of credit which expire March 1, 1997 and
April 1, 1997, leaving $2,750,000 available for additional draws. Letters of
credit issued in connection with the lines of credit are secured by the cash
surrender value of life insurance on the life of the majority stockholder of
the Company. The provisions of the lines of credit contain various covenants
requiring the Company to maintain certain ratios and to perform or not perform
other actions. At September 30, 1997 and 1996, the Company was in compliance
with these provisions.
NOTE 6 - ACCRUED EXPENSES AND OTHER LIABILITIES
<TABLE>
<CAPTION>
SEPTEMBER 30
--------------------
1996 1997
------ ------
<S> <C> <C>
Accrued expenses and other liabilities are summarized as follows:
Payroll taxes withheld and accrued $ 599 $ 655
Workers' compensation and general liability insurance 1,005 829
State sales and use tax 37 27
Other liabilities 212 340
------ ------
$1,853 $1,851
====== ======
</TABLE>
NOTE 7 - EMPLOYEE BENEFITS
The Company provides deferred compensation to key employees under the Davis
Electrical Constructors, Inc. Incentive Plan. The plan provides for the award
of units to participants that are equivalent in value to one share of the
Company's stock at book value. Effective October 1, 1996, the Company elected
to suspend the Davis Electrical Constructors, Inc. Incentive Plan. The effect
of this election was to cease the appreciation in the book value of the unit as
compared to the initial value per unit defined by the plan on the date of
award. All other terms of the plan are still in effect. The present value of
deferred compensation under the plan since inception is computed as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30
1996 1997
------ ------
<S> <C> <C>
Deferred compensation from appreciation of units awarded to $5,277 $5,277
participants
Discounted at 8 percent for the time value of money
until the dates of estimated future payouts 2,738 $2,535
------ ------
Present value of deferred compensation $2,539 $2,742
====== ======
</TABLE>
For the years ended September 30, 1997 and 1996, $203,550 and $188,047 was
charged to operations under the Plan, respectively. The compensation deferred
under the plan is currently 60 percent vested to the participants. Vesting
under the plan begins after the fifth year of participation and increases
twenty percent per year until fully vested. Provisions for full vesting of
benefits under the plan are also provided upon the death or disability of the
participant, termination of the plan and certain other events related to the
majority stockholder.
The participants shall receive payment of plan benefits upon termination of
employment or upon specific actions by the board of directors. Upon termination
of a participant's employment, the participant shall receive payment of the
value of his share units over such period of time (not to exceed ten years) as
the board shall determine in its absolute discretion.
The Company also provides an executive bonus plan whereby the Company shall
pay bonuses for each fiscal year to each identified executive in an amount
equal to a specified percentage of Company's net profits for such fiscal year.
21
<PAGE> 23
NOTE 8 - LEASE COMMITMENTS
At September 30, 1997 and 1996, the Company was obligated under several
non-cancelable operating leases on certain property and equipment that had an
initial or remaining term of more than one year. Lease payments charged to
operations under such leases were approximately $551,745 for the year ended
September 30, 1997 and $558,000 for the year ended September 30, 1996,
respectively. Future minimum lease payments under such operating leases that
have initial or non-cancelable terms in excess of one year are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
------------------
<S> <C>
1998 371
1999 167
2000 138
2001 90
2002 and thereafter 315
-----
1,081
=====
</TABLE>
NOTE 9 - INCOME TAXES
The provision for income taxes for the year ended September 30, 1996 and
1995 consists of the following components:
<TABLE>
<CAPTION>
1995 1996
------- -------
<S> <C> <C>
State income taxes currently payable $ 1,615 $ 132
Deferred tax benefit (270) --
Reversal of prior years' deferred tax asset -- 878
------- -------
Total $ 1,345 $ 1,010
======= =======
</TABLE>
As discussed in Note 1, the Company has elected S corporation status
effective as of October 1, 1995. Accordingly, the deferred tax asset of
$878,593 as of the date the election for the change was filed has been
eliminated through the deferred tax provision.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
The Company is self insured on major medical coverage which it provides to
its employees. Specific and aggregate excess reinsurance is carried by the
Company to limit potential costs under the self insured plan. Amounts due for
claims submitted by covered employees and the related charges to operations are
accounted for in the period the underlying occurrence or incident for the claim
occurs. Claims payable are processed by an administrator designated by the
Company.
The Company is insured for workers compensation claims in certain states
under policies with high deductible provisions generally totaling $250,000 per
incident. Specific and aggregate excess reinsurance is carried by the Company
to limit potential costs.
NOTE 11 - RELATED PARTY TRANSACTIONS
The Company leases offices, warehouses and certain equipment from
stockholders and partnerships in which the stockholders are partners. For the
years ended September 30, 1997 and 1996, approximately $630,556 and $422,000
was charged to operations under such operating leases, respectively.
NOTE 12 - MAJOR CUSTOMERS AND RISK CONCENTRATION
The Company had sales of approximately 27.9 percent of total sales to two
major customers during 1997. In addition, the Company grants credit, generally
without collateral, to its customers, which are general contractors in the
industrial construction markets. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors
within the industrial construction
22
<PAGE> 24
markets. However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
23
<PAGE> 25
ITEM 7. EXHIBITS
(C) EXHIBITS
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Elliott, Davis & Company, LLP
<PAGE> 26
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: May 6, 1999
<PAGE> 27
EXHIBIT INDEX
23.1 Consent of Arthur Andersen, LLP
23.2 Consent of Elliott, Davis & Company, LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report on the financial statements of Mills Electrical Contractors, Inc. dated
September 11, 1998 in this Current Report on Form 8-K of Integrated Electrical
Services, Inc. and to the incorporation by reference of said report into
Integrated Electrical Services, Inc.'s previously filed Registration Statements
on Form S-8 (File Nos. 333-67113, 333-45447 and 333-45449) and on the
previously filed post effective amendment No. 5 to Form S-1 on Form S-4 (File
No. 333-50031).
/s/ ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Houston, Texas
MAY 6, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
AS INDEPENDENT PUBLIC ACCOUNTANTS, WE HEREBY CONSENT TO THE
INCORPORATION OF OUR REPORT, DATED DECEMBER 2, 1997, ON THE FINANCIAL STATEMENTS
OF DAVIS ELECTRICAL CONSTRUCTORS, 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), AND ON PREVIOUSLY
FILED POST EFFECTIVE AMENDMENT NO. 5 TO FORM S-1 ON FORM S-4 (FILE NO.
333-50031).
ELLIOTT, DAVIS & COMPANY, L.L.P.
GREENVILLE, SOUTH CAROLINA
MAY 5, 1999
