UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: October 24, 2003
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)
1800 West Loop South
Suite 500
Houston, Texas 77027-3233
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 860-1500
EXPLANATORY NOTE
This report is being filed to correct an error in the audited balance
sheets of Encompass Electrical Technologies, - Rocky Mountains, Inc. d/b/a
Riviera Electric, Inc. and correct the pro forma financial statements.
ITEM 5. OTHER EVENTS
Integrated Electrical Services, Inc., a Delaware corporation (the
"Company") is the largest provider of electrical contracting services in the
United States, providing a broad range of services including designing, building
and maintaining electrical, low voltage and utilities systems for the commercial
and industrial, residential, low voltage and service and maintenance markets.
On February 27, 2003, the Company consummated the acquisition of the
assets of Encompass Electrical Technologies - Rocky Mountains, Inc. d/b/a
Riviera Electric, Inc. ("Riviera"). Riviera performs electrical contracting
services primarily in Denver, Colorado, and has locations throughout the state.
In connection with the acquisition of Riviera and to comply with the
disclosure requirements of the Securities and Exchange Commission regarding the
financial statements of the business acquired, the Company is filing this
Current Report containing the following audited financial statements and
unaudited pro forma financial statements.
(a) Financial Statements of Business Acquired
See Pages 3 through 20
(b) Pro Forma Financial Statements
See Pages 21 through 24
2
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND
EXHIBITS
(A) FINANCIAL STATEMENTS OF BUSINESS ACQUIRED
INDEPENDENT AUDITOR'S REPORT
Integrated Electrical Services, Inc.
Houston, Texas
We have audited the accompanying balance sheets of Encompass Electrical
Technologies - Rocky Mountains, Inc. d/b/a Riviera Electric, Inc. (a
Colorado corporation) as of December 31, 2002 and 2001, and the related
statements of operations, changes in stockholder's equity and cash
flows for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. 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.
As discussed in Note 2 to the financial statements, the Company sold
substantially all of its operating assets on February 27, 2003. As a
result, the Company has changed its basis of accounting from the going
concern basis to the liquidation basis of accounting as of December 31,
2002. As further discussed in Note 14 to the financial statements, the
Company has restated its December 31, 2002 balance sheet to allocate
the provision for loss on disposal of assets as a result of adopting
the liquidation basis of accounting amongst those operating assets
which were sold. The effect of this restatement had no effect on
previously reported results of operations and cash flows.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Encompass
Electrical Technologies - Rocky Mountains, Inc. d/b/a Riviera Electric,
Inc. as of December 31, 2002 and 2001, and the results of its
operations and its cash flows for the years then ended in conformity
with generally accepted accounting principles.
BROCKMANN, ARMOUR & COMPANY, LLC
Denver, Colorado
May 5, 2003, except for Note 14 as to which the date is October 23,
2003
3
ENCOMPASS ELECTRICAL TECHNOLOGIES, - ROCKY MOUNTAINS, INC.
d/b/a RIVIERA ELECTRIC, INC.
BALANCE SHEETS
DECEMBER 31,
2002 2001
----------- -----------
(Restated)
ASSETS
Current assets:
Cash and cash equivalents $ - $ -
Accounts receivable, net of allowance for doubtful
Accounts of $- and $260,000, respectively -
Uncompleted contracts 8,744,390 7,926,119
Completed contracts 203,314 193,585
Service 2,691,637 3,933,046
Retainage 2,639,264 3,351,061
Employee and other 8,332 20,380
Costs and estimated earnings in excess of billings on
uncompleted contracts 376,731 468,762
Unbilled work-in-process 124,818 512,162
Deferred tax asset, current - 282,000
Other current assets 79,377 54,714
----------- -----------
Total current assets 14,867,863 16,741,829
Property and equipment, net of accumulated
depreciation and amortization 671,829 1,200,930
Other assets:
Goodwill, net of impairment reserve totaling $23,106,875 as of December
31, 2002 and net of accumulated amortization totaling $1,732,661 as
of December 31, 2001, respectively - 21,374,214
Due from parent company, net of impairment reserve
totaling $8,818,913 and $0, respectively - 10,505,838
Other assets 158,856 239,236
----------- -----------
158,856 32,119,288
----------- -----------
Total assets $15,698,548 $50,062,047
=========== ===========
See independent auditor's report and notes to financial statements.
4
ENCOMPASS ELECTRICAL TECHNOLOGIES, - ROCKY MOUNTAINS, INC.
d/b/a RIVIERA ELECTRIC, INC.
BALANCE SHEETS (CONTINUED)
DECEMBER 31,
2002 2001
------------ ------------
(Restated)
LIABILITIES
Current liabilities:
Checks written in excess of cash balance $ 448,718 $ 136,085
Accounts payable -
Trade 4,907,551 4,377,880
Retainage 231,069 68,606
Billings in excess of costs and estimated earnings on
uncompleted contracts 1,513,458 1,485,293
Accrued liabilities -
Salaries, wages and bonuses 3,030,182 3,065,523
Payroll tax, withholdings and other 790,685 726,509
Compensated absences 562,994 495,770
Pension and profit-sharing contributions 63,498 182,515
Reserve for health insurance claims and other 439,393 246,385
------------ ------------
Total current liabilities 11,987,548 10,784,566
Deferred tax liability, non-current 96,000 100,000
STOCKHOLDER'S EQUITY
Common stock, no par value, 1,000 shares authorized,
100 shares issued and outstanding 26,291,479 26,291,479
Retained earnings (accumulated deficit) (22,676,479) 12,886,002
------------ ------------
Total stockholder's equity 3,615,000 39,177,481
------------ ------------
Total Liabilities and Stockholders' Equity $ 15,698,548 $ 50,062,047
============ ============
See independent auditor's report and notes to financial statements.
5
ENCOMPASS ELECTRICAL TECHNOLOGIES, - ROCKY MOUNTAINS, INC.
d/b/a RIVIERA ELECTRIC, INC.
STATEMENTS OF OPERATIONS
DECEMBER 31,
2002 2001
------------ ------------
Revenue:
Contracts $ 64,626,413 $ 59,305,363
Service 19,442,135 22,989,745
------------ ------------
84,068,548 82,295,108
Cost of revenue:
Contracts 52,160,400 45,311,726
Service 16,909,203 18,905,761
------------ ------------
69,069,603 64,217,487
------------ ------------
Gross profit 14,998,945 18,077,621
General and administrative expenses 11,959,415 11,955,519
Provision for loss on disposal of assets 6,846,940 -
Impairment of amounts due from parent company 8,818,913 -
------------ ------------
Income (loss) from operations (12,626,323) 6,122,102
Other income (expense):
Interest income 3,963 21,749
Gain (loss) on disposal of property and equipment 10,161 (151,157)
Other income 104,096 345,748
------------ ------------
118,220 216,340
------------ ------------
Income (loss) before income tax provision and
cumulative effect of change in accounting
principle (12,508,103) 6,338,442
Income tax provision:
Current 1,402,164 2,561,768
Deferred 278,000 34,000
------------ ------------
1,680,164 2,595,768
------------ ------------
Income (loss) before cumulative effect of
change in accounting principle (14,188,267) 3,742,674
Cumulative effect of change in accounting principle,
net of tax 21,374,214 -
------------ ------------
Net income (loss) $(35,562,481) $ 3,742,674
============ ============
See independent auditor's report and notes to financial statements.
6
ENCOMPASS ELECTRICAL TECHNOLOGIES, - ROCKY MOUNTAINS, INC.
d/b/a RIVIERA ELECTRIC, INC.
STATEMENT OF CHANGES IN STOCKHOLDER'S EQUITY
YEARS ENDED DECEMBER 31, 2002 AND 2001
Common Stock
---------------------------
Retained
Shares earnings
issued and (accumulated
outstanding Amount (deficit) Total
------------ ------------ ------------ ------------
Balance, January 1, 2001 100 $ 18,355,324 $ 6,178,958 $ 24,534,282
Increase attributable to merger of
affiliate company - 7,936,155 2,964,370 10,900,525
Net income - - 3,742,674 3,742,674
------------ ------------ ------------ ------------
Balance, December 31, 2001 100 26,291,479 12,886,002 39,177,481
Net loss - - (35,562,481) (35,562,481)
------------ ------------ ------------ ------------
Balance, December 31, 2002 100 $ 26,291,479 $(22,676,479) $ 3,615,000
============ ============ ============ ============
See independent auditor's report and notes to financial statements.
7
ENCOMPASS ELECTRICAL TECHNOLOGIES, - ROCKY MOUNTAINS, INC.
d/b/a RIVIERA ELECTRIC, INC.
STATEMENT OF CASH FLOWS
DECEMBER 31,
2002 2001
------------ ------------
Cash flows from operating activities:
Net income (loss) $(35,562,481) $ 3,742,674
Adjustments to reconcile net income (loss) to net cash
Provided (used) by operating activities -
Depreciation and amortization 348,465 906,000
Provision for allowance for doubtful accounts 140,000 (232,419)
(Gain) loss on disposal of property and equipment (10,161) 151,157
Cumulative effect of change in accounting principle 21,374,214 -
Impairment of amounts due from parent company 8,818,913 -
Provision for loss on disposal of assets 6,846,940 -
Deferred income tax provision 278,000 34,000
(Increase) decrease in -
Accounts receivable (5,234,010) 5,614,417
Costs and estimated earnings in excess of billings
on uncompleted contracts (72,280) (275,262)
Unbilled work-in-progress 332,904 (168,457)
Other current assets (48,189) 41,313
Increase (decrease) in -
Checks written in excess of cash balance 312,633 507,608
Accounts payable 692,134 27,248
Billings in excess of costs and estimated earnings
on uncompleted contracts 28,165 (2,918,251)
Accrued liabilities 170,050 1,240,412
------------ ------------
Net cash provided (used) by operating activities (1,584,703) 8,670,440
Cash flows from investing activities:
Release of restricted cash - 111,543
Proceeds from disposal of property and equipment 12,031 40,573
Purchase of property and equipment (114,253) (394,000)
------------ ------------
Net cash used by investing activities (102,222) (241,884)
Cash flows from financing activities:
Net advances from / (advances to) parent company 1,686,925 (8,428,556)
------------ ------------
Net cash provided (used) by financing activities 1,686,925 (8,428,556)
------------ ------------
Net increase in cash and cash equivalents - -
Cash and cash equivalents, beginning of year - -
------------ ------------
Cash and cash equivalents, end of year $ - $ -
============ ============
See independent auditor's report and notes to financial statements.
8
ENCOMPASS ELECTRICAL TECHNOLOGIES - ROCKY MOUNTAINS, INC.
d/b/a RIVIERA ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. Organization and description of business:
Encompass Electrical Technologies - Rocky Mountains, Inc. d/b/a Riviera
Electric, Inc. (the Company), a wholly owned subsidiary of Encompass
Services Corporation (ESC), is a construction and servicing company
specializing in building and maintaining electrical systems in the
State of Colorado. The Company performs work primarily in the
industrial, commercial and municipal markets.
The Company was incorporated on February 12, 1998, as CCC3 Acquisition
Co., a wholly owned subsidiary of Consolidated Capital Corporation
(CCC), in the State of Colorado. On February 27, 1998, CCC merged with
Riviera Electric Construction Co., where CCC was the surviving
corporation, and in March 1998 took the trade name Riviera Electric,
Inc. On September 15, 1998, CCC changed its name to Building One
Services Corporation (Building One). On February 22, 2000, Building One
merged with Group Maintenance America Corp and changed its name to
Encompass Services Corporation. On March 21, 2001, the Company changed
its name to Encompass Electrical Technologies - Rocky Mountains, Inc.,
d/b/a Riviera Electric, Inc.
The Company's long-term construction contracts are primarily comprised
of fixed-price contracts and cost-plus-a-fee contracts subject to a
guaranteed maximum price. The Company's service contracts are primarily
comprised of fixed-price and time and material contracts. One customer
comprised 17% of contract revenues and two customers comprised 37% of
contract revenues during the years ended December 31, 2002 and 2001,
respectively.
2. Summary of significant accounting policies:
Liquidation basis of accounting
As discussed further in Note 14 to the financial statements, on
February 27, 2003, the Company sold substantially all of its operating
assets and contracts to IES ENC, Inc., a wholly owned subsidiary of
Integrated Electrical Services, Inc. As a result, the Company has
changed its basis of accounting from the going concern basis to the
liquidation basis of accounting as of December 31, 2002. In conjunction
with this change in the Company's basis of accounting, the Company has
recognized a provision for loss on disposal of assets totaling
$6,846,940 to reflect the Company's net assets at a value approximating
the net proceeds received from the sale of the Company.
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
9
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.
Operating cycle
The Company's contracts typically last six months, but occasionally
exceed one year. In accordance with normal construction industry
practice, the Company includes in current assets and current
liabilities certain amounts relating to construction contracts, which
may be realizable and payable over a period in excess of one year.
Accounting for construction contracts and service revenue
Revenues from long-term construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of total
costs incurred to date to estimated total costs for each contract. This
method is used because management considers expected costs to be the
best available measure of progress on these contracts.
Revenues from cost-plus-fee contracts are recognized on the basis of
costs incurred during the period plus the fee earned. Contract costs
include all direct job costs and those indirect costs related to
contract performance, such as indirect labor, payroll taxes and
benefits, supplies, insurance, vehicle expenses, equipment repairs, and
depreciation. General and administrative costs are charged to expense
as incurred.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenue recognized in excess of
billings. The liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts", represents billings in excess of
revenue recognized.
Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job
performance, job conditions, and estimated profitability, including
those arising from final contract settlements, may result in revisions
to costs and income and are recognized in the period in which the
revisions are determined. Profit incentives are included in revenues
when their realization is reasonably assured. An amount equal to
contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
Revenues from service work are recognized on the accrual method,
measured by amounts billed and unbilled work-in-process, which is
comprised of billable hours at stated contractual billing rates plus
reimbursable expenses at stated contractual mark-up rates.
Concentrations of risk
Financial instruments that potentially subject the Company to credit
risk consist principally of cash and cash equivalents and accounts
receivable.
Accounts receivable are concentrated with customers located throughout
Colorado. At December 31, 2002 and 2001, two and three customers
comprised approximately 30% and 43%, respectively of outstanding
accounts receivable. To reduce the credit risk associated with accounts
receivable, the Company routinely files liens and analyzes the
10
credit worthiness of its customers and reviews the funding mechanisms
of municipal projects to protect the Company's interests.
Cash and cash equivalents
The Company includes cash equivalents under the caption cash and cash
equivalents. Cash equivalents include money market funds and other
highly liquid financial instruments with an initial maturity of less
than three months. Checks written in excess of cash balance represents
outstanding checks exceeding the Company's bank balances.
Accounts receivable
Accounts receivable from long-term construction contracts are based on
contract prices. Accounts receivable from service work are based on
contract prices, and consist primarily of groups of small-balance
homogeneous accounts, which are collectively evaluated for impairment.
The Company provides an allowance for doubtful accounts based upon a
review of outstanding receivables, historical collection information,
and existing economic conditions. Contract and service receivables are
due 30 days after the date of the invoice. Retentions receivable are
due 30 days after completion of the project and acceptance by the
owner. Receivables past due more than 180 days are considered
delinquent. Delinquent receivables may be reserved or written-off based
on individual credit evaluation and specific circumstances of each
customer. As of December 31, 2001, the Company has $260,000 reserved as
an allowance for doubtful accounts.
Accounts receivable are stated at their liquidation value as of
December 31, 2002.
Property and equipment
Property and equipment is stated at cost as of December 31, 2001.
Repairs and maintenance of a routine nature are charged to expense as
incurred, while those that improve or extend the life of existing
assets are capitalized. When items of property and equipment are sold
or retired, the related costs and accumulated depreciation are removed
from the accounts and any gain or loss is included in income.
Depreciation is provided on a straight-line basis over the estimated
useful lives of the respective assets. Vehicles, office furniture and
equipment and machinery and equipment are depreciated between 3 and 7
years. Leasehold improvements are depreciated between 5 and 7 years.
Property and equipment is stated at its liquidation value as of
December 31, 2002.
Realization of long-lived assets
In accordance with SFAS No. 21, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", the
Company evaluates the recoverability of property and equipment or other
assets, if facts and circumstances indicate that any of those assets
might be impaired. 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
has occurred. The effect of any
11
impairment would be to expense the difference between the fair value of
such property and its carrying value. As further discussed in Note 14
to the financial statements, the Company has adopted the liquidation
basis of accounting and recorded an impairment reserve pertaining to
property and equipment totaling $293,019.
Fair value of financial instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, amounts due from parent company and accounts
payable. The fair values of these financial instruments approximates
their carrying amounts based on their subsequent liquidation as a
result of the sale of the operating assets of the Company.
Advertising
Advertising costs are charged to expense as incurred and are included
in general and administrative expenses. Advertising expense totaled
$154,945 and $92,300 for the years ended December 31, 2002 and 2001,
respectively.
Income taxes
The current provision for income taxes represents estimated income
taxes currently due. Deferred tax assets and liabilities are recorded
for the estimated future tax effects of temporary differences between
the tax basis of assets and liabilities and amounts reported in the
balance sheets. The overall change in deferred tax assets and
liabilities for the period measures the deferred tax provision for the
period. Effects of changes in enacted tax laws on deferred tax assets
and liabilities are reflected as adjustments to tax expense in the
period of enactment.
3. Goodwill
Effective January 1, 2002, the Company adopted Statement of Accounting
Standards (SFAS), No. 142, "Goodwill and Other Intangible Assets,"
which establishes new accounting and reporting requirements for
goodwill and other intangible assets. Under SFAS No. 142, all goodwill
amortization ceased effective January 1, 2002. Goodwill attributable to
each of the Company's reporting units was tested for impairment by
comparing the fair value of each reporting unit with its carrying
value. Fair value was determined using discounted cash flows, market
multiples and market capitalization as of January 1, 2002. Significant
estimates used in the methodologies include estimates of future cash
flows, future short-term and long-term growth rates, weighted average
cost of capital and estimates of market multiples for each of the
reportable units. These impairment tests are required to be performed
at adoption of SFAS No. 142 and at least annually thereafter or upon
divesture of a reporting unit. The Company determined its investment in
goodwill had become impaired and recorded an impairment charge of
$21,374,214. Under SFAS No. 142, the impairment adjustment recognized
at adoption of the new rules was reflected as a cumulative effect of
change in accounting principle in the Company's statements of
operations. Impairment adjustments recognized after adoption, if any,
generally are required to be recognized as operating expenses.
The audited results of operations presented below for the year ended
December 31, 2002
12
and adjusted results of operations for the year December 31, 2001
reflect the operations of the Company had the Company adopted the
non-amortization provisions of SFAS No. 142 effective January 1, 2001:
2002 2001
------------ ------------
Reported net income (loss) $(35,562,481) $ 3,742,674
Add: Cumulative effect of a change in
accounting principle, net of tax 21,374,214 -
Add: Goodwill amortization, net of tax - 527,538
------------ ------------
Adjusted net income (loss) $(14,188,267) $ 4,270,212
============ ============
4. Property and equipment
Accumulated Net Book
December 31, 2001: Cost Depreciation Value
------------------------------ ----------- ------------ ----------
Vehicles $ 209,871 $ 102,304 $ 107,567
Office furniture and equipment 848,595 443,195 405,400
Machinery and equipment 474,761 197,268 277,493
Leasehold improvements 471,486 61,016 410,470
----------- ------------ ----------
$ 2,004,713 $ 803,783 $1,200,930
=========== ============ ==========
Depreciation expense on property and equipment totaled $348,465 and
$378,462 for the years ended December 31, 2002 and 2001, respectively.
Depreciation expense allocated to cost of contract revenue for the
years ended December 31, 2002 and 2001, totaled $111,938 and $122,098,
respectively.
As discussed further in Note 14, the Company has adopted the
liquidation basis of accounting. Property and equipment has been stated
its liquidation value as of December 31, 2002.
5. Income taxes
The Company accounts for income taxes under the provisions of Statement
of Financial Accounting Standards (SFAS) No. 109, "Accounting for
Income Taxes", which establishes accounting and reporting standards for
recognizing the tax effects of differences between the tax basis of
assets and liabilities and their reported amounts in the financial
statements.
The Company has an informal tax sharing agreement with ESC under which
the Company incurs income tax expense (benefit) for taxes computed as
if the Company were a separate entity. The Company recognizes an asset
or liability to ESC in the amount of current income taxes and records
deferred taxes calculated pursuant to the rules of SFAS No. 109.
13
During the years ended December 31, 2002 and 2001, the Company provided
for income tax expense at a combined Federal and state rate of 37.5%. A
reconciliation between the reported provision for income taxes and the
expected amounts computed by applying the statutory Federal income tax
rate of 34% to earnings before income taxes is as follows for the years
ended December 31, 2002 and 2001:
2002 2001
----------- -----------
Expected tax expense (benefit) $(4,252,755) $ 2,155,070
State income taxes, net of federal benefit (579,125) 293,470
Permanent differences and other 6,512,044 147,228
----------- -----------
Total provision for income taxes $ 1,680,164 $ 2,595,768
=========== ===========
Permanent differences are primarily attributable to the
non-deductibility of the provision for loss on disposal of assets and
impairment of amounts due from ESC.
The provision for income taxes for the years ended December 31, 2002
and 2001 consists of the following:
2002 2001
---------- ----------
Current $1,402,164 $2,561,768
Deferred 278,000 34,000
---------- ----------
$1,680,164 $2,595,768
========== ==========
The deferred income tax (expense) for the years ended December 31, 2002
and 2001, results from the following:
2002 2001
----------- -----------
Differences between financial and tax reporting:
Allowance for doubtful accounts $ 52,500 $ (87,157)
Accrued compensated absences 25,209 62,484
Accrued reserve for health insurance
Claims 74,473 63,294
Contracts less then 10% complete 66,966 (37,135)
Provision for loss on disposal of assets 2,567,603 -
Depreciation 4,173 (36,562)
Increase in valuation allowance (3,068,000) -
Other (924) 1,076
----------- -----------
$ (278,000) $ (34,000)
=========== ===========
The net deferred tax asset (liability) consists of the following as of
December 31:
2002 2001
--------- ---------
Current $ - $ 282,000
Non-current (96,000) (100,000)
--------- ---------
$ (96,000) $ 182,000
========= =========
14
Following are the components of the net deferred tax assets
(liabilities) as of December 31:
2002 2001
----------- -----------
Deferred tax assets:
Allowance for doubtful accounts $ 150,000 $ 97,500
Accrued compensated absences 211,123 185,914
Accrued reserve for health insurance
Claims 137,768 63,295
Provision for loss on disposal of assets 2,567,603 -
Other 1,506 3,053
----------- -----------
3,068,000 349,762
Less valuation allowance (3,068,000) -
----------- -----------
Total deferred tax asset - 349,762
Deferred tax liabilities
Contracts less than 10% complete - (66,966)
Depreciation (96,000) (100,796)
----------- -----------
Total deferred tax liabilities (96,000) (167,762)
----------- -----------
Net deferred tax assets (liabilities) $ (96,000) $ 182,000
=========== ===========
A valuation allowance has been provided at December 31, 2002, as the
benefits of the deferred tax asset will accrue to the benefit of ESC
upon their recognition, the benefit of which is not anticipated to be
reimbursed to the Company.
6. Contracts in progress
Year ended December 31,
-----------------------------
2002 2001
Total contracts $ 86,574,545 $ 101,775,147
Estimated costs:
Costs to date 53,084,473 42,588,617
Costs to complete 16,525,986 37,085,987
------------- -------------
Total estimated costs 69,610,459 79,674,604
------------- -------------
Estimated gross profit $ 16,964,086 $ 22,100,543
============= =============
Amount billed to date $ 67,042,598 $ 55,152,521
Cost and estimated earnings in excess of billings on
uncompleted contracts 541,042 468,762
Billings in excess of costs and estimated earnings on
uncompleted contracts (1,513,458) (1,485,293)
------------- -------------
Contract revenue earned 66,070,182 54,135,990
Costs to date 53,084,473 42,588,617
------------- -------------
Gross profit earned $ 12,985,709 $ 11,547,373
============= =============
15
Cost and estimated earnings in excess of billings on uncompleted
contracts are reported in the accompanying financial statements as of
December 31, 2002:
Cost and estimated earnings in excess of billings on
uncompleted contracts $ 541,042
Less provision for loss on disposal of assets (164,311)
---------
$ 376,731
=========
7. Backlog
The following is a reconciliation of backlog representing unearned
contract revenue on signed contracts:
December 31,
------------------------------
2002 2001
------------- -------------
Balance, January 1, $ 47,639,157 $ 36,408,843
New contracts 33,719,896 63,310,660
Contract adjustments 3,771,723 7,225,017
------------- -------------
85,130,776 106,944,520
Less contract revenue earned (64,626,413) (59,305,363)
------------- -------------
Balance, December 31, $ 20,504,363 $ 47,639,157
============= =============
8. Operating leases
The Company leases certain vehicles under master lease agreements
originated by ESC on behalf of the Company and office equipment,
storage, job site housing and office facilities under various operating
lease agreements with initial terms ranging from 30 to 84 months that
expire through March 2008. Future minimum lease payments under
operating lease arrangements as of December 31, 2002 are as follows:
Year ending
December 31,
-----------
2003 $ 1,569,570
2004 1,313,521
2005 1,182,819
2006 795,431
2007 649,083
Thereafter 41,790
-----------
$ 5,552,214
===========
Rent expense under such operating lease arrangements for the years
ended December 31, 2002 and 2001 totaled $1,598,198 and $1,499,789,
respectively, which is included in general and administrative expense
and costs of contract revenue. These leases were assumed by IES, ENC
upon the sale of the Company as discussed in Note 14.
9. Profit Sharing Plan / 401(k) plan
ESC maintains a group profit sharing/401(k) plan covering all full-time
employees who have been employed by the Company for more than three
months. Under the plan,
16
employees may make before-tax contributions ranging from 0% to 15%,
subject to certain other limitations. Employer contributions are made
at a rate of 50% of pre-tax earnings, up to a maximum of 6% of eligible
earnings. Employees are fully vested in their individual contributions
immediately and fully vested in Company contributions after one year of
employment. For plan years ended December 31, 2002 and 2001, matching
contributions to the group plan made by the Company totaled $494,636
and $493,138, respectively.
10. Related party transactions
The Company subcontracted to other divisions of ESC as well as provided
electrical services for other divisions of ESC. ESC also provided group
health, general liability, worker's compensation and casualty
insurance, a group 401(k) plan and surety bonds for its divisions. The
following is a list of related party transactions with ESC and other
divisions of ESC as of or for the years ended December 31:
2002 2001
---------- ----------
Accounts receivable $ 526,376 $ 490,709
Retention receivable 112,854 2,580
Accounts payable 940,900 7,499
Retention payable 158,716 876
Management fees paid to ESC 3,023,609 2,752,334
Insurance premiums paid to ESC 1,862,811 1,558,536
401 (k) remittances 2,091,140 2,082,950
Surety bonds 80,497 158,453
Intercompany revenues earned 3,069,121 2,350,918
Intercompany subcontract costs incurred 2,160,493 106,112
As of December 31, 2002, the Company has impaired the net intercompany
balance due from ESC totaling $8,818,913 as ESC is in Chapter 11
reorganization and this amount was not satisfied as a result of the
sale of substantially all of the operating assets of the Company (see
Note 14).
11. Merger
Effective March 22, 2001, the Company and Zwart, Inc. d/b/a Mountain
View Electric (MVE), a wholly owned subsidiary of ESC, entered into a
merger agreement to combine the operations of the two companies.
Subsequent to the merger, the Company dissolved MVE.
12. Partial self-insurance plan
ESC provides a group health insurance plan providing medical benefits
to eligible employees of the Company under a partially self-insured
plan (the "Plan"). Under the Plan, the Company pays for all claims less
than $75,000 per year, per plan member, with a third-party insurance
carrier providing for "stop loss" insurance on claims in excess of this
amount. The Plan is administered by a third-party administrator. The
Company reserves amounts each month for estimated claims incurred but
not reported (payable by the Company) based on administrator provided
estimates. Reserves as of December 31,
17
2002 and 2001 total $367,000 and $135,000, which are included on the
accompanying balance sheets under the caption "Reserve for health
insurance claims and other". Claims and administrative fees paid during
the years ended December 31, 2002 and 2001 totaled $3,000,047 and
$3,104,801, respectively.
13. Cash flows
During the year ended December 31, 2001, the Company had non-cash
operating, investing and financing activities resulting from its merger
with MVE on March 22, 2001 as follows:
Net cash received in merger $ 139,515
Accounts receivable and other current assets 2,398,486
Receivable from ESC 1,249,736
Cost and estimated earnings in excess of billings on
uncompleted contracts 75,495
Unbilled work-in-process 65,786
Property and equipment, net of accumulated depreciation 122,470
totaling $63,167
Goodwill, net of accumulated amortization totaling $304,806 8,211,495
Accounts payable (480,894)
Accrued liabilities (203,107)
Billings in excess of costs and estimated earnings on
uncompleted contracts (678,457)
Common Stock (7,936,155)
Retained earnings (2,964,370)
18
14. Adjustments of historical values / Restatement of balance sheet
On February 27, 2003, the Company sold all of its operating assets and
contracts to IES ENC, Inc., a wholly owned subsidiary of Integrated
Electrical Services, Inc., for $3,850,000 less a final purchase price
adjustment of approximately $235,000, for a net total of approximately
$3,615,000 plus assumed liabilities. Effective with the decision to
liquidate the assets of the Company, the carrying amounts of assets and
liabilities were adjusted from their historical bases to the amounts of
cash expected from their realization and settlement. The initial
adjustment decreased net assets by $6,846,940 from $22,545,448 to
$15,698,548, as follows:
Estimated
Liquidation/Settlement
Historical Basis Value
---------------- ----------------------
Accounts receivable $ 20,518,200 $ 14,286,937
Costs and estimated earnings in
excess of billings on
uncompleted contracts 541,042 376,731
Unbilled work in process 179,258 124,818
Other current assets 113,998 79,377
Vehicles 66,024 45,973
Office furniture and equipment 338,164 235,465
Machinery and equipment 205,228 142,901
Leasehold improvements 355,432 247,490
Other assets 228,142 158,856
Checks written in excess of cash balance (448,718) (448,718)
Accounts payable (5,138,620) (5,138,620)
Billings in excess of costs and estimated
earnings on uncompleted contracts (1,513,458) (1,513,458)
Accrued liabilities (4,886,752) (4,886,752)
Deferred tax liability, non-current (96,000) (96,000)
------------ ------------
$ 10,461,940 $ 3,615,000
============ ============
In the Company's previously issued financial statements, the Company had not
adjusted the individual historical carrying amounts of assets and liabilities to
their respective realization/settlement values, but had merely provided a
provision for loss on disposal of assets in the amount of $6,846,940. The
accompanying restated December 31, 2002 balance sheet allocates this provision
amongst the respective assets and liabilities. The restatement had no effect on
the previously reported results of operations and cash flows.
15. Commitments and contingencies
The Company engages in cost-plus-a-fee contracts subject to guaranteed
maximum price provisions. These contracts have specific definitions for
cost and are subject to audit provisions by the owners or general
contractors. No determination has been made as to the impact, if any,
an audit of the underlying costs would have on the Company's financial
position or results of operations. Currently, none of the Company's
contracts are under audit.
The Company is occasionally engaged in legal matters, which arise in
the ordinary course of business. Management intends to vigorously
defend such matters. Management does
19
not believe that the disputes will have a material adverse impact on
the results of operations or financial position of the Company.
The Company had pledged its operating assets and as of December 31,
2002 and 2001 was a guarantor of various debt obligations of ESC.
20
(B) PRO FORMA FINANCIAL INFORMATION
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The unaudited pro forma statements of operations for the year ended
September 30, 2002, presents the statement of operations data to give effect to
the acquisition by Integrated Electrical Services, Inc. ("IES"), of Riviera
Electric, Inc. as if it had occurred on October 1, 2001. The unaudited pro forma
statements of operations for the six months ended March 31, 2003, presents the
statement of operations data to give effect to the acquisition by Integrated
Electrical Services, Inc., of Riviera Electric, Inc. (the "Company") as if it
had occurred on October 1, 2002.
IES has analyzed the savings that it expects to realize from reductions
in administrative bonuses on plans that will not continue and management charges
and has reflected these savings in the unaudited pro forma statements of
operations.
Certain pro forma adjustments are based on preliminary estimates,
available information and certain assumptions that IES management deems
appropriate and may be revised as additional information becomes available. The
pro forma financial data do not purport to represent what IES's combined results
of operations would actually have been if such transactions in fact had occurred
on this date and are not necessarily representative of IES's combined financial
position or results of operations for any future period. Since the acquired
entity was not under common control or management prior to its acquisition by
IES, historical combined results may not be comparable to, or indicative of,
future performance. The unaudited pro forma combined financial statements should
be read in conjunction with the historical consolidated financial statements and
notes thereto included in the company's Annual Report for the year ended
September 30, 2002 filed on Form 10-K. See also "Risk Factors" included
elsewhere therein.
21
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)
RIVIERA
IES AND RIVIERA PRO FORMA PRO FORMA PRO FORMA
SUBSIDIARIES ELECTRIC, INC. ADJUSTMENTS ADJUSTED TOTAL
------------ ------------- ----------- ---------- ----------
REVENUES ..................................... $1,475,430 $ 84,069 $ - $ 84,069 $1,559,499
COST OF SERVICES ............................. 1,253,844 69,070 - 69,070 1,322,914
---------- ------------- ----------- ---------- ----------
Gross profit .............................. 221,586 14,999 - 14,999 236,585
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES .................. 174,184 11,959 (4,117)(a,b) 7,842 182,026
RESTRUCTURING CHARGES ........................ 5,556 - - - 5,556
PROVISION FOR LOSS ON DISPOSAL OF ASSETS ..... - 6,847 - 6,847 6,847
IMPAIRMENT OF AMOUNTS DUE FROM PARENT ........ - 8,819 - 8,819 8,819
---------- ------------- ----------- ---------- ----------
Income (loss) from operations ............. 41,846 (12,626) 4,117 (8,509) 33,337
OTHER INCOME (EXPENSE):
Interest expense ..................... (26,702) 4 - 4 (26,698)
Other, net 964 114 - 114 1,078
---------- ------------- ----------- ---------- ----------
Interest and other expense, net ........... (25,738) 118 - 118 (25,620)
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGE IN
ACCOUNTING PRINCIPLE ...................... 16,108 (12,508) 4,117 (8,391) 7,717
PROVISION FOR INCOME TAXES ................... 6,175 1,680 (4,884)(c) (3,204) 2,971
---------- ------------- ----------- ---------- ----------
NET INCOME (LOSS) BEFORE CUMULATIVE
EFFECT OF CHANGE IN ACCOUNTING
PRINCIPLE ................................. $ 9,933 $ (14,188) $ 9,001 $ (5,187) $ 4,746
========== ============= =========== ========== ==========
EARNINGS PER SHARE:
Basic earnings per share before
cumulative effect of change in
accounting principle ................... $ 0.25 $ 0.12
========== ==========
Diluted earnings per share before
cumulative effect of change in
accounting principle ................... $ 0.25 $ 0.12
========== ==========
SHARES USED IN THE COMPUTATION OF
EARNINGS PER SHARE:
Basic ............................... 39,847,591 39,847,591
========== ==========
Diluted ............................. 39,847,591 39,847,591
========== ==========
SEE NOTE TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS.
22
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
UNAUDITED PRO FORMA STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED MARCH 31, 2003
(IN THOUSANDS)
RIVIERA
IES AND RIVIERA PRO FORMA PRO FORMA PRO FORMA
SUBSIDIARIES ELECTRIC, INC. ADJUSTMENTS ADJUSTED TOTAL
------------ ------------- ----------- ---------- ----------
REVENUES ............................... $ 691,712 $ 27,896 $ - $ 27,896 $ 719,608
COST OF SERVICES ....................... 591,251 23,580 - 23,580 614,831
---------- ---------- ----------- ---------- ----------
Gross profit ........................ 100,461 4,316 - 4,316 104,777
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES ............ 76,079 4,344 (1,140)(a,b) 3,204 79,283
PROVISION FOR LOSS ON
DISPOSAL OF ASSETS .................. - 6,847 - 6,847 6,847
IMPAIRMENT OF AMOUNT DUE
FROM PARENT ......................... - 8,819 - 8,819 8,819
---------- ---------- ----------- ---------- ----------
Income (loss) from operations ....... 24,382 (15,694) 1,140 (14,554) 9,828
OTHER INCOME (EXPENSE):
Interest expense .................... (12,799) - - - (12,799)
Other, net .......................... 85 - - - 85
---------- ---------- ----------- ---------- ----------
Interest and other expense, net ..... (12,714) - - - (12,714)
INCOME (LOSS) BEFORE INCOME TAXES ...... 11,668 (15,694) 1,140 (14,554) (2,886)
PROVISION FOR INCOME TAXES ............. 4,492 420 (6,023)(c) (5,603) (1,111)
---------- ---------- ----------- ---------- ----------
NET INCOME (LOSS) ...................... $ 7,176 $ (16,114) $ 7,163 $ (8,951) $ (1,775)
========== ========== =========== ========== ==========
EARNINGS (LOSS) PER SHARE:
Basic earnings per share ........... $ 0.18 $ (0.05)
========== ==========
Diluted earnings per share ......... $ 0.18 $ (0.05)
========== ==========
SHARES USED IN THE COMPUTATION OF
EARNINGS (LOSS) PER SHARE:
Basic ......................... 39,388,158 39,388,158
========== ==========
Diluted ....................... 39,423,220 39,388,158
========== ==========
SEE NOTE TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS.
23
INTEGRATED ELECTRICAL SERVICES, INC.
NOTE TO UNAUDITED PRO FORMA FINANCIAL STATEMENTS
1. UNAUDITED PRO FORMA STATEMENT OF OPERATIONS:
The Unaudited Pro Forma Statements of Operations for the year ended
September 30, 2002 and for the six months ended March 31, 2003 for IES and
Subsidiaries reflects the historical results of IES.
Pro Forma Adjustments consist of the following:
(a) Reflects the reduction in administrative bonus payments to the
management of the Company on plans that will not continue.
(b) Reflects the reversal of management fees recorded by the previous
owners of the Company.
(c) Reflects the incremental provision for federal and state income taxes
at a 38.5% overall tax rate.
The Unaudited Pro Forma Statements of Operations for the year ended
September 30, 2002 and for the six months ended March 31, 2003 for IES and
Subsidiaries do not include adjustments to add back the effect of a $6.8 million
provision for loss on disposal of assets and an $8.8 million impairment of
amounts due from parent that are reflected in the historical financial
statements of Riviera Electric, Inc. IES believes that had Riviera Electric,
Inc. been a subsidiary of IES during the periods presented that these
adjustments would not have been recorded. Additionally, IES believes that these
adjustments in the historical Riviera Electric, Inc. financial statements are
not reflective of future performance.
24
(C) EXHIBITS
23.1 Consent of Brockmann, Armour and Co., LLC
25
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/ William W. Reynolds
-------------------------------
William W. Reynolds
Executive Vice President and
Chief Financial Officer
Dated: October 24, 2003
26
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
------- -----------
23.1 Consent of Brockmann, Armour and Co., LLC