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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 14, 1998
REGISTRATION NO. 333-50031
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
Post-Effective
Amendment
No. 1
to
FORM S-1-A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
DELAWARE 1731 76-0542208
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
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515 POST OAK BOULEVARD
SUITE 450
HOUSTON, TEXAS 77027
(713) 860-1500
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
---------------------
JOHN F. WOMBWELL
SENIOR VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY
515 POST OAK BLVD., SUITE 450
HOUSTON, TEXAS 77027
(713) 860-1500
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
---------------------
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ---------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
THIS REGISTRATION STATEMENT CONTAINS A COMBINED PROSPECTUS PURSUANT TO RULE
429 UNDER THE SECURITIES ACT, WHICH RELATES TO THE COMPANY'S EARLIER
REGISTRATION STATEMENT NO. 333-45479.
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EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one (the
"Acquisition Prospectus") to be used in connection with the acquisition of the
assets or the securities of businesses by the Company and one (the "Selling
Stockholder Prospectus") to be used by persons or entities who have received
stock of the Company in exchange for the assets or the securities of a business
and who wish to sell such stock. The Acquisition Prospectus and the Selling
Stockholder Prospectus are identical except that they contain different front
and back cover pages and different descriptions of the plan of distribution. The
form of Acquisition Prospectus is included herein and is followed by those pages
to be used in the Selling Stockholder Prospectus which differ from those used in
the Acquisition Prospectus. Each of the pages for the Selling Stockholder
Prospectus included herein is labeled "Alternate Page for Selling Stockholder
Prospectus."
<PAGE> 3
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
SUBJECT TO COMPLETION
PROSPECTUS
21,000,000 SHARES
INTEGRATED ELECTRICAL SERVICES, INC.
COMMON STOCK
This Prospectus covers 21,000,000 shares of Common Stock of Integrated
Electrical Services, Inc. ("IES" or the "Company") which may be offered and
issued from time to time by the Company in connection with its acquisition of
the securities and assets of other businesses. It is expected that the terms of
acquisitions involving the issuance and sale by the Company of Common Stock
covered by this Prospectus will be determined by direct negotiations with the
owners or controlling persons of the businesses whose securities or assets are
acquired. The Company expects that the shares of Common Stock issued in
exchange for securities or assets in business combination transactions will be
valued at prices reasonably related to market prices of the Common Stock either
at the time the terms of an acquisition are agreed upon or at or about the time
of delivery of such shares of Common Stock.
The Common Stock trades on The New York Stock Exchange (the "NYSE") under the
symbol "IEE." The last reported sale price of the Common Stock on the NYSE on
September 11, 1998 was $13 7/8 per share.
All expenses of this offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of Common
Stock, although finders fees may be paid with respect to specific acquisitions.
Any person receiving a finder's fee may be deemed to be an Underwriter within
the meaning of the Securities Act of 1933, as amended (the "Securities Act").
_______________
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
_______________
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 14, 1998.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and financial
statements, including the notes thereto, appearing elsewhere in this
Prospectus. See "Risk Factors" for information that should be carefully
considered by prospective investors.
THE COMPANY
Integrated Electrical Services, Inc. ("IES" or the "Company"), a Delaware
Corporation, was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial and residential markets. On January 30,
1998, concurrent with the closing of its initial public offering ("IPO" or
"Offering") of common stock, IES acquired, in separate transactions 16 companies
and related entities engaged in all facets of electrical contracting and
maintenance services (collectively, the "Founding Companies" or the "Founding
Company Acquisitions"). Subsequent to its IPO, and through September 11, 1998,
the Company has acquired 19 additional electrical contracting and maintenance
businesses (the "Post IPO Acquisitions"). Of these 19 Post IPO Acquisitions, 18
were accounted for using the purchase method of accounting (the "Post IPO
Purchased Companies") and one was accounted for using the pooling-of-interests
method of accounting (the "Pooled Company"). IES has acquired 35 electrical
contracting and maintenance service companies (collectively the "Companies")
with pro forma combined revenues of $705.0 million and $553.3 million for the
year ended September 30, 1997, and the nine months ended June 30, 1998,
respectively, making the Company one of the largest providers of electrical
contracting and maintenance services in the United States. Of such 1997 pro
forma revenues, approximately 80% was derived from commercial (approximately
46%) and industrial (approximately 34%) contracting, approximately 14% was
derived from residential contracting and approximately 6% was derived from
electrical maintenance work. Combined revenues of the Companies, which have
been in business an average of 21 years, increased at an average compound annual
growth rate of approximately 17% from fiscal 1995 through 1997.
The Company offers a broad range of electrical contracting services,
including design and installation for both new and renovation projects in the
commercial, industrial and residential markets. The Company also offers
long-term and per call maintenance services, which generally provide recurring
revenues that are relatively independent of levels of construction activity.
Typically, the Companies specialize in either commercial and industrial or
residential work, although a few of the Companies have both commercial and
industrial and residential operations.
In certain markets the Company offers design-and-build expertise and
specialized services, which typically require specific skills and equipment and
provide higher margins than general electrical contracting and maintenance
services. In a design-and-build project, the electrical contractor applies
in-house electrical engineering expertise to design the most cost-effective
electrical system for a given structure and purpose, taking into account local
code requirements. Specialized services offered by the Company include
installations of wiring or cabling for the following: data cabling for computer
networks; fiber optic cable systems; telecommunications systems; energy
management systems which control the amount of power used in facilities; fire
alarm and security systems; cellular phone transmission sites; "smart houses"
that integrate computer, energy management, security, safety, comfort and
telecommunication systems; lightning protection systems; clean rooms for
fabrication of microprocessors and similar devices; computer rooms; back-up
electrical systems and uninterruptible power supplies; high voltage
distribution and traffic signal systems.
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INDUSTRY OVERVIEW
General. Virtually all construction and renovation in the United States
generates demand for electrical contracting services. Depending upon the exact
scope of work, electrical work generally accounts for approximately 8% to 12%
of the total construction cost of the Company's commercial and industrial
projects and 5% to 10% of the total construction cost of the Company's
residential projects. In recent years, the Companies have experienced a
growing demand for electrical contracting services per project due to increased
electrical code requirements, demand for additional electrical capacity,
including increased capacity for computer systems, additional data cabling
requirements and the construction of smart houses with integrated systems.
The overall electrical contracting industry, including commercial, industrial
and residential markets, was estimated by the U.S. Census to have generated
annual revenues in excess of $40 billion in 1992, the most recent available
U.S. Census data. These Census data indicate that the electrical contracting
industry is highly fragmented with more than 54,000 companies, most of which
are small, owner-operated businesses, performing various types of electrical
work. The Company believes there are significant opportunities for a
well-capitalized national company to provide comprehensive electrical
contracting and maintenance services and that the fragmented nature of the
electrical contracting industry will provide significant opportunities to
consolidate commercial and industrial and residential electrical contracting
and maintenance businesses.
Commercial and Industrial Market. Commercial and industrial consumers of
electrical contracting and maintenance services include general contractors;
developers; consulting engineers; architects; owners and managers of large
retail establishments, office buildings, high-rise apartments and condominiums;
theaters and restaurants; hotels and casinos; manufacturing and processing
facilities; arenas and convention centers; hospitals; school districts;
military and other government agencies; airports; prisons and car lots. The
Company provides electrical contracting and maintenance services to the full
range of commercial and industrial customers.
From fiscal 1995 through 1997, the Companies' revenues from electrical
contracting for commercial and industrial customers have grown at an average
compound annual rate of approximately 17% per year. The Company believes that
growth in the commercial and industrial market reflects a number of factors,
including (i) levels of construction and renovation activity; (ii) regulations
imposed by electric codes, which establish minimum power and wiring
requirements; (iii) safety codes mandating additional installation of smoke
detectors and the use of ground fault circuit protection devices in more
locations; (iv) revised national energy standards that dictate the use of more
energy-efficient lighting fixtures and other equipment; (v) continuing demand
to build out lease spaces in office buildings and to reconfigure space for new
tenants; (vi) increases in use of electrical power, creating needs for
increased capacity and outlets, as well as data cabling and fiber optics and
(vii) requirements of building owners and developers to facilitate marketing
their properties to tenants and buyers by installing electrical capacity in
excess of minimum code requirements.
Residential Market. Contracting work for the residential market consists
primarily of electrical installations in new single family and low-rise
multifamily residence construction for customers such as large homebuilders and
apartment developers. The Company also provides maintenance services to these
customers as well as to individual property owners in some locations. The
residential market is primarily dependent on the number of single family and
multi-family home starts, which are in turn affected by interest rates, tax
considerations and
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general economic conditions. Competitive factors particularly important in the
residential market include a contractor's ability to build relationships with
customers by providing services in diverse geographic markets as construction
activity shifts to new locations. The Companies residential electrical
contracting revenues have grown at an average compound annual rate of
approximately 19% from fiscal 1995 through 1997.
STRATEGY
The Company believes that its size, geographical diversity of operations,
industry relationships, expertise in specialized markets, number of licensed
electricians and access to design technology give the Company significant
competitive advantages in the electrical contracting and maintenance services
industry. Through increased size, the Company believes it has greater ability
to compete for larger jobs that require greater technical expertise, personnel
availability and bonding capacity, to more effectively allocate and share
resources in serving customers in each of its markets, and to attract, train
and retain qualified electricians. The Company also believes that increased
size provides increased efficiency in materials purchasing, computer system
development, employee benefits, bonding, insurance and financing. The Company
believes that the diversity of its operations diminishes the effects of
regional and market downturns, offers opportunities to pursue growth in its
existing markets and creates a base of expertise to expand into new markets and
serve new customers.
The Company leverages its experienced management and extensive relationships
within the electrical contracting industry to increase its revenues and reduce
its cost infrastructure through internal growth as well as the acquisition of
additional electrical contracting businesses. The Company's management includes
a Chief Executive Officer and two Chief Operating Officers, each with 25 years
or more of experience in the electrical contracting industry. The Company has
extensive business relationships within the industry, in part through Companies
that are members of the Independent Electrical Contractors Association ("IEC").
The IEC is the second largest electrical trade organization in the U.S. and has
nearly 3,000 contracting firms as members. The Company's Chief Executive
Officer is a past president of the IEC, and two founders are members of the
executive committee of the IEC. The IEC sponsors forum groups, which are
discussion groups of members of the IEC that foster the sharing of best
business practices. The Companies are members of the IEC and other trade
organizations, and the Company has implemented programs to share best practices
among the Companies and future acquisitions.
The Company's goal is to become a leading national provider of electrical
services by improving its operations, expanding its business and markets
through internal growth and pursuing an aggressive acquisition strategy.
Operating Strategy. The Company believes there are significant opportunities
to increase revenues and profitability of the Founding Companies and
subsequently acquired businesses. The key elements of the Company's operating
strategy are:
Share Information, Technical Capabilities and Best Practices. The Company
believes it will be able to expand the services it offers in its local
markets by leveraging the specialized technical and marketing strengths of
individual Companies. The Company identifies and shares best practices that
can be successfully implemented throughout its operations. The Company
intends to use the computer-aided-design technology and expertise of certain
of the Companies to bid for more design-and-build projects and to assist
customers in value engineering and creating project documents. The Company
believes that its increased
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size, capital and workforce will permit it to pursue projects that require
greater design and performance capabilities and the ability to meet
accelerated timetables.
Expand Scope of Maintenance and Specialized Services. The Company intends
to further develop its long-term and per-call maintenance service
operations, which generally realize higher gross margins and provide
recurring revenues that are relatively independent of levels of construction
activity. The Company also believes that certain specialized businesses
currently offered by only a few of the Companies can be expanded throughout
the Company and in some cases can provide higher margins. Through sharing of
expertise and specialized licenses and the ability to demonstrate a safety
record in specialized markets served by the Companies, the Company intends
to expand its presence and profitability in markets where it previously
relied on subcontractors.
Establish National Market Coverage. The Company believes that the growth
of many of the Companies has been restricted due to the geographic
limitations of existing operations and that the Company's broad geographic
coverage will increase internal growth opportunities. The Company intends to
leverage its geographic diversity to bid for additional business from
existing customers that operate on a regional and national basis, such as
developers, contractors, homebuilders and owners of national chains. The
Company believes that significant demand exists from such companies to
utilize the services of a single electrical contracting and maintenance
service provider and that existing local and regional relationships can be
expanded as the Company develops a nationwide network.
Operate on Decentralized Basis. The Company believes that, while
maintaining strong operating and financial controls, a decentralized
operating structure will retain the entrepreneurial spirit present in each
of the Companies. The Company also is structured to allow it to capitalize
on the considerable local and regional market knowledge and customer
relationships possessed by each Company, as well as companies that may be
acquired in the future. By maintaining a local and regional focus in each of
its markets, the Company believes it will be able to build relationships
with general contractors and other customers, address design preferences and
code requirements, respond quickly to customer demands for higher-margin
renovation and upgrade projects and adjust to local conditions.
Attract and Retain Quality Employees. The Company believes that the
ability to attract and retain qualified electricians is a critical
competitive factor and that the acquisitions of the Companies provides
competitive advantages in this regard. The Company attracts and develops
skilled employees by extending active recruiting and training programs,
offering stock-based compensation for key employees, and offering expanded
career paths and more stable income through the larger public company. The
Company believes that this ability will allow it to increase efficiency and
pursue additional customer relationships.
Achieve Operating Efficiencies. Certain administrative functions have been
centralized. In addition, by combining overlapping operations of certain of
the Companies, the Company expects to realize savings in overhead and other
expenses. The Company uses its increased purchasing power to gain volume
discounts in areas such as electrical materials, vehicles, advertising,
bonding, employee benefits and insurance. The Company will seek to realize
additional cost savings and other benefits by the sharing of purchasing,
pricing, bidding and other business practices and the sharing of licenses.
The Company intends to further develop and extend the use of computer
systems to facilitate communication among the Companies. At some locations,
the larger combined workforce provides additional staffing flexibility.
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Acquisition Strategy. The Company believes that, due to the highly fragmented
nature of the electrical contracting and maintenance services industry, it has
significant opportunities to pursue its acquisition strategy. The Company
focuses on acquiring companies with management philosophies based on an
entrepreneurial attitude as well as a willingness to learn and share improved
business practices through open communications. The Company believes that many
electrical contracting and maintenance service businesses that lack the capital
necessary to expand operations will become acquisition candidates. For these
acquisition candidates, the Company provides (i) information on best practices,
(ii) expertise to expand in specialized markets, (iii) the opportunity to focus
on customers rather than administration, (iv) national name recognition, (v)
increased liquidity and (vi) the opportunity for a continued role in
management. The Companies participate in professional associations such as the
IEC and Associated Builders and Contractors, and the Company intends to
continue these relationships, in part to assist in identifying attractive
acquisition candidates. Other key elements of the Company's acquisition
strategy are:
Enter New Geographic Markets. The Company pursues acquisitions that are
located in new geographic markets, are financially stable and have the
customer base necessary to integrate with or complement its existing
business. The Company also expects that increasing its geographic diversity
will allow it to better serve an increasingly nationwide base of customers
and further reduce the impact on the Company of local and regional economic
cycles, as well as weather-related or seasonal variations in business.
Expand Within Existing Markets. Once the Company has entered a market, it
seeks to acquire other well-established electrical contracting and
maintenance businesses operating within that region, including "tuck-in"
acquisitions of smaller companies. The Company believes that tuck-in
acquisitions afford the opportunity to improve its overall cost structure
through the integration of such acquisitions into existing operations as
well as to increase revenues through access to additional specialized
markets, such as heavy industrial markets. Despite the integration
opportunities afforded by such tuck-in acquisitions, the Company maintains
existing business names and identities to retain goodwill for marketing
purposes.
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SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
IES acquired the Founding Companies simultaneously with the consummation of
the Offering. Pursuant to the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin No. 97 ("SAB97"), Houston-Stafford Electric, Inc. and
subsidiaries ("HSE") is considered for accounting purposes the entity which
acquired the other Founding Companies and IES (the "Accounting Acquirer"). As
such, IES's consolidated historical financial statements represent the financial
position and results of operations of (i) HSE (as restated to include the
financial position and results of operations of the Pooled Company), and (ii)
the other Founding Companies and the Post IPO Purchased Companies beginning
on their respective dates of acquisition. The following summary unaudited pro
forma combined financial data present certain data for IES, as adjusted for (i)
the effects of the acquisitions of the Founding Companies and the Post IPO
Purchased Companies, (ii) the effects of certain other pro forma adjustments to
the historical financial statements and (iii) the consummation of the Offering
(including the underwriters exercise of the overallotment option) and the
application of the net proceeds therefrom. Such pro forma data include the
results of operations of IES and the other Founding Companies and the Post IPO
Purchased Companies as if their acquisitions, the Offering and related
transactions were closed on October 1, 1996 and are not necessarily
indicative of the results that the Company would have obtained had these events
actually occurred at that date or indicative of the Company's future results.
During the periods presented below, the Companies were not under common control
or management and, therefore, the data presented may not be comparable to or
indicative of future performance. The unaudited pro forma combined income
statement data are based on preliminary estimates, available information and
certain assumptions that Company management deems appropriate. The unaudited pro
forma combined financial data should be read in conjunction with the other
financial information included elsewhere in this Prospectus. See "Selected
Financial Data," the Unaudited Pro Forma Combined Financial Statements and notes
thereto, and the historical financial statements of IES and for certain of the
Acquired Companies and the notes thereto, all included elsewhere in this
Prospectus.
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<CAPTION>
PRO FORMA
-----------------------------------
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30,1997 JUNE 30, 1998
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(UNAUDITED)
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INCOME STATEMENT DATA:
Revenues .................................... $ 705,034 $ 553,355
Cost of services (including depreciation) ... 562,171 442,475
------------ ------------
Gross profit ................................ 142,863 110,880
Selling, general and administrative
expenses(a) ............................... 72,901 56,856
Goodwill amortization(b) .................... 7,154 5,449
------------ ------------
Income from operations ...................... 62,808 48,575
Interest and other income (expense), net(c).. (4,902) (3,695)
------------ ------------
Income before income taxes .................. 57,906 44,880
Provision for income taxes .................. 24,401 18,874
------------ ------------
Net income(d) ............................... $ 33,505 $ 26,006
============ ============
Net income per share:
Basic .................................. $ 1.09 .85
============ ============
Diluted ................................ $ 1.09 .84
============ ============
Shares used in computing pro forma net
income per share(e):
Basic .................................. 30,756,875 30,756,875
============ ============
Diluted ................................ 30,756,875 31,114,124
============ ============
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1998
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ACTUAL PRO FORMA (F) (G)
-------- -----------------
(UNAUDITED)
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BALANCE SHEET DATA:
Working capital .................... $ 57,504 $ 80,908
Total assets ....................... 363,497 492,544
Long-term debt, net of current
maturities ....................... 28,628 98,544
Total stockholders' equity ......... 255,382 295,498
</TABLE>
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(a) The unaudited pro forma combined income statement data reflect certain
reductions in salary, bonus and benefits of the owners of the Companies to
which they have agreed prospectively, and the effect of revisions of certain
lease agreements between the Companies and certain stockholders of the
Companies. Additionally, excludes the $13.6 million non-recurring, non-cash
compensation charge recognized by IES related to the issuance of Common
Stock to management and the $17.0 million non-recurring, non-cash
compensation charge recorded by HSE in connection with a note receivable and
rights held by an officer of HSE which was exchanged for cash and shares of
IES common stock in connection with the Founding Company Acquisitions. See
"Certain Transactions."
(b) Reflects amortization of the goodwill recorded as a result of the
acquisitions of the Founding Companies and the Post IPO Purchased Companies
over a 40-year period and computed on the basis described in the notes to
the Unaudited Pro Forma Combined Financial Statements.
(c) Reflects additional interest expense related to the debt discussed in (g)
below, net of the reduction of interest expense attributable to $8.1
million of historical debt which was repaid with proceeds from the Offering
or distributed prior to the acquisitions of the Founding Companies.
Additionally, reflects elimination of interest income, and a $316,000
reduction in minority interest expense.
(d) Assumes all pretax income before non-deductible goodwill and other
permanent items is subject to a 38% overall tax rate.
(e) Includes (i) 12,313,025 shares issued to the owners of the Founding
Companies, (ii) 1,396,602 shares issued to the management of IES, (iii)
2,655,709 shares of Restricted Common Stock issued to the founder and
Chairman of the Board of IES and trusts for the benefit of his children,
(iv) the 8,050,000 shares sold in the Offering (including the underwriters
exercise of the overallotment option for 1,050,000 shares), and (v)
6,341,539 shares issued to the owners of the Post IPO Acquisitions. Also,
the nine months ended June 30, 1998 includes 357,249 shares computed under
the treasury stock method related to 3,110,550 options outstanding at
September 11, 1998. See "Description of Capital Stock."
(f) Reflects the acquisitions of the eight post IPO Acquisitions which closed
subsequent to June 30, 1998, as if they had occurred on June 30, 1998 as
described in the notes to the Unaudited Pro Forma Combined Financial
Statements. The unaudited pro forma combined balance sheet data are based
upon preliminary estimates, available information and certain assumptions
that management deems appropriate and should be read in conjunction with the
other financial information and historical financial statements, and notes
thereto, included elsewhere in this Prospectus.
(g) Reflects $4.2 million of previously undistributed earnings and nonoperating
assets, net of liabilities distributed in connection with the acquisitions
to the owners of the eight post IPO Acquisitions which closed subsequent to
June 30, 1998. This amount was funded through transfers of cash and
nonoperating assets. See "Certain Transactions." Also, includes
approximately $63.6 million of debt incurred net of cash acquired to fund
the cash portion of the consideration paid for the eight post IPO
Acquisitions which closed subsequent to June 30, 1998.
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RISK FACTORS
Prospective investors should carefully consider the following factors as well
as the other information contained in this Prospectus. This Prospectus contains
forward-looking statements. Actual results could differ materially from those
projected in the forward-looking statements as a result of a number of factors,
including the risk factors set forth below and elsewhere in this Prospectus.
ABSENCE OF COMBINED OPERATING HISTORY
Prior to January 30, 1998, the Founding Companies and prior to the date of
acquisition the Post IPO Acquisitions operated as separate independent
entities, and there can be no assurance that the Company will be able to
integrate these businesses on an economic basis. In addition, there can be no
assurance that the recently assembled management group will be able to oversee
the combined entity and effectively implement the Company's operating or growth
strategies. The pro forma combined financial results of the Companies cover
periods during which the Companies and IES were not under common control or
management and, therefore, may not be indicative of the Company's future
financial or operating results. The success of the Company will depend on
management's ability to integrate the Companies and other future acquisitions
into one organization in a profitable manner. The inability of the Company to
successfully integrate the Companies and to coordinate and integrate certain
administrative, banking, insurance and accounting functions and computer
systems would have a material adverse effect on the Company's financial
condition and results of operations and would make it unlikely that the
Company's acquisition program will be successful.
EXPOSURE TO DOWNTURNS IN COMMERCIAL CONSTRUCTION OR HOUSING STARTS
A substantial portion of the Company's business involves installation of
electrical systems in newly constructed and renovated commercial buildings,
plants and residences. The extent to which the Company is able to maintain or
increase revenues from new installation services will depend on the levels of
new construction starts from time to time in the geographic markets in which it
operates and likely will reflect the cyclical nature of the construction
industry. The level of new commercial installation services is affected by
fluctuations in the level of new construction of commercial buildings in the
markets in which the Company operates, due to local economic conditions,
changes in interest rates and other related factors. The housing industry is
similarly affected by changes in general and local economic conditions, such as
employment and income levels, the availability and cost of financing for home
buyers (including the continued deductibility of mortgage-linked interest
expenses in determining federal income tax), consumer confidence and housing
demand. Downturns in levels of commercial construction or housing starts would
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Seasonality and Quarterly
Fluctuations."
RELIANCE ON ACQUISITIONS
One of the Company's principal growth strategies is to increase its
revenues, geographic diversity and the scope of services offered and to
diversify its business mix through the acquisition of electrical contracting
companies. There can be no assurance that the Company will be able to acquire
additional businesses or to integrate and manage such additional businesses
successfully. Acquisitions may involve a number of risks, including: adverse
short-term effects on the Company's reported operating results; diversion of
management's
9
<PAGE> 12
attention; dependence on retention, hiring and training of key personnel; risks
associated with unanticipated problems or legal liabilities and amortization of
acquired intangible assets. Some or all of these risks could have a material
adverse effect on the Company's financial condition or results of operations.
In addition, to the extent that consolidation becomes more prevalent in the
industry, the prices for attractive acquisition candidates may increase and the
number of attractive acquisition candidates may decrease. The Company believes
that the electrical contracting industry may experience consolidation on both a
national and a regional level by other companies that have acquisition
objectives similar to the Company's objectives. Other consolidators may have
greater financial resources than the Company to finance acquisition and
internal growth opportunities and might be willing to pay higher prices than
the Company for the same acquisition opportunities. If such acquisitions can be
made, there can be no assurance that the businesses acquired will achieve sales
and profitability that justify the investment therein. See "Business --
Strategy."
MANAGEMENT OF GROWTH
The Company expects to grow internally and through acquisitions. Management
expects to expend significant time and effort in evaluating, completing and
integrating acquisitions and opening new facilities. There can be no assurance
that the Company's systems, procedures and controls will be adequate to support
the Company's operations as they expand. Any future growth also will impose
significant added responsibilities on members of senior management, including
the need to identify, recruit and integrate new senior level managers and
executives. There can be no assurance that such additional management will be
identified and retained by the Company. If the Company is unable to manage its
growth efficiently and effectively, or is unable to attract and retain
additional qualified management, there could be a material adverse effect on
the Company's financial condition and results of operations. See "Business --
Strategy."
AVAILABILITY OF ELECTRICIANS
The Company's ability to provide high-quality electrical services on a timely
basis is dependent upon an adequate supply of skilled electricians.
Accordingly, the Company's ability to increase its productivity and
profitability will be limited by its ability to employ, train and retain
skilled electricians necessary to meet the Company's requirements. Many
companies in the electrical contracting and maintenance service industry are
currently experiencing shortages of qualified electricians, and there can be no
assurance that the Company will be able to maintain an adequate skilled labor
force necessary to operate efficiently, that the Company's labor expenses will
not increase as a result of a shortage in the supply of skilled technicians or
that the Company will not have to curtail its planned internal growth as a
result of labor shortages. See "Business -- Company Operations -- Employee
Screening, Training and Development."
COMPETITION
The electrical contracting industry is highly competitive and is served by
small, owner-operated private companies, public companies and several large
regional companies. Additionally, the Company could face competition in the
future from other competitors entering the market, including public utilities.
Certain of the Company's larger competitors offer a greater range of services,
such as mechanical construction, plumbing and heating, ventilation and air
conditioning services. In certain geographic regions, the Company may not be
eligible to compete for certain contracts because its employees are not subject
to collective bargaining arrangements. See "Business -- Industry Overview."
Competition in the electrical contracting industry depends on a number of
factors, including price. Certain of the Company's competitors may have lower
overhead cost structures and may, therefore, be able to provide their services
at lower rates than the Company. See "Business -- Competition."
10
<PAGE> 13
ACQUISITION FINANCING
The Company intends to use its Common Stock for a portion of the
consideration for future acquisitions. If the Common Stock does not maintain a
sufficient valuation or potential acquisition candidates are unwilling to
accept Common Stock as part of the consideration for the sale of their
businesses, the Company may be required to utilize more of its cash resources,
if available, in order to pursue its acquisition program. If the Company does
not have sufficient cash resources, its growth could be limited unless it is
able to obtain additional capital through future debt or equity financings.
The Company has a bank line of credit for $175 million for working capital,
capital expenditures, other corporate purposes and acquisitions. The line of
credit is subject to customary drawing conditions. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Combined
Liquidity and Capital Resources."
SEASONALITY; FLUCTUATION OF QUARTERLY OPERATING RESULTS
The electrical contracting service business can be subject to seasonal
variations in operations and demand that affect the construction business,
particularly in residential construction, which is affected by weather
conditions. Quarterly results may also be materially affected by the timing of
acquisitions, the timing and magnitude of acquisition assimilation costs and
regional economic conditions. Accordingly, the Company's performance in any
particular quarter may not be indicative of the results which can be expected
for any other quarter or for the entire year. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Seasonality and
Quarterly Fluctuations."
CONTROL BY EXISTING MANAGEMENT AND STOCKHOLDERS
The Company's executive officers, directors and affiliates beneficially own
approximately 31% of the total outstanding shares of Common Stock and
Restricted Common Stock. These persons, if acting in concert, will be able to
continue to exercise control over the Company's affairs, to elect the entire
Board of Directors and to control the disposition of any matter submitted to a
vote of stockholders. See "Principal Stockholders."
POSSIBLE VOLATILITY OF STOCK
The Common Stock is traded on the NYSE, but no assurance can be given that an
active trading market for the Common Stock will continue. The market price of
the Common Stock may be subject to significant fluctuations from time to time
in response to numerous factors, including variations in the reported financial
results of the Company and changing conditions in the economy in general or in
the electrical contracting and maintenance service industry in particular. In
addition, the stock markets experience significant price and volume volatility
from time to time which may affect the market price of the Common Stock for
reasons unrelated to the Company's performance.
11
<PAGE> 14
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of its
executive officers and senior management of the Companies. Furthermore, the
Company will be dependent on the senior management of companies that may be
acquired in the future. Although the Company entered into an employment
agreement with each of the Company's executive officers, there can be no
assurance that any individual will continue in such capacity for any particular
period of time. The loss of key personnel, or the inability to hire and retain
qualified employees could have an adverse effect on the Company's business,
financial condition and results of operations. The Company does not maintain key
man life insurance. See "Management."
SHARES ELIGIBLE FOR FUTURE SALE
As of September 11, 1998, 28,182,698 shares of Common Stock and 2,655,709
shares of Restricted Common Stock were issued and outstanding. Prior to and
simultaneously with the closing of the Offering, the Company issued 13,709,627
shares of Common Stock and 2,655,709 shares of Restricted Common Stock. None of
these 16,365,336 shares was issued in a transaction registered under the
Securities Act, and, accordingly, such shares may not be sold except in
transactions registered under the Securities Act or pursuant to an exemption
from registration, including the exemptions contained in Rules 144 and 701 under
the Securities Act. In addition, the owners of the Companies have agreed with
the Company not to sell, contract to sell or otherwise dispose of 21,231,920
shares of Common Stock received as consideration in the acquisitions for a
period of two years following receipt thereof without the Company's consent.
When these shares become saleable, the market price of the Common Stock could be
adversely affected by the sale of substantial amounts of the shares in the
public market. Certain stockholders of the Company have certain piggy-back
registration rights with respect to 16,365,336 shares of Common Stock, which may
be exercised during the two-year period referred to above. The Company has
outstanding options to purchase up to a total of approximately 3,110,550 shares
of Common Stock issued pursuant to the Company's Option Stock Plans.
There can be no assurance that the resale or the availability for sale of the
shares of Common Stock eligible for future sale will not have an adverse effect
on the prevailing market price of the Common Stock.
12
<PAGE> 15
CERTAIN ANTI-TAKEOVER PROVISIONS
The Company's Amended and Restated Certificate of Incorporation, Bylaws,
employment agreements and employee benefit plans contain provisions which may
have the effect of delaying, deferring or preventing a change in control of the
Company. For example, the Company's Amended and Restated Certificate of
Incorporation and Bylaws provide for, among other things, a classified Board of
Directors, the prohibition of stockholder action by written consent and the
affirmative vote of at least 66 2/3% of all outstanding shares of Common Stock
to approve the removal of directors from office. The Company's Board of
Directors has the authority to issue shares of preferred stock in one or more
series and to fix the rights and preferences of the shares of any such series
without stockholder approval. Any series of preferred stock is likely to be
senior to the Common Stock with respect to dividends, liquidation rights and,
possibly, voting. In addition, the Board of Directors may issue certain rights
pursuant to the rights plan authorized by the Amended and Restated Certificate
of Incorporation. The ability to issue preferred stock or rights could have the
effect of discouraging unsolicited acquisition proposals. The Company's 1997
Stock Plan contains provisions that allow for, among other things, the
acceleration of vesting or payment of awards granted under such plan in the
event of a "change of control," as defined in such plan. In addition, the
Company has entered into employment agreements with certain executive officers
and key employees allowing for cash payments under certain circumstances
following a change in control, which is generally defined to occur upon (i) the
acquisition by any person of 20% or more of the total voting power of the
outstanding securities of the Company, (ii) the first purchase pursuant to a
tender or exchange offer for Common Stock, (iii) the approval of certain
mergers, sale of substantially all the assets, or dissolution of the Company or
(iv) a change in a majority of the members of the Company's Board of Directors.
13
<PAGE> 16
THE COMPANY
IES was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial and residential markets. Since the
closing of the Offering, IES has acquired 35 companies. The Companies, which
have been in business for an average of 21 years, had pro forma combined year
ended September 30, 1997, and the nine months ended June 30, 1998, revenues of
approximately $705.0 million and $553.0 million, respectively.
Integrated Electrical Services, Inc. was incorporated in Delaware in June
1997. Its executive offices are located at 515 Post Oak Boulevard, Suite 450,
Houston, Texas 77027, and its telephone number is (713) 860-1500.
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that may be offered and
issued by the Company from time to time in connection with the acquisitions of
the securities and assets of other businesses. Other than the securities and
assets acquired, there will be no proceeds to the Company from these offerings.
PRICE RANGE OF COMMON STOCK
The Company's Common Stock has traded on the NYSE since January 27, 1998, the
effective date of the Company's initial public offering. Set forth below are
the high and low trading prices for the common stock during the periods
presented.
<TABLE>
<CAPTION>
HIGH LOW
-------- ------
<S> <C> <C>
FISCAL YEAR ENDED SEPTEMBER 30, 1998:
2nd Quarter (from January 30, 1998) ........ 19 7/8 13
3rd Quarter ................................ 23 3/4 17 1/8
4th Quarter (through September 11, 1998) ... 22 15/16 13 1/8
</TABLE>
At September 11, 1998, there were approximately 207 stockholders of record of
the Company's Common Stock. On September 11, 1998, the last reported sale of
the Common Stock on the NYSE was $13 7/8 per share.
DIVIDEND POLICY
The Company intends to retain all of its earnings, if any, to finance the
expansion of its business and for general corporate purposes, including future
acquisitions, and does not anticipate paying any cash dividends on its Common
Stock for the foreseeable future. In addition, the Company's revolving credit
facility includes, and any additional lines of credit established in the future
may include, restrictions on the ability of the Company to pay dividends
without the consent of the lender.
14
<PAGE> 17
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
IES acquired the Founding Companies simultaneously with the consummation of
the Offering on January 30, 1998. Pursuant to the Securities and Exchange
Commission's ("SEC") Staff Accounting Bulletin No. 97 ("SAB97"), Houston-
Stafford Electric, Inc. and subsidiaries ("HSE") is considered for accounting
purposes the entity which acquired the other Founding Companies and IES (the
"Accounting Acquirer"). As such, IES's consolidated historical financial
statements represent the financial position and results of operations of (i) HSE
as restated to include the financial position and results of operations of the
Pooled Company, and (ii) the other Founding Companies and the Post IPO
Purchased Companies beginning on their respective dates of acquisition. The
following selected historical financial data for IES as of December 31, 1995 and
1996, and September 30, 1997, and for the years ended December 31, 1994, 1995
and 1996, and the year ended September 30, 1997, have been derived from the
consolidated audited financial statements of IES included elsewhere in this
Prospectus and reflect all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of such data. The selected
historical financial data as of June 30, 1998, and for the nine months ended
June 30, 1997 and 1998, nine months ended September 30, 1997 and as of December
31, 1993 and for the year ended December 31, 1993, have been derived from the
unaudited consolidated financial statements of IES, which have been prepared on
the same basis as the audited financial statements and, in the opinion of
Company management, reflect all adjustments consisting of normal recurring
adjustments, necessary for a fair presentation of such data. The results of
operations for the interim periods presented should not be regarded as
indicative of the results that may be expected for a full year.
The summary unaudited pro forma combined financial data below present certain
data including IES as adjusted for (i) the effects of the acquisitions of the
Founding Companies and the Post IPO Purchased Companies, (ii) the effects of
certain other pro forma adjustments to the historical financial statements and
(iii) the consummation of the Offering and the application of the net proceeds
therefrom. Such pro forma data include the results of operations of IES and the
other Founding Companies and the Post IPO Purchased Companies as if their
acquisitions, the Offering and related transactions were closed on October 1,
1996, and are not necessarily indicative of the results that the Company would
have obtained had these events actually occurred at that date or indicative of
the Company's future results. During the periods presented below, the Companies
were not under common control or management and, therefore, the data presented
may not be comparable to or indicative of post-combination results to be
achieved by the Company. The unaudited pro forma combined income statement data
are based on preliminary estimates, available information and certain
assumptions that Company management deems appropriate. The unaudited pro forma
combined financial data should be read in conjunction with the other financial
information included elsewhere in this Prospectus. See the Unaudited Pro Forma
Combined Financial Statements and the notes thereto, included elsewhere in this
Prospectus.
15
<PAGE> 18
<TABLE>
<CAPTION>
NINE MONTHS YEAR NINE MONTHS
ENDED ENDED ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, JUNE 30,
--------------------------------------------- ---------- ---------- ----------------------
1993 1994 1995 1996 1997 1997 1997 1998
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL INCOME STATEMENT
DATA (IES AND SUBSIDIARIES):
Revenues .......................... $ 49,220 $ 65,211 $ 73,345 $ 101,431 $ 92,379 $ 117,111 $ 79,847 $ 219,620
Cost of services .................. 44,169 57,633 63,709 85,081 76,306 95,937 65,189 173,420
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
Gross profit ...................... 5,051 7,578 9,636 16,350 16,073 21,174 14,658 46,200
Selling, general and
administrative expenses ......... 4,373 6,786 7,905 10,228 10,222 14,261 10,170 29,467
Non-cash, non-recurring
Compensation charge ........... -- -- -- -- -- -- -- 17,036
Goodwill amortization .............. -- -- -- -- -- -- -- 1,743
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
Income (loss) from operations ...... 678 792 1,731 6,122 5,851 6,913 4,488 (2,046)
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
Interest and other income
(expense), net ................... 32 (80) (182) 14 292 385 44 348
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes ..................... 710 712 1,549 6,136 6,143 7,298 4,532 (1,698)
Provision for income taxes ........ 228 287 563 2,471 2,408 2,923 1,847 6,443
--------- --------- --------- ---------- ---------- ---------- ---------- ----------
Net income (loss) ................. $ 482 $ 425 $ 986 $ 3,665 $ 3,735 $ 4,375 $ 2,685 $ (8,141)
========= ========= ========= ========== ========== ========== ========== ==========
Net income (loss) per share (i):
Basic ......................... $ .11 $ .09 $ .22 $ .82 $ .83 $ .97 $ .60 $ (.49)
========= ========= ========= ========== ========== ========== ========== ==========
Diluted ....................... $ .11 $ .09 $ .22 $ .82 $ .83 $ .97 $ .60 $ (.49)
========= ========= ========= ========== ========== ========== ========== ==========
</TABLE>
16
<PAGE> 19
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, 1997 JUNE 30, 1998
------------------ ------------
(UNAUDITED)
<S> <C> <C>
PRO FORMA COMBINED:
Revenues ........................................... $ 705,034 $ 553,355
Cost of services (including depreciation) .......... 562,171 442,475
------------ ------------
Gross profit ....................................... 142,863 110,880
Selling, general and administrative expenses(a) ... 72,901 56,856
Goodwill amortization(b) ........................... 7,154 5,449
------------ ------------
Income from operations ............................. 62,808 48,575
Interest and other income (expense), net(c) ........ (4,902) (3,695)
------------ ------------
Income before income taxes ......................... 57,906 44,880
Provision for income taxes ......................... 24,401 18,874
------------ ------------
Net income(d) ...................................... $ 33,505 $ 26,006
============ ============
Net income per share:
Basic ......................................... $ 1.09 $ .85
============ ============
Diluted ....................................... $ 1.09 $ .84
============ ============
Shares used in computing pro forma net income per share(e):
Basic ......................................... 30,756,875 30,756,875
============ ============
Diluted ....................................... 30,756,875 31,114,124
============ ============
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL (h)
--------------------------------------------------------------------------
AS OF DECEMBER 31, AS OF AS OF PRO FORMA
----------------------------------------------- SEPTEMBER 30, JUNE 30, AS OF JUNE 30,
1993 1994 1995 1996 1997 1998 1998 (f) (g)
-------- -------- -------- -------- ------------- -------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET
DATA:
Working capital .............. $ 2,729 $ 3,095 $ 3,905 $ 6,351 $ 8,568 $ 57,504 $ 80,908
Total assets ................. 11,337 13,594 14,882 23,712 35,795 363,497 492,544
Long-term debt, net
of current maturities ...... 852 1,429 812 1,406 1,275 28,628 98,544
-------- -------- -------- -------- -------- -------- --------
Total stockholders' equity ... $ 4,641 $ 4,431 $ 5,842 $ 8,706 $ 12,635 255,382 295,498
======== ======== ======== ======== ======== ======== ========
</TABLE>
__________
(a) The unaudited pro forma combined income statement data reflect certain
reductions in salary, bonus and benefits of the owners of the Companies to
which they have agreed prospectively, and the effect of revisions of
certain lease agreements between the Companies and certain stockholders of
the Companies. Additionally, excludes the $13.6 million non-recurring,
non-cash compensation charge recognized by IES related to the issuance of
Common Stock to management and the $17.0 million non-recurring, non-cash
compensation charge recorded by HSE in connection with a note receivable
and rights held by an officer of HSE which was exchanged for cash and
shares of IES common stock in connection with the Founding Company
Acquisitions. See "Certain Transactions."
(b) Reflects amortization of the goodwill to be recorded as a result of the
acquisitions of the Founding Companies and the Post IPO Purchased Companies
over a 40-year period and computed on the basis described in the notes to
the Unaudited Pro Forma Combined Financial Statements.
(c) Reflects additional interest expense related to the debt discussed in (g)
below, net of the reduction of interest expense attributable to $8.1
million of historical debt which was repaid with proceeds from the Offering
or distributed prior to the acquisitions of the Founding Companies.
Additionally, reflects elimination of interest income, and a $316,000
reduction in minority interest expense.
17
<PAGE> 20
(d) Assumes all pretax income before non-deductible goodwill and other
permanent items is subject to a 38% overall tax rate.
(e) Includes (i) 12,313,025 shares issued to the owners of the Founding
Companies, (ii) 1,396,602 shares issued to the management of IES, (iii)
2,655,709 shares of Restricted Common Stock issued to the founder and
Chairman of the Board of IES and trusts for the benefit of his children,
(iv) the 8,050,000 shares sold in the Offering (including the underwriters
exercise of the overallotment option for 1,050,000 shares), and (v)
6,341,539 shares issued to the owners of the Post IPO Acquisitions. Also,
the nine months ended June 30, 1998, includes 357,249 shares computed under
the treasury stock method related to 3,110,550 options outstanding at
September 11, 1998. See "Description of Capital Stock."
(f) Reflects the acquisitions of the 8 post IPO Acquisitions which closed
subsequent to June 30, 1998, as if they had occurred on June 30, 1998 as
described in the notes to the Unaudited Pro Forma Combined Financial
Statements. The unaudited pro forma combined balance sheet data are based
upon preliminary estimates, available information and certain assumptions
that management deems appropriate and should be read in conjunction with the
other financial information and historical financial statements, and notes
thereto, included elsewhere in this Prospectus.
(g) Reflects $4.2 million of previously undistributed earnings and nonoperating
assets, net of liabilities distributed in connection with the acquisitions
to the owners of the 8 post IPO Acquisitions which closed subsequent to June
30, 1998. This amount was funded through transfers of cash and nonoperating
assets. See "Certain Transactions." Also, includes approximately $63.6
million of debt incurred net of cash acquired to fund the cash portion of
the consideration paid for the 8 post IPO Acquisitions which closed
subsequent to June 30, 1998,
(h) Historical balance sheet data for IES and Subsidiaries represents the
financial position of the accounting acquirer (HSE) as of periods ended
prior to January 30, 1998 (as restated for the Pooled Company) and HSE and
the Post IPO Purchased Companies beginning on their respective dates of
acquisition.
(i) Historical shares used in determining historical earnings per share are
based on (a) the shares issued to acquire HSE and the Pooled Company
totaling 4,492,039 (basic and diluted) for periods ended prior to January
30, 1998, and (b) the shares in (a) plus the shares issued to acquire the
other Founding Companies and the Post IPO Purchased Companies beginning on
their respective dates of acquisition, along with the incremental shares for
options outstanding determined using the treasury stock method as follows:
<TABLE>
<CAPTION>
BASIC DILUTED
---------- ----------
<S> <C> <C>
Weighted average shares outstanding .... 16,400,110 16,400,110
Common stock equivalents ............... -- 357,249
---------- ----------
16,400,110 16,757,359
========== ==========
</TABLE>
18
<PAGE> 21
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Founding
Companies' Financial Statements, and related notes thereto, and "Selected
Financial Data" appearing elsewhere in this Prospectus.
The Company's revenues are derived primarily from electrical construction and
maintenance services provided to commercial, industrial and residential
customers. Of the Company's pro forma combined year ended September 30, 1997
revenues of $705.0 million, approximately 80% was derived from commercial and
industrial contracting, approximately 14% was derived from residential
contracting and approximately 6% was derived from electrical maintenance work.
Revenues from fixed-price construction and renovation contracts are generally
accounted for on a percentage-of-completion basis, using the cost-to-cost
method. The cost-to-cost method measures the percentage completion of a
contract based on total costs incurred to date compared to total estimated
costs at completion. Maintenance and other service revenues are recognized as
the services are performed.
Cost of services consists primarily of salaries and benefits of employees,
subcontracted services, materials, parts and supplies, depreciation, fuel and
other vehicle expenses and equipment rentals. The Company's gross margin, which
is gross profit expressed as a percentage of revenues, depends on the relative
proportions of costs related to labor and materials. On jobs in which a higher
percentage of the cost of services consists of labor costs, the Company
typically achieves higher gross margins than on jobs where materials represent
more of the cost of services. Materials costs can be calculated with relatively
greater accuracy than labor costs, and the Company seeks to maintain higher
margins on its labor-intensive projects to compensate for the potential
variability of labor costs for these projects. Selling, general and
administrative expenses consist primarily of compensation and related benefits
for owners, administrative salaries and benefits, advertising, office rent and
utilities, communications and professional fees. Certain owners and certain key
employees of the Companies have agreed to reductions in their compensation and
related benefits in connection with the Acquisitions. Such reductions in
salaries, bonuses and benefits have been reflected as a pro forma adjustment in
the Unaudited Pro Forma Combined Statement of Operations and are reflected in
the terms of employment agreements with the Company.
The Company believes that it has realized savings from (i) consolidation of
insurance and bonding programs; (ii) reduction in other general and
administrative expenses, such as training and advertising; (iii) the Company's
ability to borrow at lower interest rates than the Companies; (iv)
consolidation of operations in certain locations and (v) greater volume
discounts from suppliers of materials, parts and supplies. Offsetting these
savings are costs related to the Company's corporate management, costs of being
a public company and costs of integrating companies acquired in acquisitions.
As a result of the acquisitions of the Companies accounted for as purchases,
the excess of the consideration paid over the fair value of the net assets
acquired was recorded as goodwill on the Company's balance sheet and is being
amortized as a non-cash charge to the income statement over a 40-year period.
19
<PAGE> 22
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED RESULTS OF
OPERATIONS
The following table presents selected historical results of operations of IES
and Subsidiaries. These historical income statements represent the results of
operations of (i) the Accounting Acquirer (HSE), (as restated to include the
financial position and results of operations of the Pooled Company) for periods
ending prior to January 30, 1998 and (ii) HSE (as restated) and the results of
operations of the Post IPO Purchased Companies beginning on their respective
dates of acquisition.
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
Years Ended December 31, September 30, September 30,
------------------------------------ ----------------- -----------------
1995 1996 1997 1997
---------------- ---------------- ----------------- -----------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ............................... $ 73,345 100% $ 101,431 100% $ 92,379 100% $ 117,111 100%
Cost of Services ....................... 63,709 87 85,081 84 76,306 83 95,937 82
--------- ---- --------- ---- --------- ---- --------- ----
Gross profit ........................ 9,636 13 16,350 16 16,073 17 21,174 18
Selling, general and
administrative expenses ............. 7,905 11 10,228 10 10,222 11 14,261 12
Goodwill amortization .................. -- -- -- -- -- -- -- --
Non-cash, non-recurring compensation
charge in connection with the
founding company acquisitions ....... -- -- -- -- -- -- -- --
--------- ---- --------- ---- --------- ---- --------- ----
Income/(loss) from operations .......... $ 1,731 2% $ 6,122 6% $ 5,851 6% $ 6,913 6%
========= ==== ========= ==== ========= ==== ========= ====
<CAPTION>
Nine Months Ended
June 30,
------------------------------------
1997 1998
----------------- -----------------
(UNAUDITED)
Revenues ............................... $ 79,847 100% $ 219,620 100%
Cost of Services ....................... 65,189 82 173,420 79
--------- ---- --------- ----
Gross profit ........................ 14,658 18 46,200 21
Selling, general and
administrative expenses ............. 10,170 13 29,467 13
Goodwill amortization .................. -- -- 1,743 1
Non-cash, non-recurring compensation
charge in connection with the
founding company acquisitions ....... -- -- 17,036 8
--------- ---- --------- ----
Income/(loss) from operations .......... $ 4,488 5% $ (2,046) (1)%
========= ==== ========= ====
</TABLE>
20
<PAGE> 23
Integrated Electrical Services, Inc. and Subsidiaries Consolidated results for
the nine months ended June 30, 1998 compared to the nine months ended June 30,
1997
Revenues increased $139.8 million, or 175%, from $79.8 million for the nine
months ended June 30, 1997, to $219.6 million for the nine months ended June 30,
1998. The increase in revenues is principally due to the acquisition of the
Founding Companies (excluding Houston-Stafford) on January 30, 1998, and the
acquisition of the Post IPO Acquisitions during the three months ended June 30,
1998.
Gross profit increased $31.5 million, or 215%, from $14.7 million for the nine
months ended June 30, 1997, to $46.2 million for the nine months ended June 30,
1998. The increase in gross profit was principally due to the Acquisitions of
the Founding Companies (excluding Houston-Stafford) on January 30, 1998, and the
acquisitions of the Post IPO Acquisitions during the three months ended June 30,
1998. As a percentage of revenues, gross profit increased from 18.4% in 1997 to
21.0% in 1998. This increase is attributed to Houston Stafford's lower markup
on certain materials acquired under significant customer contracts and
additional overtime in the prior year.
Selling, general and administrative expenses increased $19.3 million, or 189%,
from $10.2 million for the nine months ended June 30, 1997, to $29.5 million for
the nine months ended June 30, 1998. This increase in selling, general and
administrative expenses was primarily attributable to the Acquisitions of the
Founding Companies (excluding Houston-Stafford) on January 30, 1998, the
acquisitions of the Post IPO Acquisitions during the three months ended June 30,
1998, a $5.6 million bonus paid to the owners of Houston-Stafford during the
four months ended in January 1998, compared to a $1.5 million bonus during the
four months ended in January 1997, and approximately $1.7 million of additional
corporate costs incurred in 1998 associated with being a public company which
did not exist in 1997. Excluding such bonuses and higher corporate costs,
selling, general and administrative expenses as a percentage of revenues
decreased from 10.7% in 1997 to 10.0% in 1998.
Operating income decreased $6.5 million, or 233%, from $4.5 million for the
nine months ended June 30, 1997, to $(2.0) million for the nine months ended
June 30, 1998. This decrease in operating income is primarily attributed to the
Founding Company Acquisitions (excluding Houston-Stafford) on January 30, 1998,
the acquisitions of the Post IPO Acquisitions during the three months ended June
30, 1998, the non-recurring owner bonuses in 1997, which was partially offset by
higher corporate costs discussed above. As a percentage of revenues, operating
income (excluding the owner bonuses and higher corporate costs noted above)
increased from 7.7% in 1997 to 10.3% in 1998.
Integrated Electrical Services, Inc. and Subsidiaries Consolidated results for
the year ended September 30, 1997 compared to the year ended December 31, 1996.
Revenues increased $15.7 million, or 15%, from $101.4 million for the year
ended December 31, 1996 to $117.1 million for the year ended September 30, 1997
primarily as a result of increased demand and the consolidation of an
electrical supply company, partially offset by the effects of unusually rainy
weather in Texas.
Gross profit increased $4.8 million, or 30%, during the year ended September
30, 1997 to $21.2 million, and gross margin increased to 18% during the year
ended September 30, 1997 from 16% during the year ended December 31, 1996 as a
result of favorable pricing related to the increase in demand and higher
discounts on certain long-term material purchase commitments.
Selling, general and administrative expenses increased 40% from $10.2 million
to $14.3 million. The increase was primarily attributable to an increase in
bonuses for certain key employees and to a lesser degree higher insurance
costs.
Integrated Electrical Services, Inc. and Subsidiaries Consolidated results for
the year ended December 31, 1996 compared to the year ended December 31, 1995
21
<PAGE> 24
Revenues increased $28.1 million, or 38%, from $73.3 million for the year
ended December 31, 1995, to $101.4 million for the year ended December 31,
1996, primarily due to an overall increase in demand and new contracts under
which Houston-Stafford is the sole or primary provider of electrical
installation services for certain significant residential contractors.
Gross profit increased $6.8 million, or 71%, from $9.6 million for the year
ended December 31, 1995 to $16.4 million for the year ended December 31, 1996.
Gross margin increased from 14% to 18% over these periods. The increase in
gross profit amounts and percentages is primarily attributable to favorable
pricing related to the increase in demand and higher discounts on certain
long-term material purchase commitments.
Selling, general and administrative expenses increased 29% from $7.9 million
to $10.2 million. The increase was attributable to the addition of
administrative infrastructure necessary to support Houston-Stafford's growth
and the establishment of a new merit bonus system. Selling, general and
administrative expenses as a percentage of revenues remained constant during
1996 when compared to 1995.
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES CONSOLIDATED LIQUIDITY
AND CAPITAL RESOURCES
As of June 30, 1998, the Company had cash of $13.3 million and, had borrowed
$20.0 million under its Credit Facility, had $1.0 million of letters of credit
outstanding and had available capacity under its Credit Facility of $49.0
million.
During the nine months ended June 30, 1998, the Company generated $7.9 million
of net cash from operating activities. Net cash used in investing activities
was $68.2 million, including $66.6 million used for the purchase of businesses.
Net cash flows provided by financing activities was $69.5 million resulting
primarily from $91.5 million of net proceeds from the IPO, $20.6 million from
borrowings under the Company's Credit Facility, reduced by payments of debt
assumed in connection with acquisitions and distributions to the Accounting
Acquirer totaling $42.7 million.
On August 7, 1998, the Company increased its three-year revolving credit
facility to $175.0 million (the "Credit Facility"). The Credit Facility is used
for working capital, capital expenditures, other corporate purposes and
acquisitions. The amounts borrowed under the Credit Facility bear interest at
an annual rate equal to either (a) the London interbank offered rate ("LIBOR")
plus 1.0% to 2.0%, as determined by the ratio of the Company's total funded debt
to EBITDA (as defined), or (b) the higher of (i) the bank's prime rate and (ii)
the Federal Funds rate plus 0.5%, plus up to an additional 0.5% as determined by
the ratio of the Company's total funded debt to EBITDA. Commitment fees of
0.25% to 0.375%, as determined by the ratio of the Company's total funded debt
to EBITDA, are due on any unused borrowing capacity under the Credit Facility.
The Company's subsidiaries have guaranteed the repayment of all amounts due
under the facility, and the facility is secured by the capital stock of the
guarantors and the accounts receivable of the Company and the guarantors. The
Credit Facility requires the consent of the lenders for acquisitions exceeding a
certain level of cash consideration, prohibits the payment of cash dividends on
the Company's common stock, restricts the ability of the Company to incur other
indebtedness and requires the Company to comply with certain financial
covenants. Availability of the Credit Facility is subject to customary drawing
conditions.
The Company anticipates that its cash flow from operations and proceeds from
its Credit Facility will provide sufficient cash to enable the Company to meet
its working capital needs, debt service requirements and planned capital
expenditures for property and equipment through 1998.
Through September 14, 1998, the Company utilized a combination of existing
cash, borrowings under its credit facility, and its common stock to acquire 35
companies with total 1997 revenues of approximately $ 705.0 million. The cash
component of the consideration paid for these companies was funded with
proceeds from the IPO, existing cash, and borrowings under the Credit Facility.
As of September 14, 1998, $91.0 million was borrowed under the Credit Facility.
The Company intends to continue to pursue acquisition opportunities and may be
in various stages of negotiation, due diligence and documentation of potential
acquisitions at any time. The timing, size or success of any acquisition effort
and the associated potential capital commitments cannot be predicted. The
Company expects to fund future acquisitions primarily with working capital, cash
flow from operations and borrowings, including any unborrowed portion of the
Credit Facility, as well as issuances of additional equity. To the extent the
Company funds a significant portion of the consideration for future acquisitions
with cash, it may have to increase the amount of the Credit Facility or obtain
other sources of financing, including the issuance of
22
<PAGE> 25
additional debt or equity. Capital expenditures for equipment and expansion of
facilities are expected to be funded from cash flow from operations and
supplemented as necessary by borrowings under the Credit Facility.
SEASONALITY AND QUARTERLY FLUCTUATIONS
The Company's results of operations from residential construction are seasonal,
depending on weather trends, with typically higher revenues generated during
the spring and summer and lower revenues during the fall and winter. The
commercial and industrial aspect of the Company's business is less subject to
seasonal trends, as this work is performed inside structures protected from the
weather. The Company's service business is generally not affected by
seasonality. In addition, the construction industry has historically been
highly cyclical. The Company's volume of business may be adversely affected by
declines in construction projects resulting from adverse regional or national
economic conditions. Quarterly results may also be materially affected by the
timing of new construction projects and acquisitions and the timing and
magnitude of acquisition assimilation costs. Accordingly, operating results
for any fiscal period are not necessarily indicative of results that may be
achieved for any subsequent fiscal period.
INFLATION
Due to the relatively low levels of inflation experienced in fiscal 1995, 1996,
and 1997, inflation did not have a significant effect on the results of the
company in those fiscal years, or any of the Acquired Companies during similar
periods.
RECENT ACCOUNTING PRONOUNCEMENTS
Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
based method of accounting for employee stock options or similar equity
instruments and the current intrinsic, value-based method of accounting
prescribed by Accounting Principles Board Opinion No. 25 ("APB No. 25").
Entities electing to remain with the accounting in APB No. 25 must make pro
forma disclosures of net income and earnings per share as if the fair value
method of accounting had been applied. The Company will provide pro forma
disclosure of net income and earnings per share, as applicable, in the notes to
future consolidated annual financial statements.
In June, 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information" which establishes standards for the way
public enterprises are to report information about operating segments in annual
financial statements and requires the reporting of selected information about
operating segments in interim financial reports issued to shareholders. SFAS
No. 131 also establishes standards for related disclosures about products and
services, geographic areas, and major customers. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997, at which time the Company will
adopt the provision. This statement is not anticipated to have a material
impact on the Company's financial disclosures.
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, and 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.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosure about Segments of an Enterprise and Related Information,"
which establishes standards for the way public enterprises are to report
information about operating segments in annual financial statements and
requires the reporting of selected information about operating systems in
interim financial reports issued to shareholders. SFAS No. 131 is effective
for the Company for its year ended September 30, 1999, at which time the
Company will adopt the provision. The Company is currently evaluating the
impact on the Company's financial disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Retirement Benefits," which becomes effective for financial
statements for the year ended September 30, 1999. SFAS No. 132 requires
revised disclosures about pension and other postretirement benefit plans. The
Company is currently assessing the impact of this statement on its annual
financial statements.
On June 1, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for the Company
for its year ended September 30, 2000. SFAS No. 133 requires a company to
recognize all derivative
23
<PAGE> 26
instruments (including certain derivative instruments embedded in other
contracts) as assets or liabilities in its balance sheet and measure them at
fair value. The statement requires that changes in t he derivatives fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. The Company is evaluating SFAS No. 133 and the impact on existing
accounting policies and financial reporting disclosures. However, the Company
has not to date engaged in activities or entered into arrangements normally
associated with derivative instruments.
YEAR 2000 DATE CONVERSION
The Company is in the process of identifying and evaluating potential issues
for its information technology and third party relationships associated with
the date change in the year 2000. The Company has not yet fully assessed any
Year 2000 remedial costs, but is in the process of identifying and developing
solutions to the Year 2000 issues. While the Company is not currently able to
quantify the cost of corrective actions, it does not expect that these actions
will materially exceed the cost of normal software upgrades and replacements
expected to occur through the year 2000. While the Company believes all
necessary work will be completed in a timely fashion, it cannot guarantee that
the systems of other companies on which the Company relies will be converted
within the same timeframe. The Company is attempting to obtain assurances from
vendors, business partners, and others with which it conducts business that
their systems will be Year 2000 compliant. If as a result of foregoing process
the Company determines that a material business interruption may occur due to
the Year 2000 issue, it will attempt to implement an appropriate contingency
plan.
MILLS RESULTS OF OPERATIONS
Mills, headquartered in Dallas, Texas was founded in 1972 and operates
primarily in the greater Dallas-Fort Worth area. Mills derives a significant
portion of its revenues from higher margin design-and-build services and from
data cabling and fire alarm systems.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30, YEAR ENDED
-------------------------------- -------------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
-------------- -------------- ------------- -------------- --------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ........................... $35,250 100% $65,439 100% $43,684 100% $52,644 100% $74,399 100%
Cost of services ................... 27,372 78 50,535 77 33,998 78 44,035 84 60,572 81
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Gross profit ..................... 7,878 22 14,904 23 9,686 22 8,609 16 13,827 19
Selling, general and
administrative expenses .......... 4,741 13 7,643 12 3,837 9 4,972 9 8,778 12
------- ---- ------- ---- ------- ---- ------- ---- ------- ----
Income (loss) from operations .... $ 3,137 9% $ 7,261 11% $ 5,849 13% $ 3,637 7% $ 5,049 7%
======= ==== ======= ==== ======= ==== ======= ==== ======= ====
</TABLE>
24
<PAGE> 27
Mills results for the year ended September 30, 1997 compared to the year ended
December 31, 1996
Revenues increased $9.0 million, or 14%, from $65.4 million for the year
ended December 31, 1996, to $74.4 million for the year ended September 30,
1997, primarily due to the acquisition of Regional Electric in June 1996 (which
represents approximately $13 million of 1997 and $5.2 million of 1996
revenues).
Gross profit decreased $1.1 million, or 7%, from $14.9 million for the year
ended December 31, 1996 to $13.8 million for the year ended September 30, 1997.
Gross margin decreased from 23% to 19% due to a decrease in demand for higher
margin, complex industrial work offset by an increase in demand for lower
margin commercial work, as well as a planned increase in the operating
infrastructure at Regional Electric to support Mill's growth strategy in the
Fort Worth market.
Selling, general and administrative expenses increased 15% from $7.6 million
to $8.8 million. The increase was attributable to a full year of general and
administrative expenses relating to the June 1996 acquisition of Regional
Electric, and a $0.2 million severance payment to the former owner of Regional
Electric.
Mills results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $8.9 million, or 21%, from $43.7 million for the nine
months ended September 30, 1996 to $52.6 million for the nine months ended
September 30, 1997, primarily as a result of the acquisition of Regional
Electric, which specializes in commercial and industrial electrical contracting
and fire alarm, data cabling and control system installation in the greater
Fort Worth area.
Gross profit decreased $1.1 million, or 11%, during the first nine months of
1997 as compared to the nine months ended September 30, 1996. Gross margin
decreased from 22% to 16% due to a decrease in demand for higher margin,
complex industrial work offset by an increase in demand for lower margin
commercial work, as well as a planned increase in the operating infrastructure
at Regional Electric to support Mill's growth strategy in the Fort Worth
market.
Selling, general and administrative expenses increased 30% from $3.8 million
to $5.0 million. The increase was attributable to a full year of general and
administrative expenses relating to the June 1996 acquisition of Regional
Electric, and a $0.2 million severance payment to the former owner of Regional
Electric.
Mills results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $30.1 million, or 86%, from $35.3 million for the year
ended December 31, 1995 to $65.4 million for the year ended December 31, 1996,
primarily due to the acquisition of Regional Electric in June 1996 (which
represents approximately $5.2 million of 1996 revenues), an increase in demand
for large and complex industrial construction contracts for manufacturing and
distribution facilities in the greater Dallas area for which only a select
group of electrical contractors have the resources and expertise to bid and a
30% increase in maintenance and service revenues resulting from Mills' focus on
increasing its maintenance and service revenues.
25
<PAGE> 28
Gross profit increased $7.0 million, or 89%, from $7.9 million for the year
ended December 31, 1995 to $14.9 million for the year ended December 31, 1996.
Gross margin increased to 23% from 22% during this period due to an increase in
higher margin maintenance and service work.
Selling, general and administrative expenses increased 61% from $4.7 million
to $7.6 million. The increase was attributable to increased business volume,
including that related to the acquisition of operations of Regional Electric
and increases in discretionary bonus and savings plan distributions.
MILLS LIQUIDITY AND CAPITAL RESOURCES
Mills used approximately $2.9 million of net cash for operating activities
for the nine months ended September 30, 1997, primarily for working capital.
Net cash used in investing activities was approximately $1.2 million, primarily
for the purchase of tools and equipment. Net cash used in financing activities
was $0.3 million, primarily for stockholder distributions and long-term debt.
At September 30, 1997, Mills had a $2.0 million revolving line of credit
available that expires June 1, 1999. At September 30, 1997, there were
outstanding draws against this line of credit in the amount of $400,000, which
are due and payable within one year.
Mills generated $2.7 million of net cash from operating activities for the
year ended September 30, 1997. Net cash used in investing activities was
approximately $1.5 million, primarily for additions to property and equipment.
Net cash used in financing activities of $3.7 million primarily resulted from
distributions to stockholders.
At September 30, 1997, Mills had working capital of $7.8 million and total
debt obligations of $0.8 million that relate to the acquisition of Regional
Electric and certain capital leases.
Mills generated $7.9 million in net cash from operating activities for the
year ended December 31, 1996, as a result of increased profitability. Net cash
used in investing activities was approximately $0.6 million, representing $0.9
million used for the purchase of property and equipment, partly offset by $0.3
million, net, in collection of loans. Net cash used in financing activities was
$3.9 million for the year ended December 31, 1996, primarily for distribution
of dividends to stockholders. At December 31, 1996, Mills had a $2.0 million
revolving line of credit that was originally scheduled to expire June 1, 1997
and was extended to June 1, 1999. At December 31, 1996, there were no
outstanding draws against this line of credit.
At December 31, 1996, Mills had working capital of $5.5 million and total debt
obligations of $0.6 million.
BEXAR-CALHOUN RESULTS OF OPERATIONS
Bexar was founded in 1966 and operates primarily in the areas around the
cities of San Antonio, New Braunfels and Laredo, Texas. Calhoun was founded in
1958 and operates in the counties around San Antonio.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
26
<PAGE> 29
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- ------------------------------------ ----------------
1995 1996 1996 1997 1997
--------------- ---------------- ---------------- ---------------- ----------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ....................... $27,730 100% $33,023 100% $24,994 100% $24,136 100% $32,165 100%
Cost of services ............... 20,964 76 25,017 76 18,909 76 18,868 78 24,976 78
------- ----- ------- ----- ------- ----- ------- ----- ------
Gross profit ................. 6,766 24 8,006 24 6,085 24 5,268 22 7,189 22
Selling, general and
administrative expenses ...... 3,637 13 3,686 11 2,713 11 2,793 12 3,766 12
------- ---- ------- ----- ------- ----- ------- ----- ------- ----
Income (loss)
from operations ............ $ 3,129 11% $ 4,320 13% $ 3,372 13% $ 2,475 10% $ 3,423 10%
======= ==== ======= ===== ======= ===== ======= ===== ======= ====
</TABLE>
Bexar-Calhoun results of operations for the year ended September 30, 1997
compared to the year ended December 31, 1996
Revenues decreased $0.8 million, or 3%, from $33.0 million for the year ended
December 31, 1996, to $32.2 million for the year ended September 30, 1997,
primarily due to the completion in 1996 of an unusually large electrical
construction contract for a state university in Laredo, Texas.
Gross profit decreased $0.8 million, or 10%, from $8.0 million for the year
ended December 31, 1996, to $7.2 million for the year ended September 30, 1997.
Gross margins decreased to 22% from 24% over these periods. The decrease in
gross profit related to completion of the large state university contract in
1996 and gross margin declined due to a change in customer mix associated with
a decrease in higher margin retail construction in San Antonio.
Selling, general and administrative expenses remained relatively constant in
1997 as compared to 1996.
Bexar-Calhoun results for the nine months ended September 30, 1997 compared to
nine months ended September 30, 1996
Revenues decreased $0.9 million, or 3%, from $25.0 million in 1996 to $24.1
million in 1997, primarily due to an increase in overall growth offset by the
completion in 1996 of an unusually large electrical construction contract for a
state university in Laredo, Texas.
Gross profit decreased $0.8 million, or 13%, from $6.1 million in 1996 to
$5.3 million in 1997. Gross margin decreased from 24% in 1996 to 22% in 1997.
The decrease in gross profit related to completion of the large state
university contract in 1996 and gross margin declined due to a change in
customer mix associated with a decrease in higher margin retail construction in
San Antonio.
Selling, general and administrative expenses remained relatively constant
from 1996 to 1997.
Bexar-Calhoun results for the year ended December 31, 1996 compared to the
year ended December 31, 1995
Revenues increased $5.3 million, or 19%, from $27.7 million in 1995 to $33.0
million in 1996, primarily due to reassignment of certain personnel to Laredo
and New Braunfels, Texas. Bexar-Calhoun realized a $3.6 million increase in
revenues in these two markets between 1995 and 1996, in part from an unusually
large electrical construction contract for a university in Laredo, Texas.
27
<PAGE> 30
Gross profit increased $1.2 million, or 18%, from $6.8 million in 1995 to
$8.0 million in 1996. Gross margin remained stable over these periods. The
increase in gross profit was attributable to higher revenues.
Selling, general and administrative expenses did not significantly change
from 1995 to 1996. Selling, general and administrative expenses declined as a
percentage of revenue from 13% in 1995 to 11% in 1996.
BEXAR-CALHOUN LIQUIDITY AND CAPITAL RESOURCES
Bexar-Calhoun generated $3.1 million of net cash from operating activities
for the nine months ended September 30, 1997. Net cash used in investing
activities was approximately $0.9 million, primarily for additions to property
and equipment and loans to stockholders. Net cash used in financing activities
of $1.5 million resulted from stockholder distributions net of debt repayments.
Bexar-Calhoun generated $3.3 million of net cash from operating activities
for the year ended September 30, 1997. Net cash used in investing activities
was approximately $1.1 million, primarily for additions of property and
equipment. Net cash used in financing activities of $1.9 million primarily
resulted from stockholder distributions and repayments of debt.
At September 30, 1997, Bexar-Calhoun had working capital of $4.2 million and
total debt of $0.9 million.
Bexar-Calhoun generated $2.7 million in net cash from operating activities
for the year ended December 31, 1996, primarily from net income offset by
growth in working capital. Net cash used in investing activities was
approximately $0.6 million for additions to property and equipment net of
stockholder loan repayments. Net cash used by financing activities was $2.8
million for the year ended December 31, 1996 primarily as a result of
stockholder distributions net of debt repayments.
At September 30, 1996, Bexar-Calhoun had working capital of $4.2 million and
total debt of $1.9 million.
POLLOCK RESULTS OF OPERATIONS
Pollock was founded in 1983 and is headquartered in Houston, Texas. Pollock
has specialized expertise in design-and-build projects for commercial and
industrial customers.
28
<PAGE> 31
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
ELEVEN MONTHS ENDED YEAR ENDED
YEARS ENDED OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
---------------------------------- ------------------------------------ ---------------
1995 1996 1996 1997 1997
--------------- --------------- ---------------- ---------------- ---------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ....................... $ 13,002 100% $ 15,816 100% $ 13,305 100% $ 17,780 100% $ 20,291 100%
Cost of services ............... 10,602 82 13,534 86 11,646 88 14,782 83 16,670 82
-------- ---- -------- ---- -------- ---- -------- ---- -------- ----
Gross profit ................. 2,400 18 2,282 14 1,659 12 2,998 17 3,621 18
Selling, general and
administrative expenses ...... 2,149 16 2,463 15 2,083 16 2,515 14 2,895 14
---- -------- ---- -------- ---- -------- ---- -------- ----
Income (loss)
from operations ............ $ 251 2% $ (181) (1)% $ (424) (4)% $ 483 3% $ 726 4%
======== ==== ======== ==== ======== ==== ======== ==== ======== ====
</TABLE>
Pollock results for the year ended September 30, 1997 compared to the year
ended October 31, 1996
Revenues increased $4.5 million, or 28%, from $15.8 million for the year
ended October 31, 1996 to $20.3 million for the year ended September 30, 1997,
primarily due to an increase in large commercial contracts, increased data
cabling work, and higher revenues from service work.
Gross profit increased $1.4 million, or 59%, from $2.2 million for the year
ended October 31, 1996 to $3.6 million for the year ended September 30, 1997.
Gross margin increased to 18% from 14% over these periods. The gross profit and
gross margin increases in 1997 when compared to 1996 are primarily attributable
to specific low margin or loss contracts in 1996 that did not recur in 1997.
Selling, general and administrative expenses increased 18% from $2.5 million
to $2.9 million due to the addition of certain strategic management personnel.
As a percent of revenues, selling, general and administrative expenses
decreased in 1997 over 1996 by 1%.
Pollock results for the eleven months ended September 30, 1997 compared to
eleven months ended September 30, 1996
Revenues increased $4.5 million, or 34%, from $13.3 million for the eleven
months ended September 30, 1996 to $17.8 million for the eleven months ended
September 30, 1997, primarily due to an increase in large commercial contracts,
increased data cabling work and higher revenues for service and small project
work.
Gross profit increased $1.3 million, or 81%, from $1.7 million for the eleven
months ended September 30, 1996 to $3.0 million for the eleven months ended
September 30, 1997. Gross margin increased to 17% from 12% over these periods.
The gross profit and gross margin increases in 1997 when compared to 1996 are
primarily attributable to specific low margin or loss contracts in 1996 that
did not recur in 1997.
Selling, general and administrative expenses increased 21% from $2.1 million
to $2.5 million due to the addition of certain strategic management personnel.
As a percentage of revenues, selling, general and administrative expenses
actually decreased in 1997 over 1996 by 2%.
Pollock results for the year ended October 31, 1996 compared to the year ended
October 31, 1995
Revenues increased $2.8 million, or 22%, from $13.0 million for the year
ended October 31, 1995, to $15.8 million for the year ended October 31, 1996,
primarily due to an increase in commercial construction and the addition of
data cabling services.
29
<PAGE> 32
Gross profit decreased $0.1 million, or 5%, from $2.4 million for the year
ended October 31, 1995 to $2.3 million for the year ended October 31, 1996.
Gross margin decreased to 14% from 18% over these periods. These decreases were
due to specific low margin or loss contracts in 1996.
Selling, general and administrative expenses increased 15% from $2.1 million
to $2.5 million. The increase was attributable to an increase in management
staff necessary to support Pollock's growth strategy, including the addition of
data cabling expertise.
POLLOCK LIQUIDITY AND CAPITAL RESOURCES
Pollock used $0.1 million of net cash for operating activities during the
eleven months ended September 30, 1997. Net cash used in investing activities
was approximately $0.1 million, primarily for increases in the leasing of
capital assets. Net cash provided by financing activities of $0.3 million
resulted from additional short-term line of credit borrowings.
Net cash from operating activities for the year ended September 30, 1997 was
not material in amount. Net cash used in investing activities was approximately
$0.2 million, primarily for increases in the leasing of capital assets. Net
cash provided by financing activities of $0.5 million resulted from additional
short-term line of credit borrowings.
At September 30, 1997, Pollock had working capital of $0.6 million and total
debt of $1.8 million.
Pollock used $0.7 million in net cash from operating activities for the year
ended October 31, 1996, primarily to fund working capital requirements. Net
cash used in investing activities was approximately $0.2 million for additions
to property and equipment. Net cash provided by financing activities was $0.7
million for the year ended October 31, 1996 primarily as a result of short-term
line of credit borrowings.
At October 31, 1996, Pollock had working capital of $0.5 million and total
debt of $1.5 million.
MUTH RESULTS OF OPERATIONS
Muth was founded in 1970 and has seven offices located in South Dakota,
including its headquarters in Mitchell. Muth also from time to time operates in
Wyoming, Montana, Nebraska and Minnesota.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------- -------------------------------------- -----------------
1995 1996 1996 1997 1997
----------------- ----------------- ----------------- ----------------- -----------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .................. $16,012 100% $16,830 100% $12,517 100% $14,466 100% $18,779 100%
Cost of services .......... 12,189 76 12,834 76 9,751 78 11,428 79 14,511 77
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Gross profit ............ 3,823 24 3,996 24 2,766 22 3,038 21 4,268 23
Selling, general
and administrative
expenses ................ 2,923 18 2,957 18 2,147 17 2,264 16 3,074 16
------- ------- ------- ------- ------- ------- ------- ------- ------- -------
Income (loss)
from operations ....... $ 900 6% $ 1,039 6% $ 619 5% $ 774 5% $ 1,194 7%
======= ======= ======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
30
<PAGE> 33
Muth results for the year ended September 30, 1997 compared to the year ended
December 31, 1996
Revenues increased $2.0 million, or 12%, from $16.8 million for the fiscal
period ended December 31, 1996 to $18.8 million for the fiscal year ended
September 30, 1997, due to a significant increase in market demand that was
offset by work delays caused by the harsh winter, which lasted from November
1996 through early April 1997.
Gross profit increased $0.3 million, or 7%, from $4.0 million for the fiscal
period ended December 31, 1996 to $4.3 million for the fiscal year ended
September 30, 1997. The increase in gross profit is attributable to increased
market demand that was offset by work delays caused by the harsh winter, which
lasted from November 1996 through early April 1997. Gross margin decreased to
23% from 24% over these periods.
Muth results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $2.0 million, or 16%, from $12.5 million for the nine
months ended September 30, 1996 to $14.5 million for the nine months ended
September 30, 1997, due to a significant increase in market demand that was
offset by work delays caused by the harsh winter, which lasted from November
1996 through early April 1997.
Gross profit increased $0.2 million, or 10%, from $2.8 million for the nine
months ended September 30, 1996 to $3.0 million for the nine months ended
September 30, 1997. Gross margin decreased to 21% from 22% over these periods.
The decreases in the gross margin are solely attributable to the harsh winter
and related work delays in early 1997.
Selling, general and administrative expenses increased 5% from $2.1 million
to $2.3 million. The increase was attributable to the increase in market demand
and related infrastructure costs.
Muth results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $0.8 million, or 5%, from $16.0 million for the year ended
December 31, 1995 to $16.8 million for the year ended December 31, 1996, due to
increased market demands for electrical contracting services, slightly offset
by delays caused by the harsh winter, which started in November 1996 and
continued through early April 1997.
Gross profit increased $0.2 million, or 5%, from $3.8 million for the year
ended December 31, 1995 to $4.0 million for the year ended December 31, 1996.
There was no significant change in gross margin. The gross profit and gross
margin increases in 1996 when compared to 1995 were attributable to increased
margins on service work in 1996 and increased revenues.
Selling, general and administrative expenses remained constant over these
periods.
31
<PAGE> 34
MUTH LIQUIDITY AND CAPITAL RESOURCES
Muth generated $0.5 million of net cash from operating activities for the
nine months ended September 30, 1997. Net cash used in investing activities was
approximately $0.2 million, primarily for additions to property and equipment.
Net cash used in financing activities of $0.4 million primarily related to
distributions to stockholders.
Muth generated $0.5 million of net cash from operating activities for the
fiscal year ended September 30, 1997. Net cash used in investing activities was
approximately $0.2 million, primarily for additions to property and equipment.
Net cash used in financing activities of $0.3 million primarily relates to
payments of short-term debt.
At September 30, 1997, Muth had working capital of $2.3 million and total debt
of $0.5 million. Muth currently has no long-term debt. Cash requirements
increased for the fiscal year ended September 30, 1997 as a result of a higher
proportion of government contracts, which typically have payment periods of 45
to 60 days rather than the 20-day period typical for private contracts.
Muth generated $0.5 million in net cash from operating activities for the
year ended December 31, 1996, primarily from earnings net of investments in
working capital. Net cash used in investing activities was approximately $0.4
million for additions to property and equipment. Net cash used by financing
activities was $0.1 million for the year ended December 31, 1996 primarily as a
result of stockholder distributions in excess of borrowings.
At December 31, 1996, Muth had working capital of $1.9 million and total debt
of $0.5 million.
32
<PAGE> 35
DANIEL RESULTS OF OPERATIONS
Daniel Electrical Contractors, Inc. was founded in 1986, is headquartered in
Miami, Florida, and operates primarily in South Florida. Daniel Electrical of
Treasure Coast Inc. was founded in 1995 and is headquartered in Vero Beach,
Florida. In addition to commercial and industrial contracting, Daniel services
high-end residential construction and repairs on a time-and-material basis,
from both its Miami and Vero Beach, Florida locations.
The following table sets forth selected statement of operations data and such
data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED
----------------------------------------- --------------------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
------------------- ------------------ ------------------ ------------------ -------------------
(IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ................ $ 12,049 100% $ 12,585 100% $ 8,846 100% $ 14,670 100% $ 18,409 100%
Cost of services ........ 11,725 97 9,713 77 6,675 75 10,480 71 13,518 73
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
Gross profit .......... 324 3 2,872 23 2,171 25 4,190 29 4,891 27
Selling, general and
administrative ........ 1,502 13 1,884 15 1,360 15 1,792 12 2,316 13
-------- -------- -------- -------- ------- -------- -------- -------- -------- --------
expenses
Income/(loss) from
operations ........... $ (1,178) (10)% $ 988 8% $ 811 10% $ 2,398 17% $ 2,575 14%
======== ======== ======== ======== ======= ======== ======== ======== ======== ========
</TABLE>
33
<PAGE> 36
Daniel results for the year ended September 30, 1997 compared to the year
ended December 31, 1996
Revenues increased $5.8 million, or 46%, from $12.6 million for the year
ended December 31, 1996 to $18.4 million for the year ended September 30, 1997,
primarily due to increased contract revenues on several large high-rise
condominium projects in South Florida during the year ended September 30, 1997.
Gross profit increased $2.0 million, or 70%, from $2.9 million for the year
ended December 31, 1996 to $4.9 million for the year ended September 30, 1997.
Gross margin increased from 23% to 27%, primarily due to increased labor
efficiencies and an increase in higher margin high-rise residential contracts.
Selling, general and administrative expenses increased $0.4 million, or 23%,
from $1.9 million for the year ended December 31, 1996 to $2.3 million for the
year ended September 30, 1997, primarily due to increases in office salaries
associated with increased revenues. As a percentage of revenues, selling,
general and administrative expenses decreased from 15% to 13%.
Daniel results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $5.9 million, or 66%, from $8.8 million for the nine
months ended September 30, 1996 to $14.7 million for the nine months ended
September 30, 1997, primarily due to favorable pricing for negotiated contracts
in process during the nine months ended September 30, 1997.
Gross profit increased $2.0 million, or 93%, from $2.2 million for the nine
months ended September 30, 1996 to $4.2 million for the nine months ended
September 30, 1997. Gross margin increased from 25% to 29%, primarily due to
increased labor efficiencies and an increase in higher margin high-rise
residential contracts.
Selling, general and administrative expenses increased $0.4 million, or 32%,
from $1.4 million for the nine months ended September 30, 1996 to $1.8 million
for the nine months ended September 30, 1997, primarily due to increases in
office salaries associated with increased revenues. As a percentage of
revenues, selling, general and administrative expenses decreased from 15% to
12%.
Daniel results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $0.6 million, or 4%, from $12.0 million for the year ended
December 31, 1995 to $12.6 million for the year ended December 31, 1996,
primarily due to increased revenues from negotiated contracts in process during
the year ended December 31, 1996.
Gross profit increased $2.6 million, or 786%, from $0.3 million for the year
ended December 31, 1995 to $2.9 million for the year ended December 31, 1996.
Gross margin increased from 3% to 23%, as a result of cost overruns incurred in
1995 on certain projects and an increase in labor efficiencies and an increase
in higher margin high-rise residential contracts.
Selling, general and administrative expenses increased $0.4 million, or 25%,
from $1.5 million for the year ended December 31, 1995 to $1.9 million for the
year ended December 31, 1996, as a result of the increase in revenues.
34
<PAGE> 37
DANIEL LIQUIDITY AND CAPITAL RESOURCES
Daniel generated $1.8 million in net cash from operating activities for the
nine months ended September 30, 1997, primarily due to an increase in accounts
receivable and accounts payable, both of which represented offsets to net
income generated during the period. Net cash used in investing activities was
approximately $0.9 million, principally for capital expenditures. Net cash used
in financing activities was approximately $0.3 million, principally for
shareholder distributions net of long-term borrowings.
Daniel generated $2.0 million in net cash from operating activities for the
year ended September 30, 1997, primarily due to an increase in accounts
receivable and accounts payable, both of which represented offsets to net
income generated during the period. Net cash used in investing activities was
approximately $1.3 million, principally for capital expenditures. Net cash used
in financing activities was approximately $0.4 million, principally for
shareholder distributions net of long-term borrowings.
Working capital as of September 30, 1997 was $4.5 million, and total debt
outstanding was $0.7 million, of which $0.6 million was owed to a shareholder.
Days sales outstanding in accounts receivable increased from 42 days as of
December 31, 1996, to 68 days as of September 30, 1997. Such increase is
attributable to an increase in sales during the second and third quarters of
1997.
Daniel generated $1.2 million in net cash from operating activities for the
year ended December 31, 1996, primarily due to an increase in collections of
deposits and billings on contracts in progress. Net cash used in investing
activities was approximately $0.5 million, principally for capital expenditures
and increases in mutual fund investments. Net cash used in financing activities
was approximately $0.4 million, principally for debt repayments.
Working capital as of December 31, 1996 was $2.4 million, and total debt
outstanding was $0.6 million, all of which was owed to a shareholder.
35
<PAGE> 38
AMBER RESULTS OF OPERATIONS
Amber was founded in 1979 and operates from its base near Orlando, Florida.
Amber's revenues in fiscal 1996 were primarily from commercial and industrial
contracting.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED YEAR ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1995 1996 1996 1997 1997
---------------- -------------- -------------- -------------- --------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ................ $ 9,728 100% $13,878 100% $10,572 100% $13,080 100% $16,386 100%
Cost of services ........ 8,635 89 12,215 88 8,710 82 9,910 76 13,415 82
------- ------- ------- ----- ------- ----- ------- ----- ------- -----
Gross profit .......... 1,093 11 1,663 12 1,862 18 3,170 24 2,971 18
Selling, general and
administrative
expenses .............. 957 10 1,160 8 978 9 1,197 9 1,379 8
------- ------- ------- ----- ------- ----- ------- ----- ------- -----
Income from
operations ........... $ 136 1% $ 503 4% $ 884 8% $ 1,973 15% $ 1,592 10%
======= ======= ======= ===== ======= ===== ======= ===== ======= =====
</TABLE>
36
<PAGE> 39
Amber results for the year ended September 30, 1997 compared to the year ended
December 31, 1996
Revenues increased $2.5 million, or 18%, from $13.9 million for the year
ended December 31, 1996 to $16.4 million for the year ended September 30, 1997,
primarily due to three large retail construction contracts in 1997.
Gross profit increased $1.3 million, or 79%, from $1.7 million for the year
ended December 31, 1996 to $3.0 million for the year ended September 30, 1997.
Gross margins increased to 18% from 12% over these periods. The gross profit
and gross margin increases in 1997 when compared to 1996 are attributable to an
increase in the overall demand, as well as demand for higher margin retail
construction contracts.
Selling, general and administrative expenses increased 19% from $1.2 million
to $1.4 million. As a percentage of revenues, selling, general and
administrative expenses remained relatively constant in 1997 as compared to
1996.
Amber results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $2.5 million, or 24%, from $10.6 million for the nine
months ended September 30, 1996 to $13.1 million for the nine months ended
September 30, 1997, primarily from three large retail construction contracts in
1997.
Gross profit increased $1.3 million, or 70%, from $1.9 million in 1996 to
$3.2 million in 1997. Gross margin increased from 18% to 24% over these
periods. The improvement in gross margin was attributable to an increase in the
number of commercial contracts with higher gross margins recognized.
Selling, general and administrative expenses increased 22% from $1.0 million
to $1.2 million for the nine months ended September 30, 1996 compared to the
nine months ended September 30, 1997.
Amber results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $4.2 million, or 43%, from $9.7 million in 1995 to $13.9
million in 1996, primarily due to increased commercial construction of shopping
malls and grocery stores in central Florida.
Gross profit increased $0.6 million, or 52%, from $1.1 million in 1995 to
$1.7 million in 1996. Gross margin remained stable over these periods.
Selling, general and administrative expenses increased 21% from $1.0 million
in 1995 to $1.2 million in 1996. The increase was attributable to increased
management salaries associated with increased revenues.
AMBER LIQUIDITY AND CAPITAL RESOURCES
Amber generated $0.7 million of net cash from operating activities for the
nine months ended September 30, 1997. Net cash used in investing activities was
approximately $0.3 million, primarily for additions to property and equipment.
Net cash used in financing activities was not material in amount for the nine
months ended September 30, 1997.
37
<PAGE> 40
Amber generated $0.7 million of net cash from operating activities for the
year ended September 30, 1997. Net cash used in investing activities was
approximately $0.3 million, primarily for additions to property and equipment.
Net cash provided by financing activities was not material for the year ended
September 30, 1997.
At September 30, 1997, Amber had working capital of $1.8 million and total
debt of $0.7 million.
Amber generated $0.7 million in net cash from operating activities for the
year ended December 31, 1996, primarily for earnings and reductions in working
capital. Net cash used in investing activities was approximately $0.2 million
for additions of property and equipment. Net cash provided by financing
activities was not material for the year ended December 31, 1996.
At December 31, 1996, Amber had working capital of $0.6 million and total
debt of $0.7 million.
HAYMAKER RESULTS OF OPERATIONS
Haymaker was founded in 1981, is headquartered in Birmingham, Alabama, and
operates in Alabama, northwest Florida and North Carolina. Haymaker's revenues
in fiscal 1996 were primarily from commercial and industrial contracting
services.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30, YEAR ENDED
DECEMBER 31, -------------------------------------- SEPTEMBER 30,
1996 1996 1997 1997
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ..................... $ 7,634 100% $ 5,105 100% $ 9,243 100% $11,772 100%
Cost of services ............. 6,412 84 4,419 87 7,927 86 9,920 84
------- ------- ------- ------- ------- ------- ------- -------
Gross profit ............... 1,222 16 686 13 1,316 14 1,852 16
Selling, general and
administrative
expenses ................... 680 9 364 7 824 9 1,140 10
------- ------- ------- ------- ------- ------- ------- -------
Income from
operations ............... $ 542 7% $ 322 6% $ 492 5% $ 712 6%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Haymaker results for the year ended September 30, 1997 compared to the year
ended December 31, 1996
Revenues increased $4.2 million, or 54%, from $7.6 million for the year ended
December 31, 1996 to $11.8 million for the year ended September 30, 1997,
primarily due to a large hospital contract and an overall increase in
construction activity in Birmingham, Alabama.
Gross profit increased $0.7 million, or 52%, from $1.2 million for the year
ended December 31, 1996 to $1.9 million for the year ended September 30, 1997.
Gross margins remained constant at 16%. The gross profit increase in 1997 when
compared to 1996 was attributable to higher demand.
Selling, general and administrative expenses increased 68% from $0.7 million
to $1.1 million due to higher bonus distributions under Haymaker's incentive
compensation plan. As a percentage of revenues, selling, general and
administrative expenses increased in 1997 as compared to 1996 by 1%.
38
<PAGE> 41
Haymaker results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $4.1 million, or 81%, from $5.1 million for the nine
months ended September 30, 1996, to $9.2 million for the nine months ended
September 30, 1997, primarily due to a large hospital contract and an overall
increase in construction activity in Birmingham, Alabama.
Gross profit increased $0.6 million, or 92%, from $0.7 million for the nine
months ended September 30, 1996 to $1.3 million for the same period in 1997.
Gross margin increased to 14% in 1997 from 13% in 1996 over these periods. The
increase in gross profit and gross margin was attributable to higher demand and
lower than expected costs and certain fixed price contracts.
Selling, general and administrative expenses increased 126% from $0.4 million
for the nine months ended September 30, 1996, to $0.8 million for the nine
months ended September 30, 1997. The increase was attributable to higher bonus
distributions under Haymaker's incentive compensation plan.
HAYMAKER LIQUIDITY AND CAPITAL RESOURCES
Haymaker generated $0.4 million of net cash from operating activities for the
nine months ended September 30, 1997. Net cash used in financing activities of
$0.1 million resulted from repayments of short-term borrowings.
Haymaker generated $0.7 million of net cash from operating activities for the
year ended September 30, 1997. Net cash used in investing activities was not
material in amount. Net cash used by financing activities of $0.5 million
resulted from distributions to owners of equity interests in consolidated
entities.
At September 30, 1997, Haymaker had working capital of $1.6 million and no
debt.
Haymaker used $0.1 million in net cash from operating activities for the year
ended December 31, 1996. Net cash used by financing activities was $0.4 million
for the year ended December 31, 1996 primarily as a result of distributions to
owners of equity interests in consolidated entities.
At December 31, 1996 Haymaker had working capital of $1.3 million and no
debt.
SUMMIT RESULTS OF OPERATIONS
Summit was founded in 1987 and is located in Houston, Texas. Summit's
revenues in its fiscal year ended March 31, 1997 were primarily from commercial
and industrial contracting. Summit has specialized expertise in data cable
design and installation and lighting design.
39
<PAGE> 42
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED SEPTEMBER 30, YEAR ENDED
MARCH 31, ----------------------------------- SEPTEMBER 30,
1997 1996 1997 1997
---------------- ---------------- ---------------- ----------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues .......................... $10,565 100% $ 5,735 100% $ 6,165 100% $10,995 100%
Cost of services .................. 9,157 87 4,946 86 5,243 85 9,454 86
------- ------- ------- ------- ------- ------- ------- -------
Gross profit .................... 1,408 13 789 14 922 15 1,541 14
Selling, general and
administrative expenses ......... 1,340 12 699 12 822 13 1,463 13
------- ------- ------- ------- ------- ------- ------- -------
Income (loss) from
operations .................... $ 68 1% $ 90 2% $ 100 2% $ 78 1%
======= ======= ======= ======= ======= ======= ======= =======
</TABLE>
Summit results for the year ended September 30, 1997 compared to the year
ended March 31, 1997
Revenues increased $0.4 million, or 4%, from $10.6 million for the year ended
March 31, 1997, to $11.0 million for the year ended September 30, 1997,
primarily due to an increase in larger commercial contracts.
Gross profit increased $0.1 million, or 9%, from $1.4 million for the year
ended March 31, 1997, to $1.5 million for the year ended September 30, 1997.
Gross margins increased to 14% from 13% over these periods. The gross profit
and gross margin increases in 1997 when compared to 1996 are primarily
attributable to the increase in larger commercial contracts.
Selling, general and administrative expenses increased 9% from $1.3 million
to $1.5 million due to increases in management bonuses, higher insurance and
business promotional expenses. As a percentage of revenues, selling, general
and administrative expenses remained constant.
Summit results for the six months ended September 30, 1997 compared to six
months ended September 30, 1996
Revenues increased $0.5 million, or 7%, from $5.7 million for the six months
ended September 30, 1996 to $6.2 million for the six months ended September 30,
1997, primarily due to the addition of large contracts with short construction
periods.
Gross profit increased $0.1 million, or 17%, from $0.8 million for the six
months ended September 30, 1996 to $0.9 million for the six months ended
September 30, 1997. Gross margin increased from 14% to 15% from 1996 to 1997.
The increase in gross profit was primarily attributable to high profitability
on certain jobs with tight deadlines, partially offset by the write-off of a
receivable from a contractor which went bankrupt.
Selling, general and administrative expenses increased 18% from $0.7 million
to $0.8 million. The increase was attributable to management bonuses, higher
insurance and business promotional expenses.
40
<PAGE> 43
SUMMIT LIQUIDITY AND CAPITAL RESOURCES
Summit generated $0.1 million of net cash from operating activities for the
six months ended September 30, 1997. Net cash provided by investing activities
and net cash provided by financing activities were not material in amount for
the six months ended September 30, 1997.
Summit generated near break-even levels of net cash from operating activities
for the year ended September 30, 1997. Summit used $0.2 million of net cash
from investing activities for the year ended September 30, 1997 primarily for
the purchase of service trucks. Net cash provided by financing activities of
$0.2 million resulted from borrowings of long- term debt.
At September 30, 1997, Summit had working capital of $0.6 million and total
debt of $0.9 million.
Summit generated near break-even levels of net cash from operating activities
for the year ended March 31, 1997. Net cash used in investing activities was
approximately $0.2 million primarily for the purchase of service trucks. Net
cash provided by financing activities was $0.2 million for the year ended March
31, 1997 primarily as a result of long-term borrowings.
At March 31, 1997 Summit had working capital of $0.6 million and total debt
of $0.9 million.
41
<PAGE> 44
THURMAN & O'CONNELL RESULTS OF OPERATIONS
Thurman & O'Connell was founded in 1988. It is headquartered in Louisville,
Kentucky, and operates primarily in Louisville and the surrounding areas.
Thurman & O'Connell's revenues in 1996 and 1997 were primarily from commercial
and industrial contracting, with an emphasis on institutional and commercial
properties.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED
----------------------------------------------------------------- SEPTEMBER 30,
1995 1996 1996 1997 1997
-------------- -------------- ------------------------------------------------
(UNAUDITED) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues ................... $4,729 100% $4,551 100% $3,741 100% $3,239 100% $4,049 100%
Cost of services ........... 3,309 70 3,059 67 2,531 68 1,653 51 2,181 54
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Gross profit ............. 1,420 30 1,492 33 1,210 32 1,586 49 1,868 46
Selling, general and
administrative
expenses ................. 512 11 503 11 397 10 397 12 503 12
------ ------ ------ ------ ------ ------ ------ ------ ------ ------
Income from operations ... $ 908 19% $ 989 22% $ 813 22% $1,189 37% $1,365 34%
====== ====== ====== ====== ====== ====== ====== ====== ====== ======
</TABLE>
42
<PAGE> 45
Thurman & O'Connell results for the year ended September 30, 1997 compared to
the year ended December 31, 1996
Revenues decreased $0.6 million, or 11%, from $4.6 million for the year ended
December 31, 1996, to $4.0 million for the year ended September 30 1997,
primarily due to the completion of a large multi-year hospital project in 1996.
Gross profit increased $0.4 million, or 25%, from $1.5 million for the year
ended December 31, 1996, to $1.9 million for the year ended September 30, 1997.
Gross margin increased to 46% from 33% over these periods. The gross profit and
gross margin increases in 1997 when compared to 1996 are attributable to
favorable pricing on certain overbudget projects for which Thurman & O'Connell
shared in the cost savings it provided to its customers.
Selling, general and administrative expenses did not change significantly
between the year ended September 30, 1997 and the year ended December 31, 1996.
Thurman & O'Connell results for the nine months ended September 30, 1997
compared to nine months ended September 30, 1996
Revenues decreased $0.5 million, or 13%, from $3.7 million in the nine months
ended September 30, 1996 to $3.2 million in the nine months ended September 30,
1997, primarily due to the completion of a large multi-year hospital project in
1996.
Gross profit increased $0.4 million, or 31%, from $1.2 million in the nine
months ended September 30, 1996 to $1.6 million in the nine months ended
September 30, 1997, primarily due to favorable pricing on certain overbudget
projects for which Thurman & O'Connell shares in the cost savings provided to
its customers. Gross margin increased from 32% in the nine months ended
September 30, 1996 to 49% in the nine months ended September 30, 1997 due to a
large multi-year lower profit margin hospital project that was completed in
1996.
Selling, general and administrative expenses did not change significantly
between the nine months ended September 30, 1997 and the nine months ended
September 30, 1996.
Thurman & O'Connell results for the year ended December 31, 1996 compared to
the year ended December 31, 1995
Revenues decreased $0.1 million, or 4%, from $4.7 million in 1995 to $4.6
million in 1996, primarily due to the completion of a large multi-year hospital
project in 1996.
Gross profit increased $0.1 million, or 5%, from $1.4 million in 1995 to $1.5
million in 1996. Gross margin increased 3% from 30% in 1995 to 33% in 1996.
Selling, general and administrative expenses remained relatively constant
between 1995 and 1996.
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THURMAN & O'CONNELL LIQUIDITY AND CAPITAL RESOURCES
Thurman & O'Connell generated $0.9 million of net cash for operating
activities for the nine months ended September 30, 1997. Net cash used in
investing activities was not material in amount. Net cash used by financing
activities of $1.2 million primarily resulted from distributions to
stockholders.
Thurman & O'Connell generated $0.9 million of net cash from operating
activities for the year ended September 30, 1997. Net cash provided and used in
investing activities was not material in amount. Net cash used in financing
activities was $1.2 million, primarily for distributions to stockholders.
At September 30, 1997, Thurman & O'Connell had working capital of $1.5 million
and total debt of $0.1 million.
Thurman & O'Connell generated $1.3 million in net cash from operating
activities for the year ended December 31, 1996, primarily from earnings net of
investments in working capital. Net cash used by financing activities was $0.6
million for the year ended December 31, 1996 primarily as a result of
distributions to stockholders and payments on debt.
At December 31, 1996 Thurman & O'Connell had working capital of $1.3 million
and total debt of $0.1 million.
BUSINESS
IES was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial and residential markets. On January 30,
1998, concurrent with the closing of the Offering, IES acquired, in separate
transactions 16 Founding Companies engaged in all facets of electrical
contracting and maintenance services. Subsequent to its IPO, and through
September 11, 1998, the Company has acquired 19 additional electrical
contracting and maintenance businesses. Of these 19 Post IPO Acquisitions, 18
were accounted for using the purchase method of accounting and one was
accounted for using the pooling of interests method of accounting. IES has
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acquired 35 electrical contracting and maintenance service companies with pro
forma combined revenues of $705.0 million and $553.3 million for the year ended
September 30, 1997 and the nine months ended June 30, 1998, respectively, making
the Company one of the largest providers of electrical contracting and
maintenance services in the United States. Of such fiscal 1997 pro forma
revenues, approximately 80% was derived from commercial approximately 46% and
industrial approximately 34% contracting, approximately 14% was derived from
residential contracting and approximately 6% was derived from electrical
maintenance work. Combined revenues of the Companies, which have been in
business an average of 21 years, increased at an average compound annual
growth rate of approximately 17% from fiscal 1995 through 1997.
The Company offers a broad range of electrical contracting services,
including design and installation for both new and renovation projects in the
commercial, industrial and residential markets. The Company also offers
long-term and per-call maintenance services, which generally provide recurring
revenues that are relatively independent of levels of construction activity.
Typically, the Companies specialize in either commercial and industrial or
residential work, although a few of the Companies have both commercial and
industrial and residential operations.
In certain markets the Company offers design-and-build expertise and
specialized services, which typically require specific skills and equipment and
provide higher margins than general electrical contracting and maintenance
services. In a design-and-build project, the electrical contractor applies
in-house electrical engineering expertise to design the most cost-effective
electrical system for a given structure and purpose, taking into account local
code requirements. Specialized services offered by the Company include
installations of wiring or cabling for the following: data cabling for computer
networks; fiber optic cable systems; telecommunications systems; energy
management systems which control the amount of power used in facilities; fire
alarm and security systems; cellular phone transmission sites; "smart houses"
that integrate computer, energy management, security, safety, comfort and
telecommunication systems; lightning protection systems; clean rooms for
fabrication of microprocessors and similar devices; computer rooms; back-up
electrical systems and uninterruptible power supplies; high voltage
distribution and traffic signal systems.
INDUSTRY OVERVIEW
General. Virtually all construction and renovation in the United States
generates demand for electrical contracting services. Depending upon the exact
scope of work, electrical work generally accounts for approximately 8% to 12%
of the total construction cost of the Company's commercial and industrial
projects and 5% to 10% of the total construction cost of the Company's
residential projects. In recent years, the Companies have experienced a growing
demand for electrical contracting services per project due to increased
electrical code requirements, demand for additional electrical capacity,
including increased capacity for computer systems, additional data cabling
requirements and the construction of "smart houses" with integrated systems.
The overall electrical contracting industry, including commercial, industrial
and residential markets, was estimated by the U.S. Census to have generated
annual revenues in excess of $40 billion in 1992, the most
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recent available U.S. Census data. These Census data indicate that the
electrical contracting industry is highly fragmented with more than 54,000
companies, most of which are small, owner-operated businesses, performing
various types of electrical work. The Company believes there are significant
opportunities for a well-capitalized national company to provide comprehensive
electrical contracting and maintenance services and that the fragmented nature
of the electrical contracting industry will provide significant opportunities
to consolidate commercial and industrial and residential electrical contracting
and maintenance service businesses.
Commercial and Industrial Market. Commercial and industrial consumers of
electrical contracting and maintenance services include general contractors;
developers; consulting engineers; architects; owners and managers of large
retail establishments, office buildings, apartments and condominiums; theaters
and restaurants; hotels and casinos; manufacturing and processing facilities;
arenas and convention centers; hospitals; school districts; military and other
government agencies; airports; prisons and car lots. High-rise residential
projects are viewed as commercial rather than residential projects because the
electrical wiring methods and field skills require similar techniques.
Commercial and industrial electrical construction is most often performed by a
subcontractor for a general contractor, although an electrical contractor may
also perform services directly as a prime contractor. Generally, contracts are
obtained through a competitive bid process or on negotiated terms through
ongoing customer relationships.
Typically, electrical contracting services for the industrial and commercial
market involve wiring a structure to specifications set by the customer,
increasingly with design-and-build engineering expertise provided by the
electrical contractor. The normal commercial or industrial job is wired through
pipe or conduit, which is installed through metal or concrete structures. Some
commercial and industrial contractors prefabricate certain components offsite,
at the contractor's office or at the facilities of a subcontractor or
manufacturer, and these items are transported to the job site ready to be
installed.
From fiscal 1995 through 1997, the Companies revenues from electrical
contracting for commercial and industrial customers have grown at an average
compound annual rate of approximately 17% per year. The Company believes that
growth in the commercial and industrial market reflects a number of factors,
including (i) levels of construction and renovation activity; (ii) regulations
imposed by electric codes, which establish minimum power and wiring
requirements; (iii) safety codes mandating additional installation of smoke
detectors and the use of ground fault circuit protection devices in more
locations; (iv) revised national energy standards that dictate the use of more
energy-efficient lighting fixtures and other equipment; (v) continuing demand
to build out lease spaces in office buildings and to reconfigure space for new
tenants; (vi) increases in use of electrical power, creating needs for
increased capacity and outlets, as well as data cabling and fiber optics and
(vii) requirements of building owners and developers to facilitate marketing
their properties to tenants and buyers by installing electrical capacity in
excess of minimum code requirements.
Residential Market. Contracting work for the residential market consists
primarily of electrical installations in new single family and low-rise
multifamily residence construction for
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customers such as large homebuilders and apartment developers. The Company also
provides maintenance services to these customers as well as to individual
property owners in some locations. The typical residential electrical wiring
job is done with plastic-jacketed wiring installed through wood studs. As in
the commercial and industrial market, the opportunities for design-and-build
projects have grown recently for residential contractors. The residential
market, with its repetitive floor plans, lends itself to prefabrication
techniques. The use of prefabricated components increases productivity by
reducing construction time, labor costs and skill requirements. The residential
market is primarily dependent on the number of single family and multifamily
home starts, which are in turn affected by interest rates, tax considerations
and general economic conditions. Competitive factors particularly important in
the residential market include a contractor's ability to build relationships
with customers such as large homebuilders and apartment developers by providing
services in diverse geographic markets as construction activity shifts to new
locations. The Companies residential electrical contracting revenues have grown
at an average compound annual rate of approximately 19% from fiscal 1995
through 1997.
Residential electrical contractors with specialized expertise and the
necessary licenses are in a position to meet market demand for increasingly
complex residential electrical systems. For example, some newly constructed
homes have been designed as smart houses with integrated computer-controlled
systems wired in during construction. In addition, more stringent building and
fire codes have resulted in more complex wiring requirements for smoke
detectors and alarms.
STRATEGY
The Company believes that its size, geographical diversity of operations,
industry relationships, expertise in specialized markets, number of licensed
electricians and access to design technology give the Company significant
competitive advantages in the electrical contracting and maintenance services
industry. Through increased size, the Company believes it has greater ability
to compete for larger jobs that require greater technical expertise, personnel
availability and bonding capacity, to more effectively allocate and share
resources in serving customers in each of its markets and to attract, train and
retain qualified electricians. The Company also believes that increased size
provides increased efficiency in materials purchasing, computer system
development, employee benefits, bonding, insurance and financing. The Company
believes that the diversity of its operations diminishes the effects of
regional and market downturns, offers opportunities to pursue growth in its
existing markets and creates a base of expertise to expand into new markets and
serve new customers.
The Company leverages its experienced management and extensive relationships
within the electrical contracting industry to increase its revenues and reduce
its cost infrastructure through internal growth as well as the acquisition of
additional electrical contracting businesses. The Company's management includes
a Chief Executive Officer and two Chief Operating Officers, each with 25 years
or more of experience in the electrical contracting industry. The Company has
extensive business relationships within the industry, in part through Companies
that are members of the IEC. The IEC is the second largest electrical trade
organization in the U.S. and has nearly 3,000 contracting firms as members. The
Company's Chief Executive Officer is a past president
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<PAGE> 50
of the IEC, and two founders are members of the executive committee of the IEC.
The IEC sponsors forum groups, which are discussion groups of members of the
IEC that foster the sharing of best business practices. The Companies are
members of the IEC and other trade organizations, and the Company has
implemented programs to share best practices among the Companies and future
acquisitions.
The Company's goal is to become a leading national provider of electrical
services by improving its operations, expanding its business and markets
through internal growth and pursuing an aggressive acquisition strategy.
Operating Strategy. The Company believes there are significant opportunities
to increase revenues and profitability of the Acquired Companies and
subsequently acquired businesses. The key elements of the Company's operating
strategy are:
Share Information, Technical Capabilities and Best Practices. The Company
believes it will be able to expand the services it offers in its local
markets by leveraging the specialized technical and marketing strengths of
individual Companies. The Company identifies and shares best practices that
can be successfully implemented throughout its operations. The Company
intends to use the computer-aided- design technology and expertise of
certain of the Companies to bid for more design-and-build projects and to
assist customers in value engineering and creating project documents. The
Company believes that its increased size, capital and workforce will permit
it to pursue projects that require greater design and performance
capabilities and the ability to meet accelerated timetables.
Expand Scope of Maintenance and Specialized Services. The Company intends
to further develop its long-term and per call maintenance service
operations, which generally realize higher gross margins and provide
recurring revenues that are relatively independent of levels of construction
activity. The Company also believes that certain specialized businesses
currently offered by only a few of the Companies can be expanded throughout
the Company and in some cases can provide higher margins. Through sharing of
expertise and specialized licenses and the ability to demonstrate a safety
record in specialized markets served by the Companies, the Company intends
to expand its presence and profitability in markets where it previously
relied on subcontractors.
Establish National Market Coverage. The Company believes that the growth
of many of the Companies has been restricted due to the geographic
limitations of existing operations and that the Company's broad geographic
coverage will increase internal growth opportunities. The Company intends to
leverage its geographic diversity to bid for additional business from
existing customers that operate on a regional and national basis, such as
developers, contractors, homebuilders and owners of national chains. The
Company believes that significant demand exists from such companies to
utilize the services of a single electrical contracting and maintenance
service provider and existing local and regional relationships can be
expanded as the Company develops a nationwide network.
Operate on Decentralized Basis. The Company believes that, while
maintaining strong operating and financial controls, a decentralized
operating structure will retain the
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entrepreneurial spirit present in each of the Companies. The Company also
structured to allow it to capitalize on the considerable local and regional
market knowledge and customer relationships possessed by each of the
Companies, as well as companies that may be acquired in the future. By
maintaining a local and regional focus in each of its markets, the Company
believes it will be able to build relationships with general contractors and
other customers, address design preferences and code requirements, respond
quickly to customer demands for higher-margin renovation and upgrade
projects and adjust to local conditions.
Attract and Retain Quality Employees. The Company believes that the
ability to attract and retain qualified electricians is a critical
competitive factor and that the acquisitions of the Companies provide
competitive advantages in this regard. The Company attracts and develops
skilled employees by extending active recruiting and training programs,
offering stock-based compensation for key employees, and offering expanded
career paths and more stable income through the larger public company. The
Company believes that this ability will allow it to increase efficiency and
pursue additional customer relationships.
Achieve Operating Efficiencies. Certain administrative functions have been
centralized. In addition, by combining overlapping operations of certain of
the Companies, the Company expects to realize savings in overhead and other
expenses. The Company uses its increased purchasing power to gain volume
discounts in areas such as electrical materials, vehicles, advertising,
bonding, employee benefits and insurance. The Company will seek to realize
additional cost savings and other benefits by the sharing of purchasing,
pricing, bidding and other business practices and the sharing of licenses.
The Company intends to further develop and extend the use of computer
systems to facilitate communication among the Acquired Companies. At some
locations, the larger combined workforce provides additional staffing
flexibility.
Acquisition Strategy. The Company believes that, due to the highly fragmented
nature of the electrical contracting and maintenance services industry, it has
significant opportunities to pursue its acquisition strategy. The Company
focuses on acquiring companies with management philosophies based on an
entrepreneurial attitude as well as a willingness to learn and share improved
business practices through open communications. The Company believes that many
electrical contracting and maintenance service businesses that lack the capital
necessary to expand operations will become acquisition candidates. For these
acquisition candidates, the Company provides (i) information on best
practices, (ii) expertise to expand in specialized markets, (iii) the
opportunity to focus on customers rather than administration, (iv) national
name recognition, (v) increased liquidity and (vi) the opportunity for a
continued role in management. The Companies participate in professional
associations such as the IEC and Associated Builders and Contractors, and the
Company intends to continue these relationships, in part to assist in
identifying attractive acquisition candidates. Other key elements of the
Company's acquisition strategy are:
Enter New Geographic Markets. The Company pursues acquisitions that are
located in new geographic markets, are financially stable and have the
customer base necessary to integrate with or complement its existing
business. The Company also expects that increasing its geographic diversity
will allow it to better serve an increasingly nationwide base of
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customers and further reduce the impact on the Company of local and regional
economic cycles, as well as weather- related or seasonal variations in
business.
Expand Within Existing Markets. Once the Company has entered a market, it
seeks to acquire other well-established electrical contracting and
maintenance businesses operating within that region, including "tuck-in"
acquisitions of smaller companies. The Company believes that tuck-in
acquisitions afford the opportunity to improve its overall cost structure
through the integration of such acquisitions into existing operations as
well as to increase revenues through access to additional specialized
markets, such as heavy industrial markets. Despite the integration
opportunities afforded by such tuck-in acquisitions, the Company maintains
existing business names and identities to retain goodwill for marketing
purposes.
COMPANY OPERATIONS
The Company offers a broad range of electrical contracting services,
including installation and design, for both new and renovation projects in the
commercial, industrial and residential markets. The Company also offers
long-term and per call maintenance services, which generally provide recurring
revenues that are relatively independent of levels of construction activity.
In certain markets the Company offers design-and-build expertise and
specialized services, which typically require specific skills and equipment and
provide higher margins than general electrical contracting and maintenance
services. The Company also acts as a subcontractor for a variety of national,
regional and local builders in the installation of electrical and other
systems.
Commercial and Industrial. New commercial and industrial work begins with
either a design request or engineer's plans from the owner or general
contractor. Initial meetings with the parties allow the contractor to prepare
preliminary and then more detailed design specifications, engineering drawings
and cost estimates. Once a project is awarded, it is conducted in scheduled
phases, and progress billings are rendered to the owner for payment, less a
retainage of 5% to 10% of the construction cost of the project. Actual field
work (ordering of equipment and materials, fabrication or assembly of certain
components, delivery of materials and components to the job site, scheduling of
work crews and inspection and quality control) is coordinated during these
phases. The Company generally provides the materials to be installed as a part
of these contracts, which vary significantly in size from a few hundred dollars
to several million dollars and vary in duration from less than a day to more
than a year.
Residential. New residential installations begin with a builder providing
architectural or mechanical drawings for the residences within the tract being
developed. The Company typically submits a bid or contract proposal for the
work. Company personnel analyze the plans and drawings and estimate the
equipment, materials and parts and the direct and supervisory labor required
for the project. The Company delivers a written bid or negotiates an
arrangement for the job. The installation work is coordinated by the Company's
field supervisors along with the builder's personnel. Payments for the project
are generally obtained within 30 days, at which time any mechanics' and
materialmen's liens securing such payments are released. Interim payments are
often obtained to cover labor and materials costs on larger projects.
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Maintenance Services. The Company's maintenance services are supplied on a
long-term and per call basis. The Company's long-term maintenance services are
provided through service contracts that require the customer to pay an annual
or semiannual fee for periodic diagnostic services at a specific discount from
standard prices for repair and replacement services. The Company's per call
maintenance services are initiated when a customer requests emergency repair
service or the Company calls the client to schedule periodic maintenance work.
Service technicians are scheduled for the call or routed to the customer's
residence or business by the dispatcher. Service personnel work out of the
Company's service vehicles, which carry an inventory of equipment, tools, parts
and supplies needed to complete the typical variety of jobs. The technician
assigned to a service call travels to the residence or business, interviews the
customer, diagnoses the problem, prepares and discusses a price quotation,
performs the work and often collects payment from the customer. Most work is
warrantied for one year.
Major Customers. The Company has a diverse customer base, with no single
customer accounting for more than 5% of the Company's pro forma combined
revenues for the year ended September 30, 1997. As a result of emphasis on
quality and worker reliability, management and a dedicated sales and work force
at the Companies have been responsible for developing and maintaining
successful relationships with key customers. Customers of the Companies
generally include general contractors; developers; consulting engineers;
architects; owners and managers of large retail establishments, office
buildings, apartments and condominiums, theaters and restaurants; hotels and
casinos; manufacturing and processing facilities; arenas and convention
centers; hospitals; school districts; military and other government agencies;
airports; prisons and car lots. The Company intends to continue its emphasis on
developing and maintaining relationships with its customers by providing
superior, high-quality service.
Employee Screening, Training and Development. The Company is committed to
providing the highest level of customer service through the development of a
highly trained workforce. Employees are encouraged to complete a progressive
training program to advance their technical competencies and to ensure that
they understand and follow the applicable codes, the Company's safety practices
and other internal policies. The Company supports and funds continuing
education for its employees, as well as apprenticeship training for its
technicians under the Bureau of Apprenticeship and Training of the Department
of Labor and similar state agencies. Employees who train as apprentices for
four years may seek to become journeymen electricians and, after additional
years of experience, master electricians. The Company pays progressive
increases in compensation to employees who acquire such additional training,
and more highly trained employees serve as foremen, estimators and project
managers. The Company's master electricians are licensed in one or more cities
or other jurisdictions in order to obtain the permits required in the Company's
business, and certain master electricians have also obtained specialized
licenses in areas such as security systems and fire alarm installation. In some
areas, licensing boards have set continuing education requirements for
maintenance of licenses. Because of the lengthy and difficult training and
licensing process for electricians, the Company believes that the number,
skills and licenses of its employees constitute a competitive strength in the
industry.
The Company actively recruits and screens applicants for its technical
positions and has established programs in some locations to recruit apprentice
technicians directly from high
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schools and vocational-technical schools. Prior to employment, the Company will
make an assessment of the technical competence level of all potential new
employees, confirm background references, conduct random drug testing and check
criminal and driving records.
Purchasing. As a result of economies of scale derived through the
acquisitions of the Companies and the Company's in- house supply operations,
the Company believes it will be able to purchase equipment, parts and supplies
at discounts to historical levels. In addition, as a result of the Company's
size, it believes it will also lower its costs for (i) the purchase or lease
and maintenance of vehicles; (ii) bonding, casualty and liability insurance;
(iii) health insurance and related benefits; (iv) retirement benefits
administration; (v) office and computer equipment; (vi) marketing and
advertising; (vii) long distance services and (viii) a variety of accounting,
financial management and legal services.
Substantially all the equipment and component parts the Company sells or
installs are purchased from manufacturers and other outside suppliers. The
Company is not materially dependent on any of these outside sources.
MANAGEMENT INFORMATION AND CONTROLS
The Company has centralized its consolidated accounting and financial
reporting activities at its operational headquarters in Houston, Texas, while
basic accounting activities are conducted at the operating level. The Company
believes that its current information systems hardware and software are
adequate to meet current needs for financial reporting, internal management
control and other necessary information and the needs of newly acquired
corporations.
PROPERTY AND EQUIPMENT
The Company operates a fleet of owned and leased service trucks, vans and
support vehicles. It believes these vehicles generally are adequate for the
Company's current operations.
At September 14, 1998, the Company maintained warehouses, sales facilities
and administrative offices at 76 locations. Substantially of the Company's
facilities are leased. The Company leases its corporate headquarters located in
Houston, Texas.
The Company believes that its properties are generally adequate for its
present needs. Furthermore, the Company believes that suitable additional or
replacement space will be available as required.
COMPETITION
The electrical contracting industry is highly fragmented and competitive.
Most of the Company's competitors are small, owner-operated companies that
typically operate in a limited geographic area. There are few public companies
focused on providing electrical contracting services. In the future,
competition may be encountered from new entrants, such as public
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utilities and other companies attempting to consolidate electrical contracting
service companies. Competitive factors in the electrical contracting industry
include (i) the availability of qualified and licensed electricians, (ii)
safety record, (iii) cost structure, (iv) relationships with customers, (v)
geographic diversity, (vi) ability to reduce project costs, (vii) access to
technology, (viii) experience in specialized markets and (ix) ability to obtain
bonding. See "Risk Factors -- Competition."
REGULATIONS
The Company's operations are subject to various federal, state and local laws
and regulations, including (i) licensing requirements applicable to
electricians; (ii) building and electrical codes; (iii) regulations relating to
consumer protection, including those governing residential service agreements
and (iv) regulations relating to worker safety and protection of the
environment. The Company believes it has all required licenses to conduct its
operations and is in substantial compliance with applicable regulatory
requirements. Failure of the Company to comply with applicable regulations
could result in substantial fines or revocation of the Company's operating
licenses.
Many state and local regulations governing electricians require permits and
licenses to be held by individuals. In some cases, a required permit or license
held by a single individual may be sufficient to authorize specified activities
for all the Company's electricians who work in the state or county that issued
the permit or license. The Company intends to implement a policy to ensure
that, where possible, any such permits or licenses that may be material to the
Company's operations in a particular geographic region are held by at least two
Company employees within that region.
LITIGATION
Each of the Founding Companies has, from time to time, been a party to
litigation arising in the normal course of its business, most of which involves
claims for personal injury or property damage incurred in connection with its
operations. Management believes that none of these actions will have a material
adverse effect on the financial condition or results of operations of the
Company.
EMPLOYEES
At September 11, 1998, the Company had approximately 8,141 employees. The
Company is not a party to any collective bargaining agreements. The Company
believes that its relationship with its employees is satisfactory.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning the Company's
directors, officers and certain key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
-------------------- --- --------------------------------------------
<S> <C> <C>
C. Byron Snyder..... 50 Chairman of the Board of Directors
Jon Pollock......... 52 President, Chief Executive Officer and Director
Jerry Mills......... 57 Senior Vice President and Chief Operating
Officer -- Commercial and Industrial and Director
Ben L. Mueller...... 51 Senior Vice President and Chief Operating
Officer --
Residential and Director
Jim P. Wise ........ 54 Senior Vice President and Chief Financial Officer
John F. Wombwell.... 36 Senior Vice President, General Counsel and Secretary
D. Merril Cummings.. 37 Vice President -- Mergers and Acquisitions
J. Paul Withrow..... 33 Vice President and Chief Accounting Officer
Donald Paul Hodel... 62 Director
Richard Muth........ 50 President of Muth Electric, Inc., and Director
Alan R. Sielbeck.... 45 Director
Robert Stalvey...... 48 Vice President of Ace Electric, Inc., and Director
Richard L. Tucker... 63 Director
Bob Weik............ 62 President of BW Consolidated, Inc., and Director
</TABLE>
Directors are elected at each annual meeting of stockholders. All officers
serve at the discretion of the Board of Directors, subject to terms of their
employment agreement terms. See "-- Employment Agreements."
C. Byron Snyder has been Chairman of the Board of Directors of the Company
since its inception. Mr. Snyder is owner and President of Relco Refrigeration
Co., a distributor of refrigerator equipment, which he acquired in 1992. Prior
to 1992, Mr. Snyder was the owner and Chief Executive Officer of Southwestern
Graphics International, Inc., a diversified holding company which owned Brandt
& Lawson Printing Co., a Houston-based general printing business, and Acco
Waste Paper Company, an independent recycling business. Brandt & Lawson
Printing Co. was sold to Hart Graphics in 1989, and Acco Waste Paper Company
was sold to Browning-Ferris Industries in 1991. Mr. Snyder is a director of
Carriage Services, Inc., a publicly held death care company.
Jon Pollock has been President, Chief Executive Officer and a director of
the Company since consummation of the Offering. Mr. Pollock has been the
president of Pollock Electric Inc., one of the Founding Companies, since he
founded that company in 1983. Mr. Pollock is a Registered Professional Engineer
in Texas and several other states and holds Master Electrician licenses from 50
different jurisdictions. Mr. Pollock received a bachelor of science in
electrical engineering from Washington University. Mr. Pollock is past National
President of the Independent Electrical Contractors Association and received
the IEC Electrical Man of the Year award in 1996. As National President of the
IEC, Mr. Pollock was responsible for overseeing the IEC's activities relating
to the development and execution of apprenticeship and safety training
programs, industry lobbying activities and the development of national
electrical code standards.
Jerry Mills has been Senior Vice President and Chief Operating Officer --
Commercial and Industrial and a director of the Company since consummation of
the Offering. Mr. Mills has been the President of Mills Electrical Contractors,
Inc., one of the founding companies, since he began that company in 1972. Mr.
Mills is a past board member of the Independent Electrical Contractors, the
Associated Builders and Contractors, the Associated General Contractors and
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the Richardson Electrical Board. Prior to 1972, Mr. Mills was an officer and
part owner of Koegel Cash Consulting Engineers.
Ben L. Mueller has been Senior Vice President, Chief Operating Officer --
Residential and a director of the Company since consummation of the Offering.
Mr. Mueller has been the Executive Vice President of Houston-Stafford since
1993 and has served as vice president of Houston-Stafford since 1975. Mr.
Mueller is a past member of the board of the IEC, Houston Chapter, and has
served on the Electrical Board for the City of Sugar Land, Texas.
Jim P. Wise joined the Company in September 1997 as Senior Vice President and
Chief Financial Officer. From September 1994 to September 1997, he was Vice
President -- Finance and Chief Financial Officer at Sterling Chemicals, Inc., a
publicly held manufacturer of commodity petrochemicals and pulp chemicals. From
July 1994 to September 1994, he was Senior Vice President and Chief Financial
Officer of U.S. Delivery Systems, Inc., a delivery service consolidator. From
September 1991 to July 1994, he was Chairman and Chief Executive Officer of
Neostar Group, Inc., a private investment banking and financial advisory firm.
Mr. Wise was employed by Transco Energy Company as Executive Vice President,
Chief Financial Officer and was a member of the Board of Directors from
November 1982 until September 1991.
John F. Wombwell has been Senior Vice President, General Counsel and
Secretary of the Company since consummation of the Offering. Mr. Wombwell was a
partner at Andrews & Kurth L.L.P., where he practiced law in the area of
corporate and securities matters for more than five years.
D. Merril Cummings joined the Company as Vice President -- Mergers and
Acquisitions in October 1997. Mr. Cummings has served as a consultant to the
Company since its inception in June 1997. From February 1997 through June 1997
he served as a consultant to C. Byron Snyder and his privately owned
corporations. From 1992 through 1996, Mr. Cummings served as Vice President and
Chief Financial Officer for J A Interests, Inc., a private asset management
company, and its commonly owned affiliates, including Southern Jet Management,
Inc., a general aviation services and charter company. From 1982 through
January 1992, Mr. Cummings held various positions with Arthur Andersen LLP. Mr.
Cummings is a Certified Public Accountant.
J. Paul Withrow has served as Vice President and Chief Accounting Officer of
the Company since October 1997. From 1987 to 1997, Mr. Withrow held various
positions with Arthur Andersen LLP. Mr. Withrow is a Certified Public
Accountant.
Donald Paul Hodel has been a director of the Company since April 1998. Mr.
Hodel has served as President of the Christian Coalition since June 1997. He is
Managing Director of Summit Group International, Ltd,. an energy and natural
resources consulting firm he founded in 1989. Mr. Hodel served as Secretary of
the Interior from 1985 to 1989 and Secretary of Energy from 1982 to 1985. Mr.
Hodel has served as director of both publicly traded and privately held
companies and is the recipient of the Presidential Citizens Medal and honorary
degrees from three universities. Mr. Hodel serves on the board of directors of
Columbia Energy Group.
55
<PAGE> 58
Richard Muth has been a director of the Company since consummation of the
Offering. Mr. Muth founded Muth Electric, Inc. in 1970 and has been the owner
and president since that time. Mr. Muth served on the South Dakota State
Electrical Commission from 1980 to 1991 and the Associated General Contractors
Associate Division Board. Mr. Muth also received the South Dakota Electrical
Council "Man of the Year" award in 1993. Mr. Muth holds electrical contractors'
licenses in South Dakota, Minnesota, Nebraska, Wyoming and Montana.
Alan R. Sielbeck has been a director of the Company since consummation of the
Offering. Mr. Sielbeck has served as Chairman of the Board and Chief Executive
Officer of Service Experts, Inc., a publicly traded heating, ventilation and
air conditioning service company, since its inception in March 1996. Mr.
Sielbeck has served as Chairman of the Board and President of AC Service and
Installation Co. Inc. and Donelson Air Conditioning Company, Inc. since 1990
and 1991, respectively. From 1985 to 1990, Mr. Sielbeck served as President of
RC Mathews Contractor, Inc., a commercial building general contractor, and
Chief Financial Officer of RCM Interests, Inc., a commercial real estate
development company.
Robert Stalvey has been a director of the Company since consummation of the
Offering. Mr. Stalvey has served as Vice President of Ace since 1976. Mr.
Stalvey will continue to serve in these positions following the consummation of
the Offerings.
Richard L. Tucker has been a director of the Company since consummation of
the Offering. Dr. Tucker holds the Joe C. Walter Jr. Chair in Engineering, is
Director of the Construction Industry Institute, and is Director of the Sloan
Program for the Construction Industry at the University of Texas at Austin. Dr.
Tucker has been on the faculty at the University of Texas since 1976. Dr.
Tucker is a registered engineer.
Bob Weik has been a director of the Company since consummation of the
Offering. Mr. Weik has served as President, Treasurer and a director of the
Bexar-Calhoun companies since their inception in 1958. Mr. Weik will continue
to serve in those positions following the consummation of the Offerings.
The Board of Directors has established an Audit Committee and a Compensation
Committee. The Audit Committee recommends the appointment of auditors and
oversees the accounting and audit functions of the Company. The Compensation
Committee will determines the salaries and bonuses of executive officers and
administers the 1997 Stock Plan. Messrs. Seilbeck, Tucker and Hodel serve as
members of the Company's Compensation Committee and Audit Committee. Any future
material transactions, including the issuance of securities other than through
the 1997 Stock Plan and the 1997 Directors Stock Plan, between the Company and
its management and affiliates will be subject to prior review and approval by
the members of the Board of Directors without an interest in such transaction.
The Board of Directors is divided into three classes of directors, with
directors serving staggered three-year terms, expiring at the annual meeting of
stockholders following the 1998 fiscal year, 1999 fiscal year and 2000 fiscal
year, respectively. At each annual meeting of stockholders, one class of
directors will be elected for a full term of three years to succeed that class
of directors whose terms are expiring.
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<PAGE> 59
C. Byron Snyder and trusts for the benefit of his children, as the holders of
all of the outstanding Restricted Common Stock, are be entitled to elect one
member of the Company's Board of Directors and to one-half of one vote for each
share held on all other matters. Holders of Restricted Common Stock are not
entitled to vote on the election of any other directors. Only the holders of
the Restricted Common Stock may remove the director such holders are entitled
to elect. See "Description of Capital Stock."
DIRECTOR COMPENSATION
Directors who are employees of the Company or a subsidiary do not receive
additional compensation for serving as directors. Each director who is not an
employee of the Company or a subsidiary will receive a fee of $2,000 for
attendance at each Board of Directors meeting and $1,000 for each committee
meeting (unless held on the same day as a Board of Directors meeting).
Directors of the Company will be reimbursed for reasonable out-of-pocket
expenses incurred in attending meetings of the Board of Directors or committees
thereof, and for other expenses reasonably incurred in their capacity as
directors of the Company. Each non-employee director will receive stock options
to purchase 5,000 shares of Common Stock upon initial election to the Board of
Directors and thereafter an annual grant of 5,000 options on each September 30
on which the non-employee director continues to serve. See "-- 1997 Directors
Stock Plan."
EXECUTIVE COMPENSATION
The Company was incorporated in June 1997 and, prior to the Offering, had not
conducted any operations other than activities related to the acquisitions of
the Founding Companies and the Offering. During 1998 the annualized base
salaries of its most highly compensated executive officers will be: Mr. Pollock
- -- $225,000, Mr. Mills -- $200,000, Mr. Mueller -- $200,000, Mr. Wise --
$190,000 and Mr. Wombwell -- $190,000.
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<PAGE> 60
EMPLOYMENT AGREEMENTS
The Company has entered into employment agreements with each executive
officer of the Company which prohibits such officer from disclosing the
Company's confidential information and trade secrets and generally restricts
these individuals from competing with the Company for a period of two years
after the date of the termination of employment with the Company. Each of the
agreements has an initial term of five years and provides for annual extensions
at the end of its initial term, subject to the parties' mutual agreement, and
is terminable by the Company for "cause" upon ten days' written notice and
without "cause" (i) by the employee upon thirty days' written notice or (ii) by
the Company upon approval of 51% of the Board of Directors. The employment
agreements provide that the Company shall pay each executive officer the annual
salary set forth above under "-- Executive Compensation," which salary may be
increased by the Board of Directors. Such agreements also provide that each
executive officer will be reimbursed for out-of-pocket business expenses and
shall be eligible to participate in all benefit plans and programs as are
maintained from time to time by the Company. All employment agreements provide
that if the officer's employment is terminated by the Company without "cause"
or is terminated by the officer for "good reason," the officer will be entitled
to receive a lump sum severance payment at the effective time of termination
equal to the base salary (at the rate then in effect) for the greater of (i)
the time period remaining under the term of the agreement or (ii) one year. In
addition, the time period during which such officer is restricted from
competing with the Company will be shortened from two years to one year.
The employment agreements contain certain provisions concerning a
change-in-control of the Company, including the following: (i) in the event the
officer's employment is terminated within two years following the change in
control by the Company other than for "cause" or by the officer for "good
reason," or the officer is terminated by the Company within three months prior
to the change in control at the request of the acquirer in anticipation of the
change in control, the officer will be entitled to receive a lump sum severance
amount equal to the greater of (i) three years' base salary or (ii) the base
salary for whatever period is then remaining on the initial term and the
provisions which restrict competition with the Company shall not apply; (ii) in
any change-of-control situation, the officer may elect to terminate his
employment by giving five business days' written notice prior to the closing of
the transaction giving rise to the change-in-control, which will be deemed a
termination of employment by the Company without "cause," and the provisions of
the employment agreement governing the same will apply, except that the
severance amount otherwise payable shall be doubled (but not to exceed six
times the officer's base pay) (if the successor does not give written notice of
its acceptance of the Company's obligations under the employment agreement at
least ten business days prior to the anticipated closing date, the severance
amount shall be tripled, but not to exceed nine times base salary) and
provisions which restrict competition with the Company shall not apply; and
(iii) if any payment to the officer is subject to the 20% excise tax on excess
parachute payments, the officer shall be made "whole" on a net aftertax basis.
A change in control is generally defined to occur upon (i) the acquisition by
any person of 20% or more of the total voting power of the outstanding
securities of the Company, (ii) the first purchase pursuant to a tender or
exchange offer for Common Stock, (iii) the approval of certain mergers, sale of
substantially all the assets, or dissolution of the Company or (iv) a change in
a majority of the members of the Company's Board of Directors.
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<PAGE> 61
In general, a "parachute payment" is any "payment" made by the Company in the
nature of compensation that is contingent on a change in control of the Company
and includes the present value of the accelerations of vesting and the payment
of options and other deferred compensation amounts upon a change in control. If
the aggregate present value of the parachute payments to certain individuals,
including officers, equals or exceeds three times that individual's "base
amount" (generally, the individual's average annual compensation from the
Company for the five calendar years ending before the date of the change in
control), then all parachute amounts in excess of the base amount are "excess"
parachute payments. An individual will be subject to a 20% excise tax on excess
parachute amounts and the Company will not be entitled to a tax deduction for
such payments.
1997 STOCK PLAN
The Company's 1997 Stock Plan was adopted by the Board of Directors and
stockholders in October 1997. The purpose of the 1997 Stock Plan is to provide
officers, employees and consultants with additional incentives by increasing
their ownership interests in the Company. Individual awards under the 1997
Stock Plan may take the form of one or more of: (i) either incentive stock
options ("ISOs") or non-qualified stock options ("NQSOs"); (ii) stock
appreciation rights; (iii) restricted or phantom stock; (iv) bonus stock
awards; (v) awards not otherwise provided for, the value of which is based in
whole or in part upon the value of the Common Stock and (vi) cash awards that
may or may not be based on the achievement of performance goals, including
goals related to one or more of the following: cash flow, return on equity,
sales, profit margin, earnings per share and stock price.
The Compensation Committee or the Company's President, to the extent such
duties are delegated to him by the Compensation Committee, will administer the
1997 Stock Plan and select the individuals who will receive awards and
establish the terms and conditions of those awards. The Compensation Committee
will not be eligible to receive awards under the plan, and the President will
not have the authority to make grants to officers or directors of the Company.
See "Management -- Directors and Executive Officers" for the composition of the
Compensation Committee following the consummation of the Offerings. The maximum
number of shares of Common Stock that may be subject to outstanding awards,
determined immediately after the grant of any award, may not exceed the greater
of 3,500,000 shares or 15% of the aggregate number of shares of Common Stock
outstanding; provided, however, that ISOs may not be granted with respect to
more than 1,000,000 shares. Shares of Common Stock which are attributable to
awards which have expired, terminated or been canceled or forfeited are
available for issuance or use in connection with future awards. The maximum
number of shares of Common Stock with respect to which any person may receive
options and stock appreciation rights in any year is 250,000 shares and the
maximum value of any other amount may not exceed $4 million as of the date of
its grant.
The 1997 Stock Plan will remain in effect for ten years, unless earlier
terminated by the Board of Directors. The 1997 Stock Plan may be amended by the
Board of Directors or the Compensation Committee without the consent of the
stockholders of the Company, except that any amendment will be subject to
stockholder approval if required by any federal or state law or
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<PAGE> 62
regulation or by the rules of any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted.
NQSOs to purchase 150,000 shares of Common Stock have been granted to each of
Mr. Wise and Mr. Wombwell. The options granted to Messrs. Wise and Wombwell
have an exercise price equal to 60% of the initial public offering price per
share in the offering. Each of these options will vest at the rate of 20% per
year, commencing on the first anniversary of grant and will expire at the
earliest of (i) ten years from the date of grant, (ii) three months following
termination of employment, other than due to death or disability or (iii) one
year following a termination of employment due to death or disability.
1997 DIRECTORS STOCK PLAN
The Company's 1997 Directors Stock Plan was adopted by the Board of Directors
and approved by the Company's stockholders in October 1997. The Directors Plan
provides for (i) the automatic grant to each non-employee director serving at
the consummation of the Offerings of an option to purchase 5,000 shares, (ii)
the automatic grant to each non-employee director of an option to purchase
5,000 shares upon such person's initial election as a director and (iii) an
automatic annual grant to each non-employee director of an option to purchase
5,000 shares on each September 30th on which such director remains a
non-employee director. All options will have an exercise price per share equal
to the fair market value of the Common Stock on the date of grant, will vest
over five years at the rate of 20% per year and will expire on the earliest of
(i) ten years from the date of grant, (ii) three months after termination of
service as a director, other than due to death or disability or (iii) one year
following a termination of employment due to death or disability. In addition,
options can be granted to a non-employee director upon such terms as the Board
determines, whenever it believes such additional grant is appropriate. The
maximum number of shares of Common Stock that may be subject to outstanding
awards determined immediately after the grant of any award is 250,000.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
The Company was founded in June 1997 by C. Byron Snyder. In connection with
the formation of IES, IES issued to Mr. Snyder, the Snyder Children's Trust
and D. Merril Cummings a total of 2,329,600 shares of Common Stock for nominal
consideration. The shares issued to the Snyder Children's Trust were
subsequently transferred to two separate trusts, each for the benefit of one of
Mr. Snyder's children. Mr. Snyder is currently a director of the Company. The
trustees of the trusts are independent third parties not subject to control by
Mr. Snyder. In September 1997, IES issued an additional 442,589 shares to Mr.
Snyder and such trusts. The total value of the shares (based upon a value of
$9.75 per share) issued to Mr. Snyder and the trusts were recognized as
acquisition costs in connection with the Acquisitions. In
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<PAGE> 63
October 1997, Mr. Snyder and the trusts exchanged 2,655,709 shares of Common
Stock for an equal number of shares of Restricted Common Stock. Mr. Snyder
agreed to advance whatever funds were necessary to effect the Acquisitions and
the Offerings. As of September 30, 1997, Mr. Snyder had outstanding advances to
the Company in the aggregate amount of approximately $1.6 million at September
30, 1997. The initial $1 million of such advances bore interest at 8.5%, and
additional advances bore interest at LIBOR plus 1.5%. All of Mr. Snyder's
advances were repaid from the net proceeds of the Offering.
The Company has issued a total of 1,396,602 shares of Common Stock at $.01
per share to various members of management, including: Mr. Pollock -- 465,914
shares, Mr. Mills -- 232,957 shares, Mr. Mueller -- 232,957 shares, Mr. Wise --
100,000 shares, Mr. Wombwell -- 100,000 shares and other key employees --
264,774 shares. The Company also granted options to purchase 5,000 shares of
Common Stock under the 1997 Directors Stock Plan, effective upon the
consummation of the Offerings, to each of the non-employee directors of the
Company.
Simultaneously with the closing of the Offering, the Company acquired by
stock purchase all the issued and outstanding capital stock and other equity
interests of the Founding Companies, at which time each Founding Company became
a wholly owned subsidiary of the Company. The Acquisitions Consideration was
negotiated by the parties and was based primarily upon the pro forma adjusted
net income of each Founding Company. The Acquisitions Consideration consisted
of (i) approximately $53.4 million in cash and (ii) 12,313,025 shares of Common
Stock. In addition, the Company repaid historical indebtedness of the Founding
Companies. In connection with the Acquisitions, owners of certain of the
Founding Companies received distributions, as described below.
Individuals who are executive officers or directors of the Company received
the following portions of the Acquisitions Consideration for their interests in
the Founding Companies.
<TABLE>
<CAPTION>
SHARES OF
COMPANY CASH COMMON STOCK
-------------------- ------------ ------------
<S> <C> <C>
Houston-Stafford
Ben Mueller....... $ 4,648,161 1,072,652
Mills
Jerry Mills ...... 9,306,722 2,147,705
Bexar-Calhoun
Bob Weik(a) ...... 6,174,713 1,424,935
Pollock
Jon Pollock ...... 985,493 319,729
Muth
Richard Muth(b) .. 1,939,750 447,635
Ace
Robert Stalvey ... 413,956 95,528
------------ ------------
Total ....... $ 23,468,795 5,508,184
============ ============
</TABLE>
(a) Excludes cash of $322,989 and 74,536 shares of Common Stock received by two
related trusts in which Mr. Weik may be deemed to have an interest, as to
which Mr. Weik disclaims beneficial ownership.
(b) Excludes cash of $111,320 and 25,689 shares of Common Stock received by Mr.
Muth's wife, Darlene Muth, as to which he disclaims beneficial ownership.
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<PAGE> 64
The foregoing table does not include distributions to owners (based on
September 30, 1997 balances), as follows: $2.4 million received by Mr. Mueller,
$9.4 million received by Mr. Mills, $2.0 million received by Mr. Weik, $383,000
received by Mr. Pollock, $1.8 million received by Mr. Muth and $204,000
received by Mr. Stalvey.
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
During fiscal 1994, 1995 and 1996, Houston-Stafford made payments totaling
$174,000, $124,000 and $187,000, respectively, to the Brown-Mueller Joint
Venture, a general partnership of which Mr. Mueller is a member, for lease
payments on certain real properties used as electrical shops. For the year
ended September 30, 1997, such lease payments totaled $109,000. Mr. Mueller is
Senior Vice President, Chief Operating Officer -- Residential and a director of
the Company.
At December 31, 1996, Houston-Stafford owed Mr. Mueller $185,985 on a
promissory note, payable in monthly installments and maturing April 2001. Such
note was prepaid by Houston-Stafford in October 1997.
At December 31, 1996, Houston-Stafford owed Mr. Mueller $766,400 related to a
promissory note maturing August 2003 and secured by Mr. Mueller's stock in
Houston-Stafford, and such obligation and any related obligations shall be
terminated at the consummation of the Offerings. Mr. Mueller will receive
approximately $4.6 million and 1.1 million shares of Common Stock in connection
with the Acquisitions in exchange for such promissory note as well as 0.2
million shares for his new role as a member of IES management. Houston-Stafford
will recognize a non-cash, non-recurring compensation charge of approximately
$17.0 million related to the transfer of such cash and shares of Common Stock
to Mr. Mueller at the time of the Acquisitions.
Pursuant to a 5-year lease agreement effective November 1, 1997,
Houston-Stafford agreed to lease certain facilities owned by Mr. Mueller in
Spring, Texas. Such lease agreement provides for an annual rent of $20,000,
which the Company believes is not in excess of fair rental value for such
facilities.
During fiscal 1994, Mills derived contract revenues of $187,000 from CIMA
Services, Inc. ("CIMA"), an electrical services company of which Mr. Mills was
a part owner until October 1997. Additionally, during fiscal 1994, Mills paid
$2,900,000 to CIMA for material purchases. At December 31, 1994, Mills had
outstanding accounts receivable from CIMA of $145,000 and accounts payable to
CIMA of $294,000. Mr. Mills is Senior Vice President and Chief Operating
Officer -- Commercial and Industrial and a director of the Company.
During fiscal 1995, Mills derived contract revenues of $1.1 million from
CIMA. Additionally, during fiscal 1995, Mills paid $812,000 to CIMA for
material purchases. At December 31, 1995, Mills had outstanding accounts
receivable from CIMA of $2,000 and accounts payable to CIMA of $23,000.
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<PAGE> 65
During fiscal 1996, Mills derived contract revenues of $1.3 million from
CIMA. Additionally, during fiscal 1996, Mills paid $1.1 million to CIMA for
material purchases. At December 31, 1996, Mills had outstanding accounts
receivable from CIMA of $208,000 and accounts payable to CIMA of $633,000.
From January 1, 1997 to September 1, 1997, Mills derived contract revenues of
$776,000 from CIMA. Additionally, during this period of time, Mills paid $1.1
million to CIMA for material purchases. At August 31, 1997, Mills had
outstanding accounts receivable from CIMA of $314,000 and accounts payable to
CIMA of $119,000.
Mills leases certain real property from Mr. Mills. Amounts paid pursuant to
this lease were $26,000 for 1995, $156,000 for 1996 and $117,000 for the nine
months ended September 30, 1997.
During 1995, Mr. Weik incurred indebtedness from Bexar-Calhoun of which the
largest aggregate amount outstanding at any time was $647,000. All of such
indebtedness was repaid as of April 18, 1997. Mr. Weik is a director of the
Company.
During 1997, Mr. Weik incurred indebtedness from Bexar-Calhoun of which the
largest aggregate amount outstanding at any time was $533,525. All of such
indebtedness was repaid as of August 6, 1997.
Prior to the closing of the Acquisitions and the consummation of the
Offerings, Bexar-Calhoun will distribute all interest it owns, directly or
indirectly, in real property to Mr. Weik and his immediate family. It is
anticipated that such real estate will be leased to the Company for an annual
rent of approximately $150,000. The Company believes that such rent is not in
excess of fair rental value for such facilities.
Pollock leases certain real property from Mr. Pollock. Amounts paid pursuant
to this lease were $20,000 for fiscal 1995, $36,000 for fiscal 1996 and $36,000
for fiscal 1997.
Since January 1, 1996, Mr. Muth has from time to time incurred indebtedness
from Muth, of which the largest aggregate amount outstanding at any time was
$205,000. All amounts owed by Mr. Muth to Muth will be repaid prior to the
closing of the Offerings. Mr. Muth is a director of the Company.
Prior to the closing of the Acquisitions and the consummation of the
Offerings, certain assets of Muth will be purchased by Mr. Muth for $217,140.
From time to time in the past Muth has completed electrical contracts for
Muth Properties, L.L.C., a limited liability company of which Mr. Muth is a
member. Total electrical contracts completed by Muth for Muth Properties,
L.L.C. were $82,731 for 1995, $82,032 for 1996 and $120,915 for the six months
ended June 30, 1997. Prior to the closing of the Acquisitions and the
consummation of the Offerings, a final payment of $162,900 will be made by Muth
Properties, L.L.C. to Muth.
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<PAGE> 66
Prior to July 1, 1997, Muth leased certain real property from Mr. Muth, d/b/a
D & D Properties. Lease payments made by Muth to Mr. Muth totaled $80,725 for
1994, $95,180 for 1995, $118,088 for 1996 and $56,906 for the six months ended
June 30, 1997. Effective July 1, 1997, Muth Properties, L.L.C. became the
lessor of these properties. It is anticipated that annual rentals paid to Muth
Properties, L.L.C. by Muth will be approximately $120,000.
Stalvey Rentals, a general partnership of which Mr. Stalvey is a member, is
presently constructing a new facility to lease to Ace in Valdosta, Georgia and
an inducement letter has been executed regarding Ace's commitment to lease the
new facility for a period of 20 years beginning as soon as a certificate of
occupancy is obtained. Ace entered into a five year lease, with a five year
option period, with Mr. Stalvey and his brother. Initial annual rent on this
facility is $103,200, without respect to property taxes and insurance. Mr.
Stalvey is a director of the Company.
In addition to the transactions described above, certain of the Founding
Companies have entered into lease agreements with parties related to the
Company, for rents that the Company believes are not in excess of fair rental
value.
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<PAGE> 67
PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock, as of June 30, 1998, by (i) all
persons known to the Company to be the beneficial owner of 5% or more thereof,
(ii) each director and nominee for director, (iii) each executive officer and
(iv) all officers and directors as a group. Unless otherwise indicated, the
address of each such person is c/o Integrated Electrical Services, Inc., 515
Post Oak Blvd., Suite 450, Houston, Texas 77027. All persons listed have sole
voting and investment power with respect to their shares unless otherwise
indicated.
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP
AFTER OFFERINGS
--------------------------
SHARES PERCENT
--------- ---------
<S> <C> <C>
C. Byron Snyder(a) ............................ 2,655,709 8.6%
Jon Pollock(b) ................................ 785,743 2.5%
Jerry Mills ................................... 2,472,662 7.7%
Ben L. Mueller ................................ 1,310,359(c) 4.3%
Jim P. Wise ................................... 100,000 *
John F. Wombwell .............................. 100,000 *
Donald Paul Hodel(e) .......................... -- *
Richard Muth(d) ............................... 473,324 1.5%
Alan R. Sielbeck(e) ........................... -- *
Robert Stalvey ................................ 95,528 *
Richard L. Tucker(e) .......................... -- *
Bob Weik(f) ................................... 1,499,469 4.9%
Roy D. Brown(e) ............................... 1,608,979 5.2%
All executive officers and directors as a
group (15 persons)(g) ......................... 9,660,718 31.3%
</TABLE>
__________
* Less than one percent.
(a) Includes 1,118,193 shares held by trusts for the benefit of Mr. Snyder's
children, as to which Mr. Snyder disclaims beneficial ownership. Consists
entirely of Restricted Common Stock, which represents all of the Restricted
Common Stock outstanding. The holders of Restricted Common Stock, voting
together as a single class, are entitled to elect one member of the
Company's Board of Directors and to one-half of one vote for each share
held on all other matters on which they are entitled to vote. Holders of
Restricted Common Stock are not entitled to vote on the election of any
other directors. Such shares may be converted to Common Stock in certain
circumstances. See "Description of Capital Stock."
(b) Includes 465,914 shares of Common Stock held by the Pollock Family
Partnership, Ltd.
(c) Includes 4,750 shares held by a trust for the benefit of Mr. Mueller's
daughter.
(d) Includes 25,689 shares of Common Stock owned by Mr. Muth's wife, as to
which Mr. Muth disclaims beneficial ownership.
(e) Mr. Hodel's address is Christian Coalition, 1801-L Sara Drive, Chesapeake,
VA 23320-2647. Mr. Sielbeck's address is Service Experts, Inc., 111
Westwood Place, Suite 420, Brentwood, TN 37027. Mr. Tucker's address is The
University of Texas at Austin, 3208 Red River Street, Suite 300, Austin, TX
78705-2697. Mr. Brown's address is Houston-Stafford Electric, Inc., 10203
Mula Circle, Stafford, Texas 77477.
(f) Includes 74,536 shares of Common Stock owned by two related trusts, as to
which Mr. Weik disclaims beneficial ownership.
(g) Includes 2,655,709 shares of Restricted Common Stock described in Note (a)
above.
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<PAGE> 68
DESCRIPTION OF CAPITAL STOCK
GENERAL
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, par value $0.01 per share, 2,655,709 shares of Restricted Common
Stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par
value $0.01 per share. As of September 11, 1998, 30,756,875 shares of Common
Stock and Restricted Common Stock are issued and outstanding. The following
summary of the terms and provisions of the Company's capital stock does not
purport to be complete and is qualified in its entirety by reference to the
Company's Amended and Restated Certificate of Incorporation and Bylaws, which
have been filed as exhibits to the Company's registration statement, of which
this Prospectus is a part, and applicable law.
COMMON STOCK AND RESTRICTED COMMON STOCK
The holders of Common Stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Such
holders are not entitled to vote cumulatively for the election of directors.
Holders of a majority of the shares of Common Stock entitled to vote in any
election of directors may elect all of directors standing for election.
The holders of Restricted Common Stock, voting together as a single class,
are entitled to elect one member of the Company's Board of Directors and to
one-half of one vote for each share held on all other matters on which they are
entitled to vote. Holders of Restricted Common Stock are not entitled to vote
on the election of any other directors. Only the holder of the Restricted
Common Stock may remove the director such holder is entitled to elect.
Subject to the rights of any then outstanding shares of preferred stock,
holders of Common Stock and Restricted Common Stock are together entitled to
participate pro rata in such dividends as may be declared in the discretion of
the Board of Directors out of funds legally available therefor. Holders of
Common Stock and Restricted Common Stock together are entitled to share ratably
in the net assets of the Company upon liquidation after payment or provision
for all liabilities and any preferential liquidation rights of any preferred
stock then outstanding. Holders of Common Stock and holders of Restricted
Common Stock have no preemptive rights to purchase shares of stock of the
Company. Shares of Common Stock are not subject to any redemption provisions
and are not convertible into any other securities of the Company. Shares of
Restricted Common Stock are not subject to any redemption provisions and are
convertible into Common Stock as described below. All outstanding shares of
Common Stock and Restricted Common Stock are, and the shares of Common Stock to
be issued pursuant to the Offering and the Acquisitions will be, upon payment
therefor, fully paid and non-assessable.
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Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis in the event of a disposition of such share of
Restricted Common Stock by the holder thereof (other than a distribution by a
holder to its partners or beneficial owners, or a transfer to a related party
of such holders (as defined in Sections 267, 707, 318 and/or 4946 of the
Internal Revenue Code of 1986, as amended)).
The Common Stock is listed on the NYSE under the symbol "IEE." The Restricted
Common Stock is not listed on any exchange.
PREFERRED STOCK
The preferred stock may be issued from time to time by the Board of Directors
as shares of one or more classes or series. Subject to the provisions of the
Company's Amended and Restated Certificate of Incorporation and limitations
prescribed by law, the Board of Directors is expressly authorized to adopt
resolutions to issue the shares, to fix the number of shares and to change the
number of shares constituting any series, and to provide for or change the
voting powers, designations, preferences and relative, participating, optional
or other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative),
dividend rates, terms of redemption (including sinking fund provisions),
redemption prices, conversion rights and liquidation preferences of the shares
constituting any class or series of the preferred stock, in each case without
any further action or vote by the stockholders. The Company has no current
plans to issue any shares of preferred stock of any class or series.
One of the effects of undesignated preferred stock may be to enable the Board
of Directors to render more difficult or to discourage an attempt to obtain
control of the Company by means of a tender offer, proxy contest, merger or
otherwise, and thereby to protect the continuity of the Company's management.
The issuance of shares of preferred stock pursuant to the Board of Directors'
authority described above may adversely affect the rights of the holders of
Common Stock. For example, preferred stock issued by the Company may rank prior
to the Common Stock as to dividend rights, liquidation preference or both, may
have full or limited voting rights and may be convertible into shares of Common
Stock. Accordingly, the issuance of shares of preferred stock may discourage
bids for the Common Stock at a premium or may otherwise adversely affect the
market price of the Common Stock.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is subject to the provisions of Section 203 of the Delaware
General Corporation Law ("Section 203"). Section 203 provides, with certain
exceptions, that a Delaware corporation may not engage in any of a broad range
of business combinations with a person or an affiliate, or associate of such
person, who is an "interested stockholder" for a period of three years from the
date that such person became an interested stockholder unless: (i) the
transaction resulting in a person becoming an interested stockholder, or the
business combination, is approved by the Board of Directors of the corporation
before the person becomes an interested stockholder, (ii) the interested
stockholder acquired 85% or more of the outstanding voting stock of the
corporation in the same transaction that makes such person an interested
stockholder (excluding
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shares owned by persons who are both officers and directors of the corporation,
and shares held by certain employee stock ownership plans) or (iii) on or after
the date the person becomes an interested stockholder, the business combination
is approved by the corporation's board of directors and by the holders of at
least 66% of the corporation's outstanding voting stock at an annual or special
meeting, excluding shares owned by the interested stockholder. Under Section
203, an "interested stockholder" is defined as any person who is (i) the owner
of 15% or more of the outstanding voting stock of the corporation or (ii) an
affiliate or associate of the corporation and who was the owner of 15% or more
of the outstanding voting stock of the corporation at any time within the
three-year period immediately prior to the date on which it is sought to be
determined whether such person is an interested stockholder.
A corporation may, at its option, exclude itself from the coverage of Section
203 by including in its certificate of incorporation or bylaws by action of its
stockholders to exempt itself from coverage. The Company has not adopted such
an amendment to its Amended and Restated Certificate of Incorporation or
Bylaws.
LIMITATION ON DIRECTORS' LIABILITIES
Pursuant to the Company's Amended and Restated Certificate of Incorporation
and under Delaware law, directors of the Company are not liable to the Company
or its stockholders for monetary damages for breach of fiduciary duty, except
for liability in connection with a breach of the duty of loyalty, for acts or
omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, for dividend payments or stock repurchases illegal
under Delaware law or any transaction in which a director has derived an
improper personal benefit. The Company has entered into indemnification
agreements with its directors and executive officers which indemnify such
person to the fullest extent permitted by its Amended and Restated Certificate
of Incorporation, its Bylaws and the Delaware General Corporation Law. The
Company also intends to obtain directors' and officers' liability insurance.
The foregoing provisions may extend to liabilities arising due to violations of
the federal securities laws. It is the position of the Securities and Exchange
Commission (the "Commission") that indemnification for liabilities under the
Securities Act is against public policy and is, therefore, unenforceable.
AMENDED AND RESTATED CERTIFICATE OF INCORPORATION AND BYLAW PROVISIONS
The Company's Amended and Restated Certificate of Incorporation and Bylaws
include provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or an unsolicited acquisition
proposal that a stockholder might consider favorable, including a proposal that
might result in the payment of a premium over the market price for the shares
held by stockholders. These provisions are summarized in the following
paragraphs.
Classified Board of Directors. The Amended and Restated Certificate of
Incorporation provides for the Board of Directors to be divided into three
classes of directors serving staggered three-year terms. The classification of
the Board of Directors has the effect of requiring at least two annual
stockholder meetings, instead of one, to replace a majority of members of the
Board of Directors.
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Supermajority Voting. The Amended and Restated Certificate of Incorporation
requires the approval of the holders of at least 75% of the then outstanding
shares of the Company's capital stock entitled to vote thereon and the approval
of the holders of at least 75% of the then outstanding shares of each class of
stock of the Company voting separately as a class on, among other things,
certain amendments to the Amended and Restated Certificate of Incorporation.
The Board of Directors may amend, alter, change or repeal any bylaws without
the assent or vote of the stockholders, but any such bylaws may be altered,
amended or repealed upon the affirmative vote of at least 66 2/3% of the stock
entitled to vote thereon.
Authorized but Unissued or Undesignated Capital Stock. The Company's
authorized capital stock will consist of 100,000,000 shares of Common Stock,
2,655,709 shares of Restricted Common Stock, and 10,000,000 shares of preferred
stock. Any authorized but unissued (and in the case of preferred stock,
undesignated) stock may be issued by the Board of Directors in one or more
transactions. In this regard, the Company's Amended and Restated Certificate of
Incorporation grants the Board of Directors broad power to establish the rights
and preferences of authorized and unissued preferred stock. The issuance of
shares of preferred stock pursuant to the Board of Directors' authority
described above could decrease the amount of earnings and assets available for
distribution to holders of Common Stock and adversely affect the rights and
powers, including voting rights, of such holders and may also have the effect
of delaying, deferring or preventing a change in control of the Company. The
Board of Directors does not currently intend to seek stockholder approval prior
to any issuance of preferred stock, unless otherwise required by law.
Special Meeting of Stockholders. The Bylaws provide that special meetings of
stockholders of the Company may only be called by the Chairman of the Board of
Directors upon the written request of the Board of Directors pursuant to a
resolution approved by a majority of the Board of Directors.
Stockholder Action by Written Consent. The Amended and Restated Certificate
of Incorporation and Bylaws generally provide that any action required or
permitted by the stockholders of the Company must be effected at a duly called
annual or special meeting of the stockholders and may not be effected by any
written consent of the stockholders.
Notice Procedures. The Bylaws establish advance notice procedures with regard
to stockholder proposals relating to the nomination of candidates for election
as director, the removal of directors and amendments to the Amended and
Restated Certificate of Incorporation or Bylaws to be brought before annual
meetings of stockholders of the Company. These procedures provide that notice
of such stockholder proposals must be timely given in writing to the Secretary
of the Company prior to the annual meeting. Generally, to be timely, notice
must be received at the principal executive offices of the Company not less
than 80 days prior to an annual meeting (or if fewer than 90 days' notice or
prior public disclosure of the date of the annual meeting is given or made by
the Company, not later than the tenth day following the date on which the
notice of the date of the annual meeting was mailed or such public disclosure
was
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made). The notice must contain certain information specified in the Bylaws,
including a brief description of the business desired to be brought before the
annual meeting and certain information concerning the stockholder submitting
the proposal.
Charter Provisions Relating to Rights Plan. The Amended and Restated
Certificate of Incorporation authorizes the Board of Directors of the Company
to create and issue rights (the "Rights") entitling the holders thereof to
purchase from the Company shares of capital stock or other securities. The
times at which, and the terms upon which, the Rights are to be issued may be
determined by the Board of Directors and set forth in the contracts or
instruments that evidence the Rights. The authority of the Board of Directors
with respect to the Rights includes, but is not limited to, the determination
of (i) the initial purchase price per share of the capital stock or other
securities of the Company to be purchased upon exercise of the Rights, (ii)
provisions relating to the times at which and the circumstances under which the
Rights may be exercised or sold or otherwise transferred, either together with
or separately from, any other securities of the Company, (iii) antidilutive
provisions which adjust the number or exercise price of the Rights or amount or
nature of the securities or other property receivable upon exercise of the
Rights, (iv) provisions which deny the holder of a specified percentage of the
outstanding securities of the Company the right to exercise the Rights and/or
cause the Rights held by such holder to become void, (v) provisions which
permit the Company to redeem the Rights and (vi) the appointment of a rights
agent with respect to the Rights. If authorized by the Board of Directors, the
Rights would be intended to protect the Company's stockholders from certain
non-negotiated takeover attempts which present the risk of a change of control
on terms which may be less favorable to the Company's stockholder than would be
available in a transaction negotiated with and approved by the Board of
Directors. The Board of Directors believes that the interests of the
stockholders generally are best served if any acquisition of the Company or a
substantial percentage of the Company's Common Stock results from arm's-length
negotiations and reflects the Board of Directors' careful consideration of the
proposed terms of a transaction. In particular, the Rights if issued would be
intended to help (i) reduce the risk of coercive two-tiered, front-end loaded
or partial offers which may not offer fair value to all stockholders of the
Company, (ii) deter market accumulators who through open market or private
purchases may achieve a position of substantial influence or control without
paying to stockholders a fair control premium and (iii) deter market
accumulators who are simply interested in putting the Company "in play."
TRANSFER AGENT AND REGISTRAR
The Transfer Agent and Registrar for the Common Stock is Harris Trust and
Savings Bank.
SHARES ELIGIBLE FOR FUTURE SALE
The market price of the Common Stock could be adversely affected by the sale
of substantial amounts of Common Stock in the public market. As of September
11, 1998, 28,101,166 shares of Common Stock and 2,655,709 shares of Restricted
Common Stock were issued and outstanding. Of such shares, 13,923,675 shares of
Common Stock and all of the shares of Restricted Common Stock were issued in a
transaction not registered under the Securities Act,
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and, accordingly, such shares may not be sold except in transactions registered
under the Securities Act or pursuant to an exemption from registration,
including the exemptions contained in Rules 144 and 701 under the Securities
Act.
In general, under Rule 144 as currently in effect, a person, or persons whose
shares are aggregated, who has beneficially owned his or her shares for at
least one year but not more than two years, or a person who may be deemed an
"affiliate" of the Company who has beneficially owned shares for at least one
year, would be entitled to sell within any three month period a number of
shares that does not exceed the greater of 1% of the then outstanding shares of
the Common Stock or the average weekly trading volume of the Common Stock
during the four calendar weeks preceding the date on which notice of the
proposed sale is sent to the Commission. Sales under Rule 144 are also subject
to certain manner of sale provisions, notice requirements and the availability
of current public information about the Company. A person who is not deemed to
have been an affiliate of the Company at any time for 90 days preceding a sale
and who has beneficially owned his shares for at least two years would be
entitled to sell such shares under Rule 144 without regard to the volume
limitations, manner of sale provisions, notice requirements or the availability
of current public information about the Company.
In general, under Rule 701 under the Securities Act, any employee, officer,
or director of or consultant to the Company who purchased his or her shares
pursuant to a written compensatory plan or contract is entitled to rely on the
resale provisions of Rule 701. Such provisions permit nonaffiliates to sell
their Rule 701 shares without having to comply with the public information,
holding period, volume limitation, or notice provisions of Rule 144 and permit
affiliates to sell their Rule 701 shares without having to comply with the Rule
144 holding period restrictions, in each case commencing 90 days after the
commencement of the Offerings.
Prior to the Offering, there was no established trading market for the Common
Stock, and no predictions can be made as to the effect that sales of Common
Stock under Rule 144, pursuant to a registration statement, or otherwise, or
the availability of shares of Common Stock for sale, will have on the market
price prevailing from time to time. Sales of substantial amounts of Common
Stock in the public market, or the perception that such sales could occur,
could depress the prevailing market price. Such sales may also make it more
difficult for the Company to issue or sell equity securities or equity-related
securities in the future at a time and price that it deems appropriate. See
"Risk Factors -- Shares Eligible for Future Sale."
Former stockholders of the Founding Companies, certain executive officers and
directors are entitled to certain rights with respect to the registration of
their shares of Common Stock under the Securities Act. In the aggregate, these
groups hold 16,365,336 shares of Common Stock and Restricted Common Stock. If
the Company proposes to register any of its securities under the Securities
Act, such stockholders are entitled to notice of such registration and are
entitled to include, at the Company's expense, all or a portion of their shares
therein, subject to certain conditions. These registration rights do not apply
to the registration statement containing this Prospectus or to any registration
statement filed with respect to employee benefit plans.
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PLAN OF DISTRIBUTION
This Prospectus may be used by the Company for the offer and sale of up to
21,000,000 shares of Common Stock from time to time in connection with the
acquisition of other businesses, assets or securities in business combination
transactions. The consideration offered by the Company in such acquisitions, in
addition to any shares of Common Stock offered by this Prospectus, may include
assets, debt or other securities or assumption by the Company of liabilities of
the business being acquired, or a combination thereof. The terms of
acquisitions are typically determined by negotiations between the Company and
the owners of the businesses, assets or securities to be acquired, with the
Company taking into account the quality of management, the past and potential
earning power and growth of the businesses, assets or securities to be
acquired, and other relevant factors. Shares of Common Stock issued to the
owners of the businesses, assets or securities to be acquired are generally
valued at a price reasonably related to the market value of the shares of
Common Stock either at the time the terms of the acquisition are tentatively
agreed upon or at or about the time or times of added delivery of the shares of
Common Stock.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by John F. Wombwell, Esq., Senior
Vice President, General Counsel and Secretary of the Company. Mr. Wombwell
owns 100,000 shares of Common Stock and options to purchase 150,000 shares of
Common Stock, subject to vesting.
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which is included as part of the
Registration Statement, does not contain all the information contained in the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements made in the Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected, without charge, at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, and at the Commission's regional
offices at Citicorp Center, 500 West Madison Street, Room 1400, Chicago, IL
60661, and 7 World Trade Center, Suite 1300, New York, NY 10048 or on the
Internet at http://www.sec.gov. Copies of such material can also be
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obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, at prescribed rates.
The Company intends to furnish its stockholders with annual reports
containing audited financial statements and such other reports as may be
required from time to time by law or the New York Stock Exchange.
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INDEX TO FINANCIAL STATEMENTS
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INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial Statements .... F-4
Unaudited Pro Forma Combined Balance Sheet ........................... F-5
Unaudited Pro Forma Combined Statement of Operations ................. F-6
Notes to Unaudited Pro Forma Combined Financial Statements ........... F-8
INTEGRATED ELECTRICAL SERVICES, INC. AND SUBSIDIARIES
Report of Independent Public Accountants ............................. F-12
Consolidated Balance Sheets .......................................... F-13
Consolidated Statements of Operations ................................ F-14
Consolidated Statements of Cash Flows ................................ F-15
Consolidated Statements of Stockholders' Equity ...................... F-16
Notes to Consolidated Financial Statements ........................... F-17
FOUNDING COMPANIES:
INTEGRATED ELECTRICAL SERVICES, INC.
Report of Independent Public Accountants ............................. F-30
Balance Sheet ........................................................ F-31
Statements of Operations ............................................. F-32
Statements of Cash Flows ............................................. F-33
Statements of Stockholders' Equity ................................... F-34
Notes to Financial Statements ........................................ F-35
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
Report of Independent Public Accountants ............................. F-39
Consolidated Balance Sheets .......................................... F-40
Consolidated Statements of Operations ................................ F-41
Consolidated Statements of Cash Flows ................................ F-42
Consolidated Statements of Stockholders' Equity ...................... F-43
Notes to Consolidated Financial Statements ........................... F-44
BW CONSOLIDATED, INC. AND SUBSIDIARIES
Report of Independent Public Accountants ............................. F-51
Consolidated Balance Sheets .......................................... F-52
Consolidated Statements of Operations ................................ F-53
Consolidated Statements of Cash Flows ................................ F-54
Consolidated Statements of Stockholders' Equity ...................... F-55
Notes to Consolidated Financial Statements ........................... F-56
MUTH ELECTRIC, INC.
Report of Independent Public Accountants ............................. F-64
Balance Sheets ....................................................... F-65
Statements of Operations ............................................. F-66
Statements of Cash Flows ............................................. F-67
Statements of Stockholders' Equity ................................... F-68
Notes to Financial Statements ........................................ F-69
POLLOCK ELECTRIC, INC.
Report of Independent Public Accountants ............................. F-73
Balance Sheets ....................................................... F-74
Statements of Operations ............................................. F-75
Statements of Cash Flows ............................................. F-76
Statements of Stockholder's Equity ................................... F-77
Notes to Financial Statements ........................................ F-78
CHARLES P. BAGBY, CO., INC.
Report of Independent Public Accountants ............................. F-85
Balance Sheets ....................................................... F-86
Statements of Operations ............................................. F-87
Statements of Cash Flows ............................................. F-88
Statements of Stockholder's Equity ................................... F-89
Notes to Financial Statements ........................................ F-90
</TABLE>
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<TABLE>
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AMBER ELECTRIC, INC.
Report of Independent Public Accountants.............................. F-94
Balance Sheets........................................................ F-95
Statements of Operations.............................................. F-96
Statements of Cash Flows.............................................. F-97
Statements of Stockholder's Equity.................................... F-98
Notes to Financial Statements......................................... F-99
DANIEL ELECTRICAL CONTRACTORS, INC. AND DANIEL ELECTRICAL OF TREASURE COAST INC.
Report of Independent Public Accountants.............................. F-105
Combined Balance Sheets............................................... F-106
Combined Statements of Operations..................................... F-107
Combined Statements of Cash Flows..................................... F-108
Combined Statements of Stockholder's Equity........................... F-109
Notes to Combined Financial Statements................................ F-110
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
Report of Independent Public Accountants.............................. F-116
Balance Sheets........................................................ F-117
Statements of Operations.............................................. F-118
Statements of Cash Flows.............................................. F-119
Statements of Stockholder's Equity.................................... F-120
Notes to Financial Statements......................................... F-121
THURMAN & O'CONNELL CORPORATION
Report of Independent Public Accountants.............................. F-128
Balance Sheets........................................................ F-129
Statements of Operations.............................................. F-130
Statements of Cash Flows.............................................. F-131
Statements of Stockholders' Equity.................................... F-132
Notes to Financial Statements......................................... F-133
RODGERS ELECTRIC COMPANY, INC.
Report of Independent Public Accountants.............................. F-139
Balance Sheets........................................................ F-140
Statements of Operations.............................................. F-141
Statements of Cash Flows.............................................. F-142
Statements of Stockholders' Equity.................................... F-143
Notes to Financial Statements......................................... F-144
SUBSEQUENT ACQUISITIONS:
MARK HENDERSON, INC. AND SUBSIDIARIES
Report of Independent Public Accountants.............................. F-149
Consolidated Balance Sheets........................................... F-150
Consolidated Statements of Income..................................... F-151
Consolidated Statements of Retained Earnings.......................... F-152
Consolidated Statements of Cash Flows................................. F-153
Notes to Consolidated Financial Statements............................ F-155
DAVIS ELECTRICAL CONSTRUCTORS, INC.
Report of Independent Public Accountants.............................. F-162
Balance Sheets........................................................ F-163
Statements of Income and Retained Earnings............................ F-164
Statements of Cash Flows.............................................. F-165
Notes to Financial Statements......................................... F-166
FLORIDA INDUSTRIAL ELECTRIC, INC.
Report of Independent Public Accountants.............................. F-171
Balance Sheet......................................................... F-172
Statements of Income and Retained Earnings............................ F-174
Statements of Cash Flows.............................................. F-175
Notes to Financial Statements......................................... F-176
GALBRAITH ACQUISITION COMPANY, INC. AND SUBSIDIARY
Report of Independent Public Accountants.............................. F-188
Consolidated Balance Sheet............................................ F-189
Consolidated Statements of Income and Retained Earnings............... F-190
Consolidated Statements of Cash Flows................................. F-191
Notes to Financial Statements......................................... F-192
</TABLE>
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<TABLE>
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ARC ELECTRIC, INCORPORATED
Report of Independent Public Accountants.............................. F-198
Balance Sheets........................................................ F-199
Statements of Income.................................................. F-201
Statements of Cash Flows.............................................. F-202
Statements of Stockholders' Equity.................................... F-203
Notes to Financial Statements......................................... F-204
BRINK ELECTRIC CONSTRUCTION CO.
Report of Independent Public Accountants.............................. F-212
Balance Sheets........................................................ F-213
Statements of Income.................................................. F-215
Statements of Changes in Stockholders' Equity......................... F-216
Statements of Cash Flows.............................................. F-217
Notes to Financial Statements......................................... F-218
GOSS ELECTRIC COMPANY, INC.
Report of Independent Public Accountants.............................. F-223
Balance Sheets........................................................ F-224
Statement of Revenues and Retained Earnings........................... F-226
Statements of Cash Flows.............................................. F-227
Notes to Financial Statements......................................... F-229
MID-STATES ELECTRIC COMPANY, INC.
Report of Independent Public Accountants.............................. F-234
Balance Sheets........................................................ F-235
Statements of Operations.............................................. F-237
Statements of Changes in Stockholders' Equity......................... F-238
Statements of Cash Flows.............................................. F-239
Notes to Financial Statements......................................... F-240
T & H ELECTRICAL CORPORATION
Report of Independent Public Accountants.............................. F-249
Balance Sheets........................................................ F-250
Statements of Income and Retained Earnings............................ F-252
Statements of Cash Flows.............................................. F-253
Notes to Financial Statements......................................... F-254
</TABLE>
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INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to (i) the acquisitions by Integrated Electrical Services, Inc. (IES), of 16
companies and related entities engaged in all facets of electrical contracting
and maintenance services on January 30, 1998 (together, the Founding Companies),
and related transactions, (ii) IES's January 30, 1998, initial public offerings
in the United States and Canada and outside the United States and Canada
(including the underwriters exercise of the overallotment option for 1,050,000
shares) (the "Offering"), and (iii) the acquisitions of 19 additional electrical
contracting and maintenance businesses from April 1998 through September 11,
1998 (the "Post IPO Acquisitions"). Of these Post IPO Acquisitions, 18 were
accounted for using the purchase method of accounting and one was accounted for
using the pooling-of-interests method of accounting. The Founding Company
Acquisitions and the Post IPO Acquisitions are collectively referred to as the
"Companies". The Founding Company Acquisitions occurred simultaneously with the
closing of the Offering and were accounted for using the purchase method of
accounting. Pursuant to the Securities and Exchange Commission's ("SEC") Staff
Accounting Bulletin No. 97 (SAB97), Houston-Stafford Electric, Inc. ("HSE") is
for accounting purposes considered the entity which acquired the other Founding
Companies and IES (the "Accounting Acquirer"). As such, IES's consolidated
historical financial statements represent the financial position and results of
operations of (i) HSE as restated to include the financial position and results
of operations of the Pooled Company, and (ii) the other Founding Companies and
the Post IPO Acquisitions beginning on their respective dates of acquisition.
The unaudited pro forma combined balance sheet gives effect to the 8 Post
IPO Acquisitions which were acquired subsequent to June 30, 1998, and related
transactions as if they had occurred on June 30, 1998. The unaudited pro forma
combined statements of operations give effect to these transactions as if they
had occurred on October 1, 1996.
IES has preliminarily analyzed the savings that it expects to be realized
from reductions in salaries, bonuses and certain benefits to the owners. To the
extent the owners of the Companies have contractually agreed to prospective
changes in salary, bonuses, benefits and lease payments, these changes have been
reflected in the unaudited pro forma combined statement of operations.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that Company management deems appropriate
and may be revised as additional information becomes available. The pro forma
financial data do not purport to represent what IES's combined financial
position or results of operations would actually have been if such transactions
in fact had occurred on those dates and are not necessarily representative of
IES's combined financial position or results of operations for any future
period. Since the Companies were not under common control or management,
historical combined results may not be comparable to, or indicative of, future
performance. The unaudited pro forma combined financial statements should be
read in conjunction with the historical financial statements and notes thereto
included elsewhere in this Prospectus. See also "Risk Factors" included
elsewhere herein.
F-4
<PAGE> 80
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
JUNE 30, 1998
(AMOUNTS IN THOUSANDS)
<TABLE>
<CAPTION>
Davis Electrical Other
IES and Constructors, Insignificant Pro Forma
Subsidiaries Inc. Acquisitions Adjustments Pro Forma
------------ --------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 13,337 $ 3,652 $ 8,744 $ (5,469) $ 20,264
Receivables 110,541 10,240 20,489 (894) 140,376
Allowance for doubtful accounts (3,083) -- (122) (922) (4,127)
--------- --------- --------- --------- ---------
Receivables, net 107,458 10,240 20,367 (1,816) 136,249
Inventories 5,917 -- 688 (34) 6,571
Cost and estimated earnings
in excess of billings on
uncompleted contracts 7,671 2,459 2,788 -- 12,918
Prepaid Expenses 2,168 54 583 -- 2,805
--------- --------- --------- --------- ---------
Total current assets 136,551 16,405 33,170 (7,319) 178,807
GOODWILL, NET 208,699 -- -- 78,158 286,857
PROPERTY AND EQUIPMENT, NET 16,769 1,171 6,365 (607) 23,698
OTHER NONCURRENT ASSETS 1,478 3,612 1,091 (2,999) 3,182
--------- --------- --------- --------- ---------
Total Assets $ 363,497 $ 21,188 $ 40,626 $ 67,233 $ 492,544
--------- --------- --------- --------- ---------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of debt $ 516 $ -- $ 643 $ -- $ 1,159
Accounts payable and accrued expense 49,859 4,366 6,478 959 61,662
Billings in excess of costs and
estimated earnings on
uncompleted contracts 24,207 360 3,402 1,118 29,087
Income taxes payable 2,759 -- 1,315 -- 4,074
Other current liabilities 1,706 -- 211 -- 1,917
--------- --------- --------- --------- ---------
Total current liabilities 79,047 4,726 12,049 2,077 97,899
LONG-TERM BANK DEBT 20,000 -- 710 68,785 89,495
OTHER LONG-TERM DEBT, NET 8,628 -- 421 -- 9,049
OTHER NON-CURRENT LIABILITIES 440 2,907 163 (2,907) 603
--------- --------- --------- --------- ---------
Total liabilities 108,115 7,633 13,343 67,955 197,046
STOCKHOLDERS' EQUITY:
Common stock 253 62 467 (501) 281
Restricted common stock 27 -- -- -- 27
Additional paid in capital 252,445 130 2,743 37,215 292,533
Treasury stock -- -- (3,249) 3,249 --
Retained earnings 2,657 13,363 27,322 (40,685) 2,657
--------- --------- --------- --------- ---------
Total stockholders' equity 255,382 13,555 27,283 (722) 295,498
--------- --------- --------- --------- ---------
Total liabilities and stockholders'
equity $ 363,497 $ 21,188 $ 40,626 $ 67,233 $ 492,544
========= ========= ========= ========= =========
</TABLE>
F-5
<PAGE> 81
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED JUNE 30, 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Davis
Other Mark Electrical Other
IES and Founding Henderson, Constructors, Insignificant Pro Forma Pro Forma
Subsidiaries Companies Inc. Inc. Acquisitions Adjustments Total
------------ --------- ---------- ------------- ------------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES $ 219,620 $ 83,456 $ 47,985 $ 64,756 $ 137,538 $ -- $ 553,355
COST OF SERVICES 173,420 64,709 42,669 56,653 105,024 -- 442,475
--------- --------- --------- --------- --------- --------- ---------
GROSS PROFIT 46,200 18,747 5,316 8,103 32,514 -- 110,880
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 29,467 11,267 2,216 5,254 23,907 (15,255) 56,856
NON-CASH, NON-RECURRING
COMPENSATION CHARGE 17,036 -- -- -- -- (17,036) --
GOODWILL AMORTIZATION 1,743 -- -- -- -- 3,706 5,449
--------- --------- --------- --------- --------- --------- ---------
OPERATING INCOME (LOSS) (2,046) 7,480 3,100 2,849 8,607 28,585 48,575
OTHER INCOME (EXPENSE):
Interest expense (269) (408) (36) -- (219) (3,131) (4,063)
Interest income 288 181 35 102 220 (730) 96
Gain (loss) on sale of
assets 195 57 (5) -- 3 (94) 156
Other 134 (17) 20 -- 213 (234) 116
--------- --------- --------- --------- --------- --------- ---------
348 (187) 14 102 217 (4,189) (3,695)
INCOME BEFORE
INCOME TAXES (1,698) 7,293 3,114 2,951 8,824 24,396 44,880
INCOME TAX PROVISION 6,443 5,409 -- -- -- 7,022 18,874
--------- --------- --------- --------- --------- --------- ---------
NET INCOME (LOSS) $ (8,141) $ 1,884 $ 3,114 $ 2,951 $ 8,824 $ 17,374 $ 26,006
========= ========= ========= ========= ========= ========= =========
EARNINGS PER SHARE:
Basic $ .85
Diluted $ .84
Shares used in computing pro forma
earnings per share(1):
Basic 30,756,875
Diluted 31,114,124
</TABLE>
- ----------
(1) Includes (a) 2,655,709 shares issued to the IES founder and chairman of the
board, (b) 1,396,602 shares issued to management of IES, (c) 12,313,025
shares issued to owners of the Founding Companies, (d) the 8,050,000 shares
sold in the Offering (including the underwriters exercise of the
overallotment option of 1,050,000 shares), and (e) 6,341,539 shares issued
to the owners of the Post IPO Acquisitions. Additionally, includes 357,249
shares computed under the treasury stock method related to 3,110,550 options
which are currently outstanding.
F-6
<PAGE> 82
INTEGRATED ELECTRICAL SERVICES, INC.
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
Davis
IES Other Mark Electrical Other
and Founding Henderson, Constructors, Insignificant Pro Forma Pro Forma
Subsidiaries Companies Inc. Inc. Acquisitions Adjustments Total
------------ --------- ---------- ------------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES $ 117,111 $ 233,126 $ 55,541 $ 100,020 $ 199,236 $ -- $ 705,034
COST OF REVENUES 95,937 183,584 46,938 82,101 153,611 -- 562,171
--------- --------- --------- --------- --------- --------- ----------
GROSS PROFIT 21,174 49,542 8,603 17,919 45,625 -- 142,863
SELLING, GENERAL, AND
ADMINISTRATIVE EXPENSES 14,261 30,766 3,267 14,196 30,296 (19,885) 72,901
GOODWILL AMORTIZATION -- -- -- -- -- 7,154 7,154
--------- --------- --------- --------- --------- --------- ----------
OPERATING INCOME (LOSS) 6,913 18,776 5,336 3,723 15,329 12,731 62,808
OTHER INCOME (EXPENSE):
Interest expense (214) (639) (52) (2) (331) (4,369) (5,607)
Interest income 89 -- 165 290 285 (740) 89
Gain (loss) on sale of assets -- -- 13 -- 48 (61) --
Other 510 589 (423) -- 374 (434) 616
--------- --------- --------- --------- --------- --------- ----------
385 (50) (297) 288 376 (5,604) (4,902)
INCOME BEFORE
INCOME TAXES 7,298 18,726 5,039 4,011 15,705 7,127 57,906
INCOME TAX PROVISION 2,923 1,436 853 -- 1,890 17,299 24,401
--------- --------- --------- --------- --------- --------- ----------
NET INCOME (LOSS) $ 4,375 $ 17,290 $ 4,186 $ 4,011 $ 13,815 $ (10,172) $ 33,505
========= ========= ========= ========= ========= ========= ==========
EARNINGS PER SHARE:
Basic $ 1.09
Diluted $ 1.09
Shares used in computing pro forma
earnings per share (1):
Basic 30,756,875
Diluted 30,756,875
</TABLE>
- ----------
(1) Includes (a) 2,655,709 shares issued to the IES founder and chairman of the
board, (b) 1,396,602 shares issued to management of IES, (c) 12,313,025
shares issued to owners of the Founding Companies, (d) the 8,050,000 shares
sold in the Offering (including the underwriters exercise of the
overallotment option of 1,050,000 shares), and (e) 6,341,539 shares issued
to the owners of the Post IPO Acquisitions.
F-7
<PAGE> 83
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
Integrated Electrical Services, Inc. (IES), was founded to create a leading
national provider of electrical contracting and maintenance services to the
commercial, industrial and residential markets. See BASIS OF PRESENTATION for a
description of the Company's offering and acquisitions of the Companies and
related accounting treatment.
The historical financial statements of the other Founding Companies
(excluding HSE) included in the accompanying pro forma financial statements
reflect the results of operations of the Founding Companies for periods prior to
January 30, 1998, and were derived from the respective Founding Companies'
financial statements. The periods included in these financial statements for the
individual Founding Companies are for the year ended September 30, 1997, and the
period from October 1, 1997 to January 30, 1998. The audited historical
financial statements for the Founding Companies included elsewhere herein have
been included in accordance with Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 80.
The historical financial statements of the Post IPO Acquisitions reflect the
financial position of the eight Post IPO Acquisitions which were acquired
subsequent to June 30, 1998, and the results of operations of the Post IPO
acquisitions accounted for using the purchase method of accounting for the year
ended September 30, 1997, and the current fiscal year from their respective
dates of acquisition.
2. ACQUISITION OF COMPANIES:
On January 30, 1998, the Company completed its initial public offering of its
stock, which involved the sale to the public of 7,000,000 shares of the
Company's common stock at $13.00 per share. The Company received net proceeds
from the Offering of approximately $78.8 million. Concurrent with the completion
of the Offering, IES acquired the Founding Companies for consideration
consisting of $53.4 million ($38.8 million excluding the cash paid to the
Accounting Acquirer) in cash and 12,313,025 shares (8,961,000 shares excluding
the shares issued to the owners of the Accounting Acquirer) of common stock.
Additionally, on February 5, 1998, the Company sold 1,050,000 shares of its
common stock pursuant to the overallotment option granted to the underwriters in
connection with the Offering for net proceeds of approximately $12.7 million.
The Company used approximately $7.6 million of the net proceeds from the
Offering to retire outstanding third party debt and approximately $16.0 million
to pay indebtedness incurred by the Founding Companies for distributions to the
owners prior to the Acquisitions. The Company used the remaining net proceeds to
fund a portion of the cash consideration for the Post IPO Acquisitions.
Subsequent to its IPO, and through June 30, 1998, the Company has acquired 11
additional electrical contracting and maintenance businesses for approximately
$30.9 million of cash and 3.5 million shares of common stock. Of these 11 Post
IPO Acquisitions, 10 were accounted for using the purchase method of accounting
and one was accounted for using the pooling-of-interests method of accounting.
Accordingly, the Company's historical financial statements have been restated to
include the historical financial statements of the Pooled Company.
Subsequent to June 30, 1998, and through September 11, 1998, the Company has
acquired eight additional electrical contracting and maintenance businesses for
approximately $63.6 million of cash (funded through borrowings under the
Company's $175 million bank credit facility) and 2.8 million shares of
common stock. All of those acquisitions were accounted for using the purchase
method of accounting.
In connection with the acquisitions of the Founding Companies and the Post IPO
Acquisitions, the Company has recorded approximately $288 million of excess
total consideration paid over the net tangible assets acquired has been recorded
as goodwill in the accompanying consolidated financial statements. The
accompanying balance sheets include allocations of the respective purchase
prices initially assigned to the assets acquired and liabilities assumed based
on preliminary estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available.
F-8
<PAGE> 84
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS - (CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the transfer in connection with the Acquisitions of $4.2 million
of previously undistributed earnings and nonoperating assets, net of
liabilities to the owners of the eight Post IPO Acquisitions which
closed subsequent to June 30, 1998.
(b) Records the purchase of the eight Post IPO Acquisitions closed
subsequent to June 30, 1998 by IES consisting of cash of $63.6 million
and approximately 2,823,000 shares of Common Stock valued $42.9 for a
total purchase price of $106.5 million resulting in excess purchase
price of $78.1 million over the net assets acquired of $28.4 million.
The following tables summarize unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS
---------------------- PRO FORMA
(a) (b) ADJUSTMENTS
--------- --------- -----------
ASSETS
<S> <C> <C> <C>
Current assets --
Cash and cash equivalents ................................ $ (5,469) $ -- $ (5,469)
Accounts receivable ...................................... (894) (922) (1,816)
Inventories .............................................. -- (34) (34)
-------- -------- --------
Total current assets ............................... (6,363) (956) (7,319)
Goodwill, net .............................................. -- 78,158 78,158
Property and equipment, net ................................ (607) -- (607)
Other assets ............................................... (2,999) -- (2,999)
-------- -------- --------
Total assets ....................................... $ (9,969) $ 77,202 $ 67,233
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Accounts payable and accrued expenses .................... $ -- $ 959 $ 959
Billings in excess of estimated earnings on uncompleted
contracts .............................................. -- 1,118 1,118
-------- -------- --------
Total current liabilities .......................... -- 2,077 2,077
-------- -------- --------
Long-term debt, net of current maturities................... -- 68,785 68,785
Other non-current liabilities .............................. (5,722) 2,815 (2,907)
-------- -------- --------
Total liabilities .................................. (5,722) 73,677 67,955
-------- -------- --------
Stockholders' equity --
Common stock ............................................. -- (501) (501)
Additional paid-in capital ............................... (4,247) 41,462 37,215
Retained earnings ........................................ -- (40,685) (40,685)
Treasury stock ........................................... -- 3,249 3,249
-------- -------- --------
Total stockholders' equity ......................... (4,247) 3,525 (722)
-------- -------- --------
Total liabilities and stockholders' equity ......... $ (9,969) $ 77,202 $ 67,233
======== ======== ========
</TABLE>
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE
NINE MONTHS ENDED JUNE 30, 1998:
(a) Reflects the reduction in salaries, bonuses and benefits and lease
payments to the owners of the Companies. These reductions in salaries,
bonuses and benefits and lease payments have been agreed prospectively
in accordance with the terms of employment agreements executed as part
of the acquisitions. Such employment agreements are primarily for five
years, contain restrictions related to competition and provide severance
for termination of employment in certain circumstances. Also reflects
the reversal of the $17.0 million non-recurring, non-cash compensation
charge recorded by HSE in connection with a note receivable and rights
held by an officer of HSE which was exchanged for cash and shares of IES
common stock in connection with the Founding Company acquisitions.
(b) Reflects the amortization of goodwill recorded as a result of these
acquisitions (based on a 40-year estimated life).
(c) Reflects additional interest expense on borrowings of $63.6 million to
fund the cash portion of the consideration paid for the eight
acquisitions which closed subsequent to June 30, 1998, net of reduction
on interest expense attributable to the $8.1
F-9
<PAGE> 85
million of historical debt repaid using proceeds from the Offerings or
to be transferred to the owners of the Founding Companies. The
additional interest expense was calculated utilizing an assumed annual
effective interest rate of approximately 7.5%. Also, reflects
elimination of interest income.
(d) Reflects the incremental provision for federal and state income taxes at
a 38% overall tax rate, before non-deductible goodwill and other
permanent items, relating to the other statements of operations
adjustments and for income taxes on the pretax income of Companies that
have historically elected S Corporation tax status.
The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
----------------------------------------------- PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative .............. $(15,255) $ -- -- $ -- $(15,255)
expenses
Non-cash, non-recurring compensation charge ...... (17,036) -- -- -- (17,036)
Goodwill amortization ............................ -- 3,706 -- -- 3,706
-------- -------- -------- -------- --------
Income (loss) from operations .................. 32,291 (3,706) -- -- 28,585
Other income (expense) --
Interest expense ............................... -- -- (3,131) -- (3,131)
Interest income ................................ -- -- (730) -- (730)
Gain (loss) on sale of assets .................. -- -- (94) -- (94)
Other, net ..................................... -- -- (234) -- (234)
-------- -------- -------- -------- --------
Other income (expense), net .................... -- -- (4,189) -- (4,189)
-------- -------- -------- -------- --------
Income (loss) before income taxes .............. 32,291 (3,706) (4,189) -- 24,396
Provision for income taxes ....................... -- -- -- 7,022 7,022
-------- -------- -------- -------- --------
Net income (loss) ................................ $ 32,291 $ (3,706) $ (4,189) $ (7,022) $ 17,374
======== ======== ======== ======== ========
</TABLE>
5. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS FOR THE
YEAR ENDED SEPTEMBER 30, 1997:
(a) Reflects the reduction in salaries, bonuses and benefits and lease
payments to the owners of the Companies. These reductions in salaries,
bonuses and benefits and lease payments have been agreed prospectively
in accordance with the terms of employment agreements executed as part
of the acquisitions. Such employment agreements are primarily for five
years, contain restrictions related to competition and provide severance
for termination of employment in certain circumstances.
(b) Reflects the amortization of goodwill recorded as a result of these
acquisitions over a 40-year estimated life, as well as a reduction in
historical Founding Companies' minority interest expense attributable to
minority interests that were acquired as part of the transaction.
(c) Reflects additional interest expense on borrowings of $63.6 million to
fund the cash portion of the consideration paid for the eight
acquisitions which closed subsequent to June 30, 1998, net of reduction
on interest expense attributable to the $8.1 million of historical debt
repaid using proceeds from the Offerings or to be transferred to the
owners of the Founding Companies. The additional interest expense was
calculated utilizing an assumed annual effective interest rate of
approximately 7.5%. Also, reflects elimination of interest income.
(d) Reflects the incremental provision for federal and state income taxes at
a 38% overall tax rate, before non-deductible goodwill and other
permanent items, relating to the other statements of operations
adjustments and for income taxes on the pretax income of Companies that
have historically elected S Corporation tax status.
F-10
<PAGE> 86
The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
----------------------------------------------- PRO FORMA
(a) (b) (c) (d) ADJUSTMENTS
-------- -------- -------- -------- -----------
<S> <C> <C> <C> <C> <C>
Selling, general and administrative $(19,885) $ -- $ -- $ -- $(19,885)
expenses
Goodwill amortization -- 7,154 -- -- 7,154
-------- -------- -------- -------- --------
Income (loss) from operations 19,885 (7,154) -- -- 12,731
Other income (expense) --
Interest expense -- -- (4,369) -- (4,369)
Interest income -- -- (740) -- (740)
Gain (loss) on sale of assets -- -- (61) -- (61)
Other, net -- 316 (750) -- (434)
-------- -------- -------- -------- --------
Other income (expense), net -- 316 (5,920) -- (5,604)
-------- -------- -------- -------- --------
Income (loss) before income
taxes 19,885 (6,838) (5,920) -- 7,127
Provision for income taxes -- -- -- 17,299 17,299
-------- -------- -------- -------- --------
Net income (loss) $ 19,885 $ (6,838) $ (5,920) $(17,299) $(10,172)
======== ======== ======== ======== ========
</TABLE>
F-11
<PAGE> 87
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Electrical Services, Inc.:
We have audited the accompanying consolidated balance sheets of
Integrated Electrical Services, Inc., a Delaware corporation, and subsidiaries
(see Note 1) as of December 31, 1996, and September 30, 1997, and the related
consolidated statements of operations, cash flows and stockholders' equity for
each of the two years in the period ended December 31, 1996, and for the year
ended September 30, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Integrated
Electrical Services, Inc., and subsidiaries as of December 31, 1996, and
September 30, 1997, and the results of their operations and their cash flows for
each of the two years in the period ended December 31, 1996, and for the year
ended September 30, 1997, in conformity with generally accepted accounting
principles.
As discussed in Note 1, the accompanying consolidated financial
statements reflect the Company on a historical basis including Houston-Stafford
Electric, Inc., as the accounting acquirer restated for the effect of a
pooling-of-interests transaction.
ARTHUR ANDERSEN LLP
Houston, Texas
September 11, 1998
F-12
<PAGE> 88
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(NOTE 1)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30, JUNE 30,
ASSETS 1996 1997 1998
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 4,301 $ 4,154 $ 13,337
Accounts receivable-
Trade, net of allowance of $459, $537 and $3,083,
respectively 9,638 14,287 86,247
Retainage 4,143 4,611 21,211
Inventories, net 346 2,878 5,917
Costs and estimated earnings in excess of billings on
uncompleted contracts 828 1,368 7,671
Prepaid expenses and other current assets 674 1,173 2,168
------------ ------------ ------------
Total current assets 19,930 28,471 136,551
------------ ------------ ------------
RECEIVABLES FROM RELATED PARTIES 338 309 --
OTHER RECEIVABLES 166 -- --
GOODWILL, net 13 970 208,699
OTHER NONCURRENT ASSETS 303 1,934 1,478
PROPERTY AND EQUIPMENT, net 2,962 4,110 16,769
------------ ------------ ------------
Total assets $ 23,712 $ 35,794 $ 363,497
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 553 $ 894 $ 516
Accounts payable and accrued expenses 7,990 14,669 49,859
Income taxes payable 201 1,540 2,759
Billings in excess of costs and estimated earnings on
uncompleted contracts 3,319 3,266 24,207
Other current liabilities 799 332 1,706
------------ ------------ ------------
Total current liabilities 12,862 20,701 79,047
------------ ------------ ------------
LONG-TERM BANK DEBT -- -- 20,000
OTHER LONG-TERM DEBT, net of current maturities 1,406 1,275 8,628
OTHER NON-CURRENT LIABILITIES 738 1,182 440
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 authorized, none
issued and outstanding -- -- --
Common stock, $.01 par value, 100,000 shares authorized,
4,492,039, 4,492,039 and 25,278,650 shares issued and
outstanding 45 45 253
Restricted common stock, $.01 par value, 2,655,709 shares
authorized, 2,655,709 shares issued and outstanding at June
30, 1998 -- -- 27
Additional paid-in capital 887 887 252,445
Retained earnings 7,774 11,704 2,657
------------ ------------ ------------
Total stockholders' equity 8,706 12,636 255,382
------------ ------------ ------------
Total liabilities and stockholders' equity $ 23,712 $ 35,794 $ 363,497
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-13
<PAGE> 89
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(NOTE 1)
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, ENDED YEAR ENDED JUNE 30,
---------------------------- SEPTEMBER 30, SEPTEMBER 30, ----------------------------
1995 1996 1997 1997 1997 1998
------------ ------------ ------------ ------------ ------------ ------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES $ 73,345 $ 101,431 $ 92,379 $ 117,111 $ 79,847 $ 219,620
COST OF SERVICES ( including
depreciation) 63,709 85,081 76,306 95,937 65,189 173,420
------------ ------------ ------------ ------------ ------------ ------------
Gross profit 9,636 16,350 16,073 21,174 14,658 46,200
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES 7,905 10,228 10,222 14,261 10,170 29,467
NON-CASH NON-RECURRING
COMPENSATION CHARGE IN
CONNECTION WITH THE FOUNDING
COMPANY ACQUISITIONS (Note 1) -- -- -- -- -- 17,036
GOODWILL AMORTIZATION -- -- -- -- -- 1,743
------------ ------------ ------------ ------------ ------------ ------------
Income (loss) from 1,731 6,122 5,851 6,913 4,488 (2,046)
------------ ------------ ------------ ------------ ------------ ------------
operations
OTHER INCOME (EXPENSE):
Interest expense (286) (171) (164) (214) (143) (269)
Other 104 185 456 599 187 617
------------ ------------ ------------ ------------ ------------ ------------
Other income (expense), net (182) 14 292 385 44 348
------------ ------------ ------------ ------------ ------------ ------------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES 1,549 6,136 6,143 7,298 4,532 (1,698)
PROVISION FOR INCOME TAXES 563 2,471 2,408 2,923 1,847 6,443
------------ ------------ ------------ ------------ ------------ ------------
NET INCOME (LOSS) $ 986 $ 3,665 $ 3,735 $ 4,375 $ 2,685 $ (8,141)
============ ============ ============ ============ ============ ============
BASIC AND DILUTED EARNINGS (LOSS)
PER SHARE $ .22 $ .82 $ .83 $ .97 $ .60 $ (.49)
============ ============ ============ ============ ============ ============
SHARES USED IN THE COMPUTATION OF
BASIC AND DILUTED EARNINGS
(LOSS) PER SHARE (Note 2) 4,492,039 4,492,039 4,492,039 4,492,039 4,492,039 16,757,359
============ ============ ============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-14
<PAGE> 90
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(NOTE 1)
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS NINE MONTHS ENDED
DECEMBER 31, ENDED YEAR ENDED JUNE 30,
----------------------- SEPTEMBER 30, SEPTEMBER 30, -----------------------
1995 1996 1997 1997 1997 1998
---------- ---------- ---------- ---------- ---------- ----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 986 $ 3,665 $ 3,735 $ 4,375 $ 2,685 $ (8,141)
Adjustment for change in fiscal year of
the pooled company -- -- 195 -- -- --
Non-cash non-recurring compensation charge -- -- -- -- -- 17,036
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities-
Depreciation and amortization 219 304 319 398 342 2,918
Loss (gain) on sale of property and 1 3 (142) (140) (140) (195)
equipment
Changes in operating assets and liabilities-
(Increase) decrease in-
Accounts receivable (1,155) (4,157) (4,399) (3,886) (1,417) (7,004)
Inventories 315 (9) (1,400) (1,409) (1,062) 548
Costs and estimated earnings in
excess of billings on 791 (95) (540) (841) (461) (1,234)
uncompleted contracts
Prepaid expenses and other current assets 204 (91) (153) (286) 50 632
Increase (decrease) in-
Accounts payable and accrued expenses 761 1,675 2,613 2,379 542 (2,359)
Billings in excess of costs and
estimated earnings on uncompleted 962 1,609 (54) (747) (38) 5,882
contracts
Other current liabilities 249 906 688 272 (424) (216)
Other, net (11) (20) 190 210 63 2
---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by operating activities 3,322 3,790 1,052 325 140 7,869
---------- ---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 132 22 70 84 30 686
Additions of property and equipment (409) (900) (1,025) (997) (771) (2,731)
Purchase of businesses, net of cash acquired -- -- (100) (100) -- (66,588)
Increase in note receivable -- -- -- -- (76) --
Collections of notes receivable -- -- 77 77 6 475
Other, net 6 -- -- 21 -- --
---------- ---------- ---------- ---------- ---------- ----------
Net cash used in investing activities (271) (878) (978) (915) (811) (68,158)
---------- ---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt 521 2,960 10,373 10,979 4,232 20,626
Payments of long-term debt (2,446) (3,408) (10,594) (11,545) (4,071) (24,909)
Distributions to stockholders (15) -- -- -- -- --
Distributions to accounting acquirer -- -- -- -- -- (17,758)
Proceeds from initial public offering -- -- -- -- -- 91,513
---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by (used in) financing (1,940) (448) (221) (566) 161 69,472
---------- ---------- ---------- ---------- ---------- ----------
activities
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS 1,111 2,464 (147) (1,156) (510) 9,183
CASH AND CASH EQUIVALENTS, beginning of period 726 1,837 4,301 5,310 5,310 4,154
---------- ---------- ---------- ---------- ---------- ----------
CASH AND CASH EQUIVALENTS, end of period $ 1,837 $ 4,301 $ 4,154 $ 4,154 $ 4,800 $ 13,337
========== ========== ========== ========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for-
Interest $ 286 $ 171 $ 160 $ 193 $ 63 $ 161
Income taxes 266 1,643 1,421 2,571 1,204 3,308
Non-cash property distribution -- -- -- -- -- 756
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-15
<PAGE> 91
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(NOTE 1)
<TABLE>
<CAPTION>
RESTRICTED
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
----------------------- ----------------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS EQUITY
---------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 4,492,039 $ 45 -- $ -- $ 887 $ 3,123 $ 4,055
Net income -- -- -- -- -- 986 986
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1995 4,492,039 45 -- -- 887 4,109 5,041
Net income -- -- -- -- -- 3,665 3,665
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, December 31, 1996 4,492,039 45 -- -- 887 7,774 8,706
Net income -- -- -- -- -- 3,735 3,735
Adjustment for change in
fiscal year of
pooled company -- -- -- -- -- 195 195
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, September 30, 1997 4,492,039 45 -- -- 887 11,704 12,636
Non-cash non-recurring
compensation charge -- -- -- -- 17,036 -- 17,036
(unaudited)
Initial public offering of
stock (unaudited) 8,050,000 80 -- -- 91,433 -- 91,513
Issuance of stock for
acquisitions (unaudited) 12,736,611 128 2,655,709 27 160,715 -- 160,870
Distribution to accounting
acquirer (unaudited) -- -- -- -- (17,626) (888) (18,514)
Net loss (unaudited) -- -- -- -- -- (8,141) (8,141)
Other (unaudited) -- -- -- -- -- (18) (18)
---------- ---------- ---------- ---------- ---------- ---------- ----------
BALANCE, June 30, 1998
(unaudited) 25,278,650 $ 253 2,655,709 $ 27 $ 252,445 $ 2,657 $ 255,382
========== ========== ========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-16
<PAGE> 92
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION AND BASIS OF PRESENTATION:
Integrated Electrical Services, Inc. (the Company or IES), a Delaware
corporation, was founded in June 1997 to create a leading national provider and
consolidator of electrical contracting and maintenance services, focusing
primarily on the commercial, industrial and residential markets. On January 30,
1998, concurrent with the closing of its initial public offering (IPO or
Offering) of common stock, IES acquired, in separate transactions, for
consideration including $53.4 million of cash and 12,313,025 shares of common
stock, 16 companies and related entities engaged in all facets of electrical
contracting and maintenance services (collectively, the Founding Companies or
the Founding Company Acquisitions).
For financial statement presentation purposes, Houston-Stafford Electric, Inc.
(Houston-Stafford), one of the Founding Companies, has been identified as the
accounting acquirer. The acquisition of the remaining Founding Companies and IES
was accounted for using the purchase method of accounting. The allocation of
purchase prices to the assets acquired and liabilities assumed has been
initially assigned and recorded based on preliminary estimates of fair value and
may be revised as additional information concerning the valuation of such assets
and liabilities becomes available.
Subsequent to its IPO, and through June 30, 1998, the Company acquired 11
additional electrical contracting and maintenance businesses for approximately
$30.9 million of cash and 3,519,023 shares of common stock (the Post IPO
Acquisitions). Of these 11 Post IPO Acquisitions, 10 were accounted for using
the purchase method of accounting (the Purchased Companies) and one was
accounted for using the pooling-of-interests method of accounting (the Pooled
Company) resulting in a restatement of the Company's financial statements for
all periods presented (see Note 3).
The accompanying consolidated financial statements through January 30, 1998,
reflect the historical accounts of Houston-Stafford as the accounting acquirer.
The historical financial statements have been restated for all periods presented
for the effect of the acquisition accounted for as a pooling-of-interest. The
Founding Companies are included in the Company's results of operations beginning
February 1, 1998, and the Purchased Companies beginning on their respective
dates of acquisition. Houston-Stafford's results of operations through January
30, 1998, include a non-cash, non-recurring compensation charge of approximately
$17.0 million required by the Securities and Exchange Commission (SEC) in
connection with a note receivable and rights held by an officer of
Houston-Stafford which was exchanged for cash and shares of IES common stock in
connection with the Founding Company Acquisitions (see Note 10). The Company has
changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements after January 30, 1998,
include the accounts of IES and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
F-17
<PAGE> 93
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Interim Financial Information
The interim financial statements for the nine months ended June 30, 1997 and
1998, and the nine months ended September 30, 1997, are unaudited and have been
prepared pursuant to the rules and regulations of the SEC. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents.
Inventories
Inventories consist of parts and supplies held for use in the ordinary course of
business and are valued by the Company at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $219,000 and $304,000 for the years ended December 31, 1995 and
1996, and $391,000 for the year ended September 30, 1997, respectively.
Expenditures for repairs and maintenance are charged to expense when incurred.
Expenditures for major renewals and betterments, which extend the useful lives
of existing equipment, are capitalized and depreciated. Upon retirement or
disposition of property and equipment, the cost and related accumulated
depreciation are removed from the accounts and any resulting gain or loss is
recognized in the statements of operations.
Goodwill
Goodwill represents the excess of the aggregate of purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. As of September 30, 1997, accumulated
amortization was approximately $33,000.
The Company periodically evaluates the recoverability of intangibles resulting
from business acquisitions and measures the amount of impairment, if any, by
assessing current and future levels of income and cash flows as well as other
factors, such as business trends and prospects and market and economic
conditions.
Debt Issue Costs
Debt issue costs related to the Company's credit facility (see Note 6) are
included in other noncurrent assets and are amortized to interest expense over
the scheduled maturity of the debt.
F-18
<PAGE> 94
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Revenue Recognition
The Company recognizes revenue when services are performed except when work is
being performed under a construction 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. Revenues from construction contracts are recognized on the
percentage-of-completion method generally measured by the percentage of costs
incurred to date to total estimated costs for each contract. Contract costs
include all direct material and labor costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income. The effects of these
revisions are recognized in the period in which the revisions are determined. An
amount equal to contract costs attributable to claims is included in revenues
when realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage provisions
in construction contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts in recent years, the retention balance at each balance sheet date will
be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
Accounts receivable at December 31, 1996, and September 30, 1997, include
approved claims and change orders which were expected to be collected within the
fiscal year.
The Company provides an allowance for doubtful accounts based on a specified
percentage of outstanding receivables and the specific identification of
accounts receivable where collection is no longer probable.
Stock-Based Compensation
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25 under which compensation expense is recorded to the extent
that the fair market value of the related stock is in excess of the options
exercise price at date of grant. Entities electing to remain with the accounting
in APB Opinion No. 25 must make pro forma disclosures of net income and earnings
per share as if the fair value method of accounting prescribed in SFAS No. 123
had been applied. The Company will measure compensation expense attributable to
stock options based on the method prescribed in APB Opinion No. 25 and will
provide the required pro forma disclosure of net income and earnings per share,
as applicable, in the notes to future consolidated annual financial statements.
F-19
<PAGE> 95
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with SFAS No. 109. Under this method, deferred assets and
liabilities are recorded for future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and are
measured using enacted tax rates and laws.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 13 for discussion of
significant estimates reflect in the Company financial statements.
New Accounting Pronouncements
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Accordingly, in the event that facts and circumstances indicate that property
and equipment or other assets may be impaired, an evaluation of recoverability
would be performed. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset are compared to the asset's
carrying amount to determine if an impairment of such property is necessary. The
effect of any impairment would be to expense the difference between the fair
value of such property and its carrying value. Adoption of this standard did not
have a material effect on the consolidated financial position or results of
operations of the Company.
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which establishes standards for the way public enterprises are to report
information about operating segments in annual financial statements and requires
the reporting of selected information about operating segments in interim
financial reports issued to shareholders. SFAS No. 131 is effective for the
Company for its year ended September 30, 1999, at which time the Company will
adopt the provision. The Company is currently evaluating the impact on the
Company's financial disclosures.
In February 1998, the FASB issued SFAS No. 132, "Employers Disclosures about
Pensions and Other Postretirement Benefits," which becomes effective for
financial statements for the year ended September 30, 1999. SFAS No. 132
requires revised disclosures about pension and other postretirement benefit
plans. The Company is currently assessing the impact of this statement on its
annual financial statements.
On June 1, 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for the Company for
its year ended September 30, 2000. SFAS No. 133 requires a company to recognize
all derivative instruments (including certain derivative instruments embedded in
other contracts) as assets or liabilities in its balance sheet and measure them
at fair value. The statement requires that changes in the derivatives fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. The Company is evaluating SFAS No. 133 and the impact on existing
accounting policies and financial reporting disclosures. However, the Company
has not to date engaged in activities or entered into arrangements normally
associated with derivative instruments.
F-20
<PAGE> 96
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Earnings per Share
The Company has adopted SFAS No. 128, "Earning Per Share," which requires
restatement of all comparative per share amounts. Under the provisions of SFAS
No. 128, the presentation of primary earnings per share has been replaced with
earnings per share for potentially dilutive securities such as outstanding
options. All prior period earnings per share data have been restated.
For financial statement purposes as required by the rules and regulations of the
Securities Act, Houston-Stafford has been identified as the accounting acquirer
in the transaction with IES and its initial public offering. As such the shares
of IES beneficially owned by the shareholders of Houston-Stafford and the shares
issued in the pooling transaction have been used in the calculation of basic and
diluted earnings per share of the Company, for all periods prior to the IPO.
3. BUSINESS COMBINATIONS:
On January 30, 1998, concurrent with the closing of its IPO, IES acquired, in
separate transactions, for consideration including $53.4 million of cash and
12,313,025 shares of common stock, 16 companies and related entities engaged in
all facets of electrical contracting and maintenance services. Subsequent to its
IPO, and through June 30, 1998, the Company has acquired 11 additional
electrical contracting and maintenance businesses for approximately $30.9
million of cash and 3.5 million shares of common stock. Of these 11 Post IPO
Acquisitions, 10 were accounted for using the purchase method of accounting and
the Pooled Company was accounted for using the pooling-of-interests method of
accounting. Accordingly, the Company's historical financial statements have been
restated to include the historical financial statements of the Pooled Company.
Pooling
On June 1, 1998, IES completed the acquisition of all the capital stock of H.R.
Allen, Inc. (Allen), in a business combination accounted for as a
"pooling-of-interests" transaction in accordance with the requirements of APB
No. 16. Allen, headquartered in Charleston, South Carolina, provides electrical
contracting and maintenance services. IES issued 1,140,000 shares of common
stock in exchange for all of the capital stock of Allen. There were no
transactions between IES, or Allen during periods prior to the business
combination.
The following table summarizes the unaudited restated revenues, net income and
per share data of the Company after giving effect to the Pooled Company (in
thousands, except per share data).
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, YEAR ENDED
----------------------------------------------------------- SEPTEMBER 30,
1995 1996 1997
--------------------------- ---------------------------- ---------------------------
NET NET NET
REVENUES INCOME REVENUES INCOME REVENUES INCOME
------------ ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income-
As previously reported $ 54,082 $ 731 $ 70,493 $ 3,047 $ 81,575 $ 3,316
Pooled Company 19,263 255 30,938 618 35,536 1,059
------------ ------------ ------------ ------------ ------------ ------------
As restated $ 73,345 $ 986 $ 101,431 $ 3,665 $ 117,111 $ 4,375
============ ============ ============ ============ ============ ============
Earnings per share-
As previously reported $ .22 $ .91 $ .99
Pooled Company -- (.09) (.02)
------------ ------------ ------------
As restated $ .22 $ .82 $ .97
============ ============ ============
</TABLE>
F-21
<PAGE> 97
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Purchases
The total consideration paid for the Purchased Companies through June 30, 1998,
was approximately $73.0 million (including assumed debt of approximately $5.2
million). The $53.7 million excess of the total consideration paid over the net
tangible assets acquired has been recorded as goodwill in the accompanying
consolidated financial statements. The accompanying June 30, 1998, consolidated
balance sheet includes allocations of the respective purchase prices to the
assets acquired and liabilities assumed based on preliminary estimates of fair
value and are subject to final adjustment.
The unaudited pro forma data presented below reflect the results of operations
for the Company, the Founding Companies and the Purchased Companies through June
30, 1998, assuming the transactions were completed on October 1, 1996:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
SEPTEMBER 30, JUNE 30,
1997 1998
============ ============
<S> <C> <C>
Revenues $ 502,905 $ 303,077
============ ============
Net income $ 24,323 $ 16,063
============ ============
Basic earnings per share $ .95 $ .62
============ ============
Diluted earnings per share $ .95 $ .61
============ ============
</TABLE>
The preceding pro forma adjustments include: (a) the reversal of
Houston-Stafford's non-cash, non-recurring compensation charge of approximately
$17.0 million, (b) certain reductions in salaries, bonuses, benefits and lease
payments to the former owners of the acquired companies which took effect as of
the effective date of their respective acquisitions, (c) amortization of
goodwill resulting from the acquisitions, and (d) elimination of interest income
and increased interest expense on borrowings of $6.4 million to fund certain S
corporation distributions.
Subsequent to June 30, 1998, the Company acquired eight companies for an
aggregate consideration of approximately 2,823,000 shares of common stock and
$63.6 million in cash, net of cash acquired. The cash portion of such
consideration was provided by borrowings under the Company's credit facility.
4. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands)::
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Land N/A $ 1,465 $ 1,773
Buildings 5-32 486 686
Transportation equipment 3-5 1,582 2,158
Machinery and equipment 3-10 916 1,214
Building and leasehold improvements 5-32 251 273
Furniture and fixtures 5-7 326 563
------------ ------------
5,026 6,667
Less- Accumulated depreciation and amortization (2,064) (2,557)
------------ ------------
Property and equipment, net $ 2,962 $ 4,110
============ ============
</TABLE>
F-22
<PAGE> 98
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable consists of
the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
Balance at beginning of period $ 415 $ 459
Additions to costs and expenses 58 85
Deductions for uncollectible receivables written off and
recoveries (14) (7)
------------ ------------
Balance at end of period $ 459 $ 537
============ ============
</TABLE>
Accounts payable and accrued liabilities consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
Accounts payable, trade $ 5,128 $ 9,033
Accrued compensation and other expenses 2,862 5,636
------------ ------------
$ 7,990 $ 14,669
============ ============
</TABLE>
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
Costs incurred on contracts in progress $ 35,780 $ 43,997
Estimated earnings 6,480 6,816
------------ ------------
42,260 50,813
Less- Billings to date $ (44,751) $ (52,711)
------------ ------------
$ (2,491) $ (1,898)
============ ============
Costs and estimated earnings in excess of billings on uncompleted
contracts $ 828 $ 1,368
Less- Billings in excess of costs and estimated earnings on
uncompleted contracts (3,319) (3,266)
------------ ------------
$ (2,491) $ (1,898)
============ ============
</TABLE>
F-23
<PAGE> 99
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
Note payable to an officer, dated August 1996, payable in monthly
payments of $12 including interest at a rate of 8%, maturing
August 2003 and secured by stock (see Note 10) $ 766 $ 699
Note payable to a bank, dated October 1994, payable in monthly
payments of $21 plus interest at prime plus .75%, maturing
October 1998 and secured by trade receivables, inventory and
equipment 458 --
Line of credit with a bank with total borrowing capacity of
$3,100,000, bearing interest at prime plus 1/2 percent, repaid in
1998 with proceeds from the Company's credit facility -- 507
Notes payable to banks earning interest ranging from 8% to 8.25%,
repaid in 1998 with proceeds from the Company's credit facility 176 387
Note payable to an officer, bearing interest at 11%, repaid in 1998
with proceeds from the Company's credit facility 60 47
Mortgage payables to a bank and an individual bearing interest at 9%
and 10%, repaid in 1998 with proceeds from the Company's credit
facility 178 145
Capital lease obligations -- 65
Other 321 319
------------ ------------
1,959 2,169
Less- Current maturities 553 894
------------ ------------
Total long-term debt $ 1,406 $ 1,275
============ ============
</TABLE>
Principal payments due on long-term debt at September 30, 1997, are as follows
(in thousands):
<TABLE>
<S> <C>
1998 $ 894
1999 305
2000 285
2001 204
2002 182
Thereafter 299
-------
Total $ 2,169
=======
</TABLE>
Credit Facility
In January 1998, the Company obtained a credit facility from a commercial bank.
The credit facility is a three-year revolving credit facility of up to $65
million to be used for working capital, capital expenditures, other corporate
purposes and acquisitions. In August, the Company increased the credit facility
to $175.0 million. The credit facility matures July 30, 2001. Amounts borrowed
under the credit facility bear interest at an annual rate equal to either (a)
the London interbank offered rate (LIBOR) plus 1.0 percent to 2.0 percent, as
determined by the ratio of the Company's total funded debt to EBITDA (as defined
in the credit facility) or (b) the higher of (i) the bank's prime rate and (ii)
the Federal funds rate plus 0.5 percent plus up to an additional 5 percent, as
determined by the ratio of the Company's total funded debt to EBITDA. Commitment
fees of 0.25 percent to 0.375 percent, as determined by the ratio of the
Company's total funded debt to EBITDA, will be due on any unused borrowing
capacity under the credit facility. The Company's existing and future
subsidiaries
F-24
<PAGE> 100
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
guarantee the repayment of all amounts due under the facility, and the facility
is secured by the capital stock of those subsidiaries and the accounts
receivable of the Company and those subsidiaries. The credit facility requires
the consent of the lenders for acquisitions exceeding a certain level of cash
consideration, prohibits the payment of cash dividends on the common stock,
restricts the ability of the Company to incur other indebtedness and requires
the Company to comply with various affirmative and negative covenants including
certain financial ratios. As of September 11, 1998, $42 million was borrowed
under the credit facility.
7. LEASES:
The Company leases various facilities, at which it conducts its operations,
under noncancelable operating leases. For a discussion of leases with certain
related parties see Note 10.
Future minimum lease payments under these noncancelable operating leases are as
follows in thousands):
<TABLE>
<S> <C>
YEAR ENDING SEPTEMBER 30-
1998 $ 204
1999 185
2000 160
2001 133
2002 122
Thereafter 287
--------
$ 1,091
========
</TABLE>
Rental expense for the years ended December 31, 1995 and 1996, and September 30,
1997, was approximately $118,000, $155,000 and $206,000, respectively.
8. INCOME TAXES:
Federal and state income tax provisions are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEAR ENDED
----------------------------- SEPTEMBER 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Federal-
Current $ 482 $ 1,741 $ 2,691
Deferred 22 434 (149)
State-
Current 59 241 400
Deferred -- 55 (19)
------------ ------------ ------------
$ 563 $ 2,471 $ 2,923
============ ============ ============
</TABLE>
F-25
<PAGE> 101
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Actual income tax expense differs from income tax expense computed by applying
the U.S. federal statutory corporate rate of 35 percent to income before
provision for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, YEAR ENDED
------------------------------ SEPTEMBER 30,
1995 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
Provision at the statutory rate $ 542 $ 2,148 $ 2,554
Increase resulting from-
Non-deductible expenses (25) 139 150
State income tax, net of benefit for federal deduction 46 184 219
------------ ------------ ------------
$ 563 $ 2,471 $ 2,923
============ ============ ============
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
Deferred income tax assets-
Bad debts $ 137 $ 162
Reserves and accrued expenses 365 564
------------ ------------
Total deferred income tax asset 502 726
------------ ------------
Deferred income tax liabilities-
Property and equipment (40) (112)
Deferred contract revenue (1,051) (1,012)
Accrued expenses -- (47)
Total deferred income tax liability (1,091) (1,171)
------------ ------------
Net deferred income tax liability $ (589) $ (445)
============ ============
</TABLE>
The net deferred tax assets and liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ ------------
<S> <C> <C>
Current deferred tax asset $ 502 $ 726
============ ============
Deferred tax liabilities-
Current $ (1,051) $ (1,059)
Long-term (40) (112)
------------ ------------
Total $ (1,091) $ (1,171)
============ ============
</TABLE>
F-26
<PAGE> 102
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY:
Restricted Common Stock
In October 1997, the 2,655,709 shares of common stock held by the founder of IES
were converted into 2,655,709 shares of restricted common stock. The shares of
restricted common stock have rights similar to shares of common stock except
that such shares are entitled to elect one member of the board of directors and
are entitled to one-half of one vote for each share held on all other matters.
Each share of restricted common stock will convert into common stock upon
disposition by the holder of such shares.
Stock Plan
In September 1997, the Company's board of directors and stockholders approved
the Company's 1997 Stock Plan (the Plan), which provides for the granting or
awarding of incentive or nonqualified stock options, stock appreciation rights,
restricted or phantom stock and other incentive awards to directors, officers,
key employees and consultants of the Company. The number of shares authorized
and reserved for issuance under the Plan is the greater of 3.5 million shares or
15 percent of the aggregate number of shares of common stock outstanding. The
terms of the option awards will be established by the compensation committee of
the Company's board of directors. The Company has filed a registration statement
on Form S-8 under the Securities Act of 1933 registering the issuance of shares
upon exercise of options granted under this Plan. Options generally vest at the
rate of 20 percent per year, commencing on the first anniversary of the grant
date and will expire 10 years from the date of grant, three months following
termination of employment due to death or disability, or one year following
termination of employment by means other than death or disability.
Director's Stock Plan
In September 1997, the Company's board of directors and stockholders approved
the 1997 Directors' Stock Plan (the Directors' Plan), which provides for the
granting or awarding of stock options to nonemployee directors. The number of
shares authorized and reserved for issuance under the Directors' Plan is 260,000
shares. The directors' Plan provides for the automatic grant of options to
purchase 5,000 shares to each nonemployee director serving in such capacity at
the commencement of the Offerings.
Each nonemployee director was granted options to purchase an additional 5,000
shares at the time of an initial election of such director. In addition, each
director will be automatically granted options to purchase 5,000 shares annually
at each September 30, on which such director remains a director. All options
have an exercise price based on the fair market value at the date of grant and
vesting terms similar to options granted under the Stock Plan discussed above.
The Directors' Plan allows nonemployee directors to receive additional option
grants in amounts and at terms as deemed appropriate by the Company's board of
directors.
As of September 11, 1998, the Company had total outstanding options under these
Plans to purchase up to a total of approximately 3,110,550 shares of common
stock.
F-27
<PAGE> 103
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Initial Public Offering
On January 30, 1998, the Company completed its initial public offering, issuance
to the public 7,000,000 shares of its common stock at a price of $13.00 per
share, resulting in net proceeds to the Company of $78.8 million after deducting
underwriting commissions and discounts. On February 5, 1998, the Company sold
1,050,000 shares of common stock pursuant to the overallotment option granted to
the underwriters. The Company realized net proceeds from the sale of $12.7
million.
10. RELATED-PARTY TRANSACTIONS:
The Company has transactions in the normal course of business with certain
affiliated companies. Amounts due from related parties at December 31, 1996, and
September 30, 1997, were $338,000 and $309,000.
The Company leases certain real properties from certain related parties. The
annual rentals for 1995, 1996 and for the year ended September 30, 1997,
approximated $210,000, $291,000 and $216,000, respectively.
In August 1996, the Company negotiated the purchase of the stock from an
officer. The selling price of the shares totaled $800,000. The Company signed an
installment promissory note that provided for the payout of $800,000 over seven
years at 8 percent interest, secured by the purchased stock. Subsequent to the
August 1996 transaction, the executive remained an officer of the Company and
was paid cash compensation of approximately $372,000 during the last four months
of 1996 and approximately $252,000 during the first nine months of 1997. These
amounts have been reflected as compensation expense in the accompanying income
statements for the applicable periods. At the closing of the IPO, the officer
exchanged the promissory note for cash and shares of IES common stock. In
connection therewith, the Company recorded a non-cash, non-recurring
compensation charge of approximately $17.0 million.
11. EMPLOYEE BENEFIT PLANS:
Certain subsidiaries of the Company provide various defined contributions
savings plans for their employees (the Plans). The Plans cover substantially all
full-time employees of such subsidiaries. Participants vest at varying rates
ranging from full vesting upon participation to those that provide for vesting
to begin after three years of service and are fully vested after seven years.
Certain plans provide for a deferral option that allows employees to elect to
contribute a portion of their pay into the plan and provide for a discretionary
profit sharing contribution by the individual subsidiary. Generally the
subsidiaries match a portion of the amount deferred by participating employees.
Contributions for the profit sharing portion of the plan are generally at the
discretion of the individual subsidiary board of directors. The aggregate
contributions to the Plans were $50,000, $75,000 and $100,000 for the years
ended December 31, 1995 and 1996, and September 30, 1997.
12. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, receivables from related parties, other receivables,
accounts payable, a line of credit, notes payable and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
F-28
<PAGE> 104
INTEGRATED ELECTRICAL SERVICES, INC., AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. COMMITMENTS AND CONTINGENCIES:
Litigation
Subsidiaries of the Company are involved in various legal proceeds that have
arisen in the ordinary course of business. While it is not possible to predict
the outcome of such proceedings with certainty, in the opinion of the Company's
management, all such proceedings are either adequately covered by insurance or,
if not so covered should not ultimately result in any liability which would have
a material adverse effect on the financial position, liquidity or results of
operations of the Company.
Insurance
The Company carries a broad range of insurance coverage, including business auto
liability, general liability, commercial property, workers' compensation and
general umbrella policy. The Company has not incurred significant uninsured
losses on any of these items.
14. RISK CONCENTRATION:
Financial instruments, which potentially subject the Company to concentrations
of credit risk consist principally of cash deposits and trade accounts
receivable. The Company grants credit, generally without collateral, to its
customers, which are generally contractors and home builders throughout the
United States. Consequently, the Company is subject to potential credit risk
related to changes in business and economic factors throughout the United States
within the construction and home-building market. However, the Company generally
is entitled to payment for work performed and has certain lien rights in that
work. Further, management believes that its contract acceptance, billing and
collection policies are adequate to minimize any potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-29
<PAGE> 105
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Integrated Electrical Services, Inc.:
We have audited the accompanying balance sheet of Integrated Electrical
Services, Inc., a Delaware corporation, as of September 30, 1997, and the
related statements of operations, cash flows and stockholders' equity for the
period from inception (June 26, 1997) through September 30, 1997 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Integrated Electrical
Services, Inc. as of September 30, 1997, and the results of its operations and
its cash flows for the period from inception (June 26, 1997) through September
30, 1997 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
F-30
<PAGE> 106
INTEGRATED ELECTRICAL SERVICES, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
--------
ASSETS
<S> <C>
CASH AND CASH EQUIVALENTS ....................................... $ --
DEFERRED OFFERING COSTS ......................................... 1,560
--------
Total current assets .................................. 1,560
PROPERTY AND EQUIPMENT, NET ..................................... 6
--------
Total assets .......................................... $ 1,566
========
LIABILITIES AND STOCKHOLDERS' EQUITY
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES ........................ $ --
AMOUNTS DUE TO STOCKHOLDER ...................................... 1,565
--------
Total current liabilities ............................. 1,565
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 10,000,000 authorized,
none issued and outstanding .................................. --
Common stock, $.01 par value, 100,000,000 shares
authorized, 4,052,311 shares issued and outstanding .......... 41
Receivable from stockholders .................................. (40)
Additional paid-in capital .................................... 13,618
Retained deficit .............................................. (13,618)
--------
Total stockholders' equity ............................ 1
--------
Total liabilities and stockholders' equity ............ $ 1,566
========
</TABLE>
- ----------
Reflects a 2,329.6-for-one stock split effected in October 1997.
The accompanying notes are an integral part of these financial statements.
F-31
<PAGE> 107
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM OCTOBER 1,
INCEPTION 1997
THROUGH THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
-------- --------
<S> <C> <C>
REVENUES ...................................................... $ -- $ --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .................. 13,618 532
-------- --------
LOSS BEFORE INCOME TAXES ...................................... (13,618) (532)
PROVISION FOR INCOME TAXES .................................... -- --
-------- --------
NET LOSS ...................................................... $(13,618) $ (532)
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-32
<PAGE> 108
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
PERIOD FROM OCTOBER 1,
INCEPTION 1997
THROUGH THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................... $(13,618) $ (532)
Non-cash compensation charge ................................ 13,618 --
Adjustments to reconcile net loss to net cash used
in operating activities--
Changes in assets and liabilities--
Increase in deferred offering costs..................... (1,560) (2,868)
Increase in accounts payable and accrued liabilities ... -- 1,793
Increase in amounts due to stockholder ................. 1,565 1,629
-------- --------
Net cash provided by operating activities ........... 5 22
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures ........................................ (6) (22)
-------- --------
Net cash used in investing activities ............... (6) (22)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Initial capitalization ...................................... 1 --
-------- --------
Net cash provided by financing activities ........... 1 --
-------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS ..................... -- --
CASH AND CASH EQUIVALENTS, beginning of period ................ -- --
-------- --------
CASH AND CASH EQUIVALENTS, end of period ...................... $ -- $ --
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-33
<PAGE> 109
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION
(JUNE 26, 1997) THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK RECEIVABLE ADDITIONAL TOTAL
------------------------ FROM PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCKHOLDERS CAPITAL DEFICIT EQUITY
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
INITIAL CAPITALIZATION, June
26, 1997 ........................ 2,329,600 $ 23 $ -- $ -- $ -- $ 23
ISSUANCE OF ADDITIONAL SHARES
TO MANAGEMENT ................... 1,722,711 18 -- -- -- 18
NET LOSS .......................... -- -- -- 13,618 (13,618) --
RECEIVABLE FROM STOCKHOLDERS
FOR STOCK ISSUED ................ -- -- (40) -- -- (40)
--------- --------- --------- --------- --------- ---------
BALANCE, September 30, 1997 ....... 4,052,311 41 (40) 13,618 (13,618) 1
NET LOSS .......................... -- -- -- -- (532) (532)
--------- --------- --------- --------- --------- ---------
BALANCE, January 30, 1998 ......... 4,052,311 $ 41 $ (40) $ 13,618 $ (14,150) $ (531)
========= ========= ========= ========= ========= =========
</TABLE>
- ----------
Reflects a 2,329.6-for-one stock split effected in October 1997.
The accompanying notes are an integral part of these financial statements.
F-34
<PAGE> 110
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Integrated Electrical Services, Inc., a Delaware corporation (IES or the
Company), was founded in June 1997 to create a leading national provider of
electrical contracting and maintenance services, focusing primarily on the
residential, commercial and industrial markets. IES intends to acquire certain
U.S. businesses (the Acquisitions), complete the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offerings) of its common stock and, subsequent to the Offerings,
continue to acquire through merger or purchase similar companies to expand its
national and regional operations. The Company has elected a September fiscal
year.
IES has not conducted any operations, and all activities to date have
related to the Offerings and the Acquisitions. All expenditures of the Company
to date have been funded by its founder and current primary stockholder, on
behalf of the Company. The Company's founder and primary stockholder has also
committed to fund future organization expenses and offering costs. As of
September 30, 1997 and January 30, 1998, costs of approximately $1,560,000 and
$2,868,000, respectively, have been incurred in connection with the Offerings,
and such costs will be a reduction of the proceeds from the Offerings. IES has
treated these costs as deferred offering costs in the accompanying balance sheet
and statements of cash flows. IES utilized proceeds from the Offerings to
execute the Acquisitions and to repay its current primary stockholder for
funding deferred offering costs. The ability of IES to generate future operating
revenues is dependent upon the ability of the Company to manage the effect on
the combined companies of changes in demand for commercial and residential
construction, the effect of business growth, including the availability of
electricians, and the need for other key personnel. These risk factors are
discussed in more detail in "Risk Factors".
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 the 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.
2. STOCKHOLDERS' EQUITY:
Common Stock and Preferred Stock
In connection with the organization and initial capitalization of IES, the
Company issued 2,329,600 shares (as restated for the 2,329.6-for-one stock split
discussed below) of common stock at $.01 par value (Common Stock). IES
subsequently issued another 1,722,711 shares (as restated for the
2,329.6-for-one stock split discussed below) of Common Stock at $.01 par value
to certain management of IES. Consequently, as restated for the 2,329.6-for-one
stock split discussed below, the Company had issued a total of 2,655,709 shares
to its founder and Chairman of the Board, and certain trusts established for the
benefit of his children, and an aggregate of 1,396,602 shares to other executive
management of the Company. As a result of the issuance of shares to management
for nominal consideration, the Company recorded for financial statement
presentation purposes, a nonrecurring, noncash compensation charge of $13.6
million, calculated based on the fair value of such shares which has been
determined to be $9.10 and $9.80 per share (a discount of 35% and 30%,
respectively, from the estimated initial public offering price) for the shares
issued in June 1997 and September 1997, respectively. The fair value of such
shares was based on specific factors related to the Company and the transaction
including restrictions on transferability and sale, the time value of money
during the holding period and the substantive progress of the transaction at
each issuance date. The nonrecurring compensation charge discussed above does
not include any of the shares issued to the founder and chairman of the board,
and certain trusts established for the benefit of his children. The shares
issued to the founder and Chairman of the Board, and such trusts, will be
reflected as acquisition costs in connection with the Acquisitions.
IES effected a 2,329.6-for-one stock split in October 1997, for each share
of common stock of the Company then outstanding. In addition, the Company
increased the number of authorized shares of common stock to 100,000,000 and
increased the number of authorized shares of $.01 par value preferred stock to
10,000,000. The effects of the Common Stock split and the increase in the shares
of authorized common stock have been retroactively reflected on the balance
sheet, statement of stockholders' equity and in the accompanying notes.
Additionally, the difference between the initial capitalization and the par
value of Common Stock outstanding subsequent to the stock split has been
reflected as a receivable from stockholders, which is presented as a reduction
in stockholders' equity in the accompanying financial statements.
F-35
<PAGE> 111
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
Restricted Common Stock
In October 1997, the 2,655,709 shares of Common Stock held by the founder of
IES were converted into 2,655,709 shares of restricted common stock. The shares
of restricted common stock have rights similar to shares of Common Stock, except
that such shares are entitled to elect one member of the board of directors and
are entitled to one-half of one vote for each share held on all other matters.
Each share of restricted common stock will convert into Common Stock upon
disposition by the holder of such shares.
Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the Company's 1997 Stock Plan (the Plan), which provides for the
granting or awarding of incentive or nonqualified stock options, stock
appreciation rights, restricted or phantom stock, and other incentive awards to
directors, officers, key employees and consultants of the Company. The number of
shares authorized and reserved for issuance under the Plan is the greater of 3.5
million shares or 15% of the aggregate number of shares of Common Stock
outstanding. The terms of the option awards will be established by the
Compensation Committee of the Company's board of directors. The Company filed a
registration statement on Form S-8 under the Securities Act of 1933 registering
the issuance of shares upon exercise of options granted under this Plan. The
Company granted nonqualified stock options to purchase a total of approximately
2.3 million shares of Common Stock to key employees of the Company at the
initial public offering price upon consummation of the Offerings. These options
will vest at the rate of 20 percent per year, commencing on the first
anniversary of the grant date and will expire ten years from the date of grant,
three months following termination of employment due to death or disability, or
one year following termination of employment by means other than death or
disability. In September 1997, 300,000 options were granted to certain key
employees under the Plan with an exercise price equal to 60% of the initial
public offering price. These options vest at a rate of 20 percent per year,
commencing on the date of grant. The compensation expense recognized for these
options prior to September 30, 1997 was not material as they were not granted
until September 1997.
Directors' Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the 1997 Directors' Stock Plan (the Directors' Plan), which provides
for the granting or awarding of stock options to nonemployee directors. The
number of shares authorized and reserved for issuance under the Directors' Plan
is 250,000 shares. The Directors' Plan provides for the automatic grant of
options to purchase 5,000 shares to each nonemployee director serving in such
capacity at the commencement of the Offerings.
Each nonemployee director will be granted options to purchase an additional
5,000 shares at the time of an initial election of such director. In addition,
each director will be automatically granted options to purchase 5,000 shares
annually at each September 30 on which such director remains a director. All
options will have an exercise price based on the fair market value at the date
of grant and have vesting terms similar to options granted under the Stock Plan
discussed above.
The Directors' Plan allows nonemployee directors to receive additional
option grants in amounts and at terms as deemed appropriate by the Company's
board of directors.
3. STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25 under which compensation expense is recorded to the extent
that the fair market value of the related stock is in excess of the options
exercise price at date of grant. Entities electing to remain with the accounting
in APB Opinion No. 25 must make pro forma disclosures of net income and earnings
per share as if the fair value method of accounting prescribed in SFAS No. 123
had been applied. The Company will measure compensation
F-36
<PAGE> 112
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
expense attributable to stock options based on the method prescribed in APB
Opinion No. 25 and will provide the required pro forma disclosure of net income
and earnings per share, as applicable, in the notes to future consolidated
annual financial statements.
4. NEW ACCOUNTING PRONOUNCEMENTS:
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share will be computed
based on weighted average shares outstanding and will exclude dilutive
securities such as options and warrants. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. The
Company adopted this statement in December 1997, but does not anticipate that
the statement will have a material impact on the Company.
SFAS No. 129 will require additional disclosure of information about an
entity's capital structure, including information about dividend and liquidation
preferences, voting rights, contracts to issue additional shares, and conversion
and exercise prices. The Company adopted this statement in December 1997.
SFAS No. 130 requires the presentation of comprehensive income in an
entity's financial statements. Comprehensive income represents all changes in
equity of an entity during the reporting period, including net income and
charges directly to equity which are excluded from net income. This statement
did not have a material impact on the Company or its financial disclosures, as
the Company currently did not enter into any material transactions which result
in charges (or credits) directly to equity (such as additional minimum pension
liability changes, currency translation adjustments, and unrealized gains and
losses on available for sale securities).
5. FOUNDING COMPANY ACQUISITIONS:
IES acquired the following entities (the Founding Companies) on January 30,
1998 contemporaneously with the initial public offering. The entities acquired
are:
Ace Electric, Inc.
Amber Electric, Inc.
BW Consolidated, Inc. and Subsidiaries
Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure
Coast Inc.
Hatfield Electric, Inc.
Charles P. Bagby, Co., Inc. and General Partner, Inc.
Houston-Stafford Electric, Inc. and Stark Investments, Inc.
Mills Electrical Contractors, Inc.
Muth Electric, Inc.
Pollock Electric Inc.
Reynolds Electric Corp.
Rodgers Electric Company, Inc.
Summit Electric of Texas, Incorporated
Thomas Popp & Company
Thurman & O'Connell Corporation
The aggregate consideration that was paid by IES to acquire the Founding
Companies was approximately $53.4 million in cash and 12.3 million shares of
Common Stock. Additionally, approximately 3.9 million of the 4.1 million shares
issued to the IES founder and Chairman of the Board and certain trusts, and
certain other management, were reflected as acquisition costs as part of the
acquisition transactions.
F-37
<PAGE> 113
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS - CONTINUED
In addition, the Company has entered into employment agreements with certain
key executives of the Founding Companies and the executive officers of IES.
These employment agreements generally prohibit such individuals from disclosing
confidential information and trade secrets, and restrict such individuals from
competing with the Company for a period of two years following termination of
employment. The initial term of these employment agreements is five years with
provisions for annual extensions at the end of the initial term.
6. BANK CREDIT FACILITY
The Company entered into a credit facility with a commercial bank. The
credit facility is a three-year revolving credit facility of up to $70 million
to be used for working capital, capital expenditures, other corporate purposes
and acquisitions.
On August 7, 1998, the Company increased its three-year revolving credit
facility with NationsBank of Texas, N.A. as agent (the "Credit Facility") from
$70.0 million to $175.0 million. The Credit Facility matures on July 30, 2001,
bears interest at the bank's prime rate or LIBOR, at the Company's option, plus
an applicable margin based on the ratio of debt to EBITDA (as defined). An
annual commitment fee from 0.25% to 0.375% is payable on any unused portion of
the Credit Facility. The Company's subsidiaries have guaranteed the repayment of
all amounts due under the facility, and the facility is secured by the capital
stock of the guarantors and the accounts receivable of the Company and the
guarantors.
The Credit Facility will be used to fund acquisitions, capital expenditures
and working capital requirements. Under the terms of the Credit Facility the
Company is required to comply with various affirmative and negative covenants
including: (i) the maintenance of certain financial ratios, (ii) restrictions on
additional indebtedness, and (iii) restrictions on liens, guarantees and
dividends.
F-38
<PAGE> 114
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mills Electrical Contractors, Inc.:
We have audited the accompanying consolidated balance sheets of Mills
Electrical Contractors, Inc., a Texas corporation, and Subsidiary as of December
31, 1995 and 1996 and September 30, 1997, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended December 31, 1996 and for the year ended
September 30, 1997 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
F-39
<PAGE> 115
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.
F-40
<PAGE> 116
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED NINE MONTHS ENDED 1997
DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
---------------------------------- --------------------- SEPTEMBER 30, JANUARY 30,
1994 1995 1996 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(Unaudited)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES .......................... $ 25,544 $ 35,250 $ 65,439 $ 43,684 $ 52,644 $ 74,399 $ 20,882
COST OF SERVICES (including
depreciation and
amortization) ................... 20,937 27,372 50,535 33,998 44,035 60,572 16,244
-------- -------- -------- -------- -------- -------- --------
Gross profit ............ 4,607 7,878 14,904 9,686 8,609 13,827 4,638
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ......... 3,391 4,741 7,643 3,837 4,972 8,778 5,385
-------- -------- -------- -------- -------- -------- --------
Income (loss) from
operations ............ 1,216 3,137 7,261 5,849 3,637 5,049 (747)
-------- -------- -------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense ................ (22) (56) (61) (34) (19) (46) (57)
Other ........................... 92 195 215 153 215 277 44
-------- -------- -------- -------- -------- -------- --------
Other income
(expense), net ........ 70 139 154 119 196 231 (13)
-------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE MINORITY
INTEREST AND PROVISION FOR
STATE INCOME TAXES .............. 1,286 3,276 7,415 5,968 3,833 5,280 (760)
Minority interest in net
(income) loss of subsidiary ..... -- -- (3) (5) -- 2 --
-------- -------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE PROVISION
FOR STATE INCOME TAXES .......... 1,286 3,276 7,412 5,963 3,833 5,282 (760)
Provision for state income
taxes ........................... 52 131 309 182 147 274 84
-------- -------- -------- -------- -------- -------- --------
NET INCOME (LOSS) ................. $ 1,234 $ 3,145 $ 7,103 $ 5,781 $ 3,686 $ 5,008 $ (844)
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-41
<PAGE> 117
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS OCTOBER 1,
YEAR ENDED ENDED 1997
DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
------------------------------- ------------------- SEPTEMBER 30, JANUARY 30,
1994 1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ......................... $ 1,234 $ 3,145 $ 7,103 $ 5,781 $ 3,686 $ 5,008 $ (844)
Adjustments to reconcile net income
to net cash provided by (used in)
operating activities --
Depreciation and amortization ........... 179 253 385 197 449 637 245
Loss (gain) on sale of property and
equipment ............................. (2) -- (20) (21) 5 6 3
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable ................. (2,107) (1,894) (6,997) (9,998) (1,364) 1,637 2,157
Inventories, net .................... 10 1 20 2 (45) (27) 47
Costs and estimated earnings in
excess of billings on
uncompleted contracts ............. (402) 386 (198) (307) (1,255) (1,146) (319)
Prepaid expenses and other
current assets .................... (46) 105 (89) (149) (2) 58 35
Increase (decrease) in --
Accounts payable and accrued
expenses .......................... 1,780 1,178 5,057 3,090 (1,846) 121 25
Billings in excess of costs and
estimated earnings on
uncompleted contracts ............. (353) 1,159 2,777 3,926 (2,556) (3,705) 415
Unearned revenue and other
current liabilities ............... -- 98 (98) (98) -- -- --
Other, net .............................. (64) (29) (52) (130) 22 100 3
------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities .................. 229 4,402 7,888 2,293 (2,906) 2,689 1,767
------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable .............. (12) (291) (75) (75) -- -- --
Collection of notes receivable ............ 140 141 377 377 -- -- --
Proceeds from sale of property and
equipment ............................... 8 15 44 44 8 8 5
Additions of property and
equipment ............................... (279) (255) (912) (538) (1,177) (1,551) (339)
------- ------- ------- ------- ------- ------- -------
Net cash used in investing
activities ........................ (143) (390) (566) (192) (1,169) (1,543) (334)
------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt .............. -- -- -- -- 1,000 1,000 7,569
Payments of long-term debt ................ (19) (136) (204) (117) (815) (902) (90)
Distributions to stockholders ............. (147) (2,216) (3,687) (426) (516) (3,777) (8,844)
Sale of treasury stock .................... 181 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities .............. 15 (2,352) (3,891) (543) (331) (3,679) (1,365)
------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS .......................... 101 1,660 3,431 1,558 (4,406) (2,533) 68
CASH AND CASH EQUIVALENTS, beginning of
period .................................... 47 148 1,808 1,808 5,239 3,366 833
------- ------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period .................................... $ 148 $ 1,808 $ 5,239 $ 3,366 $ 833 $ 833 $ 901
======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest ................................ $ 22 $ 56 $ 61 $ 34 $ 19 $ 46 $ 48
Income Taxes ............................ $ -- $ 55 $ 93 $ 93 $ 105 $ 105 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-42
<PAGE> 118
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
-------- -------- ---------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 ............. 855 $ 1 $ 11 $ 1,808 $ (68) $ 1,752
Sale of 42 shares of treasury
stock ........................... -- -- 164 -- 17 181
Distributions to stockholders ..... -- -- -- (147) -- (147)
Net income ........................ -- -- -- 1,234 -- 1,234
-------- -------- -------- -------- -------- --------
BALANCE, December 31, 1994 ............. 855 1 175 2,895 (51) 3,020
Distributions to stockholders ..... -- -- -- (2,216) -- (2,216)
Net income ........................ -- -- -- 3,145 -- 3,145
-------- -------- -------- -------- -------- --------
BALANCE, December 31, 1995 ............. 855 1 175 3,824 (51) 3,949
Distributions to stockholders ..... -- -- -- (3,687) -- (3,687)
Net income ........................ -- -- -- 7,103 -- 7,103
-------- -------- -------- -------- -------- --------
BALANCE, December 31, 1996 ............. 855 1 175 7,240 (51) 7,365
Distributions to stockholders
(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.
F-43
<PAGE> 119
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying consolidated financial statements include the accounts of
Mills Electrical Contractors, Inc. (Mills), a Texas corporation, and its 89%
owned subsidiary, Fort Worth Regional Electrical Systems, L.L.C. (RES), a Texas
limited liability company (collectively, the Company). The subsidiary was formed
during 1996. In September 1997, Mills sold 10% of the capital stock of RES to an
officer of RES at net book value per share resulting in proceeds to the Company
of $71,000. Financial statements prior to 1996 reflect only the accounts of
Mills. All significant intercompany transactions have been eliminated in
consolidation.
The Company focuses on providing electrical system installation and repair
services primarily for mid-sized to large commercial facilities as well as
residential facilities. The Company performs the majority of its contract work
under fixed price contracts, with contract terms generally ranging from 12 to 36
months. The Company performs the majority of its work in the Dallas-Fort Worth,
Texas, area.
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.
F-44
<PAGE> 120
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
NINE MONTHS OCTOBER 1,
ENDED 1997
YEAR ENDED SEPTEMBER 30, 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 realization is probable and
the amount can be reliably estimated.
F-45
<PAGE> 121
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.
F-46
<PAGE> 122
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>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
--------------------------------------------
DECEMBER 31,
-------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Balance at beginning of period ................... $ 77 $ 128 $ 168 $ 432
Additions to/(reduction of) costs and
expenses ......................................... 51 40 158 (37)
-------- -------- -------- --------
Balance at end of period ......................... $ 128 $ 168 $ 326 $ 395
======== ======== ======== ========
</TABLE>
Included as a component of other receivables at December 31, 1995, is a note
receivable from a corporation of $291,000 with interest at 10 percent per annum.
This note was collected during 1996.
Accounts payable and accrued expenses, trade consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Accounts payable, trade ..................... $ 2,236 $ 4,922 $ 6,275
Accrued compensation and benefits ........... 1,608 3,423 1,017
Other accrued expenses ...................... 595 541 380
-------- -------- --------
$ 4,439 $ 8,886 $ 7,672
======== ======== ========
</TABLE>
Electrical system installation contracts in progress are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress ............. $ 33,016 $ 55,954 $ 80,236
Estimated earnings, net of losses ................... 7,090 15,879 16,534
-------- -------- --------
40,106 71,833 96,770
Less -- Billings to date ............................. (41,721) (76,027) (97,152)
-------- -------- --------
$ (1,615) $ (4,194) $ (382)
======== ======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts ................. $ 131 $ 329 $ 1,584
Less -- Billings in excess of costs and
estimated earnings on uncompleted contracts ..... (1,746) (4,523) (1,966)
-------- -------- --------
$ (1,615) $ (4,194) $ (382)
======== ======== ========
</TABLE>
5. LINE-OF-CREDIT DEBT:
The Company has a $2,000,000 line-of-credit agreement with a bank to be
drawn upon as needed, with variable interest at the bank's prime rate, as
defined, secured by accounts receivable, furniture, fixtures and equipment, an
assignment of a $500,000 life insurance policy on the president and the
president's personal guaranty. In June 1997, the line-of-credit agreement was
extended to
F-47
<PAGE> 123
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.
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.
F-48
<PAGE> 124
Future minimum lease payments under these noncancelable operating leases are
as follows (in thousands):
<TABLE>
<S> <C>
Year Ended September 30--
1998 .............................. $ 138
1999 .............................. 67
2000 .............................. 38
Thereafter ........................ 71
--------
$ 314
========
</TABLE>
7. RELATED-PARTY TRANSACTIONS:
The Company has entered into operating and capital lease transactions with
related parties as discussed in Note 6.
CIMA Services, Inc. (CIMA) and RES are related parties due to the ownership
by the Company's president of 49% and 1%, respectively, of these companies'
capital stock.
The related-party transactions and balances are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Accounts receivable from CIMA .............................. $ 2 $ 208 $ 632
Accounts receivable from sale of subsidiary stock .......... -- -- 71
Interest receivable from CIMA and officer .................. 1 -- --
Accounts payable to CIMA ................................... 23 633 --
Contract revenues from CIMA ................................ 1,116 1,257 1,368
Purchases of material from CIMA ............................ 812 1,080 2,062
Interest income received from CIMA and officers ............ 38 14 1
Minority interest in net income of RES ..................... -- 3 (2)
Liability attributable to minority interest ................ -- 3 75
Capital lease obligation to an officer of RES .............. -- 116 82
Payments under capital lease obligation with
an officer of RES ......................................... -- 31 54
Payments under operating leases with officers
of the Company ............................................ 26 232 270
</TABLE>
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.
F-49
<PAGE> 125
Insurance
The Company carries a broad range of insurance coverage, including workers'
compensation, business auto liability, commercial general liability, property
and an umbrella policy. The Company has not incurred significant uninsured
losses on any of these items.
11. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10 percent of total sales to three major
customers (comprising approximately 20%, 12% and 11% of total sales), two major
customers (comprising approximately 15% and 13% of total sales), two major
customers (comprising approximately 20% and 18% of total sales) and one major
customer (comprising approximately 32% of total sales) during the years ended
December 31, 1994, 1995, 1996 and September 1997, respectively. 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.
F-50
<PAGE> 126
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To BW Consolidated, Inc. and Subsidiaries:
We have audited the accompanying consolidated balance sheets of BW
Consolidated, Inc., a Texas corporation, and Subsidiaries as of December 31,
1995 and 1996 and September 30, 1997, and the related consolidated statements of
operations, cash flows and stockholders' equity for each of the three years in
the period ended December 31, 1996 and for the year ended September 30, 1997 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 BW Consolidated, Inc. and
Subsidiaries as of December 31, 1995 and 1996 and September 30, 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996 and for the year ended September 30, 1997 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
F-51
<PAGE> 127
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
------------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 1,180 $ 507 $ 1,275
Accounts receivable--
Trade, net of allowance of $82, $119 and $124, respectively ..... 3,178 4,718 4,835
Retainage ....................................................... 471 768 601
Other receivables ............................................... 62 53 71
Notes receivable from stockholders ................................. 42 -- --
Inventories, net of allowance of $24, $29,
$28 and $28, respectively ....................................... 461 557 541
Costs and estimated earnings in excess of billings ................. 186 182 224
Prepaid expenses and other current assets .......................... 5 10 29
-------- -------- --------
Total current assets ....................................... 5,585 6,795 7,576
PROPERTY AND EQUIPMENT, net .......................................... 3,925 4,609 5,206
NOTE RECEIVABLE FROM STOCKHOLDERS, net of current portion ............ 470 -- --
OTHER ASSETS ......................................................... 21 27 49
-------- -------- --------
Total assets ............................................... $ 10,001 $ 11,431 $ 12,831
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ............................... $ 214 $ 94 $ 96
Accounts payable and accrued expenses .............................. 2,318 2,131 2,400
Income taxes payable ............................................... 130 166 --
Billings in excess of costs and estimated
earnings ........................................................ 606 749 840
-------- -------- --------
Total current liabilities .................................. 3,268 3,140 3,336
-------- -------- --------
LONG-TERM DEBT, net of current maturities ............................ 951 861 842
DEFERRED TAXES ....................................................... 180 -- --
COMMITMENTS AND CONTINGENCIES
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY ......................... -- 209 1,302
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 2,000,000, 500,000, 500,000 and
500,000 shares authorized, respectively; 31,598, 20,000,
20,000 and 20,000 shares issued and outstanding, respectively.... 32 20 20
Additional paid-in capital ......................................... 566 205 205
Retained earnings .................................................. 5,965 6,996 7,126
Treasury stock, 5,088 shares, at cost .............................. (961) -- --
-------- -------- --------
Total stockholders' equity ................................. 5,602 7,221 7,351
-------- -------- --------
Total liabilities and stockholders' equity ................ $ 10,001 $ 11,431 $ 12,831
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-52
<PAGE> 128
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------ -------------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES .................................... $ 23,168 $ 27,730 $ 33,023 $ 24,994 $ 24,136
COST OF SERVICES (including
depreciation) ............................. 17,967 20,964 25,017 18,909 18,868
-------- -------- -------- -------- --------
Gross profit ....................... 5,201 6,766 8,006 6,085 5,268
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................... 3,091 3,637 3,686 2,713 2,793
-------- -------- -------- -------- --------
Income from operations ............. 2,110 3,129 4,320 3,372 2,475
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense .......................... (135) (120) (97) (73) (84)
Other ..................................... 97 263 174 137 158
-------- -------- -------- -------- --------
Other income (expense), net ........ (38) 143 77 64 74
-------- -------- -------- -------- --------
NET INCOME BEFORE INCOME TAX
AND MINORITY INTEREST ..................... 2,072 3,272 4,397 3,436 2,549
INCOME TAX EXPENSE (BENEFIT) ................ 772 1,238 (28) (67) 33
-------- -------- -------- -------- --------
NET INCOME BEFORE MINORITY
INTEREST .................................. 1,300 2,034 4,425 3,503 2,516
MINORITY INTEREST EXPENSE ................... -- -- 250 203 269
-------- -------- -------- -------- --------
NET INCOME .................................. $ 1,300 $ 2,034 $ 4,175 $ 3,300 $ 2,247
======== ======== ======== ======== ========
<CAPTION>
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
------------- ------------
<S> <C> <C>
REVENUES .................................... $ 32,165 $ 11,208
COST OF SERVICES (including
depreciation) ............................. 24,976 6,908
-------- --------
Gross profit ....................... 7,189 4,300
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ................... 3,766 3,277
-------- --------
Income from operations ............. 3,423 1,023
-------- --------
OTHER INCOME (EXPENSE):
Interest expense .......................... (108) (18)
Other ..................................... 195 54
-------- --------
Other income (expense), net ........ 87 36
-------- --------
NET INCOME BEFORE INCOME TAX
AND MINORITY INTEREST ..................... 3,510 1,059
INCOME TAX EXPENSE (BENEFIT) ................ 72 --
-------- --------
NET INCOME BEFORE MINORITY
INTEREST .................................. 3,438 1,059
MINORITY INTEREST EXPENSE ................... 316 232
-------- --------
NET INCOME .................................. $ 3,122 $ 827
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-53
<PAGE> 129
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
NINE MONTHS ENDED 1997
YEAR ENDED DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
----------------------------- ----------------- SEPTEMBER 30, JANUARY 30,
1994 1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income ....................................... $ 1,300 $ 2,034 $ 4,175 $ 3,300 $ 2,247 $ 3,122 $ 827
Adjustments to reconcile net income to
net cash provided by operating
activities --
Depreciation and amortization .................. 292 329 426 296 404 534 185
Loss (gain) on sale of property and
equipment .................................... 9 (54) (17) (19) (5) (3) 2
Deferred tax benefit ........................... -- -- (180) (180) -- -- --
Minority interest expense ...................... -- -- 250 203 269 316 232
Changes in operating assets and liabilities --
(Increase) decrease in--
Accounts receivable........................... (459) (244) (1,828) (1,115) 50 (663) 432
Inventories .................................. (7) 131 (96) (109) 16 29 (104)
Costs and estimated earnings in excess
of billings on uncompleted contracts ....... 80 (13) 4 (194) (42) 156 104
Prepaid expenses and other current assets .... (3) 4 (5) (5) (19) (19) 15
Increase (decrease) in --
Accounts payable and accrued expenses ........ (153) 141 (187) 222 269 (140) (189)
Billings in excess of costs and estimated
earnings on uncompleted contracts .......... (51) 282 143 200 91 34 263
Other current liabilities .................... 34 41 36 (18) (166) (112) --
------- ------- ------- ------- ------- ------- -------
Net cash provided by operating activities .. 1,042 2,651 2,721 2,581 3,114 3,254 1,767
------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of property and
equipment ...................................... 4 141 66 63 20 23 87
Stockholder receivable ........................... -- (512) 512 512 -- -- --
Other assets ..................................... 1 (3) (6) 3 (22) (31) 7
Additions of property and equipment .............. (485) (1,001) (1,160) (984) (892) (1,068) (411)
------- ------- ------- ------- ------- ------- -------
Net cash used in investing activities ...... (480) (1,375) (588) (406) (894) (1,076) (317)
------- ------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of short-term debt ................... 643 515 1,832 632 800 2,000 932
Borrowings of long-term debt .................... -- -- 10 24 39 25 1,099
Repayments of short-term debt ................... (643) (515) (1,832) (632) (800) (2,000) --
Repayments of long-term debt .................... (377) (310) (219) (200) (198) (217) (941)
Stockholder distributions ....................... -- (32) (2,556) (2,222) (2,117) (2,451) (3,645)
Stockholder contributions ....................... -- -- -- -- -- -- 21
Minority interest contributions ................. -- -- 85 85 935 935 316
Minority interest distributions ................. -- -- (126) (72) (111) (165) (137)
Purchase of treasury stock ...................... -- (961) -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Net cash used in financing activities ..... (377) (1,303) (2,806) (2,385) (1,452) (1,873) (2,355)
------- ------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ............................ 185 (27) (673) (210) 768 305 (905)
CASH AND CASH EQUIVALENTS,
beginning of period ............................. 1,022 1,207 1,180 1,180 507 970 1,275
------- ------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period .......................................... $ 1,207 $ 1,180 $ 507 $ 970 $ 1,275 $ 1,275 $ 370
======= ======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for --
Interest ...................................... $ 137 $ 119 $ 97 $ 73 $ 84 $ 108 $ 13
Income taxes .................................. $ 744 $ 1,197 $ 132 $ 128 $ 198 $ 202 $ --
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-54
<PAGE> 130
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
-------------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------- ------- ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993 ............. 31,151 $ 31 $ 512 $ 2,663 $ -- $ 3,206
Sale of common stock ................. 261 1 30 -- -- 31
Net income ........................... -- -- -- 1,300 -- 1,300
------- ------- ------- ------- ------- -------
BALANCE, December 31, 1994 ............. 31,412 32 542 3,963 -- 4,537
Sale of common stock ................. 186 -- 24 -- -- 24
Net income ........................... -- -- -- 2,034 -- 2,034
Dividends paid ....................... -- -- -- (32) -- (32)
Purchase of treasury stock ........... -- -- -- -- (961) (961)
------- ------- ------- ------- ------- -------
BALANCE, December 31, 1995 ............. 31,598 32 566 5,965 (961) 5,602
Shares retired upon merger ........... (26,510) (27) 154 (127) -- --
Treasury stock canceled .............. (5,088) (5) (515) (441) 961 --
Shares issued ........................ 1,000 10 -- (10) -- --
Stock split 20 to 1 and
recapitalization (Note 1) ........ 19,000 10 -- (10) -- --
Distributions to stockholders ........ -- -- -- (2,556) -- (2,556)
Net income ........................... -- -- -- 4,175 -- 4,175
------- ------- ------- ------- ------- -------
BALANCE, December 31, 1996 ............. 20,000 20 205 6,996 -- 7,221
Distributions to stockholders
(unaudited) ....................... -- -- -- (2,117) -- (2,117)
Net income (unaudited) ............... -- -- -- 2,247 -- 2,247
------- ------- ------- ------- ------- -------
BALANCE, September 30, 1997 ............ 20,000 20 205 7,126 -- 7,351
Stockholder contributions ............ -- -- 21 -- -- 21
Distributions to stockholders ........ -- -- -- (4,884) -- (4,884)
Net income ........................... -- -- -- 827 -- 827
------- ------- ------- ------- ------- -------
BALANCE, January 30, 1998 .............. 20,000 $ 20 $ 226 $ 3,069 $ -- $ 3,315
======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
F-55
<PAGE> 131
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
BW Consolidated, Inc. (the Company), a Nevada S Corporation, and
Subsidiaries, two of which are Texas limited partnerships, focuses on providing
electrical system installation and repair services primarily for residential and
mid-sized to large commercial facilities. The Company performs the majority of
its contract work under fixed-price contracts with contract terms generally
ranging from three to 24 months. The Company performs the majority of its work
in Texas.
In January 1996, the original parent company, Bexar Enterprises, Inc., a
Nevada C Corporation, was merged with BW Investments, Inc., Bexar Electric
Company, Inc., and Calhoun Electric Company, Inc., all wholly owned
subsidiaries. The survivor of the merger was Calhoun Electric Company, Inc., a
Texas S Corporation, and its 90 percent owned subsidiary, Bexar Electric
Company, Ltd. (BEC), a Texas limited partnership. The 10 percent minority
interest in the partnership was purchased by employees of Bexar Electric
Company, Ltd. An additional 10 percent minority interest in Bexar Electric
Company, Ltd. (a Texas limited partnership), was purchased by employees of the
Company in January 1997.
In May 1997, Calhoun Electric Company, Inc., a Texas S Corporation,
transferred its assets and liabilities to Calhoun Electric Company, Ltd. (CEC),
a Texas limited partnership. Subsequent to this transfer, Calhoun Electric
Company, Inc., a Texas S Corporation, reorganized as a Nevada S Corporation and
changed its name to BW Consolidated, Inc.
The accompanying financial statements present BW Consolidated, Inc. (and its
predecessors), together with its majority-owned subsidiaries on a consolidated
basis. All significant intercompany activity has been eliminated in
consolidation. Additionally, minority interests in subsidiaries of BW
Consolidated, Inc. have been reflected as "Minority Interest in Consolidated
Subsidiary" in the accompanying consolidated financial statements.
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. Additionally, in October 1997, the majority
shareholder of the Company transferred 15 percent of its interest in CEC to a
former shareholder of Calhoun Electric Company, Inc. and current employee of
CEC. The Company has changed from a calendar to a September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
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 the 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.
F-56
<PAGE> 132
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less when purchased to be cash equivalents.
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities for
the years ended December 31, 1994, 1995, 1996, and for the year ended September
30, 1997, the nine months ended September 30, 1996 and 1997 and the period from
October 1, 1997 through January 30, 1998:
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS OCTOBER 1,
SEPTEMBER 1997
YEAR ENDED 30, THROUGH
SEPTEMBER 30, ------------------- JANUARY 30,
1994 1995 1996 1997 1996 1997 1998
------- ------- ------- ------------- ------ ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
Property and equipment purchased with
direct financing .......................... $ -- $ 25 $ -- $ 141 $ -- $ 141 $ --
Like-kind exchange of equipment ............. -- 15 6 6 -- 6 --
Employee Stock Option Plan contribution
through stock distribution ................ 30 25 -- -- -- -- --
Exchange of property and equipment for
note receivable ........................... -- -- -- 18 -- 18 --
Land distribution ........................... -- -- -- -- -- -- 2,205
Debt distribution ........................... -- -- -- -- -- -- (966)
</TABLE>
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
average cost method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the consolidated statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
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, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
F-57
<PAGE> 133
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts,"' represents billings in excess of revenues
recognized.
Warranty Costs
The Company warrants labor for the first year after installation of new
electrical systems and servicing of existing electrical systems. A reserve for
warranty costs is recorded based upon the historical level of warranty claims
and management's estimate of future costs.
Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company has elected S Corporation status effective January 1, 1996, as
defined by the Internal Revenue Code, whereby the Company itself is not subject
to taxation for federal purposes. Under S Corporation status, the stockholders
report their share of the Company's taxable earnings or losses in their personal
tax returns. Consequently, the accompanying financial statements of the Company
do not include a provision for current or deferred income taxes (see Note 7).
The Company intends to terminate its S Corporation status concurrently with the
effective date of the Offerings (see Note 1).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the consolidated financial position or results of operations
of the Company.
F-58
<PAGE> 134
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
<S> <C> <C> <C> <C>
Transportation equipment .................... 10 $ 2,783 $ 3,446 $ 3,953
Machinery and equipment ..................... 5-10 709 673 684
Land and buildings .......................... 40 2,592 2,592 2,941
Furniture, fixtures and office
equipment ................................. 3-15 680 926 965
------- ------- -------
6,764 7,637 8,543
Less -- Accumulated depreciation and
amortization .............................. (2,839) (3,028) (3,337)
------- ------- -------
Property and equipment, net ............ $ 3,925 $ 4,609 $ 5,206
======= ======= =======
</TABLE>
4. DETAIL OF CERTAIN CONSOLIDATED BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Balance at beginning of period .................................. $ 80 $ 82 $ 105
Additions to costs and expenses ................................. 27 127 49
Deductions for uncollectible receivables written off and
recoveries .................................................... (25) (90) (30)
-------- -------- --------
Balance at end of period ........................................ $ 82 $ 119 $ 124
======== ======== ========
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Accounts payable, trade .............................. $ 1,134 $ 1,191 $ 1,441
Wages ................................................ 700 407 470
Insurance ............................................ 238 146 83
Contract costs ....................................... 141 207 208
Warranty reserve ..................................... 83 99 97
Other ................................................ 22 81 101
-------- -------- --------
Total accounts payable and accrued
expenses ................................. $ 2,318 $ 2,131 $ 2,400
======== ======== ========
</TABLE>
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Amended contract amount ............................... $ 15,945 $ 18,918 $ 16,983
Revenue recognized to date ............................ 7,953 11,105 8,663
-------- -------- --------
Unearned contract amount, backlog ..................... $ 7,992 $ 7,813 8,320
======== ======== ========
Costs incurred on uncompleted contracts ............... $ 5,647 $ 8,298 6,433
Estimated earnings .................................... 2,306 2,807 2,230
-------- -------- --------
Total contract revenue earned to date ....... 7,953 11,105 8,663
Less-- Billings to date ............................... 8,403 11,711 9,278
-------- -------- --------
Net overbilled open contracts ......................... (450) (606) (615)
Unbilled completed contracts .......................... 30 39 (1)
-------- -------- --------
$ (420) $ (567) $ (616)
======== ======== ========
Costs and estimated earnings in excess of
billings ............................................ $ 186 $ 182 $ 224
Billings in excess of costs and estimated
earnings ............................................ (606) (749) (840)
-------- -------- --------
$ (420) $ (567) $ (616)
======== ======== ========
</TABLE>
F-59
<PAGE> 135
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Note payable to a bank, interest at prime plus .75
percent (prime rate at 8.50 percent at September 30,
1997, principal and interest due monthly of $10
maturing in March 2004, secured by certain real
estate ........................................................ $ 678 $ 632 $ 586
Note payable to a corporation, interest at 7 percent,
principal and interest due monthly of $2 maturing in
July 2004, secured by certain real estate ..................... 140 128 --
Note payable to a bank, interest at prime, principal
and interest due monthly of $3, maturing in November
2003, secured by certain real estate .......................... 205 190 179
Note payable to a bank, interest at prime plus .75
percent, principal and interest due monthly of $2
maturing in February 2007, secured by real estate ............. -- -- $ 173
Notes payable to manufacturers, interest at 7.9
percent, principal and interest due monthly of $3,
maturing in December 1996 and May 1997, secured by
certain equipment ............................................. 43 5 --
Notes payable to a bank, interest at 8.25 percent,
principal and interest due monthly of $6, maturing
in July and October 1996, secured by certain
vehicles and equipment ........................................ 50 -- --
Various notes payable to a bank, interest ranging from
7.9 percent to 8.25 percent, principal and interest
due monthly of $7, maturing in July through November
1996, secured by certain vehicles, machinery and
office equipment .............................................. 49 -- --
------- ------- -------
Total debt ............................................ 1,165 955 938
Less-- current maturities ....................................... 214 94 96
------- ------- -------
Long-term debt less current maturities .......................... $ 951 $ 861 $ 842
======= ======= =======
</TABLE>
The maturities of long-term debt at September 30, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
1998 .................... $ 96
1999 .................... 112
2000 .................... 116
2001 .................... 126
2002 .................... 138
Thereafter .............. 350
-------
$ 938
=======
</TABLE>
The Company had two lines of credit. The first line of credit for $750,000,
secured by BEC accounts receivable, inventory and equipment, requires monthly
payments of interest at 1 percent over the prime rate. At December 31, 1995 and
1996 and at September 30, 1997, respectively, there were no advances outstanding
against the line and the full $750,000 was available. The note maturity date was
April 1998. The second line of credit for $500,000, secured by CEC accounts
receivable, inventory, equipment and trucks, requires monthly payments of
interest at 1/2 percent over the prime rate. During the 1997, this line of
credit agreement was renewed and was increased from $300,000 to $500,000. At
December 31, 1995 and 1996, respectively, there were no advances outstanding
against the line and the full $300,000 was available. At September 30, 1997,
there was no advance outstanding against the line and the full $500,000 was
available. The note maturity date was May 1998.
The Company had an irrevocable letter of credit from a bank in the amount of
$199,000 in favor of the Company's workers' compensation carrier. The expiration
date was July 1, 1997. Security for this letter of credit consisted of the
assignment of $125,000 in certificates of deposit and a second lien on real
estate of the Company, and the personal guarantee of the major stockholder.
All of the long-term debt of the Company was paid off with the proceeds from
the initial public offering of IES concurrent with the acquisition of the
Company by IES. None of the debt instruments have been renewed.
F-60
<PAGE> 136
6. LEASES:
The Company leased undeveloped property from the majority stockholder for
storage of equipment and trailers. The lease was entered into on July 1, 1994,
and expired on June 30, 1997, and was on a month-to-month basis. The
consideration for this lease was $8,000, $17,000, $19,000, $15,000 and $7,000
for the years ended December 31, 1994, 1995, 1996 and September 30, 1997 and the
period from October 1, 1997 through January 30, 1998, respectively.
7. INCOME TAXES (IN THOUSANDS):
Federal and state income taxes are as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Federal --
Current ............... $ 663 $ 1,118
Deferred .............. 26 (45)
State --
Current ............... 83 157
Deferred .............. -- 8
------- -------
$ 772 $ 1,238
======= =======
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34% to income before
provision for income taxes as follows:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------- -------
<S> <C> <C>
Provision at the statutory rate .......................... $ 704 $ 1,112
State income tax, net of benefit for federal deduction.... 54 107
Other .................................................... 14 19
------- -------
$ 772 $ 1,238
======= =======
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Deferred income tax assets --
Allowance for bad debt .............................. $ 4
Accrued liabilities and expenses .................... 122
-------
Total deferred income tax asset ............. 126
-------
Deferred income tax liabilities --
Property and equipment .............................. (306)
-------
Total deferred income tax liability ......... (306)
-------
Net deferred income tax liability ........... $ (180)
=======
</TABLE>
The net deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1995
------------
<S> <C>
Deferred tax assets --
Current .............................. $ 126
Long-term ............................ --
-------
Total ........................ $ 126
=======
Deferred tax liabilities --
Current .............................. $ --
Long-term ............................ (306)
-------
Total ........................ $ (306)
=======
</TABLE>
F-61
<PAGE> 137
Effective January 1, 1996, the Company elected S Corporation status for
Calhoun Electric and partnership status for Bexar Electric. The Company will no
longer be directly responsible for any deferred tax liability which might exist.
The removal of the deferred tax liability which existed as of December 31, 1995,
is recognized in the 1996 consolidated statement of operations (see Note 2).
8. RELATED-PARTY TRANSACTIONS:
Notes receivable from a stockholder consists of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Note receivable, secured by a second lien on
real estate, interest at 7.5 percent, payable in 60 quarterly
installments of $3 ...................................................... $ 107 $ -- $ --
Note receivable, unsecured, interest at 7.45 percent,
payments due annually in January of 15 percent of
principal plus accrued interest, balance due in January
2000 .................................................................... 405 -- --
------- ------- -------
Total notes receivable from a stockholder ....................... 512 -- --
Current portion ........................................................... 42 -- --
------- ------- -------
Noncurrent portion ........................................................ $ 470 $ -- $ --
======= ======= =======
</TABLE>
The Company recognized interest income from a stockholder of $0, $30,000,
$13,000, $5,000 and $0, in 1994, 1995, 1996 and for the year ended September
30, 1997 and for the period from October 1, 1997 through January 30, 1998,
respectively.
9. EQUITY:
In 1991, the Company adopted an employee stock ownership plan (ESOP) for the
benefit of the Company's employees. The plan covered substantially all employees
of the Company. The Company's contributions to the plan are at the discretion of
the board of directors, but may not exceed the maximum allowable deduction
permitted under the Internal Revenue Code at the time of the contribution. Under
this ESOP plan, employees cannot make contributions to the plan. The Company
made a contribution of $35,000 and $25,000 in 1994 and 1995, respectively.
Effective December 8, 1995, the Company has requested and received approval from
the Internal Revenue Service to terminate the ESOP plan. In accordance with the
termination of the ESOP, the Company repurchased as treasury stock 5,088 shares
for $961,000.
In 1996, the Company sold a minority interest in the limited partnership of
Bexar Electric to certain employees of the Company. The minority interest is
considered a limited partner; the minority interest held 10 percent and 20
percent at December 31, 1996 and September 30, 1997, respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, notes receivable from stockholders, accounts payable, a
line of credit, notes payable and long-term debt. The Company believes that the
carrying value of these instruments on the accompanying consolidated balance
sheets approximates their fair value.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's consolidated
financial position or results of operations.
F-62
<PAGE> 138
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 11 percent of total sales to one
major customer during the year ended December 31, 1996.
The Company had accounts receivable balances of approximately 15 percent and
14 percent of total accounts receivable from two major customers as of December
31, 1996, and approximately 10% due from one major customer for the year ended
September 30, 1997.
The Company had cash and cash equivalents in financial institutions which
exceeded the federally insured limits by $911,000, $269,000 and $858,000 at
December 31, 1995 and 1996, and September 30, 1997, respectively.
In addition, the Company grants credit, generally without collateral, to its
customers, which are primarily general contractors, located in Central and South
Texas. Consequently, the Company is subject to potential credit risk related to
changes in business and economic factors within the state of Texas. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
F-63
<PAGE> 139
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Muth Electric, Inc.:
We have audited the accompanying balance sheets of Muth Electric, Inc., a
South Dakota corporation, as of December 31, 1995 and 1996 and September 30,
1997, and the related statements of operations, cash flows and stockholder's
equity for each of the three years in the period ended December 31, 1996 and for
the year ended September 30, 1997 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 Muth Electric, Inc., as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996 and for the year ended September 30, 1997 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
F-64
<PAGE> 140
MUTH ELECTRIC, INC.
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 .......................................... $ 53 $ 82 $ 81
Accounts receivable--
Trade, net of allowance of $55, $63 and $91, respectively ....... 1,718 2,556 3,154
Retainage ....................................................... 417 212 383
Related party ................................................... -- 74 246
Inventories ........................................................ 750 820 898
Costs and estimated earnings in excess of
billings on uncompleted contracts ............................... 545 436 675
Prepaid expenses and other current assets .......................... 150 140 135
-------- -------- --------
Total current assets ....................................... 3,633 4,320 5,572
PROPERTY AND EQUIPMENT, net .......................................... 946 1,140 1,133
-------- -------- --------
Total assets ............................................... $ 4,579 $ 5,460 $ 6,705
======== ======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable ...................................................... $ -- $ 530 $ 540
Accounts payable and accrued expenses .............................. 1,621 1,680 2,177
Billings in excess of costs and estimated
earnings on uncompleted contracts ............................... 305 180 543
-------- -------- --------
Total current liabilities .................................. 1,926 2,390 3,260
-------- -------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $100 par value, 3,000 shares
authorized, 737 shares issued and outstanding ................... 74 74 74
Retained earnings .................................................. 2,579 2,996 3,371
-------- -------- --------
Total stockholder's equity ................................. 2,653 3,070 3,445
-------- -------- --------
Total liabilities and stockholder's equity ................. $ 4,579 $ 5,460 $ 6,705
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-65
<PAGE> 141
MUTH ELECTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
NINE MONTHS 1997
YEAR ENDED ENDED YEAR ENDED THROUGH
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, JANUARY 30,
1994 1995 1996 1996 1997 1997 1998
-------- -------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES .......................... $ 13,466 $ 16,012 $ 16,830 $ 12,517 $ 14,466 $ 18,779 $ 8,028
COST OF SERVICES (including
depreciation) ................... 9,805 12,189 12,834 9,751 11,428 14,511 6,164
-------- -------- -------- -------- -------- -------- --------
Gross profit .............. 3,661 3,823 3,996 2,766 3,038 4,268 1,864
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES ........................ 2,678 2,923 2,957 2,147 2,264 3,074 1,179
-------- -------- -------- -------- -------- -------- --------
Income from operations .... 983 900 1,039 619 774 1,194 685
-------- -------- -------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Interest income (expense) ....... 6 11 (24) (17) (20) (27) (6)
Other ........................... (79) (95) 27 22 (4) 1 3
-------- -------- -------- -------- -------- -------- --------
Other income (expense),
net ..................... (73) (84) 3 5 (24) (26) (3)
-------- -------- -------- -------- -------- -------- --------
NET INCOME ........................ $ 910 $ 816 $ 1,042 $ 624 $ 750 $ 1,168 $ 682
======== ======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-66
<PAGE> 142
MUTH ELECTRIC, INC.
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 .......................................... $ 910 $ 816 $ 1,042 $ 624 $ 750
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization ..................... 142 185 224 194 182
Loss (gain) on sale of property and
equipment ....................................... (6) 16 (28) (16) (14)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable .......................... (260) 70 (674) (406) (941)
Inventories .................................. 31 (38) (70) (66) (78)
Costs and estimated earnings in excess of
billings on uncompleted contracts .......... 579 (291) 70 (44) (239)
Prepaid expenses and other current
assets ..................................... (41) 5 10 96 5
Increase (decrease) in--
Accounts payable and accrued expenses ........ (478) 525 59 105 497
Billings in excess of costs and estimated
earnings on uncompleted contracts .......... (252) (95) (119) 47 363
------- ------- ------- ------- -------
Net cash provided by operating activities .... 625 1,193 514 534 525
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ........ 11 5 53 34 23
Additions of property and equipment ................. (201) (560) (443) (401) (184)
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities ....................... (190) (555) (390) (367) (161)
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) or notes payable .......... -- -- 530 240 10
Payments on short-term borrowings ................... -- -- -- -- --
Payments of long-term loan receivable ............... 390 -- -- -- --
Distributions to stockholders ....................... (715) (722) (625) (375) (375)
------- ------- ------- ------- -------
Net cash used in financing activities ........ (325) (722) (95) (135) (365)
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................... 110 (84) 29 32 (1)
CASH AND CASH EQUIVALENTS,
beginning of period ................................ 27 137 53 53 82
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period .............. $ 137 $ 53 $ 82 $ 85 $ 81
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for --
Interest .......................................... $ 9 $ 4 $ 33 $ 25 $ 28
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR 1997
ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
------- -------
1997 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 1,168 $ 682
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization ..................... 212 91
Loss (gain) on sale of property and
equipment ....................................... (26) 1
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable .......................... (1,209) 1,653
Inventories .................................. (82) 16
Costs and estimated earnings in excess of
billings on uncompleted contracts .......... (125) (403)
Prepaid expenses and other current
assets ..................................... (81) (7)
Increase (decrease) in--
Accounts payable and accrued expenses ........ 451 (72)
Billings in excess of costs and estimated
earnings on uncompleted contracts .......... 197 11
------- -------
Net cash provided by operating activities .... 505 1,972
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ........ 42 109
Additions of property and equipment ................. (226) (57)
------- -------
Net cash provided by (used in)
investing activities ....................... (184) 52
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) or notes payable .......... 300 1,680
Payments on short-term borrowings ................... -- (1,070)
Payments of long-term loan receivable ............... -- --
Distributions to stockholders ....................... (625) (2,495)
------- -------
Net cash used in financing activities ........ (325) (1,885)
------- -------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS ................................... (4) 139
CASH AND CASH EQUIVALENTS,
beginning of period ................................ 85 81
------- -------
CASH AND CASH EQUIVALENTS, end of period .............. $ 81 $ 220
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for --
Interest .......................................... $ 36 $ 32
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-67
<PAGE> 143
MUTH ELECTRIC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------- ------- ------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1993 ............. 737 $ 74 $ 2,290 $ 2,364
Distributions to stockholders ........ -- -- (715) (715)
Net income ........................... -- -- 910 910
------- ------- ------- -------
BALANCE, December 31, 1994 ............. 737 74 2,485 2,559
Distributions to stockholders ........ -- -- (722) (722)
Net income ........................... -- -- 816 816
------- ------- ------- -------
BALANCE, December 31, 1995 ............. 737 74 2,579 2,653
Distributions to stockholders ........ -- -- (625) (625)
Net income ........................... -- -- 1,042 1,042
------- ------- ------- -------
BALANCE, December 31, 1996 ............. 737 74 2,996 3,070
Distributions to stockholders
(unaudited) ........................ -- -- (375) (375)
Net income (unaudited) ............... -- -- 750 750
------- ------- ------- -------
BALANCE, September 30, 1997 ............ 737 $ 74 $ 3,371 $ 3,445
Distributions to stockholders ........ -- -- (2,495) (2,495)
Net income ........................... -- -- 682 682
------- ------- ------- -------
BALANCE, January 30, 1998 .............. 737 $ 74 $ 1,558 $ 1,632
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-68
<PAGE> 144
MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Muth Electric, Inc. (the Company), a South Dakota corporation, focuses on
providing electrical system installation and repair services primarily for
residential and commercial facilities. The Company performs the majority of its
contract work under fixed-price contracts with contract terms generally ranging
from one to 12 months. The Company performs the majority of its work in South
Dakota and surrounding states.
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 financial statements for the nine months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
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 the 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.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the estimated useful
life of the asset. Depreciation expense was approximately $142,000, $185,000,
$224,000, $212,000 and $91,000 for the years ended December 31, 1994, 1995, 1996
and September 30, 1997 and the period from October 1, 1997 through January 30,
1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of
F-69
<PAGE> 145
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 and depreciation costs. Provisions
for the total estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and income and their effects are recognized in the period in which the
revisions are determined. An amount equal to contract costs attributable to
claims is included in revenues when realization is probable and the amount can
be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
The Company warrants labor and materials for the first year after
installation of new electrical systems. A reserve for warranty costs is recorded
based upon the historical level of warranty claims and management's estimate of
future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable, as well as provides a general reserve for potential unknown
adjustments.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company itself is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
Consequently, the accompanying financial statements of the Company do not
include a provision for current or deferred income taxes. The Company intends to
terminate its S Corporation status concurrently with the effective date of the
Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 9 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment
F-70
<PAGE> 146
or other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the financial position or results of operations of the
Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
<S> <C> <C> <C> <C>
Transportation equipment .................... 5 $ 806 $ 868 $ 890
Machinery and equipment ..................... 7 466 635 707
Leasehold improvements ...................... 40 409 479 517
Furniture and fixtures ...................... 5 403 425 444
------- ------- -------
2,084 2,407 2,558
Less -- Accumulated depreciation and
amortization .............................. (1,138) (1,267) (1,425)
------- ------- -------
Property and equipment, net ....... $ 946 $ 1,140 $ 1,133
======= ======= =======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Balance at beginning of period ................... $ 60 $ 55 $ 63
Additions (deductions) to costs and expenses ..... (5) 8 28
------- ------- -------
Balance at end of period ......................... $ 55 $ 63 $ 91
======= ======= =======
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Accounts payable, trade ................ $ 652 $ 757 $ 1,258
Accrued compensation and benefits ...... 376 520 435
Other accrued expenses ................. 593 403 484
------- ------- -------
$ 1,621 $ 1,680 $ 2,177
======= ======= =======
</TABLE>
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress .......... $ 9,215 $ 7,159 $ 7,250
Estimated earnings, net of losses ................ 1,914 1,277 2,082
-------- -------- --------
11,129 8,436 9,332
Less-- Billings to date .......................... (10,889) (8,180) (9,200)
-------- -------- --------
$ 240 $ 256 $ 132
======== ======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts............... $ 545 $ 436 $ 675
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts .............. (305) (180) (543)
-------- -------- --------
$ 240 $ 256 $ 132
======== ======== ========
</TABLE>
F-71
<PAGE> 147
5. LINE OF CREDIT:
The Company has three lines of credit with a bank totaling $1,140,000 of
available credit. The line of credit expires January 1998 and bears interest at
9 percent. The line of credit is unsecured. At September 30, 1997, borrowings
outstanding under the line of credit were $540,000.
6. EMPLOYEE BENEFIT PLAN:
The Company has a defined 401(k) contribution profit-sharing plan. The Plan
provides for the Company to match one-half of the first 5 percent contributed by
each employee. Total contributions by the Company under the plan were
approximately $83,000, $93,000, $85,000 and $28,000 for the years ending
December 31, 1995, 1996 and September 30, 1997 and the period from October 1,
1997 through January 30, 1998, respectively. The Company may also make
discretionary contributions. The Company declared discretionary contributions of
$70,000 and $65,000 for the years ended December 31, 1995 and 1996,
respectively, and had accrued approximately $74,000 at December 31, 1996,
relating to all contributions to be funded in the subsequent fiscal year.
7. RELATED-PARTY TRANSACTIONS:
The Company periodically will obtain loans from the stockholder to meet
current cash needs. The Company will also loan out excess funds to the
stockholder. Loans neither to nor from the stockholder are charged interest. A
total of $172,000 was due from a stockholder at September 30, 1997.
The Company has an outstanding trade receivable in the amount of $74,000 to
a company owned by a member of the stockholder's family.
The Company also provides real estate management services to a company owned
by the stockholder.
The Company leases facilities from the Company's stockholder. The leases
expire annually. The rent paid under these related-party leases was
approximately $95,000, $118,000, $115,000 and $41,000 for the years ended
December 31, 1995 and 1996 and September 30, 1997 and the period from October 1,
1997 through January 30, 1998, respectively.
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, lines of credit, notes payable and
long-term debt. The Company believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.
9. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability, workers compensation and an umbrella policy.
The Company has not incurred significant uninsured losses on any of these items.
The Company is self-insured for medical claims up to $20,000 per year per
covered individual. Claims in excess of these amounts are covered by a stop-loss
policy. The Company has recorded reserves for its portion of self-insured claims
based on estimated claims incurred through December 31, 1995 and 1996 or 1997.
10. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company did not have sales greater than 10 percent of total sales to any
one customer during the years ended December 31, 1994, 1995 and 1996 or
September 30, 1997 or the period from October 1, 1997 through January 30, 1998.
In addition, the Company grants credit, generally without collateral, to its
customers located primarily in the Midwest region. Consequently, the Company is
subject to potential credit risk related to changes in business and economic
factors within the Midwest. However, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
F-72
<PAGE> 148
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pollock Electric Inc.:
We have audited the accompanying balance sheets of Pollock Electric Inc., a
Texas corporation, as of October 31, 1995 and 1996 and September 30, 1997, and
the related statements of operations, cash flows and stockholder's equity for
the years then ended 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 Pollock Electric Inc. as of
October 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended 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
F-73
<PAGE> 149
POLLOCK ELECTRIC INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 302 $ 222 $ 347
Accounts receivable--
Trade, net of allowance of $96, $178 and $175,
respectively ............................................ 2,204 4,030 4,536
Retainage ................................................. 99 566 765
Other receivables ......................................... 40 4 13
Inventories, net ............................................. -- -- 18
Costs and estimated earnings in excess of
billings on uncompleted contracts ......................... 399 202 767
Deferred tax asset ........................................... 161 263 343
Prepaid expenses and other current assets .................... 49 115 198
------- ------- -------
Total current assets ................................. 3,254 5,402 6,987
PROPERTY AND EQUIPMENT, net .................................... 280 341 379
------- ------- -------
Total assets ......................................... $ 3,534 $ 5,743 $ 7,366
======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Notes payable and capital lease obligations .................. $ 28 $ 67 $ 167
Advances outstanding under line of credit .................... 625 1,350 1,610
Accounts payable and accrued expenses ........................ 1,378 3,013 3,335
Income taxes payable ......................................... 354 181 231
Billings in excess of costs and estimated
earnings on uncompleted contracts ......................... 234 317 889
Unearned revenue and other current liabilities ............... 14 13 146
------- ------- -------
Total current liabilities ............................ 2,633 4,941 6,378
------- ------- -------
CAPITAL LEASE OBLIGATIONS, net of current
portion ...................................................... 75 75 71
DEFERRED TAX LIABILITY ......................................... 20 20 21
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 1,000,000 shares
authorized, 1,000 shares issued and outstanding ........... 1 1 1
Additional paid-in capital ................................... 9 9 9
Retained earnings ............................................ 796 697 886
------- ------- -------
Total stockholder's equity ........................... 806 707 896
------- ------- -------
Total liabilities and stockholder's
equity ............................................. $ 3,534 $ 5,743 $ 7,366
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-74
<PAGE> 150
POLLOCK ELECTRIC INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED ELEVEN MONTHS ENDED YEAR ENDED THROUGH
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
-------- -------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES .............................. $ 13,002 $ 15,816 $ 13,305 $ 17,780 $ 20,291 $ 8,984
COST OF SERVICES
(including depreciation) ............ 10,602 13,534 11,646 14,782 16,670 8,345
-------- -------- -------- -------- -------- --------
Gross profit ................. 2,400 2,282 1,659 2,998 3,621 639
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES ............................ 2,149 2,463 2,083 2,515 2,895 1,644
-------- -------- -------- -------- -------- --------
Income (loss) from
operations ................. 251 (181) (424) 483 726 (1,005)
-------- -------- -------- -------- -------- --------
OTHER INCOME
(EXPENSE):
Interest expense .................... (77) (104) (87) (155) (172) (67)
Other ............................... -- 156 154 1 3 24
-------- -------- -------- -------- -------- --------
Other income
(expense), net ............. (77) 52 67 (154) (169) (43)
-------- -------- -------- -------- -------- --------
INCOME (LOSS) BEFORE
INCOME TAXES ........................ 174 (129) (357) 329 557 (1,048)
PROVISION (BENEFIT)
FOR INCOME TAXES .................... 82 (30) (104) 140 214 (393)
-------- -------- -------- -------- -------- --------
NET INCOME (LOSS) ..................... $ 92 $ (99) $ (253) $ 189 $ 343 $ (655)
======== ======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-75
<PAGE> 151
POLLOCK ELECTRIC INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
ELEVEN MONTHS OCTOBER 1,
YEAR ENDED ENDED 1997
OCTOBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
------------------- -------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................... $ 92 $ (99) $ (253) $ 189 $ 343 $ (655)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities --
Depreciation and amortization ..................... 64 107 83 107 131 111
Deferred income taxes ............................. (141) (103) (146) (78) (35) (76)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable .......................... 577 (2,257) (1,492) (714) (1,479) (587)
Inventories .................................. -- -- -- (18) (18) --
Costs and estimated earnings in excess of
billings on uncompleted contracts .......... (164) 197 (134) (565) (234) 343
Prepaid expenses and other current assets .... (30) (41) (71) (83) (78) 83
Increase (decrease) in --
Accounts payable and accrued expenses ........ (546) 1,635 815 323 1,143 (237)
Income taxes payable ......................... 170 (172) (243) 49 120 (231)
Billings in excess of costs and estimated
earnings on uncompleted contracts .......... 9 83 636 572 19 281
Unearned revenue and other current
liabilities ................................ (31) (1) 29 133 103 (146)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities ................................. -- (651) (776) (85) 15 (1,114)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment ................. (77) (154) (112) (133) (175) (29)
------- ------- ------- ------- ------- -------
Net cash used in investing activities ........ (77) (154) (112) (133) (175) (29)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit ................. 241 725 609 343 484 800
------- ------- ------- ------- ------- -------
Net cash provided by financing activities .... 241 725 609 343 484 800
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................... 164 (80) (279) 125 324 (343)
CASH AND CASH EQUIVALENTS, beginning of period ........ 138 302 302 222 23 347
------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period .............. $ 302 $ 222 $ 23 $ 347 $ 347 $ 4
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest .......................................... $ 77 $ 104 $ 88 $ 155 $ 171 $ 37
Income taxes ...................................... $ 21 $ 245 $ 245 $ 38 $ 38 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-76
<PAGE> 152
POLLOCK ELECTRIC INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
-------- -------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1994 ......... 1,000 $ 1 $ 9 $ 704 $ 714
Net income ...................... -- -- -- 92 92
-------- -------- -------- -------- --------
BALANCE, October 31, 1995 ......... 1,000 1 9 796 806
Net loss ........................ -- -- -- (99) (99)
-------- -------- -------- -------- --------
BALANCE, October 31, 1996 ......... 1,000 1 9 697 707
Net income (unaudited) .......... -- -- -- 189 189
-------- -------- -------- -------- --------
BALANCE, September 30, 1997 ....... 1,000 $ 1 $ 9 $ 886 $ 896
Net loss ........................ -- -- -- (655) (655)
-------- -------- -------- -------- --------
BALANCE, January 30, 1998 ......... 1,000 $ 1 $ 9 $ 231 $ 241
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-77
<PAGE> 153
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Pollock Electric Inc., a Texas corporation (the Company), provides
electrical system installation, data and fiber optic cabling installation and
repair services primarily for mid-sized to large commercial facilities. The
Company performs the majority of its contract work under fixed-price contracts,
with contract terms generally ranging from one to 12 months. The Company
performs the majority of its work in the commercial and industrial markets in
Harris County, Texas, and surrounding areas.
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 financial statements for the eleven months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
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 the 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.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $64,000, $107,000, $131,000 and $111,000 for the years ended
October 31, 1995 and 1996 and September 30, 1997 and for the period from
October 1, 1997 through January 30, 1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
F-78
<PAGE> 154
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, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reasonably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor and materials for the
first year after installation of new electrical systems. The Company generally
warrants labor for one year after servicing existing electrical systems. A
reserve for warranty costs is recorded based upon the historical level of
warranty claims and management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
Accounts receivable at October 31, 1995 and 1996 and September 30, 1997,
include immaterial amounts of claims and unapproved change orders, however, the
Company generally does not recognize change orders until they are approved.
The Company provides an allowance for doubtful accounts based upon a
percentage of gross sales revenue. In addition, the Company reserves for
specific accounts when collection of such accounts is no longer probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred tax assets and liabilities are recorded for
future tax consequences of temporary differences between the financial reporting
and tax bases of assets and liabilities, and are measured using the enacted tax
rates and laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 11 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and 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
F-79
<PAGE> 155
of such property is necessary. The effect of any impairment would be to expense
the difference between the fair value of such property and its carrying value.
Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED OCTOBER 31,
USEFUL LIVES ----------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Transportation equipment .................. 4-5 $ 95 $ 132 $ 143
Machinery and equipment ................... 5-7 221 267 331
Computer and telephone equipment .......... 5 161 201 259
Leasehold improvements .................... 5-39 71 107 119
Furniture and fixtures .................... 5-7 15 24 24
-------- -------- --------
563 731 876
Less -- Accumulated depreciation and
amortization ............................ (283) (390) (497)
-------- -------- --------
Property and equipment, net ..... $ 280 $ 341 $ 379
======== ======== ========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Balance at beginning of period .............. $ 68 $ 96 $ 178
Additions to costs and expenses ............. 59 108 26
Deductions for uncollectible receivables
written off and recoveries ................ (31) (26) (29)
-------- -------- --------
Balance at end of period .................... $ 96 $ 178 $ 175
======== ======== ========
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Accounts payable, trade ................ $ 944 $ 2,553 $ 2,859
Accrued compensation and benefits ...... 301 344 302
Other accrued expenses ................. 133 116 174
-------- -------- --------
$ 1,378 $ 3,013 $ 3,335
======== ======== ========
</TABLE>
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress ............... $ 1,300 $ 6,592 $ 9,484
Estimated earnings, net of losses ..................... 239 742 1,748
-------- -------- --------
1,539 7,334 11,232
Less -- Billings to date .............................. (1,374) (7,449) (11,354)
-------- -------- --------
$ 165 $ (115) $ (122)
======== ======== ========
Costs and estimated earnings in excess of billings
on uncompleted contracts ............................ $ 399 $ 202 $ 767
Less -- Billings in excess of costs and estimated
earnings on uncompleted contracts .................. (234) (317) (889)
-------- -------- --------
$ 165 $ (115) $ (122)
======== ======== ========
</TABLE>
5. LINE OF CREDIT:
The Company has a $2,500,000 line of credit with a bank. At October 31, 1995
and 1996 and September 30, 1997, unpaid borrowings were $625,000, $1,350,000 and
$1,610,000, respectively. The line of credit expires February 28, 1998, and
bears interest
F-80
<PAGE> 156
at the bank's prime lending rate plus 1 percent. The line of credit is
personally guaranteed by Jon Pollock, sole stockholder and president of the
Company, and is secured by all accounts, contract rights, chattel paper,
instruments, general intangibles, rights to payments of any kind, all interest
of the Company in any goods, and a blanket lien of all property and equipment.
The borrowing base is limited to 75 percent of eligible accounts receivable that
are outstanding less than 60 days from the invoice date.
Interest is computed monthly on the unpaid balance and is payable monthly.
The Company has restrictive and various financial covenants with which the
Company was in compliance at September 30, 1997.
6. LEASES:
The Company leases its office space from its sole stockholder and president
under a lease agreement with a primary lease term of one year beginning November
15, 1991. At the expiration of the primary lease term, the Company exercised its
option to extend the lease for an additional five-year period. Effective
November 1, 1995, the lease agreement was modified to include additional office
space. The basic rent was increased to $3,000 per month, and the expiration date
was extended to November 30, 1998.
In addition to the basic lease cost, the Company must pay insurance, actual
taxes, maintenance and other operating costs. The rent paid under this
related-party lease was approximately $20,000, $36,000, $36,000 and $12,000 for
the years ended October 31, 1995 and 1996 and September 30, 1997 and for the
period from October 1, 1997 through January 30, 1998, respectively.
Future minimum lease payments under this noncancelable operating lease are
as follows (in thousands):
<TABLE>
<CAPTION>
OCTOBER SEPTEMBER
31, 30,
-------- --------
<C> <C> <C>
1997 ................... $ 36 $ --
1998 ................... 36 36
1999 ................... 3 6
-------- --------
$ 75 $ 42
======== ========
</TABLE>
Certain vehicles and equipment have been leased under terms that constitute
capital leases. Accordingly, the costs of the assets (the lower of the cash
purchase price or the present value of the future minimum lease payments) were
recorded as an addition to property and the related liabilities were recorded as
lease obligations. The assets are amortized using the straight-line method, and
interest expense is recorded on the basis of the outstanding lease obligation.
The net present value of future minimum lease payments under the capital
leases as recorded in short-term and long-term debt at October 31, 1996 and
September 30, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending October 31--
1997 ........................................... $ 54
1998 ........................................... 51
1999 ........................................... 32
--------
Total lease payments ............................. 137
Less -- Amounts representing interest ............ (16)
--------
Present value of minimum lease payments .......... $ 121
========
Year ending September 30--
1998 ........................................... $ 71
1999 ........................................... 54
2000 ........................................... 20
2001 ........................................... 7
--------
Total lease payments ............................. 152
Less -- Amounts representing interest ............ (19)
--------
Present value of minimum lease payments .......... $ 133
========
</TABLE>
F-81
<PAGE> 157
7. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
OCTOBER 31, YEAR ENDED THROUGH
----------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1997 1998
-------- -------- ------------- -----------
<S> <C> <C> <C> <C>
Federal --
Current ............... $ 259 $ 72 $ 318 $ (210)
Deferred .............. (187) (99) (122) (137)
State --
Current ............... 35 10 39 --
Deferred .............. (25) (13) (21) (46)
-------- -------- -------- --------
$ 82 $ (30) $ 214 $ (393)
======== ======== ======== ========
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
(loss) for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
OCTOBER 31, YEAR ENDED THROUGH
----------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1997 1998
-------- -------- ------------- -----------
<S> <C> <C> <C> <C>
Income tax expense (benefit) at the statutory rate .... $ 61 $ (45) $ 194 $ (367)
Increase (decrease) resulting from --
State income taxes, net of related tax effect ....... 6 (2) 12 (31)
Nondeductible expenses .............................. 15 17 8 5
-------- -------- -------- --------
$ 82 $ (30) $ 214 $ (393)
======== ======== ======== ========
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of income and expenses for financial reporting purposes and for tax purposes.
The tax effects of these temporary differences, representing deferred tax assets
and liabilities, result principally from the following (in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Deferred income tax assets --
Bad debt reserve ............................... $ 42 $ 51 $ 53
Warranty reserve ............................... 28 44 49
Contracts ...................................... 51 50 75
Accrued expenses ............................... 40 118 166
-------- -------- --------
Total deferred income tax assets ....... 161 263 343
-------- -------- --------
Deferred income tax liabilities --
Property and equipment ......................... (17) (17) (52)
State taxes .................................... (1) (4) (4)
Contracts ...................................... (116) (103) (208)
-------- -------- --------
Total deferred income tax liabilities .. (134) (124) (264)
-------- -------- --------
Net deferred income tax assets ......... $ 27 $ 139 $ 79
======== ======== ========
</TABLE>
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
OCTOBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Deferred tax assets --
Current ................................... $ 161 $ 263 $ 343
Long-term ................................. -- -- --
-------- -------- --------
Total ............................. 161 263 343
-------- -------- --------
Deferred tax liabilities --
Current ................................... (114) (104) (243)
Long-term ................................. (20) (20) (21)
-------- -------- --------
Total ............................. (134) (124) (264)
-------- -------- --------
Net deferred income tax assets .... $ 27 $ 139 $ 79
======== ======== ========
</TABLE>
F-82
<PAGE> 158
8. RELATED-PARTY TRANSACTIONS:
The Company leases its office space from its sole stockholder and president.
Total payments made under this lease agreement were approximately $20,000,
$36,000, $36,000 and $12,000 for the years ended October 31, 1995 and 1996 and
September 30, 1997 and for the period from October 1, 1997 through January 30,
1998, respectively. (See Note 6).
In 1995, the Company encouraged its employees to purchase personal computers
by making the down payments for the purchases. The employees are repaying the
Company through payroll deductions. The outstanding amounts are classified as
accounts receivable, other in the accompanying balance sheets.
9. EMPLOYEE BENEFIT PLANS:
Stock Appreciation Plan
On May 4, 1994, the Company adopted a stock appreciation rights plan titled
the Stock Unit Plan (the Plan). Under the Plan, stock rights or units were
awarded to employees valued at the book value of the Company's stock at that
date. Subsequent increases in the book value of the stock accrue to the benefit
of the officer or employee, while decreases in the book value reduce accrued
benefits. Payments of amounts accrued under the Plan are payable at retirement
or resignation from the Company, except for cases of termination with cause, at
which time the units and benefits are forfeited. Deferred compensation liability
accrued under the Plan totaled $11,500, $17,435 and $17,435 at October 31, 1995
and 1996 and September 30, 1997, respectively. The change in the value of the
stock appreciation rights under the Plan are recorded as compensation expense as
the Company's net book value fluctuates.
Stock Purchase Agreement
The Company has entered into various agreements with certain of its officers
to provide for business continuity in the event of the death of the Company's
president and sole stockholder. The agreements provide for the purchase of life
insurance on the Company's president through split-dollar arrangements and term
insurance to provide funds for the officers of the Company to acquire the
president's stock in the event of his death. All amounts advanced by the Company
to pay premiums that are not subject to reimbursement from the officers shall be
collectible by the Company from the net equity of the insurance policy or from
the proceeds paid thereon.
Profit-Sharing and 401(k) Plan
Effective November 1, 1994, the Company established a defined contribution
plan for its employees. Employees over the age of 21 are eligible to participate
after one year of service with the Company. Under this plan, employees may elect
to defer up to 15 percent of their salary, subject to Internal Revenue Code
limits. The Company may make a discretionary match as well as a discretionary
profit-sharing contribution. The Company's contribution for the years ended
October 31, 1995 and 1996, totaled $16,970 and $22,466, respectively, and the
Company has accrued approximately $21,500 at September 30, 1997, for
contributions to be funded in the subsequent fiscal year.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit and notes payable. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
F-83
<PAGE> 159
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, workers' compensation, general liability and an umbrella policy.
The Company has not incurred significant uninsured losses on any of these items.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 16 percent of total sales to one
major customer during the years ended October 31, 1995 and 1996. During the year
ended September 30, 1997, the Company had sales of approximately 11% and 10% of
total sales to two major customers. During the period from October 1, 1997
through January 30, 1998, the Company had sales of approximately 25% and 12% of
total sales to two major customers.
In addition, the Company grants credit, generally without collateral, to its
customers, which are general contractors located primarily in Harris County,
Texas, and surrounding areas. Consequently, the Company is subject to potential
credit risk related to changes in business and economic factors within the
commercial and industrial markets in this geographic region. However, management
believes that its contract acceptance, billing and collection policies are
adequate to minimize the potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-84
<PAGE> 160
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charles P. Bagby, Co., Inc.:
We have audited the accompanying balance sheets of Charles P. Bagby, Co.,
Inc., an Alabama S-Corporation, as of December 31, 1996 and September 30, 1997,
and the related statements of operations, cash flows and stockholder's equity
for the years ended December 31, 1996 and September 30, 1997 and for the nine
months ended September 30, 1997 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 Charles P. Bagby, Co., Inc.
as of December 31, 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1996 and
September 30, 1997, and for the nine months ended September 30, 1997 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
F-85
<PAGE> 161
CHARLES P. BAGBY, CO., INC.
BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 624 $ 851
Accounts receivable --
Trade, net of allowance of $42 and $48,
respectively ............................................... 1,186 1,289
Retainage .................................................. 444 602
Notes receivable, related party ............................... 2 15
Costs and estimated earnings in excess of
billings on uncompleted contracts .......................... 167 755
Prepaid expenses and other current assets ..................... 359 323
-------- --------
Total current assets .................................. 2,782 3,835
PROPERTY AND EQUIPMENT, net ..................................... 221 246
-------- --------
Total assets .......................................... $ 3,003 $ 4,081
======== ========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued expenses ......................... $ 1,402 $ 1,821
Billings in excess of costs and estimated
earnings on uncompleted contracts .......................... 66 366
-------- --------
Total current liabilities ............................. 1,468 2,187
-------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY
Common stock, $1 par value, 1,000 shares
authorized and outstanding ................................. 1 1
Retained earnings ............................................. 1,534 1,893
-------- --------
Total stockholder's equity ............................ 1,535 1,894
-------- --------
Total liabilities and stockholder's equity ............ $ 3,003 $ 4,081
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-86
<PAGE> 162
CHARLES P. BAGBY, CO., INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM,
NINE MONTHS OCTOBER 1,
ENDED 1997
YEAR ENDED SEPTEMBER 30, YEAR ENDED THROUGH
DECEMBER 31, ---------------------- SEPTEMBER 30, JANUARY 30,
1996 1996 1997 1997 1998
------------ ----------- -------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES .......................... $ 7,634 $ 5,105 $ 9,243 $ 11,772 $ 2,623
COST OF SERVICES (including
depreciation) ................... 6,412 4,419 7,927 9,920 2,417
-------- -------- -------- -------- --------
Gross profit ............ 1,222 686 1,316 1,852 206
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES ......... 680 364 824 1,140 (6)
-------- -------- -------- -------- --------
Income from
operations ............ 542 322 492 712 212
-------- -------- -------- -------- --------
OTHER INCOME (EXPENSE):
Other ........................... 39 37 (4) (2) 4
-------- -------- -------- -------- --------
Other income
(expense), net ........ 39 37 (4) (2) 4
-------- -------- -------- -------- --------
NET INCOME ........................ $ 581 $ 359 $ 488 $ 710 $ 216
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-87
<PAGE> 163
CHARLES P. BAGBY, CO., INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
NINE MONTHS 1997
YEAR ENDED ENDED SEPTEMBER 30, YEAR ENDED THROUGH
DECEMBER 31, ------------------------ SEPTEMBER 30, JANUARY 30,
1996 1996 1997 1997 1998
------------ ----------- -------- ------------- -------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income .......................................... $ 581 $ 359 $ 488 $ 710 $ 216
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities --
Depreciation and amortization ..................... 21 15 17 23 6
Changes in operating assets and
liabilities -- (Increase) decrease in --
Accounts receivable ........................... (764) (159) (274) (879) 484
Costs and estimated earnings in excess
of billings on uncompleted
contracts ................................... (15) 94 (588) (697) 579
Prepaid expenses and other current
assets ...................................... (136) (183) 36 83 17
Increase (decrease) in --
Accounts payable and accrued expenses ......... 130 (582) 419 1,131 (1,097)
Billings in excess of costs and
estimated earnings on uncompleted
contracts ................................... 51 37 301 315 (259)
Other, net .................................... 30 20 2 12 19
-------- -------- -------- -------- --------
Net cash provided by (used in) operating
activities .................................. (102) (399) 401 698 (35)
-------- -------- -------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment ................. (20) (16) (54) (48) (1)
-------- -------- -------- -------- --------
Net cash used in investing activities ......... (20) (16) (54) (48) (1)
-------- -------- -------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings ............................... -- -- 230 230 650
Payments on short-term borrowings ................... -- -- (230) (230) --
Distributions to shareholders ....................... (360) (10) (120) (480) (1,408)
-------- -------- -------- -------- --------
Net cash used in financing activities ......... (360) (10) (120) (480) (758)
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ......................................... (482) (425) 227 170 (794)
CASH AND CASH EQUIVALENTS, beginning of
period .............................................. 1,106 1,106 624 681 851
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS, end of
period .............................................. $ 624 $ 681 $ 851 $ 851 $ 57
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest .......................................... $ 1 $ 1 $ 10 $ 10 $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-88
<PAGE> 164
CHARLES P. BAGBY, CO., INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
---------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1995 ............. 1,000 $ 1 $ 1,283 $ 1,284
Distributions to shareholder ......... -- -- (360) (360)
Net unrealized gains ................. -- -- 30 30
Net income ........................... -- -- 581 581
-------- -------- -------- --------
BALANCE, December 31, 1996 ............. 1,000 1 1,534 1,535
Distributions to shareholder ......... -- -- (120) (120)
Net unrealized losses ................ -- -- (9) (9)
Net income ........................... -- -- 488 488
-------- -------- -------- --------
BALANCE, September 30, 1997 ............ 1,000 1 1,893 1,894
Distributions to shareholders ........ -- -- (1,886) (1,886)
Net Income ........................... -- -- 216 216
-------- -------- -------- --------
BALANCE, January 30, 1998 .............. 1,000 $ 1 $ 223 $ 224
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-89
<PAGE> 165
CHARLES P. BAGBY, CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Charles P. Bagby, Co., Inc. (an Alabama S-Corporation), and its
majority-owned subsidiary, Haymaker Electric, Ltd. (collectively, the
"Company"), focuses on providing electrical system installation and repair
services primarily for mid-sized to large commercial facilities. The Company
performs the majority of its contract work under cost-plus-fee contracts and
fixed price contracts, with contract terms generally ranging from two to 18
months. The Company performs the majority of its work in the state of Alabama.
All significant intercompany activity has been eliminated in consolidation.
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 financial statements for the nine months ended September 30,
1996, are unaudited and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
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 the 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 debt instruments with an original
maturity of three months or less when purchased to be cash equivalents.
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities
for the period from October 1, 1997 through January 30, 1998:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
1997
THROUGH
JANUARY 30,
1998
-----------
<S> <C>
Property distributions............................................. $ 176
Marketable securities distribution................................. 265
Life insurance policy cash surrender value distribution............ 37
</TABLE>
F-90
<PAGE> 166
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $21,000, $23,000 and $6,000 for the years ended December 31, 1996
and September 30, 1997 and the period from October 1, 1997 through January 30,
1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
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, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company is an Alabama sub-chapter S corporation and is not subject to
federal income tax. The earnings of the Company are taxable to the individual
stockholder.
F-91
<PAGE> 167
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the financial position or results of operations of the
Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1996 1997
------------ ------------ -------------
<S> <C> <C> <C>
Transportation equipment ................ 5-6 $ 52 $ 84
Machinery and equipment ................. 5-10 33 33
Buildings and leasehold improvements .... 40 208 208
Furniture and fixtures .................. 3-10 83 93
----- -----
376 418
Less -- Accumulated depreciation
and amortization ...................... (155) (172)
----- -----
Property and equipment, net ... $ 221 $ 246
===== =====
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Balance at beginning of period ......... $22 $26
Additions to costs and expenses ........ 20 22
--- ---
Balance at end of period ............... $42 $48
=== ===
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Accounts payable, trade ................ $ 685 $1,120
Accrued compensation and benefits ...... 175 624
Other accrued expenses ................. 542 77
------ ------
$1,402 $1,821
====== ======
</TABLE>
F-92
<PAGE> 168
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
<S> <C> <C>
Costs incurred on contracts in progress ................. $ 4,304 $ 5,937
Estimated earnings, net of losses ....................... 546 1,321
------- -------
4,850 7,258
Less -- Billings to date................................. (4,749) (6,869)
------- -------
$ 101 $ 389
======= =======
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................. $ 167 $ 755
Less -- Billings in excess of costs and
estimated earnings on uncompleted contracts ........... (66) (366)
------- -------
$ 101 $ 389
======= =======
</TABLE>
5. LONG-TERM DEBT:
The Company had a $650,000 line of credit with a bank. The line of credit
expired June 30, 1998, and bore interest at 1 percent over the prime lending
rate. The line of credit was secured by a stockholder of a partner corporation.
No borrowings were outstanding under this line of credit at December 31, 1996 or
September 30, 1997. The line of credit was not renewed.
6. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit-sharing plan. The plan
provides for the Company to match 3 percent of the gross salary of each employee
subject to certain limitations. All participants are immediately fully vested.
Total contributions by the Company under the plan were approximately $51,000,
$106,000 and $23,000 for the years ended December 31, 1996 and September 30,
1997 and the period from October 1, 1997 through January 30, 1998, respectively.
7. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, a line of credit and
short-term borrowings. The Company believes that the carrying value of these
instruments on the accompanying balance sheets approximates their fair value.
8. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
9. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales comprising approximately 10%, 11% and 11% of total sales
to three major customers during the years ended December 31, 1996 and September
30, 1997, respectively. The Company had sales comprising approximately 18%, 17%,
15% and 10% of total sales to four major customers during the period from
October 1, 1997 through January 30, 1998.
F-93
<PAGE> 169
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Amber Electric, Inc.:
We have audited the accompanying balance sheets of Amber Electric, Inc., a
Florida corporation, as of December 31, 1995 and 1996 and September 30, 1997,
and the related statements of operations, cash flows and stockholder's equity
for the years then ended 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 Amber Electric, Inc. as of
December 31, 1995 and 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended 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
F-94
<PAGE> 170
AMBER ELECTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
-------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ..................................... $ 83 $ 565 $ 988
Accounts receivable--
Trade, net of allowance of $28, $40 and $51,
respectively ........................................... 1,159 1,382 2,365
Retainage .................................................. 468 518 470
Inventories ................................................... 39 28 25
Costs and estimated earnings in excess of billings
on uncompleted contracts ................................... 25 151 119
Employee advances (Note 8) .................................... 2 29 4
Note receivable, related party (Note 8) ....................... -- -- 123
Deferred tax asset ............................................ 36 65 63
Prepaid expenses and other current assets ..................... 22 -- 54
------- ------- -------
Total current assets .................................. 1,834 2,738 4,211
PROPERTY AND EQUIPMENT, net ..................................... 284 380 516
NOTE RECEIVABLE, related party (Note 8) ......................... 37 58 --
------- ------- -------
Total assets .......................................... $ 2,155 $ 3,176 $ 4,727
======= ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt .......................... $ 96 $ 133 $ 179
Line of credit ................................................ 101 -- --
Accounts payable and accrued expenses ......................... 696 1,157 1,276
Income taxes payable .......................................... 3 244 676
Billings in excess of costs and estimated earnings
on uncompleted contracts ................................... 355 408 196
Note payable, related party (Note 8) .......................... -- 100 --
Other ......................................................... 129 97 122
------- ------- -------
Total current liabilities ............................. 1,380 2,139 2,449
------- ------- -------
LONG-TERM DEBT, net of current maturities ....................... 573 538 568
DEFERRED TAX LIABILITY .......................................... 38 45 52
COMMITMENTS AND CONTINGENCIES (Note 11)
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 7,500 shares
authorized, 1,100 shares issued and
outstanding ................................................ 1 1 1
Retained earnings ............................................. 597 887 2,091
Treasury stock, 539 shares, at cost ........................... (434) (434) (434)
------- ------- -------
Total stockholder's equity ............................ 164 454 1,658
------- ------- -------
Total liabilities and stockholder's
equity .............................................. $ 2,155 $ 3,176 $ 4,727
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE> 171
AMBER ELECTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED NINE MONTHS ENDED 1997
DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
------------------- -------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES................................. $ 9,728 $13,878 $10,572 $13,080 $16,386 $ 6,677
COST OF SERVICES (including
depreciation).......................... 8,635 12,215 8,710 9,910 13,415 5,182
------- ------- ------- ------- ------- -------
Gross profit ................... 1,093 1,663 1,862 3,170 2,971 1,495
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES................ 957 1,160 978 1,197 1,379 2,132
------- ------- ------- ------- ------- -------
Income (loss) from Operations... 136 503 884 1,973 1,592 (637)
------- ------- ------- ------- ------- --------
OTHER INCOME (EXPENSE):
Interest expense....................... (65) (51) (51) (45) (45) (99)
Other.................................. 24 36 10 43 69 18
------- ------- ------- ------- ------- -------
Other income (expense), Net..... (41) (15) (41) (2) 24 (81)
------- ------- ------- ------- ------- --------
INCOME (LOSS) BEFORE PROVISION FOR
INCOME TAXES........................... 95 488 843 1,971 1,616 (718)
PROVISION (BENEFIT) FOR INCOME TAXES..... 36 198 333 767 632 (276)
------- ------- ------- ------- ------- --------
NET INCOME (LOSS)........................ $ 59 $ 290 $ 510 $ 1,204 $ 984 $ (442)
======= ======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE> 172
AMBER ELECTRIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS OCTOBER 1,
YEAR ENDED ENDED 1997
DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
------------------ ------------------ SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ...................................... $ 59 $ 290 $ 510 $ 1,204 $ 984 $ (442)
Adjustments to reconcile net income (loss) to
net cash
Provided by (used in) operating activities--
Depreciation and amortization ........................ 62 87 61 146 172 46
Bad debt expense ..................................... 17 35 9 11 37 5
(Gain) Loss on sale of property and equipment ........ -- 5 4 (1) -- --
Increase in cash surrender value of life insurance
Policy ............................................. (14) -- -- -- -- --
Deferred income taxes ................................ (41) 24 (31) 34 89 (24)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable ............................. (299) (308) (112) (946) (1,142) (1,633)
Inventories ..................................... 15 11 3 3 11 (25)
Costs and estimated earnings in excess of
billings on uncompleted contracts ............. (6) (126) (129) 32 35 (12)
Employee advances ............................... 14 (27) (15) 25 13 4
Prepaid expenses and other current assets ....... (7) 22 (19) (54) (13) 41
Note receivable, related party .................. -- (21) (21) (65) (65) 123
Increase (decrease) in --
Accounts payable and accrued expenses ........... 20 461 188 119 392 1,107
Billings in excess of costs and estimated
earnings on uncompleted contracts ............. 304 53 (171) (212) 12 448
Income taxes payable ............................ 49 163 377 432 218 (295)
Other, net ........................................... 4 1 -- (7) (6) --
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities .................................... 177 670 654 721 737 (657)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment ........... 5 2 2 8 8 --
Additions of property and equipment .................... (155) (190) (157) (290) (323) (142)
------- ------- ------- ------- ------- -------
Net cash used in investing activities ........... (150) (188) (155) (282) (315) (142)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Note payable, related party ............................ -- 100 -- (100) -- --
Borrowings of line of credit ........................... 101 -- -- -- -- --
Payments of line of credit ............................. (125) (101) (101) -- -- --
Borrowings of long-term debt ........................... 104 131 95 200 236 707
Payments of long-term debt ............................. (74) (130) (83) (116) (163) (64)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities .................................... 6 -- (89) (16) 73 643
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ................................... 33 482 410 423 495 (156)
CASH AND CASH EQUIVALENTS, beginning of period ........... 50 83 83 565 493 988
------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period ................. $ 83 $ 565 $ 493 $ 988 $ 988 $ 832
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest ............................................. $ 65 $ 51 $ 51 $ 45 $ 45 $ 99
Income taxes ......................................... $ 27 $ 10 $ 8 $ 301 $ 303 $ 44
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-97
<PAGE> 173
AMBER ELECTRIC, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
----------------- RETAINED TREASURY STOCKHOLDER'S
SHARES AMOUNT EARNINGS STOCK EQUITY
------ ------- -------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994............. 1,100 $ 1 $ 538 $ (434) $ 105
Net income........................... -- -- 59 -- 59
----- ------- ------- ------ -------
BALANCE, December 31, 1995............. 1,100 1 597 (434) 164
Net income........................... -- -- 290 -- 290
----- ------- ------- ------ -------
BALANCE, December 31, 1996............. 1,100 1 887 (434) 454
Net income (unaudited)............... -- -- 1,204 -- 1,204
----- ------- ------- ------ -------
BALANCE, September 30, 1997............ 1,100 1 2,091 (434) 1,658
Net loss.............................. -- -- (442) -- (442)
----- ------- -------- ------ -------
BALANCE, January 30, 1998.............. 1,100 $ 1 $ 1,649 $ (434) $ 1,216
===== ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements
F-98
<PAGE> 174
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Amber Electric, Inc. (the Company), a Florida corporation, focuses on
providing electrical system installation and repair services primarily for
residential and mid-sized to large commercial facilities. The Company performs
the majority of its contract work under fixed price contracts, with contract
terms generally ranging from two to 12 months. The Company performs the majority
of its work in central Florida.
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 financial statements for the nine months ended September 30,
1996 and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
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 the 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.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line and declining-balance methods over the estimated useful
lives of the related assets. Leasehold improvements are capitalized and
amortized over the estimated useful life of the asset. Depreciation and
amortization expense was approximately $62,000, $87,000, $172,000 and $46,000
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.
F-99
<PAGE> 175
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, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
one year after servicing of existing electrical systems.
Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities, and are measured using enacted tax rates
and laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results
F-100
<PAGE> 176
could differ from those estimates. Reference is made to the "Revenue
Recognition" section of this footnote for discussion of significant estimates
reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ----------- ----------- -------------
<S> <C> <C> <C> <C>
Transportation equipment........... 3-7 $ 430 $ 541 $ 631
Machinery and equipment............ 3-7 101 78 99
Leasehold improvements............. 5-39 76 74 87
Furniture and fixtures............. 3-7 121 91 191
------ ------ -------
728 784 1,008
Less -- Accumulated depreciation
and amortization................. (444) (404) (492)
------ ------ -------
Property and equipment,
net....................... $ 284 $ 380 $ 516
====== ====== =======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
<S> <C> <C> <C>
Balance at beginning of period.............. $ 17 $ 28 $ 40
Additions to costs and expenses............. 17 35 11
Deductions for uncollectible receivables
written off and recoveries................ (6) (23) --
---- ---- ----
Balance at end of period.................... $ 28 $ 40 $ 51
==== ==== ====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Accounts payable, trade ............. $ 537 $ 882 $1,006
Accrued compensation and benefits ... 84 110 187
Other accrued expenses .............. 75 165 83
------ ------ ------
$ 696 $1,157 $1,276
====== ====== ======
</TABLE>
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress .............. $ 1,912 $ 2,100 $ 1,582
Estimated earnings, net of losses .................... 333 258 192
------- ------- -------
2,245 2,358 1,774
Less -- Billings to date ............................. (2,575) (2,615) (1,851)
------- ------- -------
$ (330) $ (257) $ (77)
======= ======= =======
Costs and estimated earnings in excess of billings
on uncompleted contracts ........................... $ 25 $ 151 $ 119
Less -- Billings in excess of costs and
estimated earnings on uncompleted
contracts ..................................... (355) (408) (196)
------- ------- -------
$ (330) $ (257) $ (77)
======= ======= =======
</TABLE>
F-101
<PAGE> 177
5. LONG-TERM DEBT:
Long-term debt consists of notes payable to various banks. The debt is
secured by certain equipment. The notes are payable in monthly installments
including interest at rates ranging from 8 percent to 10.9 percent.
The Company has a note payable to a former stockholder payable in monthly
installments of $4,333, including interest at 7.5 percent, due August 2004. The
debt is guaranteed by the majority stockholder. The balance of such debt was
approximately $330,000, $302,000 and $279,000 at December 31, 1995, 1996 and
September 30, 1997, respectively.
The Company also has a note payable outstanding to an individual with a 5
percent stated interest rate and an 8.12 percent imputed interest rate. The note
is payable in monthly installments of principal and interest of $1,893,
collateralized by equipment and inventories, and is due February 2005. The
balance of the note was approximately $168,000, $153,000 and $142,000 at
December 31, 1995, 1996 and September 30, 1997, respectively.
The maturities of long-term debt as of September 30, 1997, are as follows
(in thousands):
<TABLE>
<S> <C>
Year ending December 31 --
1998.................... $ 179
1999.................... 155
2000.................... 115
2001.................... 76
2002.................... 70
Thereafter.............. 152
-----
$ 747
=====
</TABLE>
At September 30, 1997 and December 31, 1996, the Company had a $500,000 line
of credit with a bank, collateralized by accounts receivable and certain other
assets. Interest is payable monthly at the bank's prime rate (8.5 percent at
September 30, 1997). The agreement stipulates a minimum interest rate of 8
percent. Any amounts available are limited to 75 percent of eligible accounts
receivable, as defined. At September 30, 1997 and December 31, 1996, the entire
amount of the line remains available to be borrowed. The line of credit is
subject to a continuing guarantee by the Company's majority stockholder. The
line of credit is due on demand, but in no event no later than July 5, 1998.
At December 31, 1995, the maximum amount available under such line of credit
was approximately $99,000 as the Company had a $200,000 line of credit with the
bank.
6. LEASES:
The Company leases office space from the majority stockholder under a
month-to-month operating lease. Rent expense incurred under this related-party
lease was approximately $67,000, $81,000, $83,000 and $29,000 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.
There are no future minimum lease payments under this operating lease.
F-102
<PAGE> 178
7. INCOME TAXES (IN THOUSANDS):
Federal income taxes are as follows:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
DECEMBER 31, YEAR ENDED THROUGH
---------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1997 1998
---- ---- ------------- -----------
<S> <C> <C> <C> <C>
Federal --
Current ............ $ 1 $ 224 $ 510 $(251)
Deferred ........... 30 (54) 32 8
State --
Current ............ -- 27 95 -
Deferred ........... 5 1 (5) (33)
---- ----- ----- -----
$ 36 $ 198 $ 632 $(276)
==== ===== ===== =====
</TABLE>
Actual income tax expense (benefit) differs from income tax expense
(benefit) computed by applying the U.S. federal statutory corporate rate of 35
percent to income before provision for income taxes as follows:
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
DECEMBER 31, YEAR ENDED THROUGH
----------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1997 1998
----- ----- ------------- -----------
<S> <C> <C> <C> <C>
Provision at the statutory rate ................ $ 33 $ 171 $ 565 $(251)
Increase resulting from --
State income taxes, net of related
federal benefit ........................... 3 19 59 (25)
Permanent differences, primarily meals and
entertainment ............................. -- 8 8 --
----- ----- ----- -----
$ 36 $ 198 $ 632 $(276)
===== ===== ===== =====
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Deferred tax assets --
Allowance for doubtful accounts ................... $ 11 $ 17 $ 20
Other accrued expenses not deducted for tax
purposes ....................................... 25 48 43
----- ----- -----
Total ..................................... 36 65 63
----- ----- -----
Deferred tax liabilities --
Accounting for long-term contracts ................ (129) (97) (122)
Bases differences on property and equipment and
capital lease accounting ....................... (38) (45) (52)
----- ----- -----
Total ..................................... (167) (142) (174)
----- ----- -----
Net deferred income tax liabilities ....... $(131) $ (77) $(111)
===== ===== =====
</TABLE>
The net deferred tax assets and liabilities are comprised of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Deferred tax assets --
Current .............................. $ 36 $ 65 $ 63
Long-term ............................ -- -- --
----- ----- -----
Total ........................ 36 65 63
----- ----- -----
Deferred tax liabilities --
Current .............................. (129) (97) (122)
Long-term ............................ (38) (45) (52)
----- ----- -----
Total ........................ (167) (142) (174)
----- ----- -----
Net deferred tax liability ... $(131) $ (77) $(111)
===== ===== =====
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
During 1995, the Company transferred its interest in the cash surrender
value of life insurance policies in exchange for a note receivable bearing
annual interest of 4 percent to a partnership controlled by the majority
stockholder of the Company. The entire
F-103
<PAGE> 179
principal and accrued interest is due August 2005. The Company continues to pay
premiums for this policy, also increasing the receivable.
The Company had a note payable to the majority stockholder at December 31,
1996, which represented a bonus to the stockholder and was loaned to the Company
without interest attached. The balance was subsequently paid to the stockholder.
The Company will advance money to employees on occasion. Advanced amounts
are based on certain levels of employment and are repaid to the Company based on
a variety of repayment plans.
9. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit-sharing plan. The plan
provides for the Company to match, on a discretionary basis, one-half of the
first 4 percent contributed by each employee. Total contributions by the Company
under the plan were approximately $31,000, $44,000, $56,000 and $0 for the years
ending December 31, 1995, 1996 and September 30, 1997 and for the period from
October 1, 1997 through January 30, 1998, respectively. The Company had accrued
approximately $5,000 at September 30, 1997, for contributions to be funded in
the subsequent fiscal year.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, employee advances, notes receivable, a line of credit,
accounts payable, notes payable and long-term debt. The Company believes that
the carrying value of these instruments on the accompanying balance sheets
approximates their fair value.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
The Company provides for workers' compensation insurance through a partially
self-insured plan whereby the Company is responsible for certain incurred losses
with a maximum of 125 percent of standard state-rated workers' compensation
premiums. Estimated claims incurred during the years ended December 31, 1995,
1996 and September 30, 1997 were not material. Accordingly, the Company has not
recorded any reserves for its portion of self-insurance claims. During 1997, the
Company enrolled in a secured individual preferred dividend safety incentive
program for workers' compensation with a maximum premium of 100 percent of the
total normal state-rated premium. Employee health insurance is provided for
under a fully insured medical plan consisting of HMO and POS programs.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 16 percent of total sales to one
major customer for the year ended December 31, 1995, sales of approximately 15
and 13 percent of total sales to two major customers for the year ended December
31, 1996, sales of approximately 22 percent of total sales to one major customer
during the year ended September 30, 1997, and sales of approximately 51, 23 and
18 percent of total sales to three customers 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 real estate operations, general contractors, etc., located
primarily in central Florida. Consequently, the Company is subject to potential
credit risk related to changes in business and economic factors within the
central Florida region. However, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-104
<PAGE> 180
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Daniel Electrical Contractors, Inc. and
Daniel Electrical of Treasure Coast Inc.:
We have audited the accompanying combined balance sheets of Daniel
Electrical Contractors, Inc., a Florida corporation, and Daniel Electrical of
Treasure Coast Inc., a Florida corporation, as of December 31, 1995 and 1996 and
September 30, 1997, and the related combined statements of operations, cash
flows and stockholder's equity for the years then ended and for the nine months
ended September 30, 1997, and for the period from October 1, 1997 through
January 30, 1998. These combined financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
combined financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the combined financial position of Daniel
Electrical Contractors, Inc. and Daniel Electrical of Treasure Coast Inc., as of
December 31, 1995 and 1996 and September 30, 1997, and the combined results of
their operations and their cash flows for the years then ended and for the nine
months ended September 30, 1997, 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
F-105
<PAGE> 181
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ASSETS
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ................................ $ 62 $ 411 $ 917
Investments .............................................. 393 694 1,504
Accounts receivable --
Trade, net of allowance of $68, $69 and $115,
respectively ........................................ 1,819 1,444 3,443
Retainage, net of allowance of $--, $12 and $12,
respectively ........................................ 815 1,353 1,294
Employee receivables (Note 7) ......................... 8 17 30
Inventories .............................................. 103 84 23
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................. 119 719 510
Prepaid expenses and other current assets ................ 24 35 166
------ ------ ------
Total current assets ............................. 3,343 4,757 7,887
PROPERTY AND EQUIPMENT, net ................................ 322 371 541
------ ------ ------
Total assets ..................................... $3,665 $5,128 $8,428
====== ====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ..................... $ 46 $ 34 $ 62
Accounts payable and accrued expenses .................... 1,325 946 1,840
Billings in excess of costs and estimated earnings on
uncompleted contracts ................................. 121 752 1,370
Deposit on contract in progress .......................... -- 500 --
Other current liabilities (Note 7) ....................... 477 114 81
------ ------ ------
Total current liabilities ........................ 1,969 2,346 3,353
------ ------ ------
LONG-TERM DEBT, net of current maturities .................. 42 52 102
OTHER LONG-TERM LIABILITIES (Note 7) ....................... 483 483 483
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 and $0.01 par value, 7,500 and 2,000
shares authorized, 7,500 and 100 shares issued and
outstanding at December 31, 1995, 1996, and
September 30, 1997 for Daniel Electrical
Contractors, Inc. and Daniel Electrical of Treasure
Coast Inc., respectively .............................. 8 8 8
Retained earnings ........................................ 1,110 2,111 4,131
Unrealized gain on securities ............................ 53 128 351
------ ------ ------
Total stockholder's equity ....................... 1,171 2,247 4,490
------ ------ ------
Total liabilities and stockholder's equity ....... $3,665 $5,128 $8,428
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-106
<PAGE> 182
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED NINE MONTHS 1997
DECEMBER 31, ENDED SEPTEMBER 30, YEAR ENDED THROUGH
-------------------- --------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ----------- ------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES....................... $12,049 $12,585 $ 8,846 $14,670 $ 18,409 $ 9,132
COST OF SERVICES (including
depreciation)................ 11,725 9,713 6,675 10,480 13,518 6,789
------- ------- ------- ------- -------- --------
Gross profit......... 324 2,872 2,171 4,190 4,891 2,343
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES...... 1,502 1,884 1,360 1,792 2,316 1,312
------- ------- ------- ------- -------- --------
Income (loss) from
operations......... (1,178) 988 811 2,398 2,575 1,031
------- ------- ------- ------- -------- --------
OTHER INCOME (EXPENSE):
Interest expense............. (46) (73) (58) (45) (60) (20)
Other........................ 71 86 48 62 100 16
------- ------- ------- ------- -------- --------
Other income
(expense), net..... 25 13 (10) 17 40 (4)
------- ------- ------- ------- -------- ---------
NET INCOME (LOSS).............. $(1,153) $ 1,001 $ 801 $ 2,415 $ 2,615 $ 1,027
======= ======= ======= ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-107
<PAGE> 183
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED NINE MONTHS 1997
DECEMBER 31, ENDED SEPTEMBER 30, YEAR ENDED THROUGH
---------------------- ------------------------ SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ----------- ------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................ $(1,153) $ 1,001 $ 801 $ 2,415 $ 2,615 $ 1,027
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization .............. 113 125 100 116 141 57
Provision for bad debts .................... 29 205 23 47 229 34
Loss on abandonment of leasehold
improvements ............................. -- -- -- 34 34 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable ................... 423 (185) (577) (1,998) (1,606) (971)
Inventories ........................... 14 19 43 61 37 (190)
Costs and estimated earnings in
excess of billings on uncompleted
contracts ........................... 733 (600) (436) 209 45 (11)
Prepaid expenses and other current
assets .............................. 25 (11) 17 (130) (158) 150
Increase (decrease) in --
Accounts payable and accrued
expenses ............................ (567) (379) (151) 895 667 146
Deposits on contracts in progress ..... -- 500 500 (500) (500) --
Billings in excess of costs and
estimated earnings on uncompleted
contracts ........................... (92) 631 701 618 548 131
Other current liabilities ............. (42) (87) (8) 11 (68) (81)
------- ------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities ................ (517) 1,219 1,013 1,778 1,984 292
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Purchase of investments ...................... (31) (306) (3) (586) (889) (536)
Additions of property and equipment .......... (97) (175) (84) (353) (444) (5)
------- ------- ------- ------- ------- -------
Net cash used in investing
activities .......................... (128) (481) (87) (939) (1,333) (541)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Borrowings of long-term debt ................. 350 17 -- 154 171 4,062
Payments of long-term debt ................... (44) (406) (323) (92) (175) (15)
Distributions to stockholders ................ -- -- -- (395) (395) (4,005)
------- ------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities ................ 306 (389) (323) (333) (399) 42
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS ........................ (339) 349 603 506 252 (207)
CASH AND CASH EQUIVALENTS, beginning
of period ................................... 401 62 62 411 665 917
------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period ..................................... $ 62 $ 411 $ 665 $ 917 $ 917 $ 710
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION
Cash paid for --
Interest ..................................... $ 20 $ 113 $ 18 $ 7 $ 102 $ 17
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-108
<PAGE> 184
DANIEL ELECTRICAL CONTRACTORS INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK GAIN (LOSS) TOTAL
--------------------- RETAINED ON STOCKHOLDER'S
SHARES AMOUNT EARNINGS SECURITIES EQUITY
------- ------- -------- ---------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 ..................... 7,500 $ 8 $ 2,263 $ (13) $ 2,258
Issuance of stock in Daniel Electrical of
Treasure Coast Inc. ....................... 100 -- -- -- --
Change in unrealized gain on securities ...... -- -- -- 66 66
Net loss ..................................... -- -- (1,153) -- (1,153)
------- ------- ------- ------- -------
BALANCE, December 31, 1995 ..................... 7,600 8 1,110 53 1,171
Change in unrealized gain on securities ...... -- -- -- 75 75
Net income ................................... -- -- 1,001 -- 1,001
------- ------- ------- ------- -------
BALANCE, December 31, 1996 ..................... 7,600 8 2,111 128 2,247
Distributions to stockholders ................ -- -- (395) -- (395)
Change in unrealized gain on securities ...... -- -- -- 223 223
Net income ................................... -- -- 2,415 -- 2,415
------- ------- ------- ------- -------
BALANCE, September 30, 1997 .................... 7,600 8 4,131 351 4,490
Change in unrealized gains on securities ..... -- -- -- 33 33
Distributions to stockholders ................ -- -- (5,123) (384) (5,507)
Net income ................................... -- -- 1,027 -- 1,027
------- ------- ------- ------- -------
BALANCE, January 30, 1998 ...................... 7,600 $ 8 $ 35 $ -- $ 43
======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these
combined financial statements.
F-109
<PAGE> 185
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure Coast
Inc., (collectively, the Company), both Florida corporations focuses on
providing electrical system installation and repair services primarily for
residential and mid-sized to large commercial facilities. The Company performs
the majority of its contract work under fixed price contracts with contract
terms generally ranging from six to 18 months. The Company performs the majority
of its work in Dade County, Florida.
The combined financial statements include the accounts of Daniel Electrical
Contractors, Inc. and Daniel Electrical of Treasure Coast Inc. These entities
are related by virtue of common ownership. All material intercompany
transactions and balances have been eliminated in combination.
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 financial statements for the nine months ended September 30,
1996 are unaudited and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
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 the 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.
Supplemental Cash Flow Information
The Company distributed certain net assets to a stockholder of the Company
totaling approximately $1,469,000.
Investments
Investments in securities are classified as securities available for sale
and consist of equity securities. Unrealized holding gains and losses on
securities available-for-sale are reported as net amount as a separate component
of stockholder's equity.
F-110
<PAGE> 186
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation and
amortization expense was $113,000, $125,000, $141,000 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.
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, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company itself is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their share of the
Company's taxable earnings or losses in their personal tax returns.
Consequently, the accompanying financial statements of the Company do not
include a
F-111
<PAGE> 187
provision for current or deferred income taxes. The Company intends to terminate
its S Corporation status concurrently with the effective date of the Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's combined financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairments would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the combined financial position or results of operations of
the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ---------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
<S> <C> <C> <C> <C>
Transportation equipment ................. 5 $ 446 $ 517 $ 597
Machinery and equipment .................. 5 120 134 151
Computer and telephone equipment ......... 5 92 114 141
Leasehold improvements ................... 5 116 144 209
Furniture and fixtures ................... 5 26 29 29
------- ------- -------
800 938 1,127
Less -- Accumulated depreciation
and amortization ....................... (478) (567) (586)
------- ------- -------
Property and equipment, net ... $ 322 $ 371 $ 541
======= ======= =======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
<S> <C> <C> <C>
Balance at beginning of period ............. $ 47 $ 68 $ 87
Additions to costs and expenses ............ 29 205 229
Deductions for uncollectible receivables
written off and recoveries ............... (8) (192) (189)
----- ----- -----
Balance at end of period ......... $ 68 $ 81 $ 127
===== ===== =====
</TABLE>
F-112
<PAGE> 188
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Accounts payable, trade ................ $1,009 $ 686 $1,296
Accrued compensation and benefits ...... 76 28 180
Other accrued expenses ................. 240 232 364
------ ------ ------
$1,325 $ 946 $1,840
====== ====== ======
</TABLE>
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------ SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress ............. $ 6,197 $ 8,381 $ 11,760
Estimated earnings, net of losses ................... 1,238 2,993 4,120
-------- -------- --------
7,435 11,374 15,880
Less -- Billings to date ............................ (7,437) (11,407) (16,740)
-------- -------- --------
$ (2) $ (33) $ (860)
======== ======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts ................. $ 119 $ 719 $ 510
Less -- Billings in excess of costs and estimated
earnings on uncompleted contracts ................. (121) (752) (1,370)
-------- -------- --------
$ (2) $ (33) $ (860)
======== ======== ========
</TABLE>
5. LONG-TERM DEBT:
Long-term debt consists of installment obligations collateralized by certain
transportation and computer equipment, and due in various monthly installments,
including interest ranging from 6 percent to 11 percent.
The maturities of long-term debt at September 30, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $ 62
1999 44
2000 36
2001 15
2002 7
------
$ 164
</TABLE>
The Company has a $400,000 open line of credit with a bank. The line of
credit bears interest based upon the prime lending rate, which was 8.25% at
September 30, 1997. The line of credit is secured by the Company's investment in
securities and borrowings under such line of credit are due on demand. No
borrowings were outstanding under this line of credit at September 30, 1997.
6. LEASES:
In February of 1997, the Company leased its Miami facility from a Limited
Partnership which is controlled by the Company's stockholder. Prior to February
1997, the Company leased office space from a third party, and such lease expired
January 1997. The rent paid under this lease was approximately $71,000 for
December 31, 1996. The Company leases its Vero Beach facility from a company
which is owned by the Company's stockholder and is leased on a month-to-month
basis.
7. RELATED-PARTY TRANSACTIONS:
Related-Party Notes Payable
The Company has a $483,000 subordinated long-term note payable to the
president of the Company at December 31, 1995, 1996 and at September 30, 1997.
The Company also has a $175,000, $115,000 and $81,000 note payable due on demand
to the president of the Company at the respective periods.
F-113
<PAGE> 189
Related-Party Accounts Receivable
The Company has an $8,000, $8,000 and $18,000 account receivable due from
the president of the Company at December 31, 1995, 1996 and at September 30,
1997, respectively. The Company also has a $9,000 and $12,000 employee
receivable at December 31, 1996 and at September 30, 1997, respectively.
Related-Party Entertainment Expense
Costs related to related-party entertainment expense amounted to $15,000,
$8,000, $4,000 and $0 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.
Related-Party Compensation
The Company paid $58,000, $72,000, $72,000 and $0 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 to a related-party company for
compensation.
8. EMPLOYEE BENEFIT PLAN:
The Company has a nonqualifying discriminatory pension plan for certain
key executives. Contributions are subject to management's discretion. Total
contributions by the Company under the plan were approximately $9,000, $14,000,
$14,000 and $0 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.
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
investments, accounts receivable, accounts payable, a line of credit, notes
payable and long-term debt. The Company believes that the carrying value of
these instruments on the accompanying balance sheets approximates their fair
value.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
The Company is self-insured for medical claims up to $14,000 per year in
total for all covered individuals. Additionally, the Company is part of the
state's workers' compensation plan and is responsible for claims up to $100,000
per accident with a maximum aggregate exposure for 24 months of $500,000. Claims
in excess of these amounts are covered by a stop-loss policy. Under the state's
policy, the Company has a $305,000 letter of credit which expires April 1, 1998.
The Company has recorded reserves for its portion of self-insured claims based
on estimated claims incurred through March 31, 1995 and 1996, December 31, 1996,
and September 30, 1997.
11. INVESTMENTS AVAILABLE-FOR-SALE:
Investments in securities consist of equity securities and mutual funds with
an aggregate market value of $393,000, $694,000 and $1,504,000 at December 31,
1995, 1996 and September 30, 1997, respectively, and unrealized holding gains of
$66,000, $75,000 and $237,000 for the respective periods.
F-114
<PAGE> 190
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 32 percent and 21 percent of total
sales to two major customers during the year ended December 31, 1995, sales of
approximately 29 percent and 25 percent of total sales to two major customers
during the year ended December 31, 1996, sales of approximately 30 percent and
38 percent of total sales to two major customers during the year ended September
30, 1997, and sales of approximately 35 percent, 21 percent and 21 percent of
total sales to three major customers for the period from October 1, 1997 through
January 30, 1998.
In addition, the Company grants credit, generally without collateral, to its
customers, which are general contractors located primarily in southern Florida.
Consequently, the Company is subject to potential credit risk related to changes
in business and economic factors within the southern Florida region. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
F-115
<PAGE> 191
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Summit Electric of Texas, Incorporated:
We have audited the accompanying balance sheets of Summit Electric of Texas,
Incorporated, a Texas corporation, as of March 31, 1997 and September 30, 1997,
and the related statements of operations, cash flows and stockholder's equity
for the years then ended 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 Summit Electric of Texas,
Incorporated as of March 31, 1997 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended 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
F-116
<PAGE> 192
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents .................................... $ 57 $ 157
Accounts receivable--
Trade, net of allowance of $112 and $122, respectively .... 2,270 2,543
Retainage ................................................. 128 91
Receivable from stockholder ............................... -- 66
Other receivables ......................................... 6 8
Deferred tax asset ........................................... 69 69
Costs and estimated earnings in excess of billings
on uncompleted contracts .................................. 239 178
Prepaid expenses and other current assets .................... 25 27
------ ------
Total current assets ................................. 2,794 3,139
NOTES RECEIVABLE FROM RELATED PARTIES .......................... 270 268
PROPERTY AND EQUIPMENT, net .................................... 223 180
OTHER ASSETS ................................................... 49 50
------ ------
Total assets ......................................... $3,336 $3,637
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Short-term debt, including current maturities of
long-term debt ............................................ $ 819 $ 808
Accounts payable and accrued expenses ........................ 974 1,494
Billings in excess of costs and estimated earnings
on uncompleted contracts .................................. 436 182
Other current liabilities .................................... 3 19
------ ------
Total current liabilities ............................ 2,232 2,503
------ ------
LONG-TERM DEBT, net of current maturities ...................... 101 88
DEFERRED TAX LIABILITY ......................................... 11 11
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 10,000 shares
authorized, 1,000 shares issued and
outstanding ............................................... 1 1
Retained earnings ............................................ 991 1,034
------ ------
Total stockholder's equity ........................... 992 1,035
------ ------
Total liabilities and stockholder's
equity ............................................. $3,336 $3,637
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-117
<PAGE> 193
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
SIX MONTHS 1997
YEAR ENDED ENDED SEPTEMBER 30, YEAR ENDED THROUGH
MARCH 31, -------------------- SEPTEMBER 30, JANUARY 30,
1997 1996 1997 1997 1998
---------- ------- ------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES.......................... $ 10,565 $ 5,735 $ 6,165 $ 10,995 $ 3,735
COST OF SERVICES (including
depreciation)................... 9,157 4,946 5,243 9,454 3,123
-------- ------- ------- -------- --------
Gross profit............ 1,408 789 922 1,541 612
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES......... 1,340 699 822 1,463 878
-------- ------- ------- -------- --------
Income (loss) from
operations............ 68 90 100 78 (266)
-------- ------- ------- -------- ---------
OTHER INCOME (EXPENSE):
Interest expense................ (56) (19) (42) (79) (34)
Other........................... 25 13 11 23 8
-------- ------- ------- -------- --------
Other expense, net...... (31) (6) (31) (56) (26)
-------- ------- ------- -------- --------
INCOME (LOSS) BEFORE PROVISION
(BENEFIT) FOR INCOME TAXES........ 37 84 69 22 (292)
PROVISION (BENEFIT) FOR INCOME
TAXES............................. 23 28 26 21 (107)
-------- ------- ------- -------- ---------
NET INCOME (LOSS)................. $ 14 $ 56 $ 43 $ 1 $ (185)
======== ======= ======= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-118
<PAGE> 194
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
SIX MONTHS OCTOBER 1,
ENDED 1997
YEAR ENDED SEPTEMBER 30, YEAR ENDED THROUGH
MARCH 31, ---------------------- SEPTEMBER 30, JANUARY 30,
1997 1996 1997 1997 1998
------- ------- ------- ------------- ------------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................... $ 14 $ 56 $ 43 $ 1 $ (185)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating
activities --
Depreciation and amortization....................... 72 38 41 75 34
Provision for doubtful accounts .................... -- -- 10 10 --
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable ........................... 316 452 (284) (420) (90)
Receivable from stockholder ................... 56 48 (66) (58) (203)
Income tax receivable ......................... -- -- -- -- (95)
Other receivables ............................. 32 25 35 42 5
Costs and estimated earnings in
excess of billings on uncompleted
contracts ................................... (105) 1 61 (45) (38)
Prepaid expenses and other current
assets ...................................... (23) (16) (1) (8) 23
Increase (decrease) in --
Accounts payable and accrued
expenses .................................... (498) (519) 520 541 (215)
Billings in excess of costs and
estimated earnings on uncompleted
contracts ................................... 48 (52) (253) (153) (75)
Other, net ......................................... 3 2 14 15 28
------- ------- ------- ------- -------
Net cash provided by (used in)
operating activities ........................ (85) 35 120 -- (811)
------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on notes receivable from related
parties ............................................ 3 1 2 4 268
Additions to property and equipment .................. (191) (35) -- (156) (9)
------- ------- ------- ------- -------
Net cash provided by (used in)
investing activities ........................ (188) (34) 2 (152) 259
------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt and notes
payable ............................................ 238 3 (9) 226 1,654
Payments of long-term debt ........................... (19) (8) (13) (24) (1,212)
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities ........................ 219 (5) (22) 202 442
------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .......................................... (54) (4) 100 50 (110)
CASH AND CASH EQUIVALENTS, beginning of
period ............................................... 111 111 57 107 157
------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period ............... $ 57 $ 107 $ 157 $ 157 $ 47
======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest ........................................... $ 56 $ 19 $ 42 $ 79 $ 2
Income taxes ....................................... $ 35 $ 19 $ 3 $ 19 $ 34
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-119
<PAGE> 195
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------- ------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, March 31, 1996 ....... 1,000 $ 1 $ 977 $ 978
Net income .................. -- -- 14 14
------- ------- ------- -------
BALANCE, March 31, 1997 ....... 1,000 1 991 992
Net income (unaudited) ...... -- -- 43 43
------- ------- ------- -------
BALANCE, September 30, 1997.... 1,000 1 1,034 1,035
Net loss .................... -- -- (185) (185)
------- ------- ------- -------
BALANCE, January 30, 1998 ..... 1,000 $ 1 $ 849 $ 850
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-120
<PAGE> 196
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Summit Electric of Texas, Incorporated (the Company), a Texas corporation,
focuses on providing electrical system installation and repair services
primarily for mid-sized to large commercial facilities. The Company performs the
majority of its contract work under fixed price contracts, with contract
duration generally ranging from two to eight months. The Company performs the
majority of its work primarily in Houston, Texas.
On a limited basis, the Company provides auto repair and restoration
services to its sole stockholder (the Stockholder) and third parties. The
revenues and cost of services related to such activities have not been removed
from the Company's results of operations for the year ended March 31, 1997 and
September 30, 1997, as such amounts are not material.
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 March to a
September fiscal year.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the six months ended September 30, 1996
and 1997, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
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 the 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.
Supplemental Cash Flow Information
During the period from October 1, 1997 through January 30, 1998, the
Company's stockholder contributed approximately $268,000 in property and
equipment in exchange for payment of the stockholder's receivable to the
Company.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using an accelerated method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
$72,101, $75,358 and $34,000 for the years ended March 31, 1997 and September
30, 1997 and for the period from October 1, 1997 through January 30, 1998,
respectively.
F-121
<PAGE> 197
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, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income, and their effects are
recognized in the period in which the revisions are determined. An amount equal
to contract costs attributable to claims is included in revenues when
realization is probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates and
laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results
F-122
<PAGE> 198
could differ from those estimates. Reference is made to the "Revenue
Recognition" section of this footnote and Note 11 for discussion of significant
estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES MARCH 31, SEPTEMBER 30,
IN YEARS 1997 1997
------------ ---------- -------------
<S> <C> <C> <C>
Transportation equipment .................... 5 $ 450 $ 447
Machinery and equipment ..................... 7 11 11
Computer and telephone equipment ............ 5 84 84
Leasehold improvements ...................... 31.5 52 52
Furniture and fixtures ...................... 7 43 43
----- -----
640 637
Less -- Accumulated depreciation
and amortization ........................... (417) (457)
----- -----
Property and equipment, net ....... $ 223 $ 180
===== =====
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Balance at beginning of period ........................... $112 $112
Additions to costs and expenses .......................... -- 10
Deductions for uncollectible receivables
written off and recoveries ............................. -- --
---- ----
Balance at end of period ................................. $112 $122
==== ====
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Accounts payable, trade .................. $ 696 $1,175
Other accrued expenses ................... 278 319
------ ------
$ 974 $1,494
====== ======
</TABLE>
F-123
<PAGE> 199
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Costs incurred on contracts in progress ................... $ 6,482 $ 6,373
Estimated earnings, net of losses ......................... 2,122 1,818
------- -------
8,604 8,191
Less -- Billings to date .................................. (8,801) (8,195)
------- -------
$ (197) $ (4)
======= =======
Costs and estimated earnings in excess of billings on
uncompleted contracts ................................... $ 239 $ 178
Less-- Billings in excess of costs and estimated
earnings on uncompleted contracts .................... (436) (182)
------- -------
Net liability ................................... $ (197) $ (4)
======= =======
</TABLE>
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Note payable to bank bearing interest at 9.15%,
payable in monthly installments of principal and interest of
$2,612 through October 2001, secured by transportation
equipment .......................................................... $ 117 $ 106
Note payable to a financing company bearing interest
at 7.9%, payable in monthly installments of principal and
interest of $557 through January 1999, secured by transportation
equipment .......................................................... 11 9
----- -----
128 115
Less -- Current portion .............................................. (27) (27)
----- -----
Long-term debt ..................................................... $ 101 $ 88
===== =====
</TABLE>
The maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED MARCH 31, SEPTEMBER 30,
---------- --------- -------------
<S> <C> <C>
1998........... $ 27 $ 27
1999........... 29 28
2000........... 26 27
2001........... 28 28
2002........... 18 5
----- -----
$ 128 $ 115
===== =====
</TABLE>
The Company has a $1,000,000 line of credit with a bank. The line of credit
expired September 30, 1997, and bears interest at 1 percent above the prime
lending rate. The weighted average interest rate under this line of credit was
9.25 percent for fiscal 1997. The line of credit is secured by contracts
receivable, equipment, furniture and fixtures, and the personal guarantee of the
Stockholder. Outstanding borrowings under this line of credit at March 31, 1997,
total $788,142.
On September 30, 1997, the Company negotiated an amendment to its existing
bank line of credit (the Amended Line of Credit). The Amended Line of Credit has
a $1,500,000 borrowing base and is due October 3, 1998. The Amended Line of
Credit bears interest at 1 percent above the prime lending rate. Outstanding
borrowings under this line of credit at September 30, 1997, total $779,458.
The bank line of credit requires the Company to maintain certain net worth
and profitability covenants. At March 31, 1997 and September 30, 1997, the
Company was in compliance with its line-of-credit covenants, as amended.
6. LEASES:
The Company leases a facility from a company which is owned by the Company's
stockholder. The lease expires on November 30, 1998. The rent paid under this
related-party lease was approximately $96,000 for each of the years ended March
31, 1997 and September 30, 1997 and $32,000 for the period from October 1, 1997
through January 30, 1998. The Company also leases two facilities from third
parties. The rent paid under these leases were approximately $7,144, $15,051 and
$13,308 for the years ended March 31, 1997 and September 30, 1997 and for the
period from October 1, 1997 through January 30, 1998, respectively.
F-124
<PAGE> 200
Future minimum lease payments under these noncancelable operating leases are
as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
-------------------------
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
1998........................................ $ 99 $ 99
1999........................................ 66 26
2000........................................ 1 --
-- --
Thereafter.................................. ----- -----
$ 166 $ 125
===== =====
</TABLE>
7. INCOME TAXES:
Federal income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
--------------------------- THROUGH
MARCH 31, SEPTEMBER 30, JANUARY 30,
1997 1997 1998
--------- ------------- ------------
<S> <C> <C> <C>
Current--
Federal .......................... $ 17 $ 19 $ (95)
State ............................ 6 2 (12)
----- ----- -----
$ 23 $ 21 $(107)
===== ===== =====
</TABLE>
Actual income tax expense (benefit) differs from income tax expense
(benefit) computed by applying the blended U.S. federal and state statutory
corporate rate of 28 percent to income before provision for income taxes as
follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
YEAR ENDED 1997
------------------------ THROUGH
MARCH 31, SEPTEMBER 30, JANUARY 30,
1997 1997 1998
--------- ------------- ------------
<S> <C> <C> <C>
Provision at the statutory rate .............................. $ 10 $ 6 $(103)
Increase resulting from--
Permanent differences, primarily meals and entertainment ... 9 14 5
State income tax, net of benefit for federal deduction ..... 4 1 (9)
----- ----- -----
$ 23 $ 21 $(107)
===== ===== =====
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities result principally from the following (in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Allowance for doubtful accounts .................... $ 40 $ 40
Warranty and contract allowances ................... 29 29
Bases difference on property and equipment ......... (15) (29)
---- ----
Deferred tax assets ...................... $ 54 $ 40
==== ====
</TABLE>
F-125
<PAGE> 201
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Deferred tax assets --
Current .................................... $ 69 $ 69
Long-term .................................. -- --
---- ----
Deferred tax assets ................ 69 69
---- ----
Deferred tax liabilities--
Current .................................... (4) (18)
Long-term .................................. (11) (11)
---- ----
Deferred tax liability ............. (15) (29)
---- ----
Net deferred tax assets ...................... $ 54 $ 40
==== ====
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
Notes receivable from related parties consist of the following (in
thousands):
<TABLE>
<CAPTION>
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
<S> <C> <C>
Note receivable from the Stockholder, bearing an
interest rate of 7.07%, requiring monthly payments of
interest, maturing November 1998 ........................... $250 $250
Note receivable from the spouse of the Stockholder,
bearing an interest rate of 8%, requiring monthly
installments of principal and interest of $480,
maturing April 2001 ........................................ 20 18
---- ----
$270 $268
==== ====
</TABLE>
The receivable of $268,000 was subsequently repaid through a donation of
property and equipment from the Stockholder.
The Company provides auto repair and restoration services to the
Stockholder. The Stockholder reimbursed the Company $81,161, $122,979 and
$27,958 for such services for the years ended March 31, 1997 and September 30,
1997 and for the period from October 1, 1997 through January 30, 1998,
respectively.
9. EMPLOYEE BENEFIT PLAN:
The Company adopted a 401(k) savings and investment plan approved by the
Internal Revenue Service effective January 1, 1996, covering all eligible
Company employees. Contributions may be made to the plan by an employee at a
percentage of salary but cannot exceed the maximum allowed by the Internal
Revenue Code and may be matched by a discretionary Company contribution.
The Company's contributions to the plan for the years ended March 31, 1997
and September 30, 1997 and for the period from October 1, 1997 through January
30, 1998, totaled $24,747, $24,660 and $8,751, respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, notes receivable, accounts payable, and short and long-term
debt. The Company believes that the carrying values of these instruments on the
accompanying balance sheets approximate their fair values.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability, workers' compensation and an umbrella policy.
The Company has not incurred significant uninsured losses on any of these items.
F-126
<PAGE> 202
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
For the years ended March 31, 1997 and September 30, 1997, revenues from no
one individual customer exceeded 10 percent of total revenues.
In addition, the Company grants credit, generally without collateral, to its
customers, which are primarily general contractors located in Houston, Texas.
Consequently, the Company is subject to potential credit risk related to changes
in business and economic factors within Houston, Texas. However, management
believes that its contract acceptance, billing and collection policies are
adequate to minimize the potential credit risk.
F-127
<PAGE> 203
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Thurman & O'Connell Corporation:
We have audited the accompanying balance sheets of Thurman & O'Connell
Corporation, a Kentucky corporation, as of December 31, 1995 and 1996 and
September 30, 1997, and the related statements of operations, cash flows and
stockholders' equity for the years then ended 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 Thurman & O'Connell
Corporation as of December 31, 1995 and 1996 and September 30, 1997, and the
results of its operations and its cash flows for the years then ended 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
F-128
<PAGE> 204
THURMAN & O'CONNELL CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
ASSETS
<CAPTION>
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ...................................... $ 860 $1,488 $1,160
Accounts receivable --
Trade, net of allowance of $37, $10 and $17, respectively ... 1,078 315 538
Retainage ................................................... 348 78 124
Other receivables ........................................... 12 17 9
Inventories .................................................... 1,072 273 213
Costs and estimated earnings in excess of
billings on uncompleted contracts ........................... -- 22 52
Prepaid expenses and other current assets ...................... 4 13 15
------ ------ ------
Total current assets ................................... 3,374 2,206 2,111
PROPERTY AND EQUIPMENT, net ...................................... 342 306 301
------ ------ ------
Total assets ........................................... $3,716 $2,512 $2,412
====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt ........................... $ 13 $ 6 $ 7
Accounts payable and accrued expenses .......................... 663 242 262
Dividends payable to stockholders .............................. 160 200 --
Billings in excess of costs and estimated
earnings on uncompleted contracts ........................... 1,652 479 361
------ ------ ------
Total current liabilities .............................. 2,488 927 630
------ ------ ------
LONG-TERM DEBT, net of current maturities ........................ 96 93 88
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 2,000 shares
authorized, 200 shares issued and
outstanding ................................................. 300 300 300
Retained earnings .............................................. 832 1,192 1,394
------ ------ ------
Total stockholders' equity ............................. 1,132 1,492 1,694
------ ------ ------
Total liabilities and stockholders'
equity ............................................... $3,716 $2,512 $2,412
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-129
<PAGE> 205
THURMAN & O'CONNELL CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
NINE MONTHS OCTOBER 1,
YEAR ENDED ENDED 1997
DECEMBER 31, SEPTEMBER 30, YEAR ENDED THROUGH
-------------------- -------------------- SEPTEMBER 30, JANUARY 30,
1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
REVENUES ...................................... $ 4,729 $ 4,551 $ 3,741 $ 3,239 $ 4,049 $ 1,342
COST OF SERVICES .............................. 3,309 3,059 2,531 1,653 2,181 721
------- ------- ------- ------- ------- -------
Gross profit ......................... 1,420 1,492 1,210 1,586 1,868 621
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 512 503 397 397 503 182
------- ------- ------- ------- ------- -------
Income from operations ............... 908 989 813 1,189 1,365 439
------- ------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense ............................ (13) (8) (6) (4) (6) (3)
Other ....................................... 36 65 46 51 70 111
------- ------- ------- ------- ------- -------
Other income, net .................... 23 57 40 47 64 108
------- ------- ------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE .............. 931 1,046 853 1,236 1,429 547
INCOME TAX EXPENSE ............................ 19 36 24 34 46 11
------- ------- ------- ------- ------- -------
NET INCOME .................................... $ 912 $ 1,010 $ 829 $ 1,202 $ 1,383 $ 536
======= ======= ======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-130
<PAGE> 206
THURMAN & O'CONNELL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED NINE MONTHS THROUGH
DECEMBER 31, ENDED SEPTEMBER 30, YEAR ENDED JANUARY 30,
------------------- -------------------- SEPTEMBER 30, -----------
1995 1996 1996 1997 1997 1998
------- ------- ------- ------- ------------ -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................... $ 912 $ 1,010 $ 829 $ 1,202 $ 1,383 $ 536
Adjustments to reconcile net income to
net cash provided by operating activities --
Depreciation and amortization ...................... 53 49 37 39 51 26
Provision to (reduction in) allowance
for doubtful accounts ............................ 13 10 (19) 7 36 3
Loss (gain) on sale of property and equipment ...... (1) -- -- (1) (1) (96)
Changes in operating assets and liabilities --
(Increase) decrease in --
Receivables ...................................... (506) 1,018 756 (268) (6) (140)
Inventories ...................................... (405) 799 678 60 181 (37)
Costs and estimated earnings in
excess of billings on uncompleted contracts ... 68 (22) (24) (30) (28) 12
Prepaid expenses and other current contracts ..... 25 (9) (2) (2) (9) (3)
Increase (decrease) in --
Accounts payable and accrued expenses ............ (1) (421) (236) 20 (165) 18
Billings in excess of costs and
estimated earnings on uncompleted contracts ... 916 (1,173) (785) (118) (506) (71)
------- ------- ------- ------- ------- -------
Net cash provided by operating activities ..... 1,074 1,261 1,234 909 936 248
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment .......................................... 1 -- -- 23 23 290
Additions of property and equipment .................. (42) (13) (7) (56) (62) (6)
------- ------- ------- ------- ------- -------
Net cash provided by (used in) investing
activities .................................. (41) (13) (7) (33) (39) 284
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt ......................... -- 103 -- -- 103 604
Payments of long-term debt ........................... (63) (113) (7) (4) (110) (2)
Distributions to stockholders ........................ (620) (610) (610) (1,200) (1,200) (1,894)
------- ------- ------- ------- ------- -------
Net cash used in financing
activities .................................. (683) (620) (617) (1,204) (1,207) (1,292)
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS .......................................... 350 628 610 (328) (310) (760)
CASH AND CASH EQUIVALENTS, beginning of
period ............................................... 510 860 860 1,488 1,470 1,160
------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period ............................................... $ 860 $ 1,488 $ 1,470 $ 1,160 $ 1,160 $ 400
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest ......................................... $ 10 $ 8 $ 5 $ 4 $ 7 $ 2
Taxes ............................................ $ 6 $ 26 $ 23 $ 47 $ 50 $ 18
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-131
<PAGE> 207
THURMAN & O'CONNELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------ RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------- ------- -------- -------------
<S> <C> <C> <C> <C>
BALANCE, December 31, 1994 ............. 200 $ 300 $ 580 $ 880
Distributions to stockholders ........ -- -- (660) (660)
Net income ........................... -- -- 912 912
------- ------- ------- -------
BALANCE, December 31, 1995 ............. 200 300 832 1,132
Distributions to stockholders ........ -- -- (650) (650)
Net income ........................... -- -- 1,010 1,010
------- ------- ------- -------
BALANCE, December 31, 1996 ............. 200 300 1,192 1,492
Distributions to stockholders
(unaudited)......................... -- -- (1,000) (1,000)
Net income (unaudited)................ -- -- 1,202 1,202
------- ------- ------- -------
BALANCE, September 30, 1997 ............ 200 300 1,394 1,694
Distribution to stockholders ......... -- -- (1,894) (1,894)
Net Income ........................... -- -- 536 536
------- ------- ------- -------
BALANCE, January 30, 1998 .............. 200 $ 300 $ 36 $ 336
======= ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-132
<PAGE> 208
THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Thurman & O'Connell Corporation (the Company), a Kentucky corporation,
focuses on providing electrical system installation and repair services
primarily to large commercial facilities. The Company performs the majority of
its contract work under fixed price contracts, with contract terms generally
ranging from 12 to 24 months. The Company performs the majority of its work in
Kentucky.
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 financial statements for the nine months ended September 30,
1997 and 1996, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of the
Company's management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered necessary
for a fair presentation. The results of operations for the interim periods are
not necessarily indicative of the results for the entire fiscal year.
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 the 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. The Company
maintains its principal cash balances in one financial institution. The balances
are insured by the Federal Deposit Insurance Corporation up to $100,000.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are stated at the lower of cost or market using the
first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Depreciation expense was approximately $53,000, $49,000 and $51,000 and $26,000
for the years ended December 31, 1995 and 1996 and September 30, 1997 and for
the period from October 1, 1997 through January 30, 1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of
F-133
<PAGE> 209
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, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and their effects are
recognized in the period in which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems.
Income Taxes
The stockholders of the Company have elected S Corporation status as defined
by the Internal Revenue Code, whereby the Company itself is not subject to
taxation for federal purposes. Under S Corporation status, the stockholders
report their share of the Company's taxable earnings or losses in their personal
tax returns. The provision for income taxes in the accompanying financial
statements relates to income and other taxes incurred by the Company in those
localities that do not permit the Company to report its net income with that of
its stockholders (S Corporation treatment). The Company intends to terminate its
S Corporation status concurrently with the effective date of the Offerings (as
defined in Note 1).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote for discussion of significant
estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to
F-134
<PAGE> 210
expense the difference between the fair value of such property and its carrying
value. Adoption of this standard did not have a material effect on the financial
position or results of operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ---------- ---------- -------------
<S> <C> <C> <C> <C>
Land .................................... -- $ 25 $ 25 $ 25
Building ................................ 30 206 206 206
Machinery and equipment ................. 7 39 39 42
Transportation equipment ................ 5 239 241 257
Computer and telephone equipment ........ 7 19 24 26
Furniture and fixtures .................. 7 20 23 21
---------- ---------- ----------
548 558 577
Less -- Accumulated depreciation and
amortization .......................... (206) (252) (276)
---------- ---------- ----------
$ 342 $ 306 $ 301
========== ========== ==========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Balance at beginning of period ........... $ 24 $ 37 $ 18
Additions to costs and expenses .......... 13 10 36
Deductions for uncollectible receivables
written off and recoveries ............. -- (37) (37)
------ ------ ----------
Balance at end of period ................. $ 37 $ 10 $ 17
====== ====== ==========
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
<S> <C> <C> <C>
Accounts payable, trade ........... $ 516 $ 130 $ 150
Accrued compensation and benefits.. 50 60 64
Accrued cost overruns ............. 78 21 20
Accrued warranty costs ............ 10 10 10
Other accrued expenses ............ 9 21 18
------ ------ ----------
$ 663 $ 242 $ 262
====== ====== ==========
</TABLE>
Electrical system installation contracts in progress are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Costs incurred on contracts in progress ............... $ 2,159 $ 623 $ 1,844
Estimated earnings, net of losses ..................... 721 229 1,466
------- ------- -------
2,880 852 3,310
Less -- Billings to date ............................... (4,532) (1,309) (3,619)
------- ------- -------
$(1,652) $ (457) $ (309)
======= ======= =======
Costs and estimated earnings in excess of billings
on uncompleted contracts ............................ $ -- $ 22 $ 52
Less -- Billings in excess of costs and
estimated earnings on uncompleted contracts ...... (1,652) (479) (361)
------- ------- -------
$(1,652) $ (457) $ (309)
======= ======= =======
</TABLE>
F-135
<PAGE> 211
5. LONG-TERM DEBT:
During 1996, the Company refinanced the note payable to a bank which was in
place at December 31, 1995, with a variable rate note payable. The note is
payable in monthly principal and interest payments of $1,051 through October
2004, at which time any unpaid principal and interest is due. The note is
collateralized by a cash account at the bank, and the Company has agreed not to
pay dividends in excess of the Company's net income for any fiscal year.
Interest is based upon a variable rate of 1% above the rate being offered on the
sweep account (6% as of December 31, 1996 and September 30, 1997).
At December 31, 1995, the Company had a note payable to a bank which
required monthly principal payments of $1,051 plus interest at the prime rate
(8.25% at December 31, 1995) through July 2008. Under the agreement, the Company
agreed not to pay dividends in excess of the Company's net income for the year.
The note was collateralized by the Company's land and building.
The approximate aggregate maturities of long-term debt as of September 30,
1997, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 --
---------------------------
<S> <C>
1997 ................................... $ 2
1998 ................................... 7
1999 ................................... 8
2000 ................................... 8
2001 ................................... 9
Thereafter ............................. 61
---
$95
===
</TABLE>
The Company has a $1,000,000 line of credit with a bank. The line of credit
expires in April 1998 and bears interest at the prime lending rate. All
receivables are pledged as collateral under the agreement, and the Company has
agreed not to pay dividends in excess of net income for the year and to maintain
its deposit accounts with the bank. There were no borrowings under this
agreement at December 31, 1996 or September 30, 1997. In 1995, the Company had a
$500,000 unsecured line of credit at prime with a bank, which expired in April
1996. There were no borrowings under this agreement during 1995 or 1996.
6. RELATED-PARTY TRANSACTIONS:
The Company earned revenue for electrical contracting services from
companies owned by a stockholder of approximately $47,000, $40,000, $25,000 and
$82,000 for the years ended December 31, 1995 and 1996, and September 30, 1997,
respectively and the period from October 1, 1997 through January 30, 1998, with
approximately $1,000, $2,000, $4,000 and $41,000 of the revenue being recorded
as receivables at the respective balance sheet dates. In addition, the Company
had a receivable from another stockholder in the amount of approximately $1,000,
$2,000 and $5,000 as of December 31, 1995 and 1996 and September 30, 1997,
respectively, related to travel expense advances.
7. EMPLOYEE BENEFIT PLAN:
During 1995, the Company adopted a defined contribution 401(k) savings plan
covering employees meeting certain minimum service and age requirements, as
defined. The plan provides for discretionary contributions on the part of the
Company. For the years ended December 31, 1995 and 1996 and September 30, 1997,
the Company elected to match 100% of the first 2 percent contributed by each
employee. The contributions paid by the Company totaled approximately $9,000,
$12,000, $8,000 and $2,000 for the years ended December 31, 1995 and 1996 and
September 30, 1997 and for the period from October 1, 1997 through January 30,
1998, respectively.
F-136
<PAGE> 212
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit, and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
9. STOCKHOLDERS' AGREEMENT:
The Company has a right of first refusal on any stock voluntarily offered
for sale by a stockholder subject to certain terms and conditions. The
redemption price shall be as determined by the stockholders on an annual basis
or by formula which is contained in the agreement if a value has not been
established by the stockholders. Such redemption price is payable in not more
than 10 equal quarterly installments with interest at the prime rate. As of
September 30, 1997 and December 31, 1996, the redemption price was determined to
be $5.141 per share.
Upon the death of any stockholder, the Company shall redeem the stock held
by such stockholder provided that the redemption is requested in writing by the
personal representative of the deceased stockholder within two months of the
appointment of such representative or the Company elects to redeem such stock
within the same two-month period. The redemption price pursuant to this
paragraph is the same as described above. Such redemption price may be paid in
full at the closing or in installments, the down payment being the greater of
one-fifth of redemption price or any life insurance proceeds received by the
Company resulting from the death of the stockholder with the balance payable in
quarterly installments over not more than five years with interest at the prime
rate. Coverage under the key-man term life insurance purchased by the Company
totaled $1,000,000 as of December 31, 1995 and 1996 and September 30, 1997.
10. DIVIDENDS:
As long as the election made by the stockholders to report the operations of
the Company on their individual federal and state income tax returns remains in
effect, the board of directors of the Company is required to declare a dividend,
subsequent to the close of the Company's tax year and prior to the date when
payment of individual income taxes is required, to provide the stockholders
sufficient cash to pay any applicable individual income taxes resulting from the
inclusion of the Company's taxable income on their individual income tax
returns. In addition, at the discretion of the Company's board of directors, an
additional minimum dividend shall be authorized which, when combined with the
dividend required to meet the tax obligations of the shareholders, shall equal
not less than 50 percent of the net pretax income of the Company.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is not currently involved in any significant disputes or legal
actions, however, such actions could arise in the ordinary course of business.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
F-137
<PAGE> 213
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 25, 18, 12, 12 and 11 percent of
total sales to five major customers during 1995, sales of approximately 48, 11
and 10 percent of total sales to three major customers during 1996, sales of
approximately 26, 12 and 12 percent of total sales to three major customers
during the year ended September 30, 1997 and sales of approximately 47 and 14
percent of total sales to two major customers 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 general contractors in the commercial and industrial
construction markets in Kentucky. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors within
the commercial and industrial construction markets in this state. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
F-138
<PAGE> 214
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rodgers Electric Company, Inc.:
We have audited the accompanying balance sheet of Rodgers Electric Company,
Inc., a Washington corporation, as of September 30, 1997, and the related
statement of operations, cash flows and stockholders' equity for the year then
ended 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Rodgers Electric Company,
Inc. as of September 30, 1997, and the results of its operations and its cash
flows for the year then ended 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
F-139
<PAGE> 215
RODGERS ELECTRIC COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
ASSETS
SEPTEMBER 30,
1997
-------------
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents .......................................... $ 818
Accounts receivable --
Trade, net of allowance of $15 .................................. 571
Retainage ....................................................... 37
Other receivables ............................................... 5
Costs and estimated earnings in excess of billings on
uncompleted contracts .......................................... 20
Deferred tax asset ................................................. 39
Prepaid expenses and other current assets .......................... 29
------
Total current assets ....................................... 1,519
PROPERTY AND EQUIPMENT, net .......................................... 393
OTHER ASSETS ......................................................... 175
------
Total assets ............................................... $2,087
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt, including current maturities of long-term
debt ............................................................ $ 36
Accounts payable and accrued expenses .............................. 488
Billings in excess of costs and estimated earnings on uncompleted
contracts ....................................................... 109
Other liabilities .................................................. 213
------
Total current liabilities .................................. 846
------
LONG-TERM DEBT, net of current maturities ............................ 58
DEFERRED TAX LIABILITY ............................................... 75
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 500 shares authorized, 150 shares
issued and outstanding .......................................... 15
Retained earnings .................................................. 1,093
------
Total stockholders' equity ................................. 1,108
------
Total liabilities and stockholders' equity ................. $2,087
======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-140
<PAGE> 216
RODGERS ELECTRIC COMPANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
------------- -----------
<S> <C> <C>
REVENUES .............................................. $ 3,325 $ 1,600
COST OF SERVICES (including depreciation) ............. 1,621 967
------- -------
Gross profit ................................ 1,704 633
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES .......... 1,238 431
------- -------
Income from operations ...................... 466 202
------- -------
OTHER INCOME (EXPENSE):
Interest expense .................................... (7) (1)
Other ............................................... 36 7
------- -------
Other income, net ........................... 29 6
------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES .............. 495 208
PROVISION FOR INCOME TAXES ............................ 178 73
------- -------
NET INCOME ............................................ $ 317 $ 135
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-141
<PAGE> 217
RODGERS ELECTRIC COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<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 ............................................... $ 317 $ 135
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization ......................... 47 18
Distribution of property and equipment ................ -- 94
Provision for doubtful accounts ....................... 11 10
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable .............................. (275) (429)
Costs and estimated earnings in excess of billings
on uncompleted contracts ....................... (20) 16
Deferred taxes, net .............................. (34) 8
Other ............................................ 14 4
Increase (decrease) in --
Accounts payable and accrued expenses ............ 355 (262)
Income taxes payable ............................. -- (113)
Other liabilities ................................ 211 --
Billings in excess of costs and estimated earnings
on uncompleted contracts ....................... 109 (74)
---------- ----------
Net cash provided by (used in) operating
activities ..................................... 735 (593)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on notes receivable from related parties ........ 2 --
Additions to property and equipment ...................... (170) (7)
Proceeds from disposal of property and equipment ......... -- 54
---------- ----------
Net cash provided by (used in) investing
activities ..................................... (168) 47
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt and notes payable ........... 70 10
Payments of long-term debt ............................... (23) (30)
---------- ----------
Net cash provided by (used in) financing
activities ..................................... 47 (20)
---------- ----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ....... 614 (566)
CASH AND CASH EQUIVALENTS, beginning of period ............. 204 818
---------- ----------
CASH AND CASH EQUIVALENTS, end of period ................... $ 818 $ 252
========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest .............................................. $ 7 $ 2
Income taxes .......................................... $ 180 $ 176
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-142
<PAGE> 218
RODGERS ELECTRIC COMPANY, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
---------- ---------- ---------- -------------
<S> <C> <C> <C> <C>
BALANCE, September 30, 1996 .. 150 $ 15 $ 776 $ 791
Net income ................. -- -- 317 317
---------- ---------- ---------- ----------
BALANCE, September 30, 1997 .. 150 15 1,093 1,108
Net income ................. -- -- 135 135
---------- ---------- ---------- ----------
BALANCE, JANUARY 30, 1998 .... 150 $ 15 $ 1,228 $ 1,243
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-143
<PAGE> 219
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Principles of Presentation
Rodgers Electric Company, Inc. is a Washington corporation. The Company
provides electrical contracting services to commercial and industrial customers
in Western Washington. Most of the Company's revenue is from partnering with
customers and providing engineering services for design-build projects on a time
and material basis with a guaranteed not-to-exceed price.
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 financial statements for the period from October 1, 1997 through January
30, 1998 are presented for purposes of complying with certain reporting
requirements of the 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.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using a straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $47,000 and $18,000 for the year ended September 30, 1997 and for
the period from October 1, 1997 through January 30, 1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
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, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions,
F-144
<PAGE> 220
estimated profitability and final contract settlements may result in revisions
to costs and income, and their effects are recognized in the period in which the
revisions are determined. An amount equal to contract costs attributable to
claims is included in revenues when realization is probable and the amount can
be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts," represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. The Company generally warrants labor for
30 days after servicing of existing electrical systems. A reserve for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates and
laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets
and liabilities and disclosures of contingent liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Reference is made to the "Revenue Recognition" section of this footnote and Note
11 for discussion of significant estimates reflected in the Company's financial
statements.
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
F-145
<PAGE> 221
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES SEPTEMBER 30,
IN YEARS 1997
------------ -------------
<S> <C> <C>
Transportation equipment ................................... 10 $ 434
Machinery and equipment .................................... 10 53
Leasehold improvements ..................................... 10-25 33
Furniture and fixtures ..................................... 10 96
-----
616
Less -- Accumulated depreciation and amortization .......... (223)
-----
Property and equipment, net ...................... $ 393
=====
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Accounts payable, trade ..................... $106
Payroll, profit sharing and related items ... 363
Other accrued expenses ...................... 19
----
$488
====
</TABLE>
Contracts in progress (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Costs incurred on contracts in progress .............................................. $ 321
Estimated earnings, net of losses .................................................... 472
----------
793
Less-Billings to date ................................................................ (882)
----------
$ (89)
==========
Costs and estimated earnings in excess of billings on
uncompleted contracts .............................................................. $ 20
Less-Billings in excess of costs and estimated earnings on uncompleted contracts ... (109)
----------
Net liability .............................................................. $ (89)
==========
</TABLE>
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Notes payable to financing companies with interest rates ranging from
3.9% to 9.75%, payable in monthly installments of principal and
interest through March 2002, secured by transportation equipment .... 94
Less -- Current portion ............................................... (36)
----------
Long-term debt ...................................................... $ 58
==========
</TABLE>
The maturities of long-term debt are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
1998 ......................... $ 36
1999 ......................... 27
2000 ......................... 18
2001 ......................... 10
2002 ......................... 3
----------
$ 94
==========
</TABLE>
F-146
<PAGE> 222
6. RELATED PARTY TRANSACTIONS:
The Company is located in a building owned by the sole stockholder which is
leased to the Company with monthly lease payments of $2,200 per month.
7. INCOME TAXES:
Federal income taxes are $178,000 and $73,000 for the fiscal year ended
September 30, 1997 and for the period from October 1, 1997 through January 30,
1998, respectively.
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
before provision for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
PERIOD FROM
OCTOBER 1,
1997
YEAR ENDED THROUGH
SEPTEMBER 30, JANUARY 30,
1997 1998
---------- -----------
<S> <C> <C>
Provision at the statutory rate ............................ $ 173 $ 72
Increase resulting from--
Permanent differences, mainly meals and entertainment .... 5 1
---------- ----------
$ 178 $ 73
========== ==========
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets result principally from the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Allowance for doubtful accounts and other ........ $ 39
Bases difference on property and equipment ....... (75)
----------
Net deferred tax liabilities ........... $ (36)
==========
</TABLE>
9. EMPLOYEE BENEFIT PLAN:
The Company has a profit sharing plan which covers substantially all
qualified employees. The profit sharing contribution is made at the discretion
of the Directors. Benefits payable under the profit sharing plan are limited to
contributions made and earnings therein. Company contributions for the year
ended September 30, 1997 and for the period from October 1, 1997 through January
30, 1998 were $192,000 and $105,000, respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, and short and long-term debt. The Company
believes that the carrying values of these instruments on the accompanying
balance sheets approximate their fair values.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is periodically involved in disputes or legal actions arising in
the ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
F-147
<PAGE> 223
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability and an umbrella policy.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10% of total sales to three major
customers comprising approximately 25%, 22% and 13% of sales during the year
ended September 30, 1997 and total sales to four major customers comprising
approximately 34%, 15%, 15% and 10% of sales 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 primarily commercial and industrial companies located in
the North Puget Sound area of Western Washington. Consequently, the Company is
subject to potential credit risk related to changes in business and economic
factors in that area, including cyclical changes in the aerospace industry.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
F-148
<PAGE> 224
INDEPENDENT AUDITORS' REPORT
Mr. Mark Henderson, President
Mark Henderson, Inc.
Decatur, Georgia
We have audited the consolidated balance sheets of Mark Henderson, Inc., a
Georgia corporation, and Subsidiaries as of September 30, 1997 and February 28,
1997 and the related consolidated statements of income, retained earnings, and
cash flows for the years then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the consolidated financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the consolidated financial statements.
An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mark Henderson, Inc.
and Subsidiaries as of September 30, 1997 and February 28, 1997, and the results
of their operations and their cash flows for the years then ended in conformity
with generally accepted accounting principles.
As discussed in Note 13 to the financial statements, the Company has made a
change in reporting entity. The financial statements include the accounts of
Holland Electrical Systems, Inc. a 45%-owned subsidiary.
Bradshaw, Pope & Franklin, LLP
Norcross, Georgia
December 19, 1997
F-149
<PAGE> 225
MARK HENDERSON, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
February 28, 1997 September 30, 1997 June 30, 1998
----------------- ------------------ --------------
(Unaudited)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,081 $ 215 $ --
Accounts receivable 8,587 10,068 11,438
Retainage receivable 2,022 3,069 3,545
Costs and estimated earnings in excess of billings 1,157 2,596 136
Prepaid expenses 53 7 543
Other receivables 17 21 11
-------------- -------------- --------------
TOTAL CURRENT ASSETS 15,917 15,976 15,673
PROPERTY AND EQUIPMENT
Office equipment and furniture 156 185 80
Automobiles and trucks 655 601 876
Equipment 114 175 235
Leasehold improvements 77 155 177
-------------- -------------- --------------
1,002 1,116 1,368
Less accumulated depreciation 545 573 665
-------------- -------------- --------------
NET PROPERTY AND EQUIPMENT 457 543 703
-------------- -------------- --------------
TOTAL ASSETS $ 16,374 $ 16,519 $ 16,376
============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes Payable and Current Maturities of LT Debt $ 340 $ 236 $ 946
Accounts payable 3,791 4,531 3,615
Accrued expenses 1,170 638 1,027
Billings in excess of costs and estimated earnings 3,350 2,102 2,709
Income taxes payable 1,810 73 139
Deferred income taxes 46 58 6
-------------- -------------- --------------
TOTAL CURRENT LIABILITIES 10,507 7,638 8,442
-------------- -------------- --------------
LONG-TERM DEBT 144 117 1,320
-------------- -------------- --------------
MINORITY INTEREST 196 258 258
STOCKHOLDERS' EQUITY
Common stock 1 1 1
Additional paid in capital 58 58 58
Retained earnings 5,468 8,447 6,297
-------------- -------------- --------------
TOTAL STOCKHOLDERS' EQUITY 5,527 8,506 6,356
-------------- -------------- --------------
TOTAL LIABILITIES
STOCKHOLDERS' EQUITY $ 16,374 $ 16,519 $ 16,376
============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-150
<PAGE> 226
MARK HENDERSON, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Year ended Year ended Seven months ended Nine months Nine months
February 28, September 30, September 30, ended ended
1997 1997 1997 June 30, 1997 June 30, 1998
--------------- ------------- ------------------ ------------- -------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CONTRACT REVENUES EARNED $ 44,369 $ 55,541 $ 36,502 $ 37,984 $ 47,985
COST OF REVENUES EARNED 37,903 46,938 31,677 32,939 42,669
-------------- ------------- -------------- -------------- --------------
GROSS PROFIT 6,466 8,603 4,825 5,045 5,316
GENERAL AND ADMINISTRATIVE EXPENSE 2,230 3,267 1,272 2,485 2,216
-------------- ------------- -------------- -------------- --------------
INCOME FROM OPERATIONS 4,236 5,336 3,553 2,560 3,100
-------------- ------------- -------------- -------------- --------------
OTHER INCOME (EXPENSES)
Interest income 129 165 89 151 35
Gain (loss) on sale of property
and equipment 5 13 9 6 (5)
Interest expense (41) (52) (34) (30) (36)
Contributions (32) -- (8) -- 20
Other (437) (423) (230) (441) --
-------------- ------------- -------------- -------------- --------------
TOTAL OTHER INCOME (EXPENSES) (376) (297) (174) (314) 14
-------------- ------------- -------------- -------------- --------------
NET INCOME BEFORE INCOME TAXES 3,860 5,039 3,379 2,246 3,114
PROVISION FOR INCOME TAXES 1,484 853 51 777 546
-------------- ------------- -------------- -------------- --------------
INCOME BEFORE MINORITY INTEREST 2,376 4,186 3,328 1,469 2,568
MINORITY INTEREST 73 (62) (62) 0 0
-------------- ------------- -------------- -------------- --------------
NET INCOME $ 2,449 $ 4,124 $ 3,266 $ 1,469 $ 2,568
============== ============= ============== ============== ==============
</TABLE>
The accompanying notes are an integral part of these statements.
F-151
<PAGE> 227
MARK HENDERSON, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF RETAINED EARNINGS
(In Thousands)
<TABLE>
<CAPTION>
Twelve months Seven months Nine months
ended ended ended
February 28, 1997 September 30, 1997 June 30, 1998
----------------- ------------------ -------------
(Unaudited)
<S> <C> <C> <C>
RETAINED EARNINGS -
Beginning of the year $ 3,019 $ 5,468 $ 8,447
ADD:
Net income 2,449 3,266 2,568
LESS:
Shareholder distributions -0- 287 (4,718)
------------ ------------ ------------
RETAINED EARNINGS -
End of the year $ 5,468 $ 8,447 $ 6,297
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-152
<PAGE> 228
MARK HENDERSON, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Year ended Year ended Seven months Nine months Nine months
February 28, September 30, ended ended ended
1997 1997 September 30, 1997 June 30, 1997 June 30, 1998
------------ ------------ ------------------ -------------- --------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income $ 2,449 $ 4,124 $ 3,266 $ 1,469 $ 2,568
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation 190 168 89 84 134
(Gain) loss on sale of property and
equipment (5) (13) (9) (6) 5
Minority interest (73) 62 61 -- --
(Increase) decrease in:
Accounts receivable (1,624) (3,683) (1,513) (266) (1,370)
Retainage receivable (210) (1,543) (1,011) (1,149) (476)
Earnings in excess of billings (177) (1,608) (1,439) 708 2,460
Prepaid expenses (6) 3 46 (95) (536)
Other receivables 51 449 (8) (38) 10
Increase (decrease) in:
Accounts payable (225) 2,652 778 1,394 (916)
Accrued expenses 403 177 (539) 361 389
Billings in excess of earnings 1,576 (2,293) (1,247) (2,994) 607
Income taxes payable 1,521 (686) (1,729) (610) 66
Deferred income taxes (696) (681) 12 (661) (52)
---------- ---------- ---------- ---------- ----------
NET CASH PROVIDED (USED) BY OPERATING
ACTIVITIES 3,174 (2,872) (3,243) (1,802) 2,889
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Cash inflows:
Sales of property and equipment 29 20 42 10 --
Cash outflows:
Investment in Spectrol, Inc. (85) -- -- -- --
Purchases of property and equipment (150) (254) (135) (52) (299)
---------- ---------- ---------- ---------- ----------
NET CASH (USED) BY INVESTING
ACTIVITIES (206) (234) (93) (42) (299)
---------- ---------- ---------- ---------- ----------
</TABLE>
The accompanying notes are an integral part of these statements.
F-153
<PAGE> 229
MARK HENDERSON, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
CONTINUED
(In Thousands)
<TABLE>
<CAPTION>
Seven months Nine months Nine months
Year ended Year ended ended ended ended
February 28, September 30, September 30, June 30, June 30,
1997 1997 1997 1997 1998
------------- ------------ ------------- ------------ ------------
(Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash inflows:
Proceeds from loans 244 -- -- -- 1,913
Cash outflows:
Loans to related company -- -- (38) -- --
Payments on shareholder loans (90) -- -- -- --
Principle payments on debt (288) (157) (204) (288) --
Shareholder distributions -- (287) (288) (88) (4,718)
--------- --------- --------- --------- ---------
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (134) (444) (530) (376) (2,805)
--------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS 2,834 (3,550) (3,866) (2,220) (215)
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 1,247 3,765 4,081 3,765 215
--------- --------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF
YEAR $ 4,081 $ 215 $ 215 $ 1,545 $ 0
========= ========= ========= ========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Cash paid during the year for:
Interest $ 41 $ 52 $ 18 $ 30 $ 36
Income taxes $ 700 $ 1,764 $ 1,764 $ 1,438 $ 184
Additional property and
equipment acquired through $ 28 $ 73 $ 73 $ -- $ --
financing
Purchase of subsidiary net of
cash received (Note 4) $ 85 $ -- $ -- $ -- $ --
</TABLE>
The accompanying notes are an integral part of these statements.
F-154
<PAGE> 230
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Mark Henderson, Inc. and Subsidiaries are electrical contractors, performing
contracts for commercial construction projects in the Southeast.
Principles of consolidation
The consolidated financial statements include the accounts of Mark Henderson,
Inc. for the short year beginning March 1, 1997 and ending September 30, 1997
and year ended February 28, 1997; its 75%-owned subsidiary, Spectrol, Inc. for
the short year beginning May 1, 1997 and ending September 30, 1997 and six
months ended April 30, 1997; and its 45%-owned subsidiary, Holland Electrical
Systems, Inc for the seven months beginning March 1, 1997 and ending September
30, 1997 and year ending February 28, 1997. All material intercompany
transactions have been eliminated.
Effective March 1, 1997, Mark Henderson, Inc. and its 75%-owned subsidiary
Spectrol, Inc. have changed their fiscal year to end September 30 for both
financial and tax reporting purposes. Holland Electrical Systems, Inc. retained
its February 28 year end.
In June, 1998, the Company and its stockholders entered into a definitive
agreement with Integrate Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the 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 initial
term of two-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 interim financial statements for the nine months ended June 30, 1998 and
1997, and the year ended September 30, 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 recognition
Mark Henderson, Inc. and Subsidiaries record revenue from contracts on the
percentage of completion method which recognizes revenue as work on a contract
progresses. The revenue recognized is that percentage of the estimated total
revenue that incurred costs to date bear to total estimated costs, after giving
effect to Company estimates of costs to complete based upon the most recent
information. Because of the inherent uncertainties in estimating costs, it is at
least reasonably possible that the estimates used will change within the near
future.
The application of this method results in "costs and estimated earnings in
excess of billings" (current asset) with respect to certain contracts and
"billings in excess of costs and estimated earnings" (current liability) with
respect to other contracts.
Cost of revenues earned includes all direct material, labor, and subcontract
costs and those indirect costs related to contract performance, such as indirect
labor, insurance, and depreciation.
The Company considers accounts receivable to be fully collectible; accordingly,
no allowance for doubtful amounts is required. If amounts become uncollectible,
they will be charged to operations when that determination is made.
Property and equipment
Property and equipment are stated at cost. Depreciation is computed using
accelerated and straight-line depreciation methods over estimated service lives
for financial reporting purposes. Principal service lives are:
<TABLE>
<S> <C>
Office equipment and furniture 3 - 7 years
Automobiles and trucks 5 - 7 years
Equipment 5 years
Leasehold improvements 31.5 years
</TABLE>
F-155
<PAGE> 231
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Property and equipment (continued)
Expenditures for major renewals and betterments which extend the useful lives of
property and equipment are capitalized. Expenditures for maintenance and repairs
are charged to expense as incurred.
Cash and cash equivalents
For purposes of the statements of cash flows, the Company considers all
investments purchased with a maturity of three months or less to be cash
equivalents.
Use of estimates
Generally accepted accounting principles require management to estimate some
amounts reported in the financial statements; actual amounts could differ.
Compensated absences
Employees are entitled to paid vacations depending on job classification, length
of service, and other factors. The amount of compensation for future absences
cannot be reasonably estimated, and, accordingly, no liability has been recorded
in the accompanying financial statements.
Income taxes
Mark Henderson, Inc., with the consent of its shareholders, has elected to be
taxed under the provisions of Subchapter S of the Internal Revenue Code
effective March 1, 1997. Under those provisions, the Company does not pay income
taxes on their proportionate share of the Company's taxable income.
Spectrol, Inc. and Holland Electrical Systems, Inc. are taxable corporations,
and the financial statements include a provision for taxes on their earnings and
losses.
Holland Electrical Systems, Inc. reports income on long-term contracts on the
basis of the "completed contract" method of accounting for income tax purposes
while the aforementioned "percentage of completion" method of accounting is used
for financial reporting. Under the "completed contract" method, billings and
costs are accumulated during the period of construction, but no profits are
recognized until completion and acceptance of the work. The current liability of
deferred income taxes results from the deferral of gross profit on uncompleted
contracts. Deferred income taxes are reduced by the alternative minimum tax that
will be allowed as a credit in future years.
Spectrol, Inc. and Holland Electrical Systems, Inc. also incur deferred income
taxes as a result of timing differences between the recognition of depreciation
for income tax reporting and financial reporting. Accelerated depreciation is
used for tax reporting, and straight-line depreciation is primarily used for
financial statement reporting.
F-156
<PAGE> 232
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 2 - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS (in thousands):
<TABLE>
<CAPTION>
February 28, 1997 September 30,1997
----------------- -----------------
<S> <C> <C>
Total contracts $ 68,792 $ 91,911
-------------- --------------
Estimated costs -
Costs to date 24,027 43,806
Costs to complete 35,455 35,685
-------------- --------------
Total estimated costs 59,482 79,491
-------------- --------------
Estimated gross profit $ 9,310 $ 12,420
============== ==============
Amount billed to date $ 30,335 $ 50,117
Costs and estimated earnings in excess of billings 1,157 2,596
Billings in excess of costs and estimated earnings 3,350 2,102
-------------- --------------
Contract revenues earned 28,142 50,611
Costs to date 24,027 43,806
-------------- --------------
Gross profit earned $ 4,115 $ 6,805
-------------- --------------
</TABLE>
NOTE 3 - LONG-TERM DEBT
Long-term debt is summarized below: (in thousands)
<TABLE>
<CAPTION>
February 28, 1997 September 30,1997
----------------- -----------------
<S> <C> <C>
Line of credit with Wachovia Bank of Georgia, interest
at prime plus 0.25%, payable on demand, $2,000 unused at
September 30, 1997 and February 28, 1997 $ -0- $ -0-
Line of credit with Wachovia Bank, interest at prime plus
1.0% adjusted daily. Secured by all assets of the Company,
$146 unused at September 30, 1997 200 104
Various notes payable to bank and finance companies,
interest ranging from 2.9% to 11.9%, principle and
interest due monthly of $17, maturing through
February 2001, secured by vehicles and equipment 283 249
---------------- ----------------
483 353
Less current portion 340 236
---------------- ----------------
Long term debt $ 143 $ 117
================ ================
</TABLE>
F-157
<PAGE> 233
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 3 - LONG-TERM DEBT (continued)
Scheduled minimum maturities of the current and long-term debt at September 30,
1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998 $ 236
1999 74
2000 33
2001 8
2002 2
------
$ 353
======
</TABLE>
NOTE 4 - INVESTMENT IN SUBSIDIARIES
On October 21, 1996 Mark Henderson, Inc. purchased 300 shares of the outstanding
common stock of Spectrol, Inc. for $100,000. The purchase method was used to
account for the acquisition. The purchase price was allocated as follows (in
thousands):
<TABLE>
<S> <C>
Cash $ 15
Accounts receivable 659
Earnings in excess of billings 30
Employee receivables 3
Property and equipment --
Deferred credit (3)
Accounts payable (302)
Accrued liabilities (25)
Billings in excess of earnings (4)
Deferred taxes (2)
Notes payable (222)
Minority interest (49)
-----
$ 100
=====
</TABLE>
The accompanying financial statements for February 28, 1997 include operations
for Spectrol, Inc. for the six months ended April 30, 1997. Because the two
companies have different fiscal years, some intercompany transactions were not
eliminated in the consolidation. In the intervening period, Spectrol, Inc. had
$376,367 in billings to Mark Henderson, Inc. of which $247,538 is included in
accounts receivable at their fiscal year end.
Mark Henderson, Inc. acquired 45% of Holland Electrical Systems, Inc. in August,
1994. Holland Electrical Systems, Inc. is engaged in substantially the same
business as Mark Henderson, Inc.
NOTE 5 - RELATED PARTY TRANSACTIONS
Mark Henderson, Inc. leases its business premises at 5322 Snapfinger Park Drive
from stockholders on a month-to-month basis for $3,273 per month. Rent expense
under the lease for the short year ended September 30, 1997 was $22,911 and for
the year ended February 28, 1997 was $39,276. Mark Henderson, Inc. is a
guarantor on the mortgage for this property. The rent increased to $6,475 per
month starting October 1, 1997.
F-158
<PAGE> 234
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 5 - RELATED PARTY TRANSACTIONS (continued)
Holland Electrical Systems, Inc. leases its office facilities from Mike Holland,
who owns 21% of its common stock. Total lease expense for the period ended
September 30, 1997 was $10,850 and for the year ended February 28, 1997 was
$18,550.
The lease is currently on a month to month basis.
NOTE 6 - RETIREMENT PLAN
Mark Henderson, Inc. and Holland Electric Systems, Inc. sponsor 401(K) profit
sharing plans for all eligible employees who have completed one year of service
and attained the age of 21. Under the plan, employees may elect to defer a
percentage of their compensation each year subject to Internal Revenue Service
limits. The Company may make discretionary matching contributions equal to a
percentage of the amount of salary reductions elected. The Company may also make
a discretionary contribution equal to a percentage of eligible employees'
compensation.
The Company contribution to the plans for the period ended September 30, 1997
was $230,397, and for the year ended February 28, 1997 was $449,502.
NOTE 7 - INCOME TAXES
Mark Henderson, Inc. with the consent of its shareholder, has elected under the
Internal Revenue Code to be an S-corporation effective beginning March 1, 1997.
In lieu of corporation income taxes, the shareholders of an S corporation are
taxed on their proportionate share of the Company's taxable income. Spectrol,
Inc. and Holland Electrical Systems, Inc. will continue to be taxed as
C-corporations.
The components of the provision for income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
February 28, 1997 September 30, 1997
----------------- ------------------
<S> <C> <C>
Current income tax $ 2,180 $ 39
Deferred income tax (696) 12
------------ ------------
Total $ 1,484 $ 51
============ ============
</TABLE>
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards No. 109. (SFAS 109) is based on the assumption
that tax laws and financial accounting standards differ in their recognition and
measurement of assets, liabilities, equity, revenues, expenses, gains, and
losses. Therefore, differences arise between the amount of taxable income and
pretax financial income for a year, and the tax bases of assets or liabilities
differ from the amounts reported in financial statements. Since Holland
Electrical Systems, Inc. uses the completed contract method of accounting for
income tax purposes, the primary temporary differences between tax and financial
statements is the unrecognized profit on jobs in progress.
NOTE 8 - DEPRECIATION
The Company recognized $89,417 in depreciation of its property and equipment
during the period ended September 30, 1997 and $190,265 during the year ended
February 28, 1997.
F-159
<PAGE> 235
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 9 - LEASE COMMITMENTS
Mark Henderson, Inc. leases facilities at 2406 - 2408 Park Central Boulevard
under operating leases. The lease expires on September 30, 1999. The monthly
rent is $3,016 for the first two years and $3,267 for the third year. Rental
expense for the year ended September 30, 1997 was $15,080.
Mark Henderson, Inc. also leases facilities in Raleigh, North Carolina under an
operating lease that expires July, 2000. The lease commenced March 15, 1997 with
a monthly rental of $2,010. Rental expense for the short year ended September
30, 1997 was $13,756.
The Company leases several vehicles and a copier under noncancelable operating
leases.
Future minimum lease payments under the above leases are as follows (in
thousands):
<TABLE>
<S> <C>
1998 $ 156
1999 151
2000 115
2001 48
2002 -
------
$ 470
======
</TABLE>
Spectrol, Inc. leases its office and some of its equipment on a month to month
basis.
NOTE 10 - STOCK BONUS PLAN
Under certain circumstances, an officer of Holland Electrical Systems, Inc. has
the option to purchase shares of common stock of Holland Electrical Systems,
Inc. for amounts based upon the book value of the shares at the time of
exercise.
NOTE 11 - OFF-BALANCE-SHEET RISK AND CONCENTRATION OF CREDIT RISK
In March 1990, the Financial Accounting Standards issued Statement of Financial
Accounting Standards No. 105, Disclosure of Information about Financial
Instruments with Off-Balance-Sheet Risk and Financial Instruments with
Concentrations of Credit Risk. The pronouncement requires disclosure of
information about financial instruments for which risk could exceed amounts
reflected in the financial statements and information about significant
geographic, industry, or other concentrations of credit risk for all financial
instruments.
The Company has a potential concentration of credit risk in that it maintains
deposits with financial institutions in excess of amounts insured by FDIC.
Financial instruments which potentially expose the Company to concentrations of
credit risk consist primarily of trade accounts receivable. The Company has not
experienced significant losses related to receivables from individual customers
or groups of customers in a particular industry or geographic area. Due to these
factors, management believes no additional credit risk beyond amounts provided
for collection losses is inherent in the Company's accounts receivable.
F-160
<PAGE> 236
MARK HENDERSON, INC.
AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
CONTINUED
SEPTEMBER 30, 1997 AND FEBRUARY 28, 1997
NOTE 12 - COMPONENTS OF COMMON STOCK
Mark Henderson, Inc. $1 par value; 100,000 shares authorized; 1,000 shares
issued and outstanding.
Spectrol, Inc. $100 par value; 5,000 shares authorized; 400 shares issued and
outstanding.
Holland Electrical Systems, Inc. $1 par value; 100,000 shares authorized; 1,000
shares issued and outstanding.
NOTE 13 - CHANGE IN REPORTING ENTITY
The consolidated financial statements for September 30, 1997 and February 28,
1997 include the accounts of Holland Electrical Systems, Inc., a 45%-owned
subsidiary. Holland Electrical Systems, Inc. had previously been accounted for
under the equity method.
F-161
<PAGE> 237
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 the related statements of
income and retained earnings 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 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 the results of its operations
and its cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Elliott, Davis & Company, L.L.P.
Greenville, South Carolina
December 2, 1997
F-162
<PAGE> 238
DAVIS ELECTRICAL CONSTRUCTORS, INC.
BALANCE SHEETS
(IN THOUSANDS EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1998
------- -------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 6,203 $ 3,652
Accounts receivable 11,079 10,240
Costs and estimated earnings in excess of billings
on uncompleted contracts 769 2,459
Other assets 86 54
------- -------
Total current assets 18,137 16,405
PROPERTY AND EQUIPMENT 1,320 1,171
OTHER ASSETS
Cash value of life insurance 2,373 2,529
Deposit 771 771
Other assets 312 312
------- -------
3,456 3,612
------- -------
$22,913 $21,188
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 872 $ 1,434
Dividends payable 3,572 --
Accrued salaries and wages 2,142 1,089
Billings in excess of costs and estimated earnings
on uncompleted contracts 1,130 360
Accrued expenses and other liabilities 1,851 1,843
------- -------
Total current liabilities 9,567 4,726
DEFERRED COMPENSATION 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
Additional paid-in capital 130 130
Retained earnings 10,412 13,363
------- -------
10,604 13,555
------- -------
$22,913 $21,188
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-163
<PAGE> 239
DAVIS ELECTRICAL CONSTRUCTORS, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months
Ended
Year Ended June 30,
September 30, ----------------------
1997 1997 1998
----------- -------- -------
(Unaudited)
<S> <C> <C> <C>
CONTRACT REVENUE EARNED $ 100,020 $ 78,808 $64,756
COSTS OF EARNED REVENUE 82,101 64,982 56,653
--------- -------- -------
Gross profit 17,919 13,826 8,103
GENERAL AND ADMINISTRATIVE EXPENSES 14,196 5,962 5,254
--------- -------- -------
Income from operation 3,723 7,864 2,849
OTHER INCOME:
Interest Income 290 179 102
Interest Expense (2) (1) --
--------- -------- -------
Net income 4,011 8,042 2,951
RETAINED EARNINGS, BEGINNING OF YEAR 10,798 10,798 10,412
DIVIDENDS (4,397) (600) --
--------- -------- -------
RETAINED EARNINGS, END OF YEAR $ 10,412 $ 18,240 $13,363
========= ======== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-164
<PAGE> 240
DAVIS ELECTRICAL CONSTRUCTORS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Nine months ended
Year ended June 30,
September 30, ---------------------
1997 1997 1998
-------- ------- -------
(Unaudited)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 4,011 $ 8,042 $ 2,951
Adjustments to reconcile net income to net cash provided by
operating activities
(Gain) loss on sale of equipment 29 -- --
Depreciation 532 266 267
Changes in deferred and accrued amounts
Accounts receivable 3,061 3,033 839
Costs and estimated earnings in excess of billings on
uncompleted contracts (188) (834) (1,690)
Deposits (378) 20 32
Other assets -- (378) --
Accounts payable (578) (937) 562
Dividends payable (2,598) (2,598) (3,572)
Accrued salaries and wages 818 (183) (1,053)
Billings in excess of costs and estimated earnings on
uncompleted contracts (2,581) (2,469) (770)
Accrued expenses and other liabilities (2) 221 (8)
Deferred compensation 203 152 165
------- ------- -------
Net cash provided by operating activities 2,329 4,335 (2,277)
------- ------- -------
INVESTING ACTIVITIES
Proceeds from sale of equipment 18 -- --
Purchase of equipment (403) (269) (118)
Increase in cash value of life insurance (254) (166) (156)
------- ------- -------
Net cash used for investing activities (639) (435) (274)
------- ------- -------
FINANCING ACTIVITIES
Dividends (825) (600) --
------- ------- -------
Net cash used for financing activities (825) (600) --
------- ------- -------
Net increase in cash and cash equivalents 865 3,300 (2,551)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 5,338 5,338 6,203
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR 6,203 8,638 3,652
======= ======= =======
CASH PAID FOR
Interest $ 2 $ 1 $ --
======= ======= =======
Income taxes $ -- $ -- $ --
======= ======= =======
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES
The Company accrued $3,571,483 in 1997, for dividends on common stock.
The accompanying notes are an integral part of these financial
statements.
F-165
<PAGE> 241
DAVIS ELECTRICAL CONSTRUCTORS, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 31, 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 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.
F-166
<PAGE> 242
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, 1997
------------------
<S> <C>
The following summarizes accounts receivable:
Contract receivables 9,517
Contract retainages 1,432
Officers and employees 130
------
11,079
======
</TABLE>
NOTE 3 - CONTRACTS IN PROGRESS
<TABLE>
<CAPTION>
September 30, 1997
------------------
<S> <C>
The following summarizes uncompleted contracts:
Firm price contracts
Costs $ 23,159
Estimated earnings 6,322
--------
29,481
Less billings 30,213
--------
(732)
Unbilled costs on cost-plus contracts 371
--------
$ (361)
========
Included in current assets as:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 769
Included in current liabilities as:
Billings in excess of costs and estimated
earnings on uncompleted contracts 1,130
--------
$ (361)
========
</TABLE>
NOTE 4 - PROPERTY AND EQUIPMENT
Property and equipment at September 30, 1997 consists of the following:
<TABLE>
<CAPTION>
Accumulated
Cost Depreciation Net
---- ------------ ---
<S> <C> <C> <C>
Automobiles and trucks 1,359 739 620
Construction and related equipment 2,357 1,828 529
Office furniture and equipment 818 689 129
Leasehold improvements 273 231 42
----- ----- -----
4,807 3,487 1,320
===== ===== =====
</TABLE>
F-167
<PAGE> 243
NOTE 5 - NOTE PAYABLE
The Company has an unsecured $4,000,000 line of credit with a bank
which is partially guaranteed by 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, 1997
------------------
<S> <C>
Accrued expenses and other liabilities are summarized as follows:
Payroll taxes withheld and accrued $ 655
Workers' compensation and general liability insurance 829
State sales and use tax 27
Other liabilities 340
-----------------
$ 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, 1997
------------------
<S> <C>
Deferred compensation from appreciation of
units awarded to participants $ 5,277
Discounted at 8 percent for the time value of money
until the dates of estimated future payouts $ 2,535
--------------
Present value of deferred compensation $ 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.
F-168
<PAGE> 244
NOTE 7 - EMPLOYEE BENEFITS, CONTINUED
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.
NOTE 8 - LEASE COMMITMENTS
At September 30, 1997 and 1996, the Company was obligated under several
noncancellable 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>
1997
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
consists of the following components:
<TABLE>
<S> <C>
State income taxes currently payable $ 132
Reversal of prior years' deferred tax asset 878
-----------
Total $ 1,010
===========
</TABLE>
NOTE 9 - INCOME TAXES, CONTINUED
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.
F-169
<PAGE> 245
NOTE 10 - COMMITMENTS AND CONTINGENCIES, CONTINUED
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 markets. However, management believes that its
contract acceptance, billing and collection policies are adequate to minimize
the potential credit risk.
F-170
<PAGE> 246
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
Florida Industrial Electric, Inc.
We have audited the accompanying balance sheet of Florida Industrial Electric,
Inc. as of December 31, 1997, and the related statements of income and retained
earnings 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit 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 Florida Industrial Electric,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
SAPP & SAPP, P.A.
Winter Park, Florida
February 11, 1998
F-171
<PAGE> 247
FLORIDA INDUSTRIAL ELECTRICAL, INC.
BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
ASSETS
December 31, 1997 March 31, 1998
----------------- --------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 1,311 $ 641
Contract receivables 4,268 5,450
Costs and estimated earnings in
excess of billings on uncompleted
contracts 663 650
Deposits 5 7
Prepaid expenses and other current
assets 7 43
------------ ------------
Total current assets 6,254 6,791
------------ ------------
PROPERTY AND EQUIPMENT, NET: 487 554
------------ ------------
OTHER ASSETS:
Cash surrender value of life
insurance policies 71 71
Deposits 2
------------ ------------
Total other assets 73 71
------------ ------------
Total Assets $ 6,814 $ 7,416
============ ============
</TABLE>
F-172
<PAGE> 248
BALANCE SHEET
(in thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, 1997 March 31, 1998
----------------- --------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt $ 81 $ 79
Accounts payable 1,441 2,191
Payables to related parties 15 --
Billings in excess of costs and estimated
earnings on uncompleted contracts 718 789
Income tax currently payable 236 255
Deferred income tax 730 530
Other accrued expenses 242 122
-------------- --------------
Total current liabilities 3,463 3,966
-------------- --------------
LONG-TERM LIABILITIES:
Long-term debt less current maturities 565 550
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, $5 par value. Authorized
100 shares; issued 100 shares 1 1
Additional paid-in capital 20 20
Retained earnings 3,030 3,144
-------------- --------------
3,051 3,165
Treasury stock, at cost: 43 shares (265) (265)
-------------- --------------
Total stockholders' equity 2,786 2,900
-------------- --------------
Total Liabilities and
Stockholders' Equity $ 6,814 $ 7,416
============== ==============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-173
<PAGE> 249
FLORIDA INDUSTRIAL ELECTRICAL, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended March 31,
Year Ended ------------------------------
December 31, 1997 1997 1998
----------------- ------------ ------------
(unaudited)
<S> <C> <C> <C>
CONTRACT REVENUES EARNED $ 22,679 $ 4,124 $ 5,341
COST OF REVENUES EARNED 18,194 3,254 4,736
------------ ------------ ------------
GROSS PROFIT 4,485 850 605
GENERAL AND ADMINISTRATIVE EXPENSES 2,492 511 466
OTHER INCOME (EXPENSE):
Interest Expense -- (22) --
Interest and dividend income 45 3 21
Net gain (loss) on sale of property
and equipment 45 -- 9
Recovery of bad debts 25 -- --
------------ ------------ ------------
Other 9 5 --
------------ ------------ ------------
INCOME BEFORE INCOME TAXES 2,117 325 169
PROVISION FOR INCOME TAXES 810 124 55
------------ ------------ ------------
NET INCOME 1,306 201 114
RETAINED EARNINGS, BEGINNING BALANCE 1,724 1,724 3,030
------------ ------------ ------------
RETAINED EARNINGS, ENDING BALANCE $ 3,030 $ 925 $ 3,144
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-174
<PAGE> 250
FLORIDA INDUSTRIAL ELECTRICAL, INC.
STATEMENT OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Three Months Ended
Year Ended March 31,
December 31, ------------------------------
1997 1998 1998
------------ ------------ ------------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income 1,306 201 114
Depreciation and amortization 126 29 34
Net gain on sale of property and equipment (45) -- (9)
Deferred income tax expense 323 -- (200)
Other non-cash items (15)
Changes in assets and liabilities:
(Increase) decrease in contract receivables (930) (667) (1,182)
(Increase) decrease in receivables
from related parties 1 4 --
(Increase) decrease in other receivables 3 -- --
Costs and estimated earnings in excess of billings on uncompleted 153 816 13
contracts
(Increase) decrease in other current assets (3) (3) (38)
(Increase) decrease in other assets -- 3 2
Increase (decrease) in accounts payable and accrued expenses 316 (215) 630
Increase (decrease) in payables to related parties (21) (36) (15)
Billings in excess of costs and estimated earnings on uncompleted 250 (469) 71
contracts
Increase (decrease) in income taxes
currently payable 165 52 19
------------ ------------ ------------
Total adjustments 323 (486) (675)
------------ ------------ ------------
Net cash provided (used) by operating activities 1,629 (285) (561)
------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 49 -- --
Capital expenditures for property and equipment (100) (19) (92)
------------ ------------ ------------
Net cash provided (used) by investing activities 51 (19) (92)
------------ ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from short-term notes 200 269 --
Principal payments on short-term notes (450) -- (17)
Principal payments on long-term debt 164 -- --
------------ ------------ ------------
Net cash provided (used) by financing activities (414) 269 (17)
------------ ------------ ------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 1,164 (35) (670)
CASH AND CASH EQUIVALENTS, BEGINNING BALANCE 147 148 1,311
------------ ------------ ------------
CASH AND CASH EQUIVALENTS, ENDING BALANCE $ 1,311 $ 113 $ 641
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 88 $ -- $ --
Income taxes paid 323 72 36
Noncash investing and financing activities:
Long-term debt incurred related to acquisition of property and equipment $ 138 $ -- $ --
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-175
<PAGE> 251
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Activity
The Company is a special trade contractor primarily engaged in
nonresidential electrical work.
Work is performed primarily under fixed-price contracts and unit-price
contracts. Occasionally, cost-plus contracts are entered into.
In May 1998, the Company and its stockholders entered into a definitive
agreement with Integrate Electrical Services, Inc. (IES), pursuant to
which all outstanding shares of the 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 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 interim financial statements for the three months ended March 31,
1998 and 1997, are unaudited and have been prepared pursuant to the
rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete
financial statements. In the opinion of the Company's management, the
unaudited interim financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a
fair presentation. The results of operations for the interim periods
are not necessarily indicative of the results for the entire fiscal
year.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and revenue and expenses during the
period reported. Actual results could differ from those estimates.
Revenue and Cost Recognition
Contract revenues and costs on all significant long-term contracts are
recognized using the percentage of completion method of accounting for
each contract. The percentage of completion method recognizes
F-176
<PAGE> 252
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
revenue and cost as the work progresses. It takes into account the
estimate of total contract revenue and cost expected to be realized at
completion.
Under the percentage of completion method, revenue is recognized based
on the percentage that cost to date bears to total estimated cost,
based on current estimates of cost to complete. No percentage of
completion is recognized in the early stages of a contract (usually
less than 5% complete) and any cost to date is not recognized.
As contracts can extend over one or more years, revisions in estimates
of cost and earnings during the course of the work are reflected in the
accounting period in which the facts which require the revision become
known. Provisions for estimated losses on uncompleted contracts are
made in the period in which such losses are determined.
Revenues from cost-plus contracts are recognized on the basis of costs
incurred plus profit earned during the period.
Contract revenue includes approved change orders, unpriced change
orders initiated by the customer to the extent of cost incurred and
known unit-price variances. Claims are recognized only when realization
is probable and the amount can be reliably estimated.
Contract cost includes all direct materials, labor, subcontract and
other costs, and indirect costs identifiable with or allocable to the
contract. Beginning August 1, 1996, the Company began allocating the
cost of all owned equipment used for contracts directly to contract
cost. Unallocated indirect and warranty costs are charged to expense as
incurred and are included in cost of revenues earned. Unallocated
material discounts earned are treated as a reduction of cost of
revenues earned. General and administrative costs are charged to
expense as incurred.
The current assets, "Costs and estimated earnings in excess of billings
on uncompleted contracts," represents revenues recognized in excess of
amounts billed and costs incurred on contracts with no percentage of
completion recognized. The current liability, "Billings in excess of
costs and estimated earnings on uncompleted contracts," represents
billings in excess of revenues recognized.
Cash and Cash Equivalents
The Company considers the following to be cash or cash equivalents: all
cash on hand; demand
F-177
<PAGE> 253
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
deposits, savings accounts, money market accounts and certificates of
deposit with financial institutions; brokerage houses' cash funds;
mutual funds' cash funds; and other highly liquid debt instruments
purchased with a maturity of three months or less.
Receivables
Receivables are stated at net realizable value.
Property and Equipment
Property and equipment are carried at cost less accumulated
depreciation. Depreciation is computed by both the straight-line and
accelerated methods over the estimated useful lives of the assets.
Expenditures for maintenance and repairs are expense as incurred.
Replacements and betterments which increase the value or materially
extend the life of the related asset are capitalized. When assets are
sold or retired, the cost and accumulated depreciation is removed from
the accounts and any gain or loss is included in income.
Intangibles
Intangibles are amortized on a straight-line basis over five years.
Income Taxes
The Company accounts for certain income and expense items differently
for financial reporting and income tax purposes. Deferred income taxes
reflect the estimated impact of these temporary timing differences by
applying currently enacted tax laws. The nature of significant timing
differences is described in the note entitled, "Income Taxes."
Financial Instruments and Risk Concentration
The Company is a minority business enterprise and operates throughout
the southeastern United States, primarily in Florida.
F-178
<PAGE> 254
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash
equivalents and contract receivables.
The Company places cash and temporary cash investments with high
quality financial institutions. At times, such investments may be in
excess of the FDIC insurance limit.
The Company provides credit, in the normal course of business, for
construction contracts with both governmental and private entities.
Significant contracts normally require payment and performance bonds.
To reduce credit risk, the Company performs a credit evaluation before
entering into a contract for which no bond is required.
Historically, the Company has not incurred any significant credit
related losses. In management's opinion, the Company's exposure to
concentrations of credit risk is limited.
NOTE B - CONTRACT RECEIVABLES
<TABLE>
<CAPTION>
1997
------------
<S> <C>
Completed contracts, including
retainage $ 1,034
Contracts in progress:
Progress billings 2,335
Retainage 899
------------
$ 4,268
============
</TABLE>
F-179
<PAGE> 255
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
NOTE C - COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Costs incurred on uncompleted
contracts $ 20,012
Estimated gross profit earned 4,264
----------
24,276
Less: Billings to date 24,331
----------
$ (55)
==========
Included in accompanying balance
sheet under the following
captions:
Costs and estimated earnings in
excess of billings on uncompleted contracts $ 663
Billings in excess of costs and
estimated earnings on uncompleted contracts (718)
----------
$ (55)
==========
</TABLE>
F-180
<PAGE> 256
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
NOTE D - PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
1997
----------
<S> <C>
Automotive equipment 797
Communication equipment 8
Construction equipment 101
Leasehold improvements 44
Office furniture and equipment 114
----------
1,064
Less: Accumulated depreciation 577
Property and equipment, net $ 487
==========
</TABLE>
The principal lives (in years) used in determining
depreciation are as follows:
<TABLE>
<S> <C>
Automotive equipment 5
Communication equipment 10
Construction equipment 3 - 10
Leasehold improvements 3 - 40
Office furniture and equipment 3 - 10
</TABLE>
F-181
<PAGE> 257
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
NOTE E - LONG-TERM DEBT
<TABLE>
<CAPTION>
1997
----
<S> <C>
Secured:
Installment notes, payable in monthly installments of $5,958,
secured by automotive equipment, including interest
at 8.54% to 9.54% $148
Installment note, payable in monthly installments of $267,
secured by office equipment, including interest
at 21% 4
Unsecured:
Note payable - stockholder,
due 12-31-00, interest 8% 20
Note payable - stockholder,
due 12-17-01, interest 8% 12
Note payable - stockholder,
due 03-29-00, interest 8% 75
Note payable - stockholder,
due 07-19-00, interest 8% 50
</TABLE>
F-182
<PAGE> 258
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
NOTE E - LONG-TERM DEBT - CONTINUED
<TABLE>
<CAPTION>
1997
------
<S> <C>
Note payable - former
stockholder, due 12-17-01,
interest 8% 57
Note payable - former
stockholder, due 03-29-00,
interest 8% 75
Note payable - former
stockholder, due 07-19-00,
interest 8% 50
Installment note, payable to
former stockholder for treasury
stock in annual installments on
December 31 of $19,409, plus
interest at prime 155
-----
Total long-term debt 646
Less: current maturities 81
-----
Total long-term portion $ 565
-----
</TABLE>
F-183
<PAGE> 259
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
Future maturities are as follows:
The amount of long-term debt
maturing in each of the next
five years and thereafter:
<TABLE>
<S> <C>
Current maturities $ 82
Second year 61
Third year 329
Fourth year 96
Fifth year 21
Thereafter 58
----------
Total long-term debt $ 647
==========
</TABLE>
F-184
<PAGE> 260
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
NOTE F - OPERATING LEASES
Future minimum rental payments required under non-cancelable operating
leases with initial or remaining terms of one year or more consisted of
the following at December 31, 1997:
<TABLE>
<CAPTION>
Year ending December 31:
<S> <C>
1998 $ 146
1999 115
2000 30
--------
Total future minimum rental payments $ 291
========
</TABLE>
The operating lease agreements are for automotive equipment and office
and warehouse space and require additional payment for taxes, insurance
and maintenance (see Note I).
Rental expense, including short-term rentals, was as follows:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Minimum rentals under noncancelable
operating leases $ 133
Contingent rentals --
Short-term rental agreements 737
--------
Total rental expense $ 870
========
</TABLE>
NOTE G - EMPLOYEE BENEFIT PLAN
The Company has a contributory profit sharing plan for the employees.
Annual discretionary contributions have been made to the profit sharing
trust to provide funds with which to pay benefits at retirement.
Employees may also make voluntary contributions. The Company employee
benefit plan contribution was $106,417 for 1997.
F-185
<PAGE> 261
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
NOTE H - INCOME TAXES
Provision for income taxes is comprised of the following components:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Current:
Federal $ 417
State 70
--------
487
--------
Deferred:
Federal 276
State 47
--------
323
--------
Total provision $ 810
========
</TABLE>
Significant temporary differences and carryforwards that give rise to
deferred income taxes relate to the use of the completed contract
method of accounting for long-term contracts for regular tax purposes.
The tax effects of these differences and carryforwards are as follows:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Deferred tax liabilities $ 1,444
Deferred tax assets 714
--------
Net deferred tax $ 730
========
</TABLE>
The net current and noncurrent components of deferred income taxes
included in the balance sheet are as follows:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Net current liabilities $ 730
========
</TABLE>
F-186
<PAGE> 262
FLORIDA INDUSTRIAL ELECTRICAL, INC.
NOTES TO FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
NOTE H - INCOME TAXES - CONTINUED
The Company had available, at December 31, 1997, Federal alternative
minimum tax credit carryforwards of approximately $644,000 which are
available to reduce future Federal regular income tax over an
indefinite period.
In addition, the Company had state alternative minimum tax credit
carryforwards of approximately $69,000 which are available to reduce
future state income tax over an indefinite period.
The tax benefits of these credit carryforwards are reflected in the
deferred tax assets.
NOTE I - RELATED PARTY TRANSACTIONS
Assets and liabilities with officers and stockholders consist
of the following:
<TABLE>
<CAPTION>
1997
----
<S> <C>
Payables to related parties 15
Long-term debt (Note F) 157
</TABLE>
Interest expense on long-term debt was $ 16,986 for 1997
The Company leases office and warehouse space from a stockholder and
former stockholder for $4,815 per month including sales tax (see Note
F). Rent expense was $57,780 for 1997.
F-187
<PAGE> 263
INDEPENDENT AUDITORS' REPORT
Board of Directors
Galbraith Acquisition Company, Inc.
Abilene, Texas
We have audited the accompanying consolidated balance sheets of Galbraith
Acquisition Company, Inc. and its subsidiary, as of December 31, 1997, and the
related consolidated statements of income and retained earnings 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Galbraith
Acquisition Company, Inc. and its subsidiary, as of December 31, 1997, and the
results of its operations and its cash flows for the year then ended in
conformity with generally accepted accounting principles.
Wolfe and Company, P.C.
Abilene, Texas
February 27, 1998
F-188
<PAGE> 264
GALBRAITH ACQUISITION COMPANY, INC.
CONSOLIDATED BALANCE SHEETS
(In Thousands, except share data)
ASSETS
<TABLE>
<CAPTION>
December 31, 1997 March 31, 1998
----------------- --------------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash $ 362 $ 52
Contracts receivable, net of allowance of $4,157
in 1997 1,248 1,396
Accounts receivable - other 32 1
Costs and estimated earnings in excess of billings
on uncompleted contracts 80 100
Inventory 2 --
Prepaid expenses 22 56
------ ------
Total current assets 1,746 1,605
------ ------
PROPERTY AND EQUIPMENT, net 331 267
------ ------
TOTAL ASSETS $2,077 $1,872
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt $ 213 $ 35
Accounts payable 419 443
Accrued liabilities 149 137
Billings in excess of costs and estimated
earnings on uncompleted contracts 390 509
Federal income taxes payable 172 --
------ ------
Total current liabilities 1,343 1,124
------ ------
NONCURRENT LIABILITIES:
Long-term debt, net of current maturities 142 133
Deferred Federal income taxes 22 22
------ ------
Total noncurrent liabilities 164 155
------ ------
STOCKHOLDERS' EQUITY:
Common stock, no par value; 1,000,000 shares authorized;
1,000 shares issued and outstanding 1 1
Retained earnings 569 592
------ ------
Total stockholders' equity 570 593
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $2,077 $1,872
====== ======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-189
<PAGE> 265
GALBRAITH ACQUISITION COMPANY, INC.
CONSOLIDATED STATEMENTS OF INCOME AND RETAINED EARNINGS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
-----------------------------------
December 31 March 31 March 31
1997 1997 1998
----------- -------- --------
(unaudited)
<S> <C> <C> <C>
REVENUES EARNED $ 6,061 $ 956 $ 1,567
COST OF REVENUES EARNED 4,848 782 1,341
------- ------- -------
GROSS PROFIT FROM CONSTRUCTION 1,213 174 226
------- ------- -------
GENERAL AND ADMINISTRATIVE EXPENSES 619 128 109
------- ------- -------
OTHER INCOME (EXPENSE):
Interest income 1 -- 1
Interest expense (59) (9) (5)
Recovery of bad debt and miscellaneous income 2 3 6
Gain (loss) on sale of assets (1) 1 --
------- ------- -------
Net other income (expense) (57) (5) 2
------- ------- -------
INCOME BEFORE FEDERAL INCOME TAXES 537 41 119
------- ------- -------
PROVISION FOR FEDERAL INCOME TAXES:
Current 186 9 35
Deferred (benefit) expense 1 -- --
------- ------- -------
Total provision for Federal income taxes 187 9 35
------- ------- -------
NET INCOME $ 350 $ 32 $ 84
======= ======= =======
RETAINED EARNINGS, Beginning of year $ 219 $ 569
DIVIDENDS -- (61)
------- -------
RETAINED EARNINGS, End of year $ 569 $ 592
======= =======
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-190
<PAGE> 266
GALBRAITH ACQUISITION COMPANY, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
December 31 March 31 March 31
1997 1997 1998
----------- -------- --------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 350 $ 32 $ 84
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Depreciation 59 12 12
(Gain) loss on sales of assets 1 (1) --
Deferred Federal income taxes 1 -- --
Changes in assets and liabilities:
(Increase) decrease in:
Contracts receivable 164 606 (148)
Accounts receivable - other (17) 13 31
Costs and estimated earnings in excess of
Billings on uncompleted contracts (18) 31 (20)
Inventory 12 (3) 2
Prepaid expenses (1) (49) (34)
Increase (decrease) in:
Accounts payable (57) (266) 24
Accrued liabilities 109 49 (12)
Billings in excess of costs and estimated
Earnings on uncompleted contracts 82 (55) 119
Federal income taxes payable 169 -- (172)
----- ----- -----
Total adjustments 504 337 (198)
----- ----- -----
Net cash provided by operating activities 854 369 (114)
----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (36) -- --
Proceeds from sales of property and equipment 12 66 52
----- ----- -----
Net cash provided by (used in) investing activities (24) 66 52
----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Capital Contribution -- 199 --
Dividends -- -- (61)
Line of credit, net (395) (292) (187)
Proceeds from borrowings on notes payable -- 15 --
Payment of debt on stockholder loan (30) -- --
Payment of debt on notes payable (108) (395) --
----- ----- -----
Net cash (used in) financing activities (533) (473) (248)
----- ----- -----
NET INCREASE (DECREASE) IN CASH 297 (38) (310)
CASH, Beginning of period 65 65 362
----- ----- -----
CASH, End of period $ 362 $ 27 $ 52
===== ===== =====
Supplementary disclosures:
Cash paid during the year for interest $ 64 $ 9 $ 5
Cash paid during the year for income taxes $ 17 $ 8 $ 207
</TABLE>
The accompanying notes are an integral part of the
consolidated financial statements.
F-191
<PAGE> 267
GALBRAITH ACQUISITION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
NOTE 1: ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES
GENERAL
Galbraith Acquisition Company, Inc. (the Corporation) was incorporated under the
laws of the state of Texas on September 17, 1994. The Corporation was formed as
a holding company for the purpose of acquiring its wholly owned subsidiary,
Galbraith Electric Company. Galbraith Electric Company, Inc. was founded in 1941
and is an electrical contractor whose principal activity is electrical
installation on new and existing commercial buildings. The work is performed
under fixed-price and modified fixed-price contracts. Most projects are located
in the central Texas area. The length of the contracts vary but are typically
less than one year.
In May, 1998, the Company and its stockholders entered into a definitive
agreement with Integrate Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock was exchanged for cash. In
addition, the key executives of the Company entered into employment agreements
with the Company and IES which 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 interim financial statements for the three months ended March 31, 1998 and
1997, are unaudited and have been prepared pursuant to the rules and regulations
of the Securities and Exchange Commission. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of the Company's
management, the unaudited interim financial statements contain all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation. The results of operations for the interim periods are not
necessarily indicative of the results for the entire fiscal year.
Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were used.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Galbraith
Acquisition Company, Inc. (a holding company) and its wholly owned
subsidiary. Galbraith Electric Company, Inc. is the acquisition company's
only subsidiary. All significant intercompany transactions are eliminated in
the consolidation.
REVENUE AND COST RECOGNITION
Revenues from construction contracts are recognized on the
"percentage-of-completion" method, measured by the percentage of costs incurred
to date to the total estimated costs for each contract. That method is used
because management considers total cost to be the best available measure of
progress on the contracts. Because of inherent uncertainties in estimating
costs, it is at least reasonably possible that the estimates used will change
within the near term.
F-192
<PAGE> 268
GALBRAITH ACQUISITION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
Contract costs include all direct material, labor costs, and those other costs
related to contract performance such as indirect labor and insurance costs.
Selling, general, and administrative costs are charged to expense as incurred.
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 may result in revisions to costs and income, which
are recognized in the period in which the revisions are determined. Changes in
estimated job profitability resulting from job performance, job conditions,
contract penalty provisions, claims, change orders, and settlements, are
accounted for as changes in estimates in the current period.
The asset, costs and estimated earnings in excess of billings on uncompleted
contracts, represents revenues recognized in excess of amounts billed. The
liability, billings in excess of costs and estimated earnings on uncompleted
contracts, represents billings in excess of revenues recognized.
INVENTORY
Inventory consists principally of materials and are valued at the lower of cost,
first-in, first-out method, or market.
PROPERTY AND EQUIPMENT
Property and equipment are stated at historical cost, net of accumulated
depreciation. Depreciation is computed using the straight-line method and
amounted to $59,178 and $60,408, including the depreciation for the excess cost
over net assets attributable to equipment, for the years ended December 31, 1997
and 1996, respectively. The excess of cost over net assets attributable to
equipment is being depreciated using the straight-line method over the estimated
remaining useful lives of the assets and amounted to $8,663 for each of the
years ended December 31, 1997 and 1996. Estimated lives used in calculating
depreciation are summarized by major asset category as follows:
- -------------------------------------------- ----------------------------
Category Useful Life
Building and improvements 31 to 40 years
Construction equipment 7 to 10 years
Vehicles 5 years
Furniture and office equipment 5 to 10 years
Maintenance, repairs, and minor replacements are charged to expense as incurred;
major replacements and betterments are capitalized. The cost of assets, which
are sold or retired, and the related accumulated depreciation are removed from
the accounts at the time of disposition, and any resulting gain or loss is
reflected in income for the period.
FEDERAL INCOME TAXES
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due, plus deferred taxes
resulting from timing differences in the recognition of expense items for
financial accounting and tax purposes. The principal timing differences relate
to depreciation and bad debt
F-193
<PAGE> 269
GALBRAITH ACQUISITION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
expense. The deferred taxes represent the future tax return consequences of
those differences, which will either be taxable or deductible when the assets
and liabilities are recovered or settled.
CASH EQUIVALENTS
For the purpose of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of the Company's long-term debt approximates fair value
based on management's best estimate of interest rates that would be available to
the Company for similar debt obligations at December 31, 1997.
NOTE 2: CONTRACTS RECEIVABLE
Contracts receivable consisted of the following at December 31, 1997:
1997
Billed on completed contracts $ 114
Billed on uncompleted contracts 864
Retainages on uncompleted contracts 274
------
Total 1,252
Less allowance for doubtful amounts 4
------
Net contracts receivable $1,248
======
Receivables from Faulkner Construction Co. on the Grand Courts job ($268,730),
Vratsinas Construction Co. on the Winn Dixie job ($157,000), Templeton
Construction Co. on the ADAL Dorms job ($126,570), and Archer-Western
Contractors, Ltd on the Wichita Falls Claims Processing Center job ($89,656)
represent over 51% of total contracts receivable at December 31, 1997.
NOTE 3: COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
December 31, 1997
-----------------
Costs incurred on uncompleted contracts $2,652
Estimated earnings 531
------
Total 3,183
Less applicable progress billings 3,493
------
Net $ (310)
======
F-194
<PAGE> 270
GALBRAITH ACQUISITION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
The aforementioned amounts are included in the accompanying balance sheet under
the following captions:
December 31, 1997
-----------------
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 80
Billings in excess of costs and estimated
earnings on uncompleted contracts (390)
-----
Net $(310)
=====
NOTE 4: PROPERTY AND EQUIPMENT
The following is a summary of property and equipment (at cost), less accumulated
depreciation at December 31, 1997:
Buildings and improvements $139
Construction equipment 283
Vehicles 90
Furniture and office equipment 69
----
Total property and equipment 581
Less accumulated depreciation 250
----
Net property and equipment $331
====
NOTE 5: NOTE PAYABLE
The subsidiary company's bank provides $750,000 on a revolving line of credit,
of which $-0- had been drawn at December 31, 1997 and $395,000 had been drawn at
December 31, 1996. The current line of credit was renewed on April 30, 1997 and
matures on April 30, 1998, with interest tied to the bank's base rate. The line
of credit is secured by the Company's accounts receivable, contract rights, and
personal guaranties by certain directors of the Company. There are no
compensating balance requirements or commitment fees.
NOTE 6: LONG-TERM DEBT
Long-term debt consisted of the following, at December 31, 1997:
F-195
<PAGE> 271
GALBRAITH ACQUISITION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
1997
Note payable to bank, payable in monthly installments of $618
including interest at 2.75% above Wall Street Journal prime rate,
matures March 19, 2012, secured by all assets of the Company and a
personal guaranty by an officer of the Company. $ 52
Note payable to bank, payable in monthly installments of $2,424,
including interest at 2.75% above Wall Street Journal prime rate,
matures March 19, 1999, secured by all assets of the Company and a
personal guaranty by an officer of the Company. 33
Note payable to bank, payable in monthly installments of $864,
including interest at 2.75% above Wall Street Journal prime rate,
matures January 12, 2014, secured by deed of trust on real estate and
personal guaranty by an officer of the Company. 77
Vehicle notes payable to a bank and vehicle financing company,
payable in monthly installments ranging from $264 to $461,
including interest at rates from 7.9% to 9.5%, maturity dates
from January 10, 1997 to March 26, 2001, secured by vehicles. 13
Note payable to bank, payable in monthly installments of $7,800
including interest at the bank's base rate plus 1%, matures
September 13, 1998, secured by commercial pledge of subsidiary
stock, inventory, equipment, receivables, and commercial
guaranties of stockholders. 150
Note payable to stockholder, interest is payable in semi-annual
installments at NationsBank in Temple, Texas prime plus 1%,
matures September 9, 1998, unsecured. 30
------
Total 355
Less current maturities 213
Net long-term debt $ 142
=====
F-196
<PAGE> 272
GALBRAITH ACQUISITION COMPANY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1997
Principal payments on long-term debt are due as follows:
- ---------------------------- ------
Year Ending
-----------
December 31, 1998 $ 213
December 31, 1999 14
December 31, 2000 8
December 31, 2001 6
December 31, 2002 5
Thereafter 108
-----
Total $ 354
=====
NOTE 7: RETIREMENT PLAN
The Company has a 401(k) retirement plan that covers substantially all
employees. Under the plan, employees may contribute up to 15% of their
compensation. The Company matches 50% of the employee contributions with a
maximum contribution up to 2.5% of the employees compensation. The total Company
contributions including administrative costs for the years ended December 31,
1997 and 1996 were $14,343 and $8,495, respectively.
F-197
<PAGE> 273
Independent Auditor's Report
To the Board of Directors and Stockholders
Arc Electric, Incorporated
Chesapeake, Virginia
We have audited the accompanying balance sheet of Arc Electric,
Incorporated as of December 31, 1997 and the related statements of income, cash
flows, and stockholders' equity for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Arc Electric,
Incorporated at December 31, 1997, and the results of its operations and its
cash flows for the year then ended, in conformity with generally accepted
accounting principles.
Edmondson, LedBetter & Ballard, L.L.P.
Norfolk, Virginia
August 27, 1998
F-198
<PAGE> 274
ARC ELECTRIC, INCORPORATED
BALANCE SHEETS
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $1,612 $2,081
Accounts receivable
Trade, net of allowance of $104 in 1997 2,127 3,977
Retainage 346
Stockholder 35
Affiliate 5
Other receivables 6
Inventory 49 76
Costs and estimated earnings in excess of billings on
uncompleted contracts 659 68
Prepaid expense 21 41
------ ------
TOTAL CURRENT ASSETS 4,860 6,243
------ ------
PROPERTY AND EQUIPMENT, net 480 443
OTHER ASSETS
Cash value of life insurance, net of $34 loan in 1997 31 65
Deposits 4 4
------ ------
TOTAL OTHER ASSETS 35 69
------ ------
TOTAL ASSETS $5,375 $6,755
====== ======
</TABLE>
See Accompanying Notes to Financial Statements
F-199
<PAGE> 275
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
December 31, June 30,
1997 1998
------------ ----------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Current maturities of long-term debt $ 115 $ 121
Accounts payable and accrued expenses 1,407 1,657
Billings in excess of costs and estimated earnings on
uncompleted contracts 171 517
Deferred income taxes 389 389
Income taxes payable 50 296
Other current liabilities 89 --
------ ------
TOTAL CURRENT LIABILITIES 2,221 2,980
LONG-TERM DEBT, net of current maturities 93 107
DEFERRED INCOME TAXES 33 32
------ ------
TOTAL LIABILITIES 2,347 3,119
------ ------
STOCKHOLDERS' EQUITY
Common stock, par value $1 per share, authorized
50,000 shares, 111 shares issued and outstanding -- --
Additional paid-in capital 152 143
Retained earnings 2,876 3,493
------ ------
TOTAL STOCKHOLDERS' EQUITY 3,028 3,636
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $5,375 $6,755
====== ======
</TABLE>
See Accompanying Notes to Financial Statements
F-200
<PAGE> 276
ARC ELECTRIC, INCORPORATED
STATEMENTS OF INCOME
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended June 30,
For The Year Ended ---------------------------
December 31, 1997 1997 1998
------------------ -------- ----------
(Unaudited)
<S> <C> <C> <C>
Contracting Revenues Earned $ 19,004 $ 9,032 $ 7,196
Cost of Revenues Earned 13,497 6,694 5,496
-------- -------- --------
GROSS PROFIT 5,507 2,338 1,700
General and Administrative Expense 2,763 1,274 814
-------- -------- --------
Income from Operations 2,744 1,064 886
-------- -------- --------
Other Income (Expense)
Interest expense (24) (10) (15)
Other 103 37 15
-------- -------- --------
OTHER INCOME, NET 79 27 --
-------- -------- --------
INCOME BEFORE PROVISION FOR 2,823 1,091 886
INCOME TAXES
Provision For Income Taxes 1,095 423 269
-------- -------- --------
NET INCOME $ 1,728 $ 668 $ 617
======== ======== ========
</TABLE>
See Accompanying Notes to Financial Statements
F-201
<PAGE> 277
ARC ELECTRIC, INCORPORATED
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
For the Year Six Months Ended June 30,
Ended -------------------------
December 31, 1997 1997 1998
----------------- ------- --------
(Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ................................................... $ 1,728 $ 668 $ 617
Adjustments to reconcile net income to net cash provided
by operating activities-- ................................. 47
Depreciation and amortization ............................. 118 28
(Gain) loss on disposal of assets ......................... (3) -- --
Provision for uncollectable accounts ...................... 43 -- --
Increase in cash value of life insurance .................. (10) -- (34)
Deferred income taxes ..................................... 530 -- (1)
Increase (decrease) in operating assets
Accounts receivable .................................. (1,031) (2,658) (1,458)
Inventory ............................................ 2 9 (27)
Costs and estimated earnings in excess of billings
on uncompleted contracts ........................... (544) 11 591
Prepaid expense ...................................... (9) (31) (20)
Deposits and Other ................................... (2) (36) --
Increase (decrease) in operating liabilities
Accounts payable and accrued expenses ................ 663 1,643 250
Billings in excess of costs and estimated earnings
on uncompleted contracts ........................... (123) 374 346
Income taxes payable ................................. (69) 234 246
Other current liabilities ............................ 86 (19) (89)
------- ------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES ............ 1,379 223 468
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisitions of property and equipment ....................... (312) (130) (10)
Proceeds from sale of equipment .............................. 6 -- --
------- ------- -------
NET CASH USED BY INVESTING ACTIVITIES ................ (306) (130) (10)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from long-term debt ................................. 152 93 20
Principal payments on long-term debt ......................... (76) -- --
Redemption of common stock ................................... (109) -- (9)
------- ------- -------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ..... (33) 93 11
NET INCREASE IN CASH AND CASH EQUIVALENTS ...................... 1,040 186 469
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR ................... 572 572 1,612
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR ......................... $ 1,612 $ 758 $ 2,081
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest .................................................. $ 16 $ 0 $ 0
======= ======= =======
Income taxes .............................................. $ 63 $ 189 $ 50
======= ======= =======
</TABLE>
See Accompanying Notes to Financial Statements
F-202
<PAGE> 278
ARC ELECTRIC, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
(In Thousands, Except Share Amounts)
<TABLE>
<CAPTION>
Total
Stock-
Paid-in Retained holders'
Shares Amount Capital Earnings Equity
------- ------------ ------- -------- --------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1997 126 $ -- $ 170 $ 1,239 $ 1,409
Reacquired shares (15) -- (18) (91) (109)
Net income -- -- -- 1,728 1,728
------- ------------ ------- ------- -------
BALANCE, December 31, 1997 111 -- 152 2,876 3,028
------- ------------ ------- ------- -------
Other (unaudited) -- (9) -- (9)
Net Income (unaudited) -- -- -- 617 617
------- ------------ ------- ------- -------
BALANCE, June 30, 1998 (unaudited) 111 $ -- $ 143 $ 3,493 $ 3,636
======= ============ ======= ======= =======
</TABLE>
See Accompanying Notes to Financial Statements
F-203
<PAGE> 279
ARC ELECTRIC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
NATURE OF BUSINESS
Arc Electric, Incorporated, a Virginia Corporation, is an electrical
contractor headquartered in Chesapeake, Virginia. The Company specializes in
hospital, industrial and office structures. The Company also installs
industrial controls consisting of pneumatic, electrical and computer-based
systems. The Company performs the majority of its contract work under fixed
price contracts, with contract duration generally ranging from five to nine
months. Arc Electric is a regional subcontractor operating from Richmond and
southwestern Virginia through South Carolina.
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 the Company's common stock were
exchanged for cash and shares of IES common stock. In addition, the key
executives of the Company have 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 interim financial statements for the six 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.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 the reported amounts of revenues and expenses during the
reporting period. Actual results could vary from the estimates that were
used. Reference is made to the "Revenue Recognition" section below for
discussion of significant estimates reflected in the Company's financial
statements.
REVENUE RECOGNITION The Company recognizes revenue from long-term
contracts on the percentage-of-completion method, measured by the percentage
of costs incurred to date compared to estimated total costs for each
contract. Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs, and depreciation. Provisions for the total
estimated losses, if any, on uncompleted contracts are made in the year 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 year in which the revisions are determined. An amount equal to contract
costs attributable to claims is included in revenues when realization is
probable and the amount can be reliably estimated.
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon the 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 the 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.
(Continued on Next Page)
F-204
<PAGE> 280
ARC ELECTRIC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued from preceding page)
WARRANTY COSTS For certain contracts, the Company warrants labor and
materials for the first year after installation of new electrical systems.
The Company charges warranty costs to operations in the year costs are
incurred.
CASH EQUIVALENTS The Company considers all highly liquid debt
instruments purchased with an original maturity of three months or less to
be cash equivalents.
ACCOUNTS RECEIVABLE The Company provides an allowance for doubtful
accounts receivable, based upon an analysis and aging of the accounts. The
provision for uncollectible accounts charged to operations was $43,349 in
1997.
INVENTORY Inventory is valued at the lower of cost or market, using the
first-in, first-out method.
PROPERTY AND EQUIPMENT Depreciable assets are recorded at cost and
depreciation and amortization are calculated using the straight-line method
over the estimated useful lives of the assets. Leasehold improvements are
capitalized and amortized over the estimated useful life of the asset.
Depreciation and amortization expense charged to operations was $118,100 in
1997.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
the retirement or disposal of the property and equipment, the cost and
related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statement of income.
INCOME TAXES The Company follows the asset and liability method of
accounting for income taxes in accordance with Statement of Financial
Accounting Standards (SFAS) No. 109. Under this method, deferred assets and
liabilities are recorded for future tax consequences of temporary
differences between the financial and tax bases of assets and liabilities
and are measured using enacted tax rates and laws.
PROPERTY AND EQUIPMENT
Property and equipment, at cost, consists of the following (in thousands) as
of December 31, 1997:
<TABLE>
<CAPTION>
Estimated
Useful Lives Cost
------------ -------
<S> <C> <C>
Automobiles and trucks 5 years $ 509
Construction equipment 5-12 years 288
Furniture and office equipment 5-7 years 181
Leasehold improvements 5-39 years 67
-------
1,045
Less accumulated depreciation and amortization (565)
-------
Net property and equipment $ 480
=======
</TABLE>
(Continued on Next Page)
F-205
<PAGE> 281
ARC ELECTRIC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS
Activity in the Company's allowance for doubtful accounts receivable consists of
the following (in thousands) during the year ended December 31, 1997:
<TABLE>
<S> <C>
Balance at beginning of year $ 66
Additions to costs and expenses 43
Deductions for uncollectible accounts written off (5)
-------
Balance at end of year $ 104
=======
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands) as of December 31, 1997:
<TABLE>
<S> <C>
Accounts payable, trade $ 560
Accrued compensation 744
Other accrued expenses 103
-------
Total $ 1,407
=======
</TABLE>
Contracts in progress are as follows (in thousands) as of December 31, 1997:
<TABLE>
<S> <C>
Costs incurred on contracts in progress $ 5,974
Estimated earnings, net of losses 3,433
-------
9,407
Less - Billings to date (8,919)
-------
Net asset $ 488
=======
Costs and estimated earnings in excess of billings on
uncompleted contracts $ 659
Less - Billings in excess of costs and estimated earnings on
uncompleted contracts (171)
-------
Net asset $ 488
=======
</TABLE>
LINE OF CREDIT
The Company had an unused $250,000 line of credit available at December 31,
1997 with a bank. Bank advances on the credit line are payable on demand,
with interest at prime plus one-half percent. The credit line is secured by
a blanket security agreement on inventory, furniture, fixtures, and
equipment. The net book value of pledged assets is approximately $480,000.
The line of credit expired on June 30, 1998.
(Continued on Next Page)
F-206
<PAGE> 282
ARC ELECTRIC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
LONG-TERM LIABILITIES
Long-term notes and capital leases payable at December 31, 1997 are
summarized as follows (in thousands except description amounts):
<TABLE>
<CAPTION>
Net Book
Value of
Principal Current Pledged
Description Balance Portion Assets
-------------------------------------------------------- --------- -------- --------
<S> <C> <C> <C>
Notes Payable
Term notes to a bank, payable $7,188 monthly
including interest from 8% to 8.3%, expiring in
various amounts through October 2000, secured
by fifteen vehicles $ 157 $ 76 $ 223
Term notes to a bank, payable $896 monthly
including interest at 7.49%, through April 1999,
secured by two vehicles 14 10 24
Capital Leases
Payable $325 monthly including interest at 6.75%
through March 1999, secured by equipment 7 4 4
Payable $1,151 monthly including interest at
approximately 13.88% through April 1998, with a
balloon payment of $11,648 due April 1998, then
$383 monthly including interest at 13.43%
through February 1999, with a balloon payment of
$5,902 due March 1999, secured by three vehicles 24 19 24
Payable $814 quarterly without interest through
September 1998, secured by equipment 2 2 4
Payable $329 monthly including interest at 10%
through December 1998, secured by equipment 4 4 7
------- --------
208 $ 115
========
Less current portion (115)
-------
Total long-term liabilities $ 93
=======
</TABLE>
Maturities of long-term notes and capital leases payable in each of the next
five years are (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002
- ------------- -------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
$115 $72 $21 $ -- $ --
</TABLE>
(Continued on Next Page)
F-207
<PAGE> 283
ARC ELECTRIC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
LONG-TERM LIABILITIES (Continued from preceding page)
A portion of the notes payable totaling $157,489 at December 31, 1997 are
under the Company's equipment guidance facility. This guidance facility had
a $200,000 limit less amounts outstanding covered by individual notes
secured by equipment. The unused portion of the guidance facility both
expired and was renewed on June 30, 1998. The new note has a $400,000 limit
with the same terms and expires June 30, 1999.
The Company is contingently liable for a note in the name of Equipment
Leasing Company, a related party. At December 31, 1997, the note had a
balance of $602,090. This note is secured by real estate owned by Equipment
Leasing Company with a net book value of $440,000 and guaranteed by Arc
Electric, Incorporated.
In 1997, interest charged to operations was $23,949.
In 1998, additional long-term debt in the amount of $58,672 has been
obtained for the purchase of vehicles. This debt will be payable $1,679
monthly including interest at 1.9% through July 2001. This commitment is not
included in the five-year maturities presented on the preceding page.
OPERATING LEASES
Facilities are leased from Equipment Leasing Company, an affiliated
partnership partially owned by the Company's president, on a five-year lease
expiring December 2000. Rent expense paid or accrued to the affiliate was
$56,195 in 1997. In addition, a van is leased from Equipment Leasing Company
on a month-to-month basis. Rent expense for this vehicle was $8,245 for
1997.
The Company leases its Richmond facilities on a three-year lease expiring
January 31, 2001. Two vehicles are leased under two-year operating leases
expiring January 1998 and November 1999. The Company also leases equipment
as needed on a temporary basis for specific jobs, for which no long-term
commitments exist.
Total rent expense for office and warehouse space was $58,556 for 1997.
Total rent expense for vehicles and equipment was $356,376 for 1997.
Minimum future annual rent commitments under these agreements for the next
five years are (in thousands):
<TABLE>
<CAPTION>
1998 1999 2000 2001 2002 Total
- ---------- ---------- ----------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
$91 $93 $88 $69 $ -- $341
</TABLE>
In 1998, the Company leased two additional vehicles under operating leases
expiring April and December 2000. These leases are not included in the
minimum future rent commitments disclosed above.
EMPLOYEE BENEFIT PLANS
The Company has a profit-sharing plan with a 401(k) elective deferral
feature which covers substantially all of its employees. Contributions to
the profit-sharing plan and contributions to match employee deferrals are
made at the discretion of the Board of Directors. Contributions to the
profit-sharing plan for the year ended December 31, 1997 were $50,000 and
employer matching contributions were $27,911 for the year then ended.
(Continued on Next Page)
F-208
<PAGE> 284
ARC ELECTRIC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
INCOME TAXES (in thousands)
The provision for income taxes is accounted for the year ended December 31,
1997, as follows:
<TABLE>
<S> <C>
Taxes currently paid or payable $ 565
Deferred income taxes 530
--------------
Total $ 1,095
==============
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
before provision for income taxes as follows:
<TABLE>
<S> <C>
Provision at the statutory rate $ 960
Increase resulting from -
State income taxes, net of related federal benefits 112
Permanent differences, primarily officer life
insurance and meals and entertainment 23
--------------
Total $ 1,095
==============
</TABLE>
Deferred income taxes result from temporary differences in the recognition
of income and expense for financial reporting purposes and for tax purposes.
The tax effects of these temporary differences, representing deferred tax
assets and liabilities, result principally from the following:
<TABLE>
<CAPTION>
As of
December 31, 1997
-----------------
<S> <C>
Deferred tax assets -
Allowance for doubtful accounts $ 40
Other accrued expenses not deducted for tax purposes 286
--------------
Total asset 326
--------------
Deferred tax liabilities -
Accounting for joint venture contract 715
Bases differences on property and equipment 33
--------------
Total liabilities 748
--------------
Net deferred income tax liabilities $ 422
==============
The net deferred tax liabilities are comprised of the following:
Deferred tax liabilities -
Current $ 389
Long-term 33
--------------
Net deferred tax liabilities $ 422
==============
</TABLE>
(Continued on Next Page)
F-209
<PAGE> 285
ARC ELECTRIC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
JOINT VENTURE
The Company formed a joint venture partnership with another electrical
contractor to perform a large industrial contract. The partners are each
responsible for performance of a specific phase of the contract. Each
partner advanced $5,000 to fund the partnership, is responsible for funding
its direct and indirect contract costs, and is responsible for maintaining
job cost records for its portion of the job. The profit on the joint venture
will be allocated based on job cost records. The Company's investment in the
construction joint venture is accounted for by the pro rata combination
method. At December 31, 1997, the financial statements include the following
amounts related to Arc Electric, Incorporated's portion of the joint venture
(in thousands):
<TABLE>
<S> <C>
Construction billings receivable $ 780
Retainage receivable 141
Advances to the joint venture 5
Costs and estimated earnings in excess of
billings on uncompleted contracts 605
--------------
Total $ 1,531
==============
Contracting revenues earned $ 3,428
Cost of revenues earned 1,545
--------------
Gross profit $ 1,883
==============
</TABLE>
FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, and short- and long-term debt. The
Company believes that the carrying value of these instruments on the
accompanying balance sheet approximates their fair value.
CONTINGENCIES
Litigation
The Company is involved in disputes and legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
In 1998, the Company is resolving disputed contract billings of $241,845
through arbitration. At December 31, 1997, no revenue had been recognized
for costs and estimated earnings on this disputed change order work.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability, workers' compensation and an umbrella
policy. The Company has not incurred significant uninsured losses on any of
these items.
(Continued on Next Page)
F-210
<PAGE> 286
ARC ELECTRIC, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
MAJOR CUSTOMERS AND RISK CONCENTRATION
The Company had sales of approximately 25 percent of total sales to two
major customers during the year ended December 31, 1997.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
In addition, the Company grants credit, generally without collateral, to its
customers, which are primarily general contractors located from Richmond and
southwestern Virginia through South Carolina. Consequentially, the Company
is subject to potential credit risk related to changes in business and
economic factors within those areas. However, management believes that its
contract acceptance, billing and collection policies are adequate to
minimize the potential credit risk.
F-211
<PAGE> 287
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Brink Electric Construction Co.
Rapid City, South Dakota
We have audited the accompanying balance sheet of BRINK ELECTRIC CONSTRUCTION
CO. (the Company) as of March 31, 1998, and the related statements of income,
changes in stockholders' equity, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit 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 BRINK ELECTRIC CONSTRUCTION CO.
as of March 31, 1998, and the results of its operations and its cash flows for
the year then ended, in conformity with generally accepted accounting
principles.
KETEL THORSTENSON, LLP
Rapid City, South Dakota
May 28, 1998
F-212
<PAGE> 288
BRINK ELECTRIC CONSTRUCTION CO.
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
ASSETS 1998 1998
------------ ------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash $ 2,931 $ 2,205
Receivables:
Contracts (Notes 2 and 5) 4,134 5,119
Other 34 -
Notes 45 -
Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts (Note 3) 830 507
Prepaid Expenses and Other 134 82
Investment in Joint Venture (Note 11) 226 -
Deferred Income Taxes (Note 8) 120 -
------------ ------------
TOTAL CURRENT ASSETS 8,454 7,913
PROPERTY AND EQUIPMENT (Note 5) 3,193 3,154
------------ ------------
OTHER - 35
------------ ------------
TOTAL ASSETS $ 11,647 $ 11,102
============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
F-213
<PAGE> 289
BRINK ELECTRIC CONSTRUCTION CO.
BALANCE SHEETS
(In Thousands)
<TABLE>
<CAPTION>
March 31 June 30
1998 1998
----------- ------------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses $ 2,864 $ 1,620
Current Portion Note Payable (Note 6) 126 126
State and Federal Income Taxes Payable 30 161
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts (Note 3) 2 319
Other 66 52
----------- ------------
TOTAL CURRENT LIABILITIES 3,088 2,278
----------- ------------
NOTE PAYABLE, Net of Current Portion (Note 6) 377 377
----------- ------------
DEFERRED INCOME TAXES (Note 8) 199 79
----------- ------------
COMMITMENTS (Notes 5, 6, 7, 9, 10 and 11)
STOCKHOLDERS' EQUITY
Capital Stock:
Common Stock; $1 Par Value; Authorized 1,000,000 Shares; 446,248
issued at March 31, 1998 446 446
Additional Paid-In Capital 2,448 2,448
Retained Earnings 6,149 6,520
----------- ------------
9,043 9,414
Less Stockholders' Notes Receivable (Note 4) 32 18
Less Treasury Stock at Cost, 63,712 Shares at
March 31, 1998 (Note 6) 1,028 1,028
----------- ------------
7,983 8,368
----------- ------------
Total Liabilities and Stockholders' Equity $ 11,647 $ 11,102
=========== ============
</TABLE>
F-214
<PAGE> 290
BRINK ELECTRIC CONSTRUCTION CO.
STATEMENTS OF INCOME
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Three Months
Year Ended Ended Ended
March 31, June 30, June 30,
1998 1997 1998
------------- --------------- ---------------
(unaudited) (unaudited)
<S> <C> <C> <C>
Construction Contract Revenue Earned $ 21,464 $ 5,725 $ 6,404
Cost of Revenue Earned 16,119 4,569 4,985
------------- --------------- ---------------
Gross Profit 5,345 1,156 1,419
General and Administrative Expenses 3,661 889 956
------------- --------------- ---------------
Operating Income 1,684 267 463
------------- --------------- ---------------
Nonoperating Income (Expense)
Interest Income 121 12 28
Other, Net (72) - -
Interest Expense (67) (10) (18)
Gain on Sale of Property and Equipment 62 - -
------------- --------------- ---------------
44 2 10
------------- --------------- ---------------
Income Before Income Taxes 1,728 269 473
Income Tax Expense (Note 8) 654 60 102
------------- --------------- ---------------
Net Income $ 1,074 $ 209 $ 371
============= =============== ===============
</TABLE>
The accompanying notes are an integral part of these statements.
F-215
<PAGE> 291
BRINK ELECTRIC CONSTRUCTION CO.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
Common Stockholder
Stock Additional Notes Treasury
Issued Paid-In Retained Receivable Stock
$1 Par Capital Earnings (Note 4) $1 Par Total
--------- ---------- --------- ---------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- March 31, 1997 $ 442 $ 2,378 $ 5,075 $ (51) $ (1,028) $ 6,816
Common Stock Issued 5 82 - - - 87
Payments Received on
Stockholder Notes - - - 6 - 6
Repurchase of Stock (1) (12) - 13 - -
Net Income - - 1,074 - - 1,074
--------- ---------- --------- ---------- --------- -----------
Balance -- March 31, 1998 $ 446 $ 2,448 $ 6,149 $ (32) $ (1,028) $ 7,983
Payments Received on
Stockholders notes (unaudited) - - - 14 - 14
Net Income (unaudited) - - 371 - - 371
--------- ---------- --------- ---------- --------- -----------
Balance - June 30, 1998
(unaudited) $ 446 $ 2,448 $ 6,520 $ (18) $ (1,028) $ 8,368
========= ========== ========= ========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
F-216
<PAGE> 292
BRINK ELECTRIC CONSTRUCTION CO.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
Three Months Ended
--------------------
June 30, June 30,
1998 1997 1998
------- ------- --------
(unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income $ 1,074 $ 209 $ 371
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities:
Depreciation 915 227 215
Gain on Sale of Property and Equipment (62) -- --
Deferred Income Tax Expense (Benefit) 126 -- --
Working Capital Changes Increasing (Decreasing) Cash:
Receivables (750) (394) (906)
Costs and Estimated Earnings in Excess
of Billings on Uncompleted Contracts 92 (1,007) 323
Prepaid Expenses and Other (33) (19) 3
Investment in Joint Venture 585 -- 226
Accounts Payable and Accrued Expenses 1,079 (312) (1,244)
State and Federal Income Taxes Payable (121) (60) 131
Billings in Excess of Costs and Estimated
Earnings on Uncompleted Contracts (304) (92) 317
------- ------- -------
Net Cash Flows Provided by (Used in) Operating Activities 2,601 (1,448) (564)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of Property and Equipment (858) (256) (176)
Proceeds from Sale of Property and Equipment 43 -- --
------- ------- -------
Net Cash Flows Used in Investing Activities (815) (256) (176)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Issuance of Common Stock 93 -- 32
Purchase of Common Stock -- -- (18)
Borrowing (Repayment) of Note Payable (126) 526 --
------- ------- -------
Net Cash Flows Provided by (Used in) Financing Activities (33) 526 14
------- ------- -------
NET INCREASE (DECREASE) IN CASH 1,753 (1,178) (726)
CASH -- BEGINNING OF PERIOD 1,178 1,178 2,931
------- ------- -------
CASH -- END OF PERIOD $ 2,931 $ -- $ 2,205
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash Paid During the Year For:
Interest $ 69 $ 10 $ 18
Federal and State Income Taxes 648 60 102
</TABLE>
The accompanying notes are an integral part of these statements.
F-217
<PAGE> 293
BRINK ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(1) NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
a. NATURE OF BUSINESS AND ORGANIZATION
Brink Electric Construction Co. (the Company) is engaged in the construction of
electric power transmission lines and substations in the western United States.
During the year ended March 31, 1998, the transmission and substation divisions
accounted for 28 percent and 72 percent of total revenues and 41 percent and 59
percent of gross profit, respectively. Work is generally performed under
unit-price contracts. The length of the majority of the contracts is less than
two years.
In August, 1998, the Company and its stockholders entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock 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 initial
terms 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.
b. SIGNIFICANT ACCOUNTING POLICIES
The interim financial statements for the three 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.
1. 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 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.
2. Revenue and Cost Recognition
Revenues from construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs to date to
estimated costs to complete for each contract. This method is used because
management considers costs incurred to be the best available measure of progress
on these contracts. Revenue from cost-plus-fee contracts is recognized on the
basis of costs incurred during the period plus the fee earned. Due to
uncertainties inherent in the estimation process, it is at least reasonably
possible that the completion costs for contracts in progress at March 31, 1998,
will be revised significantly in the near term.
Contract costs include all direct material, direct labor, and subcontract costs
and those indirect costs related to contract performance, such as labor,
supplies, tools, repairs, and depreciation costs. The costs of uninstalled
materials specifically produced or fabricated for a project and delivered to a
job site are included in the contract costs used to measure the extent of
progress. General and administrative costs are charged to expense as incurred.
Provisions for estimated costs are charged to expense as incurred. 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 contract penalty
provisions and final contract settlements, may result in revisions to costs and
income and are recognized in the period in which the revisions are determined.
F-218
<PAGE> 294
BRINK ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
The asset, "Costs and Estimated Earnings in Excess of Billings on Uncompleted
Contracts," represents revenues recognized in excess of amounts billed. The
liability, "Billings in Excess of Costs and Estimated Earnings on Uncompleted
Contracts," represents billings in excess of revenues recognized.
3. Property and Equipment
Equipment and leasehold improvements are stated at cost. Depreciation expense is
computed principally by the straight-line method based on the following
estimated useful lives:
<TABLE>
<CAPTION>
Years
-----
<S> <C>
Equipment and Vehicles 4-10
Office Furniture and Equipment 5-10
Leasehold Improvements 5-15
</TABLE>
4. Investment in Joint Venture
The investment in joint venture is accounted for by the equity method and
includes contract receivables relating to the Company's billings to the joint
venture. The Company's share of the gross joint venture revenue, cost of revenue
and operating income is included in the statement of income.
(2) CONTRACTS RECEIVABLE, BILLED
Billed contracts receivable consist of the following at March 31:
<TABLE>
<CAPTION>
1998
-------
<S> <C>
Completed Contracts $ 487
Uncompleted Contracts 3,148
Retainage 499
-------
$ 4,134
=======
</TABLE>
(3) UNCOMPLETED CONTRACTS
Costs, estimated earnings, and billings on uncompleted contracts consist of the
following at March 31:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Costs Incurred on Uncompleted Contracts $ 5,006
Estimated Earnings 1,190
-------
6,196
Less Billings to Date 5,368
-------
$ 828
=======
Included in accompanying balance sheets under the following captions:
Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts $ 830
Billings in Excess of Costs and Estimated Earnings on Uncompleted Contracts (2)
-------
$ 828
=======
</TABLE>
F-219
<PAGE> 295
BRINK ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(4) STOCKHOLDERS' NOTES RECEIVABLE
Stockholder notes receivable represent Company financing of employee purchases
of Company stock. The notes bear interest at prime rate adjusted quarterly and
are due in August 1998. No principal or interest payments are required until
maturity. The notes are secured by the stock purchased.
(5) SHORT-TERM BANK BORROWINGS/REVOLVING LINE OF CREDIT
At March 31, 1998 and 1997, the Company had available a revolving line of credit
with First Bank of South Dakota. Under the credit agreement, the available line
is the lesser of $2.5 million or a calculated asset borrowing base. There were
no amounts outstanding at March 31, 1998 and 1997. Interest is payable monthly
at the high Wall Street Journal Prime Rate, and the note is secured by
receivables and equipment. The credit agreement contains certain covenants, the
most restrictive of which include a requirement to maintain a minimum book
tangible net worth of $5,000,000 and a maximum debt-to-tangible net worth ratio
not to exceed 1.5 to 1.0. The line of credit matures August 1998.
(6) NOTE PAYABLE
During the year ended March 31, 1997, the Company purchased 63,712 shares of its
common stock for $1,028,216. The stock purchase agreement requires the Company
to pay $400,000 in cash with the remaining $628,216 being financed over five
years. The agreement requires annual principal payments of $125,643 plus annual
interest payments at the rate of 2 percent below prime rate. The shares
purchased by the Company are held in escrow until satisfaction of the stock
purchase agreement and, accordingly, have been classified as treasury stock in
the accompanying financial statements. Interest expense under this note totaled
$58,033 and $9,816 during the years ended March 31, 1998 and 1997, respectively.
(7) LEASE ARRANGEMENTS
The Company leases property and equipment used in its operations under various
agreements which are substantially month-to-month operating leases. The total
rental expense included in the statements of income for the years ended March
31, 1998 and 1997, was $571,100 and $535,306, respectively. Included in these
amounts are payments to a partnership affiliated with the Company through common
ownership:
<TABLE>
<CAPTION>
Year Ended March 31, 1998
-------------------------
<S> <C>
Partnership
Frank Brink & Sons $ 150
</TABLE>
(8) INCOME TAXES
Income tax expense (benefit) for the years ended March 31, consists of:
<TABLE>
<CAPTION>
March 31, 1998
Current Deferred Total
------- -------- -----
<S> <C> <C> <C>
Federal $ 459 $ 126 $ 585
State 69 - 69
----------- --------- -----------
$ 528 $ 126 $ 654
=========== ========== ===========
</TABLE>
F-220
<PAGE> 296
BRINK ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
The effective rate differs from the federal statutory rate of 34 percent
primarily due to state taxes and certain nondeductible expenses for tax
purposes.
Deferred income taxes are provided on temporary differences between financial
statement and taxable income. At March 31, 1998, there are temporary differences
that relate principally to the use of accelerated depreciation for tax, the
deferral of taxable income on contracts less than 10 percent complete, joint
venture contracts, and accrued stockholder bonuses. Deferred tax assets total
$120,000 and $111,000 at March 31, 1998 and 1997, respectively, while deferred
tax liabilities total $199,430 and $64,000 at March 31, 1998 and 1997,
respectively.
(9) BACKLOG
Following is a reconciliation of the backlog of signed contracts:
<TABLE>
<S> <C>
Balance of signed but unperformed work at March 31, 1997 $ 7,033
New contracts and change orders during the year ended March 31, 1998 18,030
Less contract revenues earned during the year ended March 31, 1998 (21,464)
--------------
Balance of signed but unperformed work at March 31, 1998 $ 3,599
==============
</TABLE>
In addition, from April 1, 1998 through May 28, 1998, the Company signed
additional contracts with revenues totaling approximately $8,785,000.
(10) 401(k) PROFIT-SHARING PLAN
The Company sponsors a 401(k) Profit-Sharing Plan (the Plan) which covers all
enrolled employees with at least one year of service. Contributions to the Plan
consist of a discretionary profit-sharing provision and a matching provision as
set forth in the Plan. Plan contributions charged to operations were $146,016
and $150,543 for the years ended March 31, 1998 and 1997, respectively.
(11) JOINT VENTURE
The Company is a party to an agreement with an unrelated company to perform
certain design-build construction contracts on a joint venture basis. The
agreement requires profits and losses be shared equally, and there is a
commitment to provide financing to the joint venture as needed. At March 31,
1998 and 1997, the total contract price of joint venture contracts in progress
was $1,543,248 and $6,943,765, respectively.
The Company has recognized revenues, costs and gross profit under this agreement
during the years ended March 31, as follows:
<TABLE>
<CAPTION>
1998
----
<S> <C>
Revenues $ 2,913
Cost of Revenues 2,192
------------
Gross Profit $ 721
============
The following amounts are included in the investment in joint venture:
Contract Receivables $ 86
Costs and Estimated Earnings in Excess of Billings 140
------------
$ 226
============
</TABLE>
All the work performed by the joint venture is for one customer.
F-221
<PAGE> 297
BRINK ELECTRIC CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1998 AND 1997
(12) MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 25 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 transmission line and substation
markets in the United States. Consequently, the Company is subject to potential
credit risk related to changes in business and economic factors within the
commercial and industrial construction markets in this state. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
F-222
<PAGE> 298
Independent Auditor's Report
Board of Directors
Goss Electric Company, Inc.
Decatur, Alabama
We have audited the accompanying balance sheet of Goss Electric Company,
Inc. as of December 31, 1997 and the related statements of income and
retained earnings, and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Goss Electric
Company, Inc. at December 31, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally
accepted accounting principles.
The 1997 financial statements were reviewed by us, and our report
thereon, dated April 1, 1998, stated that we were not aware of any
material modifications that should be made to those statements for them
to be in conformity with generally accepted accounting principles.
However, a review is substantially less in scope than an audit and does
not provide a basis for the expression of an opinion on the financial
statements taken as a whole.
Wear, Howell, Strickland & Quinn, L.L.C.
Decatur, Alabama
August 25, 1998
F-223
<PAGE> 299
BALANCE SHEET
GOSS ELECTRIC COMPANY, INC.
(In Thousands)
<TABLE>
<CAPTION>
ASSETS
December 31, June 30,
1997 1998
------------ -----------
(Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 773 $ 154
Investments 3,621 --
Accounts receivable:
Trade 2,616 3,085
Retainage 416 --
Employees 54 --
Inventories 45 45
Costs and estimated earnings in excess of billings on
uncompleted contracts 738 639
Prepaid and other -- 39
------ ------
TOTAL CURRENT ASSETS 8,263 3,962
PROPERTY AND EQUIPMENT, net 412 435
OTHER ASSETS
Cash surrender value of life insurance 446 493
Note receivable, related party 110 270
------ ------
TOTAL OTHER ASSETS 556 763
------ ------
TOTAL ASSETS $9,231 $5,160
====== ======
</TABLE>
F-224
<PAGE> 300
BALANCE SHEET
GOSS ELECTRIC COMPANY, INC.
(In Thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
------------ --------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and Accrued expenses $ 694 $ 639
Note payable 3,300 --
Billings in excess of costs and estimated
earnings on uncompleted contracts 733 --
------ ------
TOTAL CURRENT LIABILITIES 4,727 639
STOCKHOLDERS' EQUITY
Common stock $1.00 par value, 100,000 authorized
shares, 1,000 issued and outstanding shares 1 1
Paid in capital 43 43
Retained earnings 4,460 4,477
------ ------
TOTAL STOCKHOLDERS' EQUITY 4,504 4,521
------ ------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $9,231 $5,160
====== ======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-225
<PAGE> 301
STATEMENT OF REVENUES AND RETAINED EARNINGS
GOSS ELECTRIC COMPANY, INC.
(In Thousands)
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended Ended Ended
December 31, June 30, June 30,
1997 1997 1998
------------ ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Revenues $ 16,385 $ 8,559 $ 8,104
Cost of services (including depreciation) 12,776 6,499 6,396
-------- -------- --------
GROSS PROFIT 3,609 2,060 1,708
Administrative and general expenses 844 443 442
-------- -------- --------
INCOME FROM OPERATIONS 2,765 1,617 1,266
Other income (expenses):
Gain on sale of assets 1 -- --
Interest and dividend income 93 1 40
Increase in cash value of life insurance 32 -- --
Bad debt expense (134) -- --
Interest expense (4) (4) --
-------- -------- --------
TOTAL OTHER INCOME (EXPENSES) (12) (3) 40
-------- -------- --------
NET INCOME 2,753 1,614 1,306
Retained earnings, beginning of period 3,287 3,287 4,460
-------- -------- --------
6,040 4,901 5,766
Less distributions 1,580 451 1,289
-------- -------- --------
RETAINED EARNINGS, END OF PERIOD $ 4,460 $ 4,450 $ 4,477
======== ======== ========
</TABLE>
F-226
<PAGE> 302
STATEMENT OF CASH FLOWS
GOSS ELECTRIC COMPANY, INC.
(In Thousands)
<TABLE>
<CAPTION>
Six Months Six Months
Year Ended Ended Ended
December 31, June 30, June 30,
1997 1997 1998
------------ ---------- ----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 2,753 $ 1,614 $ 1,306
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in cash value of life insurance (32) --
Depreciation 95 47 66
Gain on sale of assets (1) -- --
Changes in operating assets-(increase) decrease:
Accounts receivable 110 857 1
Inventories (17) (32) --
Costs and estimated earnings in excess
Of billings on uncompleted contracts (406) (268) 99
Changes in liabilities-increase (decrease):
Accounts payable and accrued expenses (46) (373) (55)
Billings in excess of costs and estimated
Earnings on uncompleted contracts 307 155 (733)
Other (1) 263 (86)
------- ------- -------
NET CASH PROVIDED BY OPERATING
ACTIVITIES 2,762 2,263 598
Cash flows from investing activities:
Purchase of property and equipment (194) (88) (89)
Net (increase) decrease in note
Receivable-related parties 240 -- (160)
Proceeds from sale of assets 1 -- --
Increase (decrease) in investments (1,493) 2,200 3,621
------- ------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (1,446) 2,112 3,372
</TABLE>
F-227
<PAGE> 303
STATEMENT OF CASH FLOWS
GOSS ELECTRIC COMPANY, INC.
(In Thousands)
<TABLE>
<CAPTION> Year Six Months Six Months
Ended Ended Ended
December 31, June 30, June 30,
1997 1997 1997
------------ ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
Cash flows from financing activities:
Distributions to shareholders (1,580) (451) (1,289)
Short term borrowings 3,300 -- --
Payments on short term borrowings (2,500) (2,500) (3,300)
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (780) (2,951) (4,589)
------- ------- -------
NET INCREASE IN CASH
AND CASH EQUIVALENTS 536 1,424 (619)
Cash and cash equivalents, beginning of year 237 237 773
------- ------- -------
CASH AND CASH EQUIVALENTS END OF YEAR $ 773 $ 1,661 $ 154
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 4 $ 4 $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-228
<PAGE> 304
NOTES TO FINANCIAL STATEMENTS
GOSS ELECTRIC COMPANY, INC.
December 31, 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES
A. Company's activities and operating cycle - The Company is engaged in a
single industry: the construction of industrial electric systems. The work
is performed under cost-plus-fee contracts, fixed-price contracts, and
fixed-price contracts modified by incentive and penalty provisions.
Construction projects are located in the southeastern part of the United
States.
In September, 1998, the Company and its stockholders entered into a
definitive agreement with Integrate Electrical Services, Inc. (IES),
pursuant to which all outstanding shares of the 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 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 interim financial statements for the six 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.
B. Revenues from cost-plus-fee contracts are recognized on the basis of costs
incurred during the period plus the fee earned. Revenues from fixed-price
and modified fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs
incurred to date to estimated total costs for each contract. This method is
used because management considers expended costs to be the best available
measure of progress on these contracts. Because of the inherent
uncertainties in estimating costs, it is at least reasonably possible that
the estimates used will change within the near term.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenue 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
revenue recognized.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation costs. Selling, general, and
administrative costs are charged to expense as incurred. 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 contract penalty
provisions, and 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.
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 the
balance sheet date will be collected within the subsequent fiscal year.
F-229
<PAGE> 305
NOTES TO FINANCIAL STATEMENTS
GOSS ELECTRIC COMPANY, INC.
December 31, 1997
NOTE 1 - SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
C. Property and equipment - Property and equipment is valued at cost less
accumulated depreciation. Expenditures for maintenance, repairs and
renewals of relatively minor items are charged to income as incurred.
Depreciation and amortization are provided principally on the straight-line
method over the estimated useful lives of related assets. Assets are
generally depreciated over periods ranging from 3 to 10 years. For income
tax purposes, accelerated methods of depreciation are generally used.
D. Inventories - Inventories consist of parts and supplies held for use in the
ordinary course of business and are stated at the lower of cost or market,
determined by the first-in-first-out (FIFO) method.
E. Allowance for doubtful accounts - The Company's receivables are deemed
collectible. No allowance for doubtful accounts is provided.
F. Investments - Investments in securities are classified as securities
available for sale.
G. Cash and Cash Equivalents - The Company considers cash on hand and in
demand deposits, as well as those investments which are generally part of
its short-term management activities, to be cash and cash equivalents.
H. Income Taxes - The Company, with the consent of its stockholders, has
elected under the Internal Revenue Code and the Code of Alabama to be an S
Corporation. In lieu of corporate income taxes, the stockholders of an S
Corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision or liability for income taxes has been
included in the financial statements.
I. Use of Estimates - The process of preparing financial statements in
conformity with generally accepted accounting principles requires the use
of estimates and assumptions regarding certain types of assets,
liabilities, revenues, and expenses. Such estimates primarily relate to
unsettled transactions and events as of the date of the financial
statements. Accordingly, upon settlement, actual results may differ from
estimated amounts.
J. New Accounting Pronouncement - Effective November 1, 1996, the Company
adopted Statement of Financial Accounting Standards SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Adoption of this standard did not have a
material effect on the financial position or results of operations of the
Company.
F-230
<PAGE> 306
NOTES TO FINANCIAL STATEMENTS
GOSS ELECTRIC COMPANY, INC.
For the year ended December 31, 1997
NOTE 2 - PROPERTY AND EQUIPMENT
Property and equipment consists of the following at December 31, 1997:
<TABLE>
<S> <C>
Assets:
Construction equipment $220
Transportation equipment 650
Office furniture 99
----
TOTAL ASSETS 969
Accumulated depreciation 557
----
NET PROPERTY AND EQUIPMENT $412
====
</TABLE>
Depreciation expense of $94,637 for the year ended December 31, 1997 was
charged as follows:
<TABLE>
<S> <C>
Cost of services $85
Administrative and general expense 10
---
TOTAL $95
===
</TABLE>
NOTE 3 - INVESTMENTS - AVAILABLE FOR SALE
Investments in securities at December 31, 1997, consist of U. S. Treasury Bills
with a face value of $3,300,000, and municipal bonds and equities with a fair
market value of $321,232.
NOTE 4 - COST AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<S> <C>
Costs incurred on contracts in progress $3,897
Estimated earnings, net of losses 136
------
4,033
Less billings to date 4,028
------
$ 5
======
Cost and estimated earnings in excess
of billings on uncompleted contracts 739
Less billings in excess of costs and
estimated earnings on uncompleted contracts 734
------
$ 5
======
</TABLE>
NOTE 5 - NOTE PAYABLE
The Company has a loan of $3,300,000 secured by U. S. Treasury Bills with a face
value of $3,300,000. The note bears interest at the bank's base rate and matures
on January 2, 1998.
F-231
<PAGE> 307
NOTES TO FINANCIAL STATEMENTS
GOSS ELECTRIC COMPANY, INC.
For the year ended December 31, 1997
NOTE 6 - RELATED PARTY TRANSACTIONS
A. The Company is the beneficiary of life insurance policies totaling
$1,100,000 on the life of the Shareholder. The cash surrender value of
these policies was $445,833 at December 31, 1997, and is shown under other
assets.
B. The Company leases building space from the Shareholder on a month to month
basis. Total rent expense for the year ended December 31, 1997, was
$48,000.
C. The Company has an unsecured note receivable of $110,000 from a relative
of the Shareholder.
D. The Company received full payment on a note receivable from the
Shareholder during the year, including interest income of $31,881.
NOTE 7 - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution profit-sharing plan and an elective
401(k) plan covering all eligible employees. The Company contributions for the
year ended December 31, 1997, was $124,531.
NOTE 8 - MAJOR CUSTOMERS AND RISK CONCENTRATION
The Company has accounts receivable from mainly large manufacturing companies
located in the Southeastern United States. The Company performs ongoing credit
evaluations of its customers financial conditions and management believes its
policies are adequate to minimize the potential credit risk.
The Company routinely maintains cash balances in financial institutions in
excess of federally insured limits.
The Company had sales comprising approximately 30% and 14% of total sales to two
customers during the year.
NOTE 9 - COMMITMENTS AND CONTINGENCIES
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
The Company carries a broad range of insurance coverage, including business auto
liability, general liability and an umbrella policy. The Company has not
incurred significant uninsured losses on any of these items.
F-232
<PAGE> 308
NOTES TO FINANCIAL STATEMENTS
GOSS ELECTRIC COMPANY, INC.
For the year ended December 31, 1997
NOTE 10 - FINANCIAL INSTRUMENTS
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, notes receivable, marketable securities, accounts payable,
and short-term borrowings. The Company believes that the carrying value of these
instruments on the accompanying balance sheet approximates their fair value.
F-233
<PAGE> 309
INDEPENDENT AUDITORS' REPORT
To Board of Directors and Stockholders
of Mid-States Electric Company, Inc.
We have audited the balance sheet of Mid-States Electric Company, Inc. as of
December 31, 1997, and the related statements of operations, changes in
stockholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit 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 Mid-States Electric Company,
Inc. as of December 31, 1997, and the results of its operations and its cash
flows for the year then ended in conformity with generally accepted accounting
principles.
PHILHOURS, RICH & FLETCHER, P.L.L.C.
Jackson, Tennessee
April 1, 1998
F-234
<PAGE> 310
MID-STATES ELECTRIC COMPANY, INC.
BALANCE SHEET
(In Thousands)
<TABLE>
<CAPTION>
December 31, June 30,
1997 1998
----------------------- --------------------
(Unaudited)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 444 $ 1,534
Contracts receivable 1,533 1,854
Contracts receivable-retainage 527 360
Accounts receivable-miscellaneous 464 133
Costs and estimated earnings in excess of
billings on uncompleted contracts 209 93
Inventories 6 6
Prepaid expenses 35 11
----------------------- --------------------
Total Current Assets 3,218 3,991
PROPERTY, PLANT, AND EQUIPMENT ASSETS:
Property, plant and equipment 1,120 1,145
Less: Accumulated depreciation 667 709
----------------------- --------------------
Total Property, Plant, and Equipment Assets 453 436
OTHER ASSETS:
Deferred expenses 13 19
Deferred taxes 8 -
----------------------- --------------------
Total Other Assets 21 19
----------------------- --------------------
TOTAL ASSETS $ 3,692 $ 4,446
----------------------- --------------------
</TABLE>
F-235
<PAGE> 311
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION> December 31, June 30,
1997 1998
---------------------- --------------------
(unaudited)
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses $ 1,093 $ 940
Billings in excess of costs and estimated
earnings on uncompleted contracts 614 638
Current portion of long-term debt 126 60
----------------------- -------------------
Total Current Liabilities 1,833 1,638
LONG-TERM LIABILITIES:
Long-term debt, less current portion 67 97
STOCKHOLDERS' EQUITY:
Common stock, no par value, 1,000 shares
authorized, 730 shares issued, and 364.44
and 601.48 shares outstanding, respectively 15 15
Retained earnings 3,953 4,872
Cost of 365.56 shares of
common stock held by the company (2,176) (2,176)
---------------------- -------------------
Total Stockholders' Equity 1,792 2,711
----------------------- -------------------
TOTAL LIABILITIES
AND STOCKHOLDERS' EQUITY $ 3,692 $ 4,446
---------------------- -------------------
</TABLE>
F-236
<PAGE> 312
MID-STATES ELECTRIC COMPANY, INC.
STATEMENTS OF OPERATIONS
(In Thousands)
<TABLE>
<CAPTION>
Year Ended Six Months Ended
December 31, June 30, June 30,
1997 1997 1998
------------- -------------- --------------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
REVENUES
Revenue from contracts $ 10,786 $ 5,056 $ 5,631
Sales of merchandise and labor 1,973 798 952
Other income 20 - -
Interest income 109 79 38
Gain on sale of equipment 2 - -
------------- -------------- --------------
Total Revenues 12,890 5,933 6,621
COSTS AND EXPENSES
Contract Costs 9,645 3,963 4,157
Cost of merchandise and labor sales 705 546 593
Operating and administrative expense 1,347 645 673
Interest 18 9 7
------------- -------------- --------------
Total Costs and Expenses 11,715 5,163 5,430
INCOME BEFORE INCOME TAXES 1,175 770 1,191
INCOME TAX PROVISION 72 46 72
------------- -------------- --------------
NET INCOME $ 1,103 $ 724 $ 1,119
------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-237
<PAGE> 313
MID-STATES ELECTRIC COMPANY, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(In thousands, except share data)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
OUTSTANDING RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT EARNINGS STOCK EQUITY
------------- ---------- ---------- -------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $ 602 $ 15 $ 4,562 $ (250) $ 4,327
Dividends paid (1,712) (1,712)
Treasury Stock Acquired (237) (1,926) (1,926)
Net income for year ended December 31, 1997 1,103 1,103
------------- ---------- ---------- -------------- ------------
Balance at December 31, 1997 365 $ 15 $ 3,953 $ (2,176) $ 1,792
------------- ---------- ---------- -------------- ------------
Dividends (unaudited) - - (200) - (200)
Net income (unaudited) - - 1,119 - 1,119
------------- ---------- ---------- -------------- ------------
Balance at June 30, 1998 (unaudited) 365 $ 15 $ 4,872 $ (2,176) $ 2,711
------------- ---------- ---------- -------------- ------------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-238
<PAGE> 314
MID-STATES ELECTRIC COMPANY, INC.
STATEMENTS OF CASH FLOWS
(In Thousands)
<TABLE>
<CAPTION>
Six Months Ended
Year Ended ----------------
December 31, June 30, June 30,
1997 1997 1998
------- ------- -------
(Unaudited) (Unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 1,103 $ 724 $ 1,119
Adjustments to reconcile net income to net cash
Provided by operating activities:
Depreciation 89 43 42
Loss on sale of equipment (2) -- --
(Increase) decrease in:
Contracts receivable 973 1,165 142
Retainage receivable 132 47 167
Accounts receivable (254) 210 (133)
Costs and estimated earnings in excess of billings on
uncompleted contracts (55) (67) 116
Prepaid expenses 13 21 24
Deferred charges 3
Other 6 1 (12)
Increase (decrease) in:
Accounts payable and accrued expenses of costs and
estimated earnings on uncompleted contracts (647) (775) (138)
Billings in excess 124 (243) 24
------- ------- -------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 1,485 1,126 1,351
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of property, plant, and equipment 2 -- --
Purchase of property, plant and equipment (134) (25) (25)
------- ------- -------
NET CASH USED IN INVESTING ACTIVITIES (132) (25) (25)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payment on notes payable (49) (37) (36)
Dividends paid (1,712) (1,311) (200)
Purchase of treasury stock (1,926) -- --
------- ------- -------
NET CASH USED IN FINANCING ACTIVITIES (3,687) (1,348) (236)
------- ------- -------
NET INCREASE (DECREASE) IN CASH (2,334) (247) 1,090
CASH BALANCE AT BEGINNING OF YEAR 2,778 2,778 444
------- ------- -------
CASH BALANCE AT END OF YEAR $ 444 $ 2,531 $ 1,534
------- ------- -------
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-239
<PAGE> 315
MID-STATES ELECTRIC COMPANY, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
(1) BUSINESS ACTIVITY. The Company is engaged as a licensed electrical
contractor in several states and is based in Jackson, Tennessee. The
work is performed under fixed-price contracts and fixed-price contracts
modified by incentive provisions. The Company also manages, for a fee,
construction projects of others.
In July, 1998, the Company and its stockholders entered into a
definitive agreement with Integrate Electrical Services, Inc. (IES),
pursuant to which all outstanding shares of the Company's common stock
was exchanged for cash and shares of IES common stock. In addition, the
key executive of the Company entered into employment agreements with
the Company and IES which have initial term of three 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 interim financial statements for the six 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. Revenue from fixed-price and modified
fixed-price construction contracts are recognized on the
percentage-of-completion method, measured by the percentage of cost
incurred to date to estimated total cost for each contract. Management
considers total cost to be the best available measure of progress on
the contracts.
Contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, and depreciation. Selling, general, and
administrative costs are charged to expense as incurred. 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 may result in revisions to
costs and income and are recognized in the period in which the
revisions are determined.
The asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts", represents revenues recognized in excess of
amounts billed. The liability, "Billings in excess of costs and
estimated earnings on uncompleted contracts", represents billings in
excess of revenues recognized.
(2) INVENTORIES. Various electrical supplies are stated at cost using the
first in, first out method or market value, whichever is less.
F-240
<PAGE> 316
MID-STATES ELECTRIC COMPANY, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
(3) PROPERTY, PLANT AND EQUIPMENT. Properties and equipment are recorded at
acquisition cost. Depreciation and amortization are computed based on
the estimated useful lives of the individual assets and/or the life of
the leases, respectively. Accelerated depreciation methods are used to
depreciate certain equipment and automotive equipment. All building
assets are depreciated or amortized using the straight-line method.
Expenditures for maintenance and repairs are charged to expense as
incurred.
(4) INCOME TAXES. The Corporation's stockholders have elected "S"
corporation status. No provision has been made for federal taxes since
such taxes represent the personal liability of the individual
stockholders.
State income taxes have been provided for all items included in the
statement of income, regardless of the period reflected for state
income tax purposes. The Company uses the percentage of completion
method to recognize contract income for both financial statement and
tax purposes. Prior to the year ended December 31,1993, the company
used the completed contracts method of income recognition for income
tax reporting.
Under Internal Revenue Code Section 481 the Company was allowed to
recognize revenues and costs previously deferred over a four year
period ending December 31, 1996. For financial statement purposes, the
accrued salary to a more than five-percent stockholder is deducted as
an expense but it cannot be claimed for tax purposes until the amount
is actually paid in the subsequent year. Deferred taxes are reflected
for timing differences which are composed of contract revenues and
costs previously deferred for tax reporting and the recording of
accrued salary to a more than five-percent stockholder.
(5) CASH AND CASH EQUIVALENTS. Cash and cash equivalents include all cash
accounts and temporary investments with an original maturity of three
months or less.
(6) USE OF ACCOUNTING 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 certain assets and liabilities and disclosures. Accordingly,
the actual amounts could differ from those estimates. Any adjustments
applied to estimated amounts are recognized in the year in which such
adjustments are determined.
F-241
<PAGE> 317
MID-STATES ELECTRIC COMPANY, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
NOTE B - LONG-TERM CONTRACTS:
Long-term contracts in process at December 31, 1997, are as follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Expenditures on uncompleted contracts $ 4,781
Estimated earnings on uncompleted contracts 1,110
-------------------
5,891
Less: Billings to date 6,296
-------------------
Total $ (405)
-------------------
Included in accompanying balance sheet as costs and estimated
earnings in excess of billings on uncompleted contracts $ 209
Included in accompanying balance sheet as billings in excess
of costs and estimated earnings on uncompleted contracts (614)
-------------------
Total $ (405)
-------------------
</TABLE>
F-242
<PAGE> 318
MID-STATES ELECTRIC COMPANY, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
NOTE C - PROPERTY, PLANT, AND EQUIPMENT ASSET:
Property, plant and equipment assets are summarized by major classification as
follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Land $ 72
Building 199
Automotive 392
Aircraft 337
Machinery and equipment 68
Furniture and fixtures 52
---------------
Total cost 1,120
Less accumulated depreciation 667
---------------
Net book value $ 453
===============
</TABLE>
NOTE D - LONG-TERM DEBT:
Long-term debt of the Corporation consists of the following:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
<S> <C>
Note payable to First Tennessee Bank of Jackson, 7.25%. See
following for details $ 79
Note payable to former owner of the Company for purchase of
land and building. See following for details 95
Capital lease of a lift truck from Caterpillar Financial Services,
Inc. 7.112%, 60 equal monthly payments of $395.42 with a final payment of $1 19
-----------
193
Less portion due within one year included in current liabilities 126
-----------
$ 67
===========
</TABLE>
F-243
<PAGE> 319
MID-STATES ELECTRIC COMPANY, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
NOTE D - LONG-TERM DEBT (CONTINUED):
The note payable to First Tennessee Bank carries a fixed interest rate of 7.25%.
The principal is to be paid at $6,125 per quarter. The remaining balance is due
on April 1, 1998. The collateralization consists of a pledge of all assets of
the Corporation, exclusive of the above assets pledged on the installment
purchases. In addition, the personal guaranties of the individual stockholders
secure the debt. The Company has a $600,000 line of credit with First Tennessee
Bank which is unsecured. The Company also has a $500,000 line of credit with
First Bank that is secured by personal guaranty of stockholder. This line
expires November 18, 1998. At December 31, 1997 and 1996, there were no
outstanding borrowings against either line.
The Company entered into an agreement with the former owner of the Company to
purchase the real estate located at 117 North Conalco Drive, for a price of
$200,000. Principal and interest are payable in monthly installment of $4,150
with interest accruing at 9%. The agreement extends until January 1, 2000, when
the entire balance of unpaid principal and all accrued interest shall be due and
payable. There are no assets or stockholder guarantees pledged as collateral
against the note.
Maturity of long-term debt is summarized as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, Amount
------------ ------
<S> <C>
1998 $ 126
1999 51
2000 8
2001 5
2002 3
----------
Total $ 193
==========
</TABLE>
NOTE E - INCOME TAXES:
As previously stated in the notes to the financial statements, the Company is an
"S" corporation. The federal income taxes will be paid by the individual
stockholders. The income tax provided is state income tax. The state income tax
consists of the following:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Currently due $ 66
Deferred tax - current 6
-------------
Income Tax Expense $ 72
=============
</TABLE>
F-244
<PAGE> 320
MID-STATES ELECTRIC COMPANY, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
NOTE E - INCOME TAXES (CONTINUED):
The deferred tax liability results from a change in the method of recognition of
revenue and costs on contracts and the accrual of salary for a more than
five-percent stockholder. Contract revenues and costs previously deferred under
the completed contract method of income recognition will be included in income
for tax purposes, in equal amounts, over the four years ended December 31, 1996.
The recognition of the deferred amounts is in accordance with Internal Revenue
Service Code section 481. The accrued salary is deducted for financial
statements when accrued but not deducted for income tax purposes until it is
actually paid in the subsequent year.
State taxes currently payable at December 31, 1997, amounted to $118,260.
NOTE F - RELATED PARTY TRANSACTIONS:
In February, 1990, the sole stockholder sold his stock to the present
stockholders. The Company entered into an agreement on February 1, 1990, with
the former stockholder to lease certain real estate located at 117 North Conalco
Drive, Jackson, Tennessee. The lease term was for five years and provides for
monthly rental of $2,500 plus all maintenance to the premises and improvements.
The Company purchased the real estate on February 1, 1995, for $200,000. See
Note "D".
During the year ended December 31, 1997, the Company purchased specialized
electrical components from a company controlled by the majority shareholder.
These components were resold to construction customers at terms and rates
similar to other items obtained from outside vendors.
Dollar volume purchases, amounts due from and amounts due to the related vendor
for the year ended December 31, 1997, are as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Purchases $ 96
======================
Sales $ 47
======================
Accounts Receivable $ 0
======================
Accounts Payable $ 0
======================
</TABLE>
F-245
<PAGE> 321
MID-STATES ELECTRIC COMPANY, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
NOTE F - RELATED PARTY TRANSACTIONS (CONTINUED):
Effective for the year ended December 31, 1992, the Company is to pay the
President a bonus of 8% of net income. The bonus amounted to $113,850 for the
year ended December 31, 1997.
NOTE G - CASH FLOW INFORMATION:
Cash paid for interest and income taxes for the year ended December 31, 1997 are
as follows:
<TABLE>
<CAPTION>
Year Ended
December 31, 1997
-----------------
<S> <C>
Interest $ 19
=======================
Income Taxes $ 174
=======================
</TABLE>
NOTE H - CONCENTRATION OF RISK:
The Company, in connection with its construction activities grants credit to
customers, that involves, to varying degrees, elements of credit risk. Such risk
is reduced by the Company's ability to obtain lien rights on the constructed
property. The maximum accounting loss from credit risk in connection with the
Company's construction operations is limited to the amounts that are recognized
in the accompanying balance sheet as contracts, retainage and accounts
receivable at December 31, 1997.
At December 31, 1997, the Company maintained cash deposits with a regional
financial institution that exceeded regulatory insurance by approximately
$36,611. If the financial institution failed to completely perform under the
terms of the financial instruments, the exposure for credit loss would be the
amount on deposit in excess of regulatory insurance.
At December 31, 1997, the Company maintained approximately $39,000 in overnight
purchase of securities with the intention of resale with First Tennessee Bank.
These funds are used to purchase a Federal Home Loan Mortgage Corporation REMIC
on an overnight basis. The market value of this security was approximately
$40,000 as of December 31, 1997. In the event First Tennessee failed to
completely perform under the terms of the agreement, the Company's exposure to
credit loss would be offset by the value of the underlying security.
F-246
<PAGE> 322
MID-STATES ELECTRIC COMPANY, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
NOTE H - CONCENTRATION OF RISK (CONTINUED):
At December 31, 1997, the Company maintained approximately $247,000 in overnight
purchase of securities with intent to resale with First Bank. These funds are
used to purchase a Federal National Mortgage Association bond on an overnight
basis. The market value of this security is approximately $995,000 as of
December 31, 1997. In the event First Bank failed to completely perform under
the terms of the agreement, the Company's exposure to loss would be offset by
the value of the underlying security.
NOTE I - LEASE COMMITMENTS:
In February 1995, the Company entered into a capital lease obligation for a
copier. The lease term is 36 months with two months payment in advance.
In March 1996, the Company entered into a lease agreement for an automobile. The
lease term is 30 months. In August 1997, the Company entered into a lease
agreement for an automobile, with a lease term of 24 months. Lease expense for
1997 amounted to $12,768.
Future required lease payments are as follows:
<TABLE>
<S> <C>
1998 $ 20
1999 9
---------
TOTAL $ 29
=========
</TABLE>
NOTE J - TREASURY STOCK:
During the year, the Company purchased 237.04 shares of stock for $1,926,396
from two stockholders. This represented 39.4% of the total shares outstanding at
the time of the purchase.
NOTE K - EMPLOYEE BENEFITS PLAN:
The Company maintains a 401(k) savings plan for all employees who are 21 and
have one year of service. Employer contributions to the plan are determined
annually by the Board of Directors. The plan was effective January 1, 1997. The
Company has made no contributions to the plan.
F-247
<PAGE> 323
MID-STATES ELECTRIC COMPANY, INC.
NOTES TO AUDITED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 1997
NOTE L - MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 75 percent of total sales to four major
customers during 1997.
In addition, the Company grants credit, generally without collateral, to its
customers, which are general contractors in the commercial and industrial
construction markets in the continental United States. Consequently, the Company
is subject to potential credit risk related to changes in business and economic
factors within the commercial and industrial construction markets in this state.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
F-248
<PAGE> 324
INDEPENDENT AUDITORS' REPORT
T & H Electrical Corporation
Wilson, North Carolina
We have audited the accompanying balance sheet of T & H Electrical
Corporation as of September 30, l997, and the related statements of income and
retained earnings and cash flows for the year then ended. The financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit 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 T & H Electrical Corporation
as of September 30, l997, and the results of its operations and its cash flows
for the year then ended in conformity with generally accepted accounting
principles.
Dees, Jackson, Watson & Associates, P.A.
Smithfield, North Carolina
December 18, 1997
F-249
<PAGE> 325
T & H ELECTRICAL CORPORATION
BALANCE SHEETS
================================================================================
ASSETS
(in Thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1998
------------- -------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash on hand and in banks $ 84 $ 452
Accounts receivable
Contract receivables 3,426 2,103
Officers 177 13
Employees 6 --
Costs and estimated earnings in excess of
billings on uncompleted contracts 418 1,014
Inventories 336 432
Prepaid expenses 29 336
Bid deposits 1 --
Corporate income tax deposits -- --
------ -------
Total Current Assets 4,477 4,350
------ -------
PROPERTY AND EQUIPMENT (AT COST)
Office equipment 252 269
Automobile and trucks 1,302 1,441
Construction equipment 636 1,270
Leasehold improvements 3 3
------ -------
2,193 2,983
Less accumulated depreciation (1,618) (1,792)
------ -------
Total Property and Equipment 575 1,191
------ -------
OTHER ASSETS
Cash surrender value of life insurance 85 84
------ -------
Total Other Assets 85 84
------ -------
Totals $5,137 $ 5,625
====== =======
</TABLE>
F-250
<PAGE> 326
T & H ELECTRICAL CORPORATION
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
(In Thousands)
<TABLE>
<CAPTION>
September 30, June 30,
1997 1998
------------- -------
(Unaudited)
<S> <C> <C>
CURRENT LIABILITIES
Notes payable $ 32 $ 32
Dividends payable 25 --
Accounts payable
Trade 1,134 630
Employee withholding taxes 119 75
Billings in excess of costs and estimated
earnings on uncompleted contracts 505 415
Accrued expenses
Salaries and wages 114 312
Payroll taxes 12 --
Profit sharing 120 75
Deferred income taxes 115 115
Corporate income taxes payable 287 306
------ ------
Total Current Liabilities 2,463 1,960
LONG-TERM DEBT
Notes payable 93 563
------ ------
Total Liabilities 2,556 2,523
------ ------
STOCKHOLDERS' EQUITY
Common stock - $10.00 par value; 10,000 shares
authorized; 30 shares issued and outstanding -- --
Paid-in capital 109 109
Retained earnings 2,472 2,993
------ ------
Total Stockholders' Equity 2,581 3,102
------ ------
Totals $5,137 $5,625
====== ======
</TABLE>
See the accompanying notes and accountants' report.
F-251
<PAGE> 327
T & H ELECTRICAL CORPORATION
STATEMENTS OF INCOME AND RETAINED EARNINGS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
Year Ended Nine Months Ended Nine Months Ended
September 30, 1997 June 30, 1997 June 30, 1998
------------------ ----------------- -----------------
(unaudited) (unaudited)
<S> <C> <C> <C>
CONTRACT REVENUES EARNED $ 13,166 $ 9,085 $8,570
COST OF REVENUES EARNED 10,110 7,041 5,922
-------- ------- ------
Gross Profit 3,056 2,044 2,648
OPERATING EXPENSES 2,429 1,341 1,827
-------- ------- ------
OPERATING INCOME 627 703 821
OTHER INCOME
Interest 5 (27) 8
Miscellaneous 4 (2) --
Gain on sale of fixed assets 1 2 --
-------- ------- ------
637 676 829
CORPORATE INCOME TAXES
Current (376) 190 308
Deferred 124 -- --
-------- ------- ------
NET INCOME 385 486 521
RETAINED EARNINGS - BEGINNING 2,111 2,111 2,472
DIVIDENDS (25) -- --
-------- ------- ------
RETAINED EARNINGS - ENDING $ 2,471 $ 2,597 $2,993
-------- ------- ------
</TABLE>
See the accompanying notes and accountants' report.
F-252
<PAGE> 328
T & H ELECTRICAL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
================================================================================
<TABLE>
<CAPTION>
Nine months Nine Months
Year Ended Ended Ended
September 30, June 30, June 30,
1997 1997 1998
------------- ----------- -----------
(unaudited) (unaudited)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 385 $ 486 $ 521
Adjustments to reconcile net income
to cash provided by operating activities
Depreciation 287 140 174
Loss on sale of fixed assets (2) -- --
Cash value of life insurance (25) -- 1
(Increase) decrease in assets
Accounts receivable (1,232) (334) 1,493
Costs and estimated earnings in excess
of billings on uncompleted contracts 521 369 (596)
Inventory (78) (313) (96)
Prepaid expenses 54 (20) (288)
Deposits 20 -- 1
Increase (decrease) in liabilities
Accounts payable 106 (716) (548)
Billings in excess of costs and estimated
earnings on uncompleted contracts 31 (116) (90)
Accrued expenses 22 -- 141
Income taxes payable 287 -- 19
Other 3 21 (44)
Deferred income taxes (124) 16 --
------- ----- -------
Net Cash Provided By (Used In)
Operating Activities 255 (467) 688
------- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets (150) (117) (790)
Proceeds from the sale of fixed assets 2 -- --
------- ----- -------
Net Cash Used By Investing Activities (148) (117) (790)
------- ----- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes issued -- 565 470
Repayment of notes issued (33) (16) --
Dividends paid (25) -- --
------- ----- -------
Net Cash Provided By (Used By)
Financing Activities (58) 549 470
------- ----- -------
INCREASE (DECREASE) IN CASH 49 (35) 368
CASH AND CASH EQUIVALENTS - BEGINNING OF YEAR 35 35 84
------- ----- -------
CASH AND CASH EQUIVALENTS - END OF YEAR $ 84 $ -- $ 452
------- ----- -------
</TABLE>
See the accompanying notes and accountants' report.
F-253
<PAGE> 329
T & H ELECTRICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Company's Activities and Operating Cycle
The Company is engaged in the business of electrical construction
contracting. The length of the Company's contracts varies but typically
extends less than two years. The Company has therefore used the
operating cycle concept in classifying all contract-related assets and
liabilities as current on the balance sheet.
In September, 1998, the Company and its stockholders entered into a
definitive agreement with Integrate Electrical Services, Inc. (IES),
pursuant to which all outstanding shares of the 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 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 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
Revenues from construction contracts through September 30, 1996 have
been recognized on the percentage of completion method for financial
accounting purposes and on the completed contract method for tax
purposes. To qualify for the completed contract method for tax purposes
the Company's gross revenues must not exceed $10 million for the
preceding three years. For the three year period ending September 30,
1996 the Company's average yearly gross revenues exceeded this
threshold. Therefore, all contracts entered into after September 30,
1996 are being accounted for using the percentage of completion method
for both tax purposes and for financial accounting purposes.
The percentage of completion method is computed using the cost to cost
method. Contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect
labor, supplies, tools, repairs and depreciation costs. General and
administrative costs are charged to expense as incurred. Provisions for
estimated losses on uncompleted contracts are made in the period in
which such losses are determined. The asset, "Costs and estimated
earnings in excess of billings on uncompleted contracts" represents
revenues recognized in excess of amounts billed. The liability,
"Billings in excess of costs and estimated earnings on uncompleted
contracts" represents billings in excess of revenues recognized.
The Company has several "Time-and-Materials" fee type jobs in process
at September 30, l997 and 1996. Management refers to these jobs as
"Open Ended Cost Plus Contracts", since these jobs do not have a fixed
contract price as with Fixed Price Contracts. The total contract amount
is determined by the amount of work ultimately performed. The amount
under total contract price in the schedule of Contracts In Progress for
these contracts is management's best estimate of the total that will be
billed on these jobs.
F-254
<PAGE> 330
Property and Equipment
Depreciation on such assets is being computed for both financial
accounting reporting purposes and income tax reporting purposes under
the modified accelerated cost recovery system. For the years ended
September 30, l997 and l996, depreciation under this method totaled
$287,297 and $290,187, respectively.
Inventory Valuation
Inventories are valued at the lower of cost (first-in, first-out) or
market prices.
Use of Estimates
The preparation of financial statements in conformity with the income
tax basis of accounting requires management to make estimates and
assumptions that affect certain reported amounts and disclosures.
Accordingly, actual results could differ from those estimates.
Concentration of Credit Risk
At year end, the Company had on deposit with a bank an amount in excess
of FDIC insurance limits. The Company has not experienced any losses in
such account and believes it is not exposed to any significant credit
risk to cash.
Deferred Income Taxes
Deferred income taxes are provided for differences in timing in
reporting income for financial statement and tax purposes arising from
differences in the methods of accounting for construction contracts.
For the year ended September 30, 1997, the Company had earnings before
income taxes of $1,214,383 for income tax purposes and $637,340 for
financial statement reporting purposes. Income tax expense for the year
ended September 30, 1997 totaled $251,922 with $375,635 currently
payable and a decrease in deferred of $123,713. A credit for prior year
alternative minimum tax of $129,862 was available and used during the
year ended September 30, 1997. For the year ended September 30, 1996,
the Company had earnings before income taxes of $90,892 for income tax
purposes and $258,042 for financial statement reporting purposes.
Income tax expense for the year ended September 30, 1996 totaled
$100,419 with $67,127 currently payable and $33,292 deferred.
Alternative minimum tax for the year ended September 30, 1996 totaled
$47,378.
F-255
<PAGE> 331
T & H ELECTRICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
CONTRACT RECEIVABLES
<TABLE>
<CAPTION>
Year Ended
September 30, 1997
------------------
<S> <C>
Contract receivables on the balance sheet
consist of the following:
Receivable on completed contracts $ 919
Receivable on contracts in progress 1,715
Retainage 792
--------
Total Contract Receivables $ 3,426
========
</TABLE>
COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
<TABLE>
<CAPTION>
Year Ended
September 30, 1997
------------------
<S> <C>
Costs incurred on uncompleted contracts $ 9,534
Estimated earnings 2,078
--------
11,612
Less billings to date 11,699
--------
$ (87)
--------
Included in accompanying balance sheet under the
following headings:
Costs and estimated earnings in excess of
billings on uncompleted contracts $ 418
Billings in excess of costs and estimated
earnings on uncompleted contracts 505
--------
$ (87)
--------
</TABLE>
F-256
<PAGE> 332
T & H ELECTRICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
RELATED PARTY TRANSACTIONS
The Company leases a warehouse and administrative office facility in
Wilson, N.C. from T.H.E. Associates, a partnership owned by the
shareholders of the Company. The lease term is from month-to-month in the
amount of $6,500. Rental expenses for the years ended September 30, l997
and l996 totaled $78,000 and $67,000, respectively.
As of September 30, 1996 loans to officers/stockholders totaled $127,091.
During the year ended September 30, 1997 additional loans to
officers/stockholders were made in the amount of $50,000 and no amounts
were repaid. The balance receivable from officer/stockholders at September
30, 1997 totaled $177,091.
The Company contracted the grading of the office lot to PLT Construction
Company, Inc. which is co-owned by a principle of the Company. The contract
price was $8,373, all of which was due and payable at September 30, 1996.
NOTES PAYABLE
<TABLE>
<CAPTION>
Current Long-Term Total
------- --------- -----
<S> <C> <C> <C>
Banks
Prime plus .25% note due at a
total of $2,648.20 per month
plus interest, collateralized by
liens on vehicles and equipment. $ 32 $ 93 $ 125
--------- --------- ----------
Total $ 32 $ 93 $ 125
========= ========= ==========
</TABLE>
Future long-term debt maturities as of September 30, l997 are as follows:
<TABLE>
<CAPTION>
Year Ending September 30, Amount
------------------------- ------
<S> <C>
1998 $ 32
1999 32
2000 32
2001 29
--------
$ 125
========
</TABLE>
The Company has a prime rate confirmed line of credit, collateralized by
the unconditional guarantee of Company stockholders, expiring January 15,
1998, with the balance at that time being repaid, renewed or restructured
by the bank. Maximum amount available is $700,000 payable upon demand with
interest payable monthly. There was no outstanding balance on this line of
credit at September 30, l997.
Additionally, the Company has a guidance line of credit expiring January
15, 1998, with maximum funds available of $500,000. The terms of this line
of credit which is collateralized by the unconditional guarantee of Company
stockholders, requires interest of prime plus .50% to be paid monthly and
principal is payable upon demand. Additionally, each advance on this line
will be handled on a per request basis with information regarding the term,
purpose and repayment source to be provided at the time of disbursement.
There was no outstanding balance on this line at September 30, l997.
F-257
<PAGE> 333
T & H ELECTRICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
================================================================================
INTEREST EXPENSE
Interest expense for the years ended September 30, l997, and l996 totaled
$34,230 and $24,449, for each year respectively.
STATEMENTS OF CASH FLOWS
The Company considers all short-term investments with an original maturity
of three months or less to be cash equivalents. At September 30, 1997, and
September 30, 1996, the Company had $243,583 and $-0-, respectively,
invested in preferred selects which have a seven day maturity.
Supplemental disclosures of cash flow information
<TABLE>
<CAPTION>
Year Ended
-----------------
September 30,1997
-----------------
<S> <C>
Cash paid for:
Interest expense $ 34
===========
Income taxes $ 51
===========
</TABLE>
PROFIT SHARING PLAN
The Company has a defined contribution profit-sharing plan for all of its
employees. Annual additions to the Plan are made at the Company's
discretion. During the years ended September 30, 1997, and 1996
contributions were $120,000 and $115,000, respectively.
DESCRIPTION OF LEASING ARRANGEMENTS
The Company leased a vehicle under an operating lease which required
monthly lease payments of $800.00 and expired June 30, 1997.
CONCENTRATION:
The Company grants credit, generally without collateral, to its customers,
which are general contractors in the commercial and industrial construction
markets in North Carolina. Consequently, the Company is subject to potential
credit risk related to changes in business and economic factors within the
commercial and industrial construction markets in this state. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
F-258
<PAGE> 334
================================================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary ........................... 2
Risk Factors ................................. 9
The Company .................................. 14
Use of Proceeds .............................. 14
Price Range of Common Stock and
Dividend Policy ............................ 14
Selected Financial Data ...................... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations .............................. 19
Business ..................................... 44
Management ................................... 54
Certain Transactions ......................... 60
Principal Stockholders ....................... 65
Description of Capital Stock ................. 66
Shares Eligible for Future Sale .............. 70
Plan of Distribution ......................... 72
Legal Matters ................................ 72
Additional Information ....................... 72
Index to Financial Statements ................ F-1
</TABLE>
================================================================================
================================================================================
21,000,000 SHARES
Integrated Electrical Services, Inc.
COMMON STOCK
---------------
PROSPECTUS
---------------
SEPTEMBER 14, 1998
================================================================================
<PAGE> 335
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
[ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED SEPTEMBER 14, 1998
PROSPECTUS
21,000,000 SHARES
Integrated Electrical Services, Inc.
COMMON STOCK
This Prospectus, as appropriately amended or supplemented, may be used from
time to time principally by persons (the "Selling Stockholders") who have
received shares of common stock, par value $0.01 per share (the "Common Stock"),
of Integrated Electrical Services, Inc. (the "Company") in connection with the
acquisition by the Company of securities or assets held by such persons, or
their transferees, and who wish to offer and sell such shares of Common Stock in
transactions in which they and any broker-dealer through whom such shares are
sold may be deemed to be Underwriters within the meaning of the Securities Act
of 1933, as amended (the "Securities Act"), as more fully described herein. The
Company will receive none of the proceeds from any such sale. Any commissions
paid or concessions allowed to any broker-dealer, and, if any broker-dealer
purchases such shares as principal, any profits received on the resale of such
shares, may be deemed to be underwriting discounts and commissions under the
Securities Act. Printing, certain legal and accounting, filing and other similar
expenses of this offering will be paid by the Company. The Selling Stockholders
will generally bear all other expenses of this offering, including brokerage
fees and any underwriting discounts or commissions.
The Registration Statement of which this Prospectus is a part also relates
to the offer and issuance by the Company from time to time of 21,000,000 shares
of Common Stock in connection with its acquisition of the securities and assets
of other businesses.
The Common Stock trades on The New York Stock Exchange (the "NYSE") under
the symbol "IEE." Application will be made to list the shares of Common Stock
offered hereby on the NYSE. The last reported sale price of the Common Stock on
the NYSE on September 11, 1998 was $13 7/8 per share.
------------------------
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 7.
------------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS SEPTEMBER 14, 1998.
<PAGE> 336
[ALTERNATE PAGE FOR SELLING STOCK HOLDER PROSPECTS]
PLAN OF DISTRIBUTION
This Prospectus, as appropriately amended or supplemented, may be used from
time to time principally by persons who have received shares of Common Stock in
connection with acquisitions by the Company of securities and assets held by
such persons, or their transferees, and who wish to offer and sell such shares
of Common Stock (such persons are herein referred to as "Selling Stockholders")
in transactions in which they and any broker-dealer through whom such shares are
sold may be deemed to be Underwriters within the meaning of the Securities Act.
The Company will receive none of the proceeds from any such sales. There
presently are no arrangements or understandings, formal or informal, pertaining
to the distribution of the shares of Common Stock described herein. Upon the
Company being notified by a Selling Stockholder that any material arrangement
has been entered into with a broker-dealer for the sale of shares of Common
Stock bought through a block trade, special offering, exchange distribution or
secondary distribution, a supplemented Prospectus will be filed, pursuant to
Rule 424(b) under the Securities Act, setting forth (i) the name of each Selling
Stockholder and the participating broker-dealer(s), (ii) the number of shares
involved, (iii) the price at which the shares were sold, (iv) the commissions
paid or the discounts allowed to such broker-dealer(s), where applicable, (v)
that such broker-dealer(s) did not conduct any investigation to verify the
information set out in this Prospectus and (vi) other facts material to the
transaction.
Selling Stockholders may sell the shares being offered hereby from time to
time in transactions (which may involve crosses and block transactions) on the
NYSE, in negotiated transactions or otherwise, at market prices prevailing at
the time of the sale or at negotiated prices. Selling Stockholders may sell some
or all of the shares in transactions involving broker-dealers, who may act
solely as agent and/or may acquire shares as principal. Broker-dealers
participating in such transactions as agent may receive commissions from Selling
Stockholders (and, if they act as agent for the purchaser of such shares, from
such purchaser), such commissions computed in appropriate cases in accordance
with the applicable rules of the NYSE, which commissions may be at negotiated
rates where permissible under such rules. Participating broker-dealers may agree
with Selling Stockholders to sell a specified number of shares at a stipulated
price per share and, to the extent such broker-dealer is unable to do so acting
as an agent for the Selling Stockholder, to purchase as principal any unsold
shares at the price required to fulfill the broker-dealer's commitment to
Selling Stockholders. In addition or alternatively, shares may be sold by
Selling Stockholders and/or by or through other broker-dealers in special
offerings, exchange distributions or secondary distributions pursuant to and in
compliance with the governing rules of the NYSE, and in connection therewith
commissions in excess of the customary commission prescribed by such governing
rules may be paid to participating broker-dealers, or, in the case of certain
secondary distributions, a discount or concession from the offering price may be
allowed to participating broker-dealers in excess of the customary commission.
Broker-dealers who acquire shares as principal may thereafter resell such shares
from time to time in transactions (which may involve crosses and block
transactions and which may involve sales to or through other broker-dealers,
including transactions of the nature described in the preceding two sentences)
on the NYSE, in negotiated transactions or otherwise, at market prices
prevailing at the time of sale or at negotiated prices, and in connection with
such resales may pay to or receive commissions from the purchaser of such
shares.
The Company may agree to indemnify each Selling Stockholder as an
Underwriter under the Securities Act against certain liabilities, including
liabilities arising under the Securities Act. Each Selling Stockholder may
indemnify any broker-dealer that participates in transactions involving sales of
the shares against certain liabilities, including liabilities arising under the
Securities Act.
The Selling Stockholders may resell the shares offered hereby only if such
securities are qualified for sale under applicable state securities or "blue
sky" laws or exemptions from such registration and qualification requirements
are available.
74
<PAGE> 337
[ALTERNATE PAGE FOR SELLING STOCKHOLDER PROSPECTUS]
======================================================
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK IN ANY
JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS UNLAWFUL TO MAKE SUCH OFFER
OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 2
Risk Factors.......................... 9
The Company........................... 14
Use of Proceeds....................... 14
Price Range of Common Stock and
Dividend Policy..................... 14
Selected Financial Data............... 15
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 19
Business.............................. 44
Management............................ 54
Certain Transactions.................. 60
Principal Stockholders................ 65
Description of Capital Stock.......... 66
Shares Eligible for Future Sale....... 70
Plan of Distribution.................. 72
Legal Matters......................... 72
Additional Information................ 72
Index to Financial Statements......... F-1
</TABLE>
======================================================
======================================================
21,000,000 SHARES
Integrated Electrical Services, Inc.
COMMON STOCK
------------------------
PROSPECTUS
------------------------
SEPTEMBER 14, 1998
======================================================
<PAGE> 338
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(A)
<TABLE>
<S> <C>
SEC Registration Fee........................................ $ 84,473
Accounting Fees and Expenses................................ 300,000
Legal Fees and Expenses..................................... 5,000
Printing Expenses........................................... 60,000
Transfer Agent's Fees....................................... 1,000
Miscellaneous............................................... 9,527
--------
Total..................................................... $460,000
========
</TABLE>
- ---------------
(a) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such
whether or not the corporation would have the power to indemnify him against
such liabilities under Section 145.
II-1
<PAGE> 339
Section 102(b)(7) of the General Corporation Law of the State of Delaware
provides that a certificate of incorporation may contain a provision eliminating
or limiting the personal liability of a director to the corporation or its
stockholders for monetary damages for breach of fiduciary duty as a director
provided that such provision shall not eliminate or limit the liability of a
director (i) for any breach of the director's duty of loyalty to the corporation
or its stockholders, (ii) for acts or omissions not in good faith or which
involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the Delaware General Corporation Law or (iv) for any transaction
from which the director derived an improper personal benefit.
Article Eighth of the Company's Amended and Restated Certificate of
Incorporation states that:
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty by such director as a director; provided, however, that this Article Eighth
shall not eliminate or limit the liability of a director to the extent provided
by applicable law (i) for any breach of the director's duty of loyalty to the
Corporation or its stockholders, (ii) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (iii) under
Section 174 of the DGCL or (iv) for any transaction from which the director
derived an improper personal benefit. No amendment to or repeal of this Article
Eighth shall apply to, or have any effect on, the liability or alleged liability
of any director of the Corporation for or with respect to any acts or omissions
of such director occurring prior to such amendment or repeal. If the DGCL is
amended to authorize corporate action further eliminating or limiting the
personal liability of directors, then the liability of a director of the
Corporation shall be eliminated or limited to the fullest extent permitted by
the DGCL, as so amended.
In addition, Article VI of the Company's Bylaws further provides that the
Company shall indemnify its officers, directors and employees to the fullest
extent permitted by law.
The Company has entered into indemnification agreements with each of its
executive officers and directors.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
Set forth below is certain information concerning all sales of securities
by the Company during the past three years that were not registered under the
Securities Act of 1933. The description presented below gives effect to the
Company's 2,329.6-for-one stock split effected in October, 1997.
(a) On June 26, 1997, the Company issued 2,329,600 shares of its
Common Stock at an aggregate price of $1,000 to C. Byron Snyder, the Snyder
Children's Trust and D. Merril Cummings.
(b) On September 5, 1997, the Company issued 1,672,711 shares of its
Common Stock to C. Byron Snyder, the Snyder Children's Trust, and to
certain executive officers and key employees at an aggregate price of $718.
(c) On October 17, 1997, the Company issued 50,000 shares of its
Common Stock to certain executive officers and key employees at an
aggregate price of $21.
(d) See "Certain Transactions" for a discussion of the issuance of
shares of Common Stock in connection with the Acquisitions.
(e) On September 14, 1998, the Company issued 214,047 shares of its
Common Stock and cash consideration of $41.3 million to the six stockholders of
Davis Electrical Constructors, Inc. in exchange for all of the outstanding
shares of common stock of such entity.
These transactions were completed without registration under the Securities
Act of 1933 in reliance on the exemption provided by Section 4(2) of the
Securities Act of 1933.
II-2
<PAGE> 340
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits. Except as indicated, all exhibits have been previously filed.
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
2.1 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Ace
Electric, Inc., and all of the Stockholders of Ace
Electric, Inc. (Incorporated by reference to 2.1 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.2 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Amber
Electric, Inc., and all of the Stockholders of Amber
Electric, Inc. (Incorporated by reference to 2.2 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.3 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., BW
Consolidated, Inc., all of the Stockholders of BW
Consolidated, Inc., Bexar Electric Company, Ltd., Calhoun
Electric Company, Ltd. and the Employee Partners of such
partnerships. (Incorporated by reference to 2.3 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.4 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Daniel
Electrical Contractors, Inc., Daniel Electrical of
Treasure Coast Inc. and all of the Stockholders of Daniel
Electrical Contractors, Inc. and Daniel Electrical of
Treasure Coast Inc. (Incorporated by reference to 2.4 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.5 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Stark
Investments, Inc., and all of the Stockholders of Stark
Investments, Inc. (Incorporated by reference to 2.5 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.6 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Hatfield
Electric, Inc., and all of the Stockholders of Hatfield
Electric, Inc. (Incorporated by reference to 2.6 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.7 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., General
Partner, Inc., Charles P. Bagby Company, Inc. and all of
the Stockholders of General Partner, Inc., and Charles P.
Bagby Company, Inc. (Incorporated by reference to 2.7 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.8 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc.,
Houston-Stafford Electric, Inc., and all of the
Stockholders of Houston-Stafford Electric, Inc.
(Incorporated by reference to 2.8 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
2.9 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Mills
Electrical Contractors, Inc., and all of the Stockholders
of Mills Electrical Contractors, Inc. (Incorporated by
reference to 2.9 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
2.10 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Muth
Electric, Inc., and all of the Stockholders of Muth
Electric, Inc. (Incorporated by reference to 2.10 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
</TABLE>
II-3
<PAGE> 341
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
2.11 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Pollock
Electric Inc., and all of the Stockholders of Pollock
Electric Inc. (Incorporated by reference to 2.11 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.12 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Thomas
Popp & Company and all of the Stockholders of Thomas Popp
& Company. (Incorporated by reference to 2.12 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.13 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Reynolds
Electric Corp., and all of the Stockholders of Reynolds
Electric Corp. (Incorporated by reference to 2.13 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.14 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Rodgers
Electric Company, Inc., and all of the Stockholders of
Rodgers Electric Company, Inc. (Incorporated by reference
to 2.14 to the Registration Statement on Form S-1 (File
No. 333-38715) of the Company)
2.15 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Summit
Electric of Texas, Incorporated, and all of the
Stockholders of Summit Electric of Texas, Incorporated.
(Incorporated by reference to 2.15 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
2.16 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Thurman &
O'Connell Corporation, and all of the Stockholders of
Thurman & O'Connell Corporation. (Incorporated by
reference to 2.16 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
2.17 -- Agreement and Plan of Merger dated as of June 18, 1998
among Integrated Electrical Services, Inc., Mark Henderson
Acquisition Corporation, Mark Henderson, Incorporated, and
Mark Henderson and Bill Collins. (Incorporated by
reference from the Company's Report on Form 8-K dated
July 14, 1998).
2.18 -- Agreement and Plan of Merger dated as of June 18, 1998
among Integrated Electrical Services, Inc., Mark Henderson
Acquisition Corporation, Holland Electrical Systems, Inc.
and Amy B. Henderson and Mary Sue Holland. (Incorporated by
reference from the Company's Report on Form 8-K dated
July 14, 1998).
2.19 -- Agreement and Plan of Merger dated as of June 18, 1998
among Integrated Electrical Services, Inc., Mark Henderson
Acquisition Corporation, Spectrol, Inc. and David Lytle.
(Incorporated by reference from the Company's Report on
Form 8-K dated July 14, 1998).
*2.20 -- Agreement and Plan of Merger dated as of September 11,
1998 among Integrated Electrical Services, Inc., Davis
Acquisition Corporation, Davis Electrical Constructors,
Inc., James B. Stephens, J. Michael Stephens, William N.
Byrd, James C. Henderson, J. Lowell Hughes and William M.
Sumerel.
3.1 -- Amended and Restated Certificate of Incorporation as
amended. (Incorporated by reference to 3.1 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
3.2 -- Bylaws. (Incorporated by reference to 3.2 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
4.1 -- Specimen Common Stock Certificate. (Incorporated by
reference to 4.1 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
**5.1 -- Opinion of John F. Wombwell, Esq. as to the legality of
the securities being registered.
10.1 -- Form of Employment Agreement (Incorporated by reference
to 10.1 to the Registration Statement on Form S-1 (File
No. 333-38715) of the Company)
10.2 -- Form of Officer and Director Indemnification Agreement.
(Incorporated by reference to 10.2 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.3 -- Integrated Electrical Services, Inc. 1997 Stock Plan.
(Incorporated by reference to 10.3 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.4 -- Integrated Electrical Services, Inc. 1997 Directors Stock
Plan. (Incorporated by reference to 10.4 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
*10.5 -- Form of Credit Agreement among the Company, the Financial
Institutions named therein and NationsBank of Texas,
N.A., including form of Subsidiary Guaranty Agreement,
form of Pledge Agreement, form of Security Agreement,
form of promissory note, and form of swing line note.
</TABLE>
II-4
<PAGE> 342
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
10.6 -- Form of Lock-up Agreement to be entered into by the
Company and the stockholders set forth on Schedule A
thereto. (Incorporated by reference to 10.6 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
*21.1 -- List of Subsidiaries.
23.1 -- Consent of John F. Wombwell, Esq. (included in Exhibit
5.1).
*23.2 -- Consent of Arthur Andersen LLP.
*23.3 -- Consent of Bradshaw, Pope & Franklin, LLP.
*23.4 -- Consent of Elliott, Davis & Company, L.L.P.
*23.5 -- Consent of Sapp & Sapp P.A.
*23.6 -- Consent of Philhours, Rich & Fletcher, P.L.L.C.
*23.7 -- Consent of Wolfe and Company, P.C.
*23.8 -- Consent of Edmondson, LedBetter & Ballard, L.L.P.
*23.9 -- Consent of Ketel Thorstenson, LP.
*23.10 -- Consent of Wear, Howell, Strickland & Quinn, L.L.C.
*23.11 -- Consent of Dees, Jackson, Watson & Associates, P.A.
**24.1 -- Power of Attorney.
*27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
** Previously filed.
(b) Financial statement schedules
None.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act, and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the
Securities Act of 1933, the information omitted from the form of prospectus
filed as part of this Registration Statement in reliance upon Rule 430A and
contained in a form of prospectus filed by the registrant pursuant to Rule
424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be
part of this Registration Statement as of the time it was declared
effective.
(2) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement.
II-5
<PAGE> 343
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) That for the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that contains a form
of prospectus shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at
that time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE> 344
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, State of Texas,
on September 14, 1998.
Integrated Electrical Services, Inc.
By: /s/ JON POLLOCK
-------------------------------------
Jon Pollock
President, Chief Executive Officer
and Director
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on September 14, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ JON POLLOCK President, Chief Executive
- ----------------------------------------------------- Officer and Director
Jon Pollock (Principal Executive Officer)
/s/ JIM P. WISE * Senior Vice President and Chief
- ----------------------------------------------------- Financial Officer (Principal
Jim P. Wise Financial Officer
/s/ J. PAUL WITHROW * Vice President and Chief
- ----------------------------------------------------- Accounting Officer (Principal
J. Paul Withrow Accounting Officer)
/s/ JERRY MILLS * Senior Vice President, Chief
- ----------------------------------------------------- Operating
Jerry Mills Officer -- Commercial and
Industrial and Director
/s/ BEN L. MUELLER * Senior Vice President, Chief
- ----------------------------------------------------- Operating
Ben E. Mueller Officer -- Residential and
Director
</TABLE>
II-7
<PAGE> 345
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<C> <S>
/s/ C. BYRON SNYDER * Chairman of the Board of
- ----------------------------------------------------- Directors
C. Byron Snyder
Director
- -----------------------------------------------------
Donald Paul Hodel
/s/ RICHARD MUTH * Director
- -----------------------------------------------------
Richard Muth
/s/ ALAN R. SIELBECK * Director
- -----------------------------------------------------
Alan R. Sielbeck
/s/ ROBERT STALVEY * Director
- -----------------------------------------------------
Robert Stalvey
/s/ RICHARD L. TUCKER * Director
- -----------------------------------------------------
Richard L. Tucker
/s/ BOB WEIK * Director
- -----------------------------------------------------
Bob Weik
</TABLE>
II-8
* /s/ Jon Pollock
----------------------
Jon Pollock, pursuant
to a power-of-attorney
filed with the Registration
Statement on Form S-1 (333-50031)
on September 14, 1998
<PAGE> 346
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
2.1 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Ace
Electric, Inc., and all of the Stockholders of Ace
Electric, Inc. (Incorporated by reference to 2.1 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.2 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Amber
Electric, Inc., and all of the Stockholders of Amber
Electric, Inc. (Incorporated by reference to 2.2 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.3 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., BW
Consolidated, Inc., all of the Stockholders of BW
Consolidated, Inc., Bexar Electric Company, Ltd., Calhoun
Electric Company, Ltd. and the Employee Partners of such
partnerships. (Incorporated by reference to 2.3 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.4 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Daniel
Electrical Contractors, Inc., Daniel Electrical of
Treasure Coast Inc. and all of the Stockholders of Daniel
Electrical Contractors, Inc. and Daniel Electrical of
Treasure Coast Inc. (Incorporated by reference to 2.4 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.5 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Stark
Investments, Inc., and all of the Stockholders of Stark
Investments, Inc. (Incorporated by reference to 2.5 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.6 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Hatfield
Electric, Inc., and all of the Stockholders of Hatfield
Electric, Inc. (Incorporated by reference to 2.6 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.7 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., General
Partner, Inc., Charles P. Bagby Company, Inc. and all of
the Stockholders of General Partner, Inc., and Charles P.
Bagby Company, Inc. (Incorporated by reference to 2.7 to
the Registration Statement on Form S-1 (File No.
333-38715) of the Company)
2.8 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc.,
Houston-Stafford Electric, Inc., and all of the
Stockholders of Houston-Stafford Electric, Inc.
(Incorporated by reference to 2.8 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
2.9 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Mills
Electrical Contractors, Inc., and all of the Stockholders
of Mills Electrical Contractors, Inc. (Incorporated by
reference to 2.9 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
2.10 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Muth
Electric, Inc., and all of the Stockholders of Muth
Electric, Inc. (Incorporated by reference to 2.10 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
</TABLE>
<PAGE> 347
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
2.11 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Pollock
Electric Inc., and all of the Stockholders of Pollock
Electric Inc. (Incorporated by reference to 2.11 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.12 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Thomas
Popp & Company and all of the Stockholders of Thomas Popp
& Company. (Incorporated by reference to 2.12 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.13 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Reynolds
Electric Corp., and all of the Stockholders of Reynolds
Electric Corp. (Incorporated by reference to 2.13 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
2.14 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Rodgers
Electric Company, Inc., and all of the Stockholders of
Rodgers Electric Company, Inc. (Incorporated by reference
to 2.14 to the Registration Statement on Form S-1 (File
No. 333-38715) of the Company)
2.15 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Summit
Electric of Texas, Incorporated, and all of the
Stockholders of Summit Electric of Texas, Incorporated.
(Incorporated by reference to 2.15 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
2.16 -- Stock Purchase Agreement dated as of October 21, 1997 by
and among Integrated Electrical Services, Inc., Thurman &
O'Connell Corporation, and all of the Stockholders of
Thurman & O'Connell Corporation. (Incorporated by
reference to 2.16 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
2.17 -- Agreement and Plan of Merger dated as of June 18, 1998
among Integrated Electrical Services, Inc., Mark Henderson
Acquisition Corporation, Mark Henderson, Incorporated, and
Mark Henderson and Bill Collins. (Incorporated by
reference from the Company's Report on Form 8-K dated
July 14, 1998).
2.18 -- Agreement and Plan of Merger dated as of June 18, 1998
among Integrated Electrical Services, Inc., Mark Henderson
Acquisition Corporation, Holland Electrical Systems, Inc.
and Amy B. Henderson and Mary Sue Holland. (Incorporated by
reference from the Company's Report on Form 8-K dated
July 14, 1998).
2.19 -- Agreement and Plan of Merger dated as of June 18, 1998
among Integrated Electrical Services, Inc., Mark Henderson
Acquisition Corporation, Spectrol, Inc. and David Lytle.
(Incorporated by reference from the Company's Report on
Form 8-K dated July 14, 1998).
*2.20 -- Agreement and Plan of Merger dated as of September 11,
1998 among Integrated Electrical Services, Inc., Davis
Acquisition Corporation, Davis Electrical Constructors,
Inc., James B. Stephens, J. Michael Stephens, William N.
Byrd, James C. Henderson, J. Lowell Hughes and William M.
Sumerel.
3.1 -- Amended and Restated Certificate of Incorporation as
amended. (Incorporated by reference to 3.1 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
3.2 -- Bylaws. (Incorporated by reference to 3.2 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
4.1 -- Specimen Common Stock Certificate. (Incorporated by
reference to 4.1 to the Registration Statement on Form
S-1 (File No. 333-38715) of the Company)
**5.1 -- Opinion of John F. Wombwell, Esq. as to the legality of
the securities being registered.
10.1 -- Form of Employment Agreement (Incorporated by reference
to 10.1 to the Registration Statement on Form S-1 (File
No. 333-38715) of the Company)
10.2 -- Form of Officer and Director Indemnification Agreement.
(Incorporated by reference to 10.2 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.3 -- Integrated Electrical Services, Inc. 1997 Stock Plan.
(Incorporated by reference to 10.3 to the Registration
Statement on Form S-1 (File No. 333-38715) of the
Company)
10.4 -- Integrated Electrical Services, Inc. 1997 Directors Stock
Plan. (Incorporated by reference to 10.4 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
*10.5 -- Form of Credit Agreement among the Company, the Financial
Institutions named therein and NationsBank of Texas,
N.A., including form of Subsidiary Guaranty Agreement,
form of Pledge Agreement, form of Security Agreement,
form of promissory note, and form of swing line note.
Incorporated by reference to 10.5 to the Registration
Statement on Form S-1 (File No. 333-38715) of the Company)
</TABLE>
<PAGE> 348
<TABLE>
<CAPTION>
EXHIBIT
-------
<C> <S>
10.6 -- Form of Lock-up Agreement to be entered into by the
Company and the stockholders set forth on Schedule A
thereto. (Incorporated by reference to 10.6 to the
Registration Statement on Form S-1 (File No. 333-38715)
of the Company)
*21.1 -- List of Subsidiaries.
23.1 -- Consent of John F. Wombwell, Esq. (included in Exhibit
5.1).
*23.2 -- Consent of Arthur Andersen LLP.
*23.3 -- Consent of Bradshaw, Pope & Franklin, LLP.
*23.4 -- Consent of Elliott, Davis & Company, L.L.P.
*23.5 -- Consent of Sapp & Sapp P.A.
*23.6 -- Consent of Philhours, Rich & Fletcher, P.L.L.C.
*23.7 -- Consent of Wolfe and Company, P.C.
*23.8 -- Consent of Edmondson, LedBetter & Ballard, L.L.P.
*23.9 -- Consent of Ketel Thorstenson, LP.
*23.10 -- Consent of Wear, Howell, Strickland & Quinn, L.L.C.
*23.11 -- Consent of Dees, Jackson, Watson & Associates, P.A.
**24.1 -- Power of Attorney.
*27 -- Financial Data Schedule.
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 2.20
AGREEMENT AND PLAN OF MERGER
DATED AS OF
SEPTEMBER 11, 1998
AMONG
INTEGRATED ELECTRICAL SERVICES, INC.,
DAVIS ACQUISITION CORPORATION,
DAVIS ELECTRICAL CONSTRUCTORS, INC.
AND
JAMES B. STEPHENS, J. MICHAEL STEPHENS,
WILLIAM N. BYRD, JAMES C. HENDERSON,
J. LOWELL HUGHES AND WILLIAM M. SUMEREL
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
ARTICLE I - The Merger............................................................................1
Section 1.1 The Merger............................................................................1
Section 1.2 Conversion of Shares..................................................................2
Section 1.3 Surrender and Payment.................................................................2
Section 1.4 Withholding Rights....................................................................2
Section 1.5 Lost Certificates.....................................................................3
Section 1.6 Other Documents to be Delivered Immediately Prior to the Effective Time...............3
Section 1.7 Conditions to the Obligations of the Company Stockholders.............................4
Section 1.8 Conditions to the Obligations of IES..................................................5
Section 1.9 Termination...........................................................................5
ARTICLE II - The Surviving Corporation.............................................................6
Section 2.1 Certificate of Incorporation..........................................................6
Section 2.2 Bylaws................................................................................6
Section 2.3 Directors and Officers................................................................6
ARTICLE III - Representations and Warranties of the Company Stockholders............................6
Section 3.1 Organization and Qualification........................................................6
Section 3.2 Capitalization; Ownership.............................................................7
Section 3.3 Authorization.........................................................................8
Section 3.4 Consents and Approvals; No Violation..................................................8
Section 3.5 Affiliate Relationships...............................................................9
Section 3.6 Financial Statements..................................................................9
Section 3.7 Undisclosed Liabilities...............................................................9
Section 3.8 Accounts and Notes Receivables........................................................9
Section 3.9 Assets................................................................................10
Section 3.10 Material Contracts; Commitments and Customers.........................................11
Section 3.11 Operating Authority...................................................................11
Section 3.12 Bank Account Information..............................................................12
Section 3.13 Conduct of Business Since Company Unaudited Balance Sheet Date........................12
Section 3.14 Litigation; Orders....................................................................12
Section 3.15 Labor Matters.........................................................................12
Section 3.16 Compliance with Laws..................................................................13
Section 3.17 Insurance.............................................................................13
Section 3.18 Environmental Matters.................................................................13
Section 3.19 Taxes.................................................................................14
Section 3.20 Employee Benefit Plans................................................................16
Section 3.21 Brokerage Fees and Commissions........................................................18
ARTICLE IV - Representations and Warranties of IES.................................................18
Section 4.1 Organization and Qualification........................................................18
Section 4.2 Capitalization........................................................................18
Section 4.3 Authorization.........................................................................19
</TABLE>
- i -
<PAGE> 3
<TABLE>
<S> <C> <C>
Section 4.4 Consents and Approval; No Violation...................................................19
Section 4.5 SEC Filings...........................................................................19
Section 4.6 No Assurances.........................................................................20
Section 4.7 Stockholder's Equity..................................................................20
ARTICLE V - Additional Covenants and Agreements...................................................21
Section 5.1 Reasonable Best Efforts...............................................................21
Section 5.2 Certain Filings.......................................................................21
Section 5.3 Public Announcements..................................................................21
Section 5.4 Further Assurances....................................................................21
Section 5.5 Notices of Certain Events.............................................................21
Section 5.6 Release from Guarantees...............................................................22
Section 5.7 Future Cooperation....................................................................22
Section 5.8 Expenses..............................................................................22
Section 5.9 Repayment of Related Party Indebtedness...............................................22
Section 5.10 FIRPTA Certificate....................................................................23
Section 5.11 Preparation and Filing of Tax Returns.................................................23
Section 5.12 Antitrust Law Compliance..............................................................24
Section 5.13 Conduct of Business Pending Closing...................................................25
Section 5.14 Notification of Certain Matters.......................................................27
Section 5.15 Vehicles..............................................................................27
Section 5.16 Deferred Compensation.................................................................27
Section 5.17 Stock Options.........................................................................28
Section 5.18 Bonuses...............................................................................28
Section 5.19 Certain Employees and Office..........................................................28
Section 5.20 Tax Audit.............................................................................28
Section 5.21 Life Insurance........................................................................29
Section 5.22 Purchase of Assets....................................................................29
Section 5.23 Airplane Lease........................................................................29
Section 5.24 Stock Purchase Agreement..............................................................29
Section 5.25 Removal of Stock Certificate Legend...................................................29
ARTICLE VI - Indemnification.......................................................................30
Section 6.1 Indemnification by the Company Stockholders...........................................30
Section 6.2 Indemnification Related to Tax Liabilities............................................31
Section 6.3 Indemnification by IES................................................................31
Section 6.4 Indemnification Proceedings...........................................................32
Section 6.5 Sole Remedy...........................................................................32
Section 6.6 Limitations and Exceptions............................................................33
Section 6.7 No Third Party Beneficiaries..........................................................33
Section 6.8 Limitation Upon Indemnity.............................................................33
Section 6.9 Punitive Damages......................................................................33
ARTICLE VII - Noncompetition Covenants..............................................................33
Section 7.1 Prohibited Activities.................................................................33
Section 7.2 Equitable Relief......................................................................34
Section 7.3 Reasonable Restraint..................................................................35
</TABLE>
- ii -
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 7.4 Severability; Reformation.............................................................35
Section 7.5 Material and Independent Covenant.....................................................35
Section 7.6 Materiality...........................................................................35
ARTICLE VIII - Applicable Securities Laws/Transfer Restrictions......................................35
Section 8.1 Company Stockholders' Representations and Warranties Concerning Securities............36
Section 8.2 Transfer Restrictions.................................................................36
Section 8.3 Resales...............................................................................37
ARTICLE IX - Nondisclosure of Confidential Information.............................................37
Section 9.1 General...............................................................................37
Section 9.2 Equitable Relief......................................................................38
Section 9.3 Non-Public Information................................................................38
Section 9.4 Survival..............................................................................38
ARTICLE X - Miscellaneous.........................................................................38
Section 10.1 Governing Law.........................................................................38
Section 10.2 Entire Agreement......................................................................38
Section 10.3 Expenses and Fees.....................................................................38
Section 10.4 Notices...............................................................................38
Section 10.5 Successors and Assigns................................................................39
Section 10.6 Survival of Representations and Warranties............................................39
Section 10.7 Headings; Definitions.................................................................39
Section 10.8 Amendments and Waivers................................................................40
Section 10.9 Construction of Certain Provisions....................................................40
Section 10.10 Severability..........................................................................40
Section 10.11 Jurisdiction..........................................................................40
Section 10.12 Waiver of Jury Trial..................................................................41
Section 10.13 Specific Performance..................................................................41
Section 10.14 Counterparts; Effectiveness...........................................................41
Section 10.15 Mutual Indemnification Against Claims.................................................41
Section 10.16 Definitions and Usage.................................................................41
Section 10.17 Disclosure Schedule...................................................................45
</TABLE>
- iii -
<PAGE> 5
EXHIBITS AND SCHEDULES
<TABLE>
<S> <C>
Exhibit A Form of Employment Agreement
Exhibit B Form of Opinion of Counsel to Company Stockholders
Exhibit C Form of Certificate of Secretary of the Company
Exhibit D Form of Company Stockholder Release
Exhibit E Form of Company Director Resignation
Exhibit F Form of Company Affiliate Letter
Exhibit G Form of Company Stockholder Receipt
Exhibit H Form of Cross-Receipt
Exhibit I Form of Opinion of John F. Wombwell
Exhibit J Form of Certificate of Secretary of IES and Acquisition
Exhibit K Form of Stock Option Agreement
Schedule 2.3 Officers of Surviving Corporation
Schedule 3.1 Organization and Qualification of Company and Subsidiaries
Schedule 3.2(a) Ownership of Company Shares and Delivery Instructions
Schedule 3.2(b) Subsidiary Corporate History, Subsidiary Stock, Other Securities
and Non-Corporate Entity Participation
Schedule 3.4 Company Consents and Approvals; No Violation
Schedule 3.5 Affiliate Relationships
Schedule 3.6 Company Financial Statements
Schedule 3.7 Company Undisclosed Liabilities
Schedule 3.8 Company Accounts and Notes Receivables
Schedule 3.9 Company Assets
Schedule 3.10 Material Contracts, Commitments and Customers
Schedule 3.11 Company Operating Authority
Schedule 3.12 Company Bank Account Information
Schedule 3.13 Company Conduct of Business
Schedule 3.14 Company Litigation; Orders
Schedule 3.15 Company Labor Agreements
Schedule 3.17 Company Insurance
Schedule 3.18 Company Disposal Sites
Schedule 3.19 Company Taxes
Schedule 3.20 Company Employee Benefit Plans
Schedule 3.21 Company Brokerage Fees and Commissions
Schedule 5.6 Company Stockholder Guarantees
Schedule 5.9 Repayment of Advances, Receivables and Loans
Schedule 5.11 Merger Consideration and Liability Allocations
Schedule 5.13 Conduct of Business
Schedule 5.15 Vehicles
Schedule 5.16 Deferred Compensation
Schedule 5.17 Stock Options
Schedule 5.18 Bonuses
Schedule 5.22 Purchase of Assets
</TABLE>
- iv -
<PAGE> 6
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER ("Agreement") dated as of September 11,
1998 among Integrated Electrical Services, Inc., a Delaware corporation ("IES"),
Davis Acquisition Corporation, a South Carolina corporation and a wholly owned
subsidiary of IES ("Acquisition"), Davis Electrical Constructors, Inc., a South
Carolina corporation ("Company"), and James B. Stephens, J. Michael Stephens,
William N. Byrd, James C. Henderson, J. Lowell Hughes and William M. Sumerel,
who are all of the stockholders of the Company (together, the "Company
Stockholders").
RECITALS:
WHEREAS, the Boards of Directors of IES and the Company have
determined that the combination of IES and the Company is in the best interests
of the stockholders of IES and the Company, respectively;
WHEREAS, the Company Stockholders desire to sell to IES all of the
issued and outstanding shares of capital stock of the Company, free and clear of
all Liens (as defined in Section 10.16), and the Company Stockholders agree to
be bound by a covenant not to compete; and
WHEREAS, IES desires to acquire such shares of capital stock of the
Company as more fully set forth herein and enforce the covenant not to compete.
NOW, THEREFORE, in consideration of the mutual covenants and
agreements set forth herein, the parties hereto agree as follows:
ARTICLE I
THE MERGER
SECTION 1.1. THE MERGER. (a) At the closing of the transactions
contemplated by this Agreement (the "Closing") and upon delivery of the
documents listed in Section 1.6, at the Effective Time (as hereinafter defined),
Acquisition shall be merged (the "Merger") with and into the Company in
accordance with the South Carolina Business Corporation Act, as amended ("South
Carolina Law"), whereupon the separate existence of Acquisition shall cease, and
the Company shall be the surviving corporation (the " Surviving Corporation").
(b) Immediately following the delivery of the documents listed in
Section 1.6, the Company and Acquisition will file Articles of Merger (the
"Certificate of Merger") with the South Carolina Secretary of State and make all
other filings or recordings required by South Carolina Law in connection with
the Merger. The Merger shall become effective at such time (the "Effective
Time") as the Certificate of Merger is duly filed with the South Carolina
<PAGE> 7
Secretary of State (or at such later time as may be agreed in writing by the
parties hereto and specified in the Certificate of Merger).
(c) From and after the Effective Time, the Surviving Corporation shall
possess all the rights, assets, powers, privileges, and franchises and be
subject to all of the obligations, liabilities, restrictions, and disabilities
of the Company and Acquisition, all as provided under South Carolina Law.
(d) The Closing of the transactions shall take place at the offices of
Merline & Thomas, P.A. in Greenville, South Carolina, at 10:00 a.m. eastern
standard time, on the first business day following the date first written above
in this Agreement.
SECTION 1.2. CONVERSION OF SHARES. At the Effective Time:
(a) (i) the shares of common stock, $1.00 par value, of the
Company ("Company Common Stock") outstanding immediately prior to the
Effective Time shall be converted into the right to receive, without
interest, an aggregate of 214,046 shares of common stock, $0.01 par value,
of IES ("IES Common Stock"), as equitably adjusted to give effect to any
stock split, stock dividend or stock combination or reclassification of
such shares occurring during the period from the date hereof to the
Closing, and (ii) IES shall pay cash consideration equal to $49,814,605.00
less the amount of deferred compensation paid to Company Stockholders
pursuant to Section 5.16, by wire transfer of immediately available funds
to the accounts designated by Company (collectively, the "Merger
Consideration"); and
(b) each share of common stock of Acquisition outstanding
immediately prior to the Effective Time shall be converted into and become
one share of common stock of the Surviving Corporation with the same
rights, powers, and privileges as the shares so converted and shall
constitute the only outstanding shares of capital stock of the Surviving
Corporation.
SECTION 1.3. SURRENDER AND PAYMENT. At the Effective Time, the Company
Stockholders will deliver to IES the certificates listed on Schedule 3.2(a) (the
"Certificates") representing all of the outstanding shares of Company Common
Stock, and IES will deliver, in exchange therefor, the Merger Consideration
divided among the Company Stockholders in accordance with the written
instructions provided in Schedule 3.2(a). The Certificates will be duly endorsed
(or accompanied by duly execute powers), with signatures of those Company
Stockholders not present at the Closing guaranteed by a commercial bank or by a
member firm of the New York Stock Exchange (the "NYSE") for any Company
Stockholder that is not present at the Closing of the Merger.
SECTION 1.4. WITHHOLDING RIGHTS. Each of the Surviving Corporation and IES
shall be entitled to deduct and withhold from the consideration otherwise
payable to any Person (as defined in Section 10.16) pursuant to this Article I
such amounts as it is required to deduct and withhold with respect to the making
of such payment under any provision of federal, state, local,
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or foreign tax law. To the extent that amounts are so withheld by the Surviving
Corporation or IES, as the case may be, such withheld amounts shall be treated
for all purposes of this Agreement as having been paid to the holder of the
shares of Company Common Stock in respect of which such deduction and
withholding was made by the Surviving Corporation or IES, as the case may be, so
long as the Surviving Corporation or IES actually pays over such withheld
amounts to the proper authority.
SECTION 1.5. LOST CERTIFICATES. If any Certificate shall have been lost,
stolen, or destroyed, upon the making of an affidavit of that fact by the Person
claiming such Certificate to be lost, stolen, or destroyed and, if required by
the Surviving Corporation, the posting by such Person of a bond, in such
reasonable amount as the Surviving Corporation may direct, as indemnity against
any claim that may be made against it with respect to such Certificate, IES will
issue in exchange for such lost, stolen, or destroyed Certificate the Merger
Consideration to be paid in respect of the shares of Company Common Stock
represented by such Certificates as contemplated by this Article I.
SECTION 1.6. OTHER DOCUMENTS TO BE DELIVERED IMMEDIATELY PRIOR TO THE
EFFECTIVE TIME.
(a) At the Closing and immediately prior to the Effective Time, the
Company and the Company Stockholders will deliver to IES:
(i) Employment Agreements (the "Employment Agreements"), each in
the form attached hereto as EXHIBIT A, for each of the following employees
of the Company: William N. Byrd, James C. Henderson, J. Lowell Hughes and
William M. Sumerel;
(ii) an opinion of counsel to the Company Stockholders in the form
attached hereto as EXHIBIT B;
(iii) a Certificate of the Secretary of the Company in the form
attached hereto as EXHIBIT C;
(iv) a release executed by the Company Stockholders in the form
attached hereto as EXHIBIT D;
(v) the resignations of the directors of the Company in the form
attached hereto as EXHIBIT E;
(vi) the minute book and corporate seal of the Company;
(vii) letters from the affiliates of the Company in the form
attached hereto as EXHIBIT F;
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(viii) receipts executed by the Company Stockholders in the form
attached hereto as EXHIBIT G; and
(ix) a cross-receipt executed by the Company Stockholders in the
form attached hereto as EXHIBIT H.
(b) At the Closing and immediately prior to the Effective Time, IES
will deliver to the Company Stockholders:
(i) the Employment Agreements executed by a duly authorized
representative of Surviving Corporation for each of the employees listed in
Section 1.6(a)(i) above;
(ii) an opinion of John F. Wombwell, Esq., Senior Vice President,
General Counsel and Secretary of IES in the form attached hereto as EXHIBIT
I;
(iii) a cross-receipt executed by IES in the form attached hereto
as EXHIBIT H; and
(iv) a Certificate of the Secretary of IES and Acquisition in the
form attached hereto as EXHIBIT J.
SECTION 1.7. CONDITIONS TO THE OBLIGATIONS OF THE COMPANY STOCKHOLDERS. The
obligations of the Company Stockholders to consummate the Merger are subject to
the fulfillment, at or before the Closing, of all of the following conditions,
any one or more of which may be waived by the Company Stockholders:
(a) The representations and warranties of IES contained in this
Agreement shall be true as of the Closing.
(b) All of the obligations of IES to be performed at or before the
Closing pursuant to the terms of this Agreement shall have been duly
performed, including, without limitation, those set forth in Article I
hereof.
(c) The documents necessary to consummate the Merger shall have
been filed with the Secretary of State of the State of South Carolina.
(d) All waiting, review and investigation periods (and any
extensions thereof) applicable to the consummation of the Merger under the
Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the "HSR Act") shall
have expired or been terminated.
SECTION 1.8. CONDITIONS TO THE OBLIGATIONS OF IES. The obligations of IES
to consummate the Merger are subject to the fulfillment, at or before the
Closing, of all of the following conditions, any one or more of which may be
waived by IES.
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<PAGE> 10
(a) The representations and warranties of the Company Stockholders
contained in this Agreement shall be true as of the Closing.
(b) All of the obligations of the Company and the Company
Stockholders to be performed at or before the Closing pursuant to the terms
of this Agreement shall have been duly performed, including, without
limitation, those set forth in Article I hereof.
(c) The documents necessary to consummate the Merger shall have
been filed with the Secretary of State of the State of South Carolina.
(d) All waiting, review and investigation periods (and any
extensions thereof) applicable to the consummation of the Merger under the
HSR Act shall have expired or been terminated.
SECTION 1.9. TERMINATION. (a) This Agreement may be terminated at any time
prior to the Closing solely:
(i) by mutual consent of IES and the Company Stockholders;
(ii) by the Company Stockholders holding in the aggregate, a
majority vote of the issued and outstanding shares of Company Common Stock
on the one hand, or by IES, on the other hand, if the transactions
contemplated by this Agreement to take place at the Closing shall not have
been consummated by September 30, 1998, unless the failure of such
transactions to be consummated is due to (A) the failure of all waiting,
review and investigation periods (and any extensions thereof) applicable to
consummation of the Merger under the HSR Act to have expired or terminated
or (B) the willful failure of the party seeking to terminate this Agreement
to perform any of its material obligations under this Agreement to the
extent required to be performed by it prior to the Closing;
(iii) by the Company Stockholders, on the one hand, or by IES, on
the other hand, if a material breach or default shall be made by the other
party in the observance or in the due and timely performance of any of the
covenants or agreements contained herein, and the curing or waiver of such
default shall not have been made on or before the Closing; or
(iv) by any party hereto if a court of competent jurisdiction or
governmental, regulatory or administrative agency or commission shall have
issued an order, decree or ruling or taken any other action (which order,
decree or ruling the parties hereto shall use all reasonable efforts to
lift), in each case restraining, enjoining or otherwise prohibiting the
transactions contemplated by this Agreement, and such order, decree, ruling
or other action shall have become final and nonappealable.
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<PAGE> 11
(b) Termination of this Agreement (i) shall have no effect upon
the Confidentiality Agreement dated May 18, 1998 between IES and Company
and such Confidentiality Agreement shall survive the termination of this
Agreement and continue in full force and effect and (ii) will in no way
limit any obligation or liability of any party based on or arising from a
breach or default by such party with respect to any of its representations,
warranties, covenants or agreements contained in this Agreement including,
but not limited to, legal costs and out of pocket expenses.
ARTICLE II
THE SURVIVING CORPORATION
SECTION 2.1. CERTIFICATE OF INCORPORATION. The articles of incorporation of
Company in effect at the Effective Time as amended by the Certificate of Merger
shall be the articles of incorporation of the Surviving Corporation until
amended in accordance with applicable law.
SECTION 2.2. BYLAWS. The bylaws of Acquisition in effect at the Effective
Time shall be the bylaws of the Surviving Corporation until amended in
accordance with applicable law.
SECTION 2.3. DIRECTORS AND OFFICERS. From and after the Effective Time,
until successors are duly elected or appointed and qualified in accordance with
applicable law, (i) the director of Acquisition at the Effective Time shall be
the sole director of the Surviving Corporation and (ii) the officers of the
Surviving Corporation shall be as set forth on Schedule 2.3 hereto.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY STOCKHOLDERS
The Company Stockholders jointly and severally represent and warrant
to IES as follows upon execution of this Agreement and as of the Effective Time:
SECTION 3.1. ORGANIZATION AND QUALIFICATION. The Company, and each of its
subsidiaries, if any, are listed on Schedule 3.1 (the "Subsidiaries"), and each
is a corporation duly organized, validly existing, and in good standing under
the laws of the state of its incorporation and has the requisite corporate power
to carry on its business as it is now being conducted. The Company, and each of
the Subsidiaries, is duly qualified to conduct business as a foreign corporation
in every state of the United States in which its ownership or lease of property
or the conduct of its business and operations makes such qualification
necessary, except for such states in which the Company's or the Subsidiaries'
failure to be so qualified is not reasonably expected to have, individually or
in the aggregate, a Company Material Adverse Effect (as defined in Section
10.16). Schedule 3.1 contains a list of all jurisdictions in which the Company
and each of the Subsidiaries is authorized or qualified to do business. The
Company has heretofore delivered to IES true and complete copies of the articles
of incorporation and bylaws of the
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<PAGE> 12
Company and each of the Subsidiaries, in each instance including any amendments
thereto, as currently in effect.
SECTION 3.2. CAPITALIZATION; OWNERSHIP. (a) The authorized capital stock of
the Company consists of 500,000 shares of Company Common Stock, of which 62,500
shares are issued and outstanding (the "Company Shares"). The Company Shares are
all of the issued and outstanding shares of capital stock of the Company and
have been duly authorized and validly issued and are fully paid and
nonassessable and free of preemptive rights. There are not, as of the date
hereof, any outstanding or authorized subscriptions, options, warrants, calls,
rights, commitments, or any other agreements of any character (any of the
foregoing, a "Commitment") obligating the Company to issue any additional shares
of capital stock of the Company, or any other securities convertible into or
evidencing the right to subscribe for any shares of capital stock of the
Company. The Company Stockholders own the respective number of shares of Company
Common Stock set forth on Schedule 3.2(a) attached hereto, free and clear of all
Liens other than restrictions imposed by applicable securities laws. Each of the
Company Stockholders has full legal right, power and authority to exchange,
assign and transfer or cause to be exchanged, assigned or transferred their
respective shares of Company Common Stock. The delivery to IES of the Company
Shares pursuant to the terms of this Agreement will transfer valid title
thereto, free and clear of all Liens other than restrictions imposed by
applicable securities laws. No Company Stockholder has or will have appraisal or
similar rights as a result of the consummation of the transactions contemplated
by this Agreement.
(b) The authorized capital stock of each of the Subsidiaries consists
of the number and type of shares of capital stock set forth on Schedule 3.2(b)
(collectively, "Subsidiary Stock"). Schedule 3.2(b) also sets forth the number
and type of shares of Subsidiary Stock which are issued and outstanding
(collectively, "Subsidiary Shares"), the securities of any other corporation
owned by the Company or any of the Subsidiaries, as well as the names of any
joint venture, partnership or other noncorporate entity in which the Company or
any of the Subsidiaries is a participant. The Subsidiary Shares are all of the
issued and outstanding shares of capital stock of the Subsidiaries and are
directly or ultimately owned by the Company, free and clear of any Liens other
than restrictions imposed by applicable securities laws, and have been duly
authorized and validly issued and are fully paid and nonassessable and free of
preemptive rights. Also set forth on Schedule 3.2(b) is a listing of all names
under which the Company and the Subsidiaries have done business within the five
(5) year period ending on the date of this Agreement, as well as the names of
all predecessors of the Company and the Subsidiaries, including the names of any
entities from whom the Company or the Subsidiaries previously acquired
significant assets within the five (5) year period ending on the date of this
Agreement. There are, as of the date hereof, no Commitments obligating any of
the Subsidiaries to issue any additional shares of capital stock of any such
Subsidiaries, or any other securities convertible into or evidencing the right
to subscribe for any shares of capital stock of any such Subsidiary.
SECTION 3.3. AUTHORIZATION. The Company has the requisite corporate power
and authority to execute and deliver this Agreement and to consummate the
transactions contemplated by this Agreement. The Company Stockholders and the
Board of Directors of the
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Company have (a) determined that participating in the Merger is in the best
interests of the Company and its stockholders and (b) approved this Agreement
and the Merger. No other corporate proceedings on the part of the Company or the
Company Stockholders are necessary to authorize the execution and delivery of
this Agreement or the consummation by the Company and the Company Stockholders
of the transactions contemplated hereby. This Agreement has been duly
authorized, executed, and delivered by the Company and the Company Stockholders
and, assuming that it has been duly executed and delivered by IES and
Acquisition, constitutes the valid and binding obligation of the Company and the
Company Stockholders, enforceable against the Company and the Company
Stockholders in accordance with its terms.
SECTION 3.4. CONSENTS AND APPROVALS; NO VIOLATION. Neither the execution
and delivery of this Agreement by the Company or the Company Stockholders, nor
the consummation by the Company or the Company Stockholders of the transactions
contemplated by this Agreement, will: (a) require any consent, approval,
authorization, or permit of, or filing with or notification to, any Governmental
Authority (as defined in Section 10.16), except (i) the filing of a Certificate
of Merger in accordance with South Carolina Law, (ii) any regulatory approvals
or routine governmental consents normally acquired after the consummation of
transactions such as transactions of the nature contemplated by this Agreement,
(iii) where the failure to obtain such consent, approval, authorization, or
permit, or to make such filing or notification, is not reasonably expected to
have, individually or in the aggregate, a Company Material Adverse Effect or
prevent or delay, in any material respect, the consummation of the transactions
contemplated by this Agreement, (iv) approvals required pursuant to the HSR Act,
or (v) as set forth on Schedule 3.4; (b) result in a default (or give rise to
any right of termination, cancellation, or acceleration) under any of the terms,
conditions, or provisions of any material contract, commitment or similar
agreement to which the Company or any of the Subsidiaries is a party, except (i)
as set forth on Schedule 3.4 or (ii) for such defaults (or rights of
termination, cancellation, or acceleration) as to which requisite waivers or
consents have been obtained or which are not reasonably expected to have,
individually or in the aggregate, a Company Material Adverse Effect or prevent
or delay, in any material respect, the consummation of the transactions
contemplated by this Agreement; or (c) assuming compliance with the matters
referred to in Section 3.4(a), violate any order, writ, injunction, decree,
statute, rule, or regulation applicable to the Company, any of the Subsidiaries,
or any of their assets, except for violations which are not reasonably expected
to have, individually or in the aggregate, a Company Material Adverse Effect or
prevent or delay, in any material respect, the consummation of the transactions
contemplated by this Agreement. The Company is not, and the consummation of the
transactions contemplated by this Agreement will not result, in violation of its
Articles of Incorporation or Bylaws.
SECTION 3.5. AFFILIATE RELATIONSHIPS. Except as set forth on Schedule 3.5,
none of the Company Stockholders nor any affiliate of any of the Company
Stockholders, and no director, officer or employee of the Company or any of the
Subsidiaries, owns, directly or indirectly, in whole or in part, any property,
assets or right, tangible or intangible, which is associated with any property,
asset or right owned by the Company or any of the Subsidiaries or which the
Company or any of the Subsidiaries is operating or using or the use of which is
necessary for its business. Except for ownership of a publicly traded
corporation not more than two (2%) percent of the
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capital stock of which is owned by a Company Stockholder, Schedule 3.5 includes
a disclosure of any relationships which any of the Company Stockholders have, or
any director, officer or employee, of the Company or any of the Subsidiaries
has, with the Company or any of the Subsidiaries or any other corporation,
partnership, firm, association or business organization, entity or enterprise
which is a competitor, potential competitor, supplier or customer of the Company
or any of the Subsidiaries. The Persons named on Schedule 3.5 are the only
Persons who may be deemed affiliates of the Company under Rule 145 of the
Securities Act of 1933, as amended (the "1933 Act").
SECTION 3.6. FINANCIAL STATEMENTS. Attached as Schedule 3.6 are (a) the
audited consolidated balance sheet, statement of income and statement of cash
flows of the Company and the Subsidiaries as of and for the years ended
September 30, 1995, 1996 and 1997 (the "Company Audited Financial Statements")
and (b) the unaudited in-house consolidated balance sheet, statement of income
and statement of cash flows of the Company and the Subsidiaries as of and for
the nine months ended June 30, 1998 (the "Company Unaudited Financial
Statements"). The Company Audited Financial Statements present fairly in all
material respects the consolidated financial position, results of operations,
and changes in financial position of the Company and the Subsidiaries as of the
respective dates or for the respective periods to which they apply in accordance
with United States generally accepted accounting principles except as provided
therein, including notes thereto, consistently applied ("GAAP").
SECTION 3.7. UNDISCLOSED LIABILITIES. Except for the liabilities set forth
on Schedule 3.7 or as reflected, reserved against, or otherwise disclosed in the
Company Unaudited Financial Statements, neither the Company nor any of the
Subsidiaries had, at the date of the unaudited balance sheet included in the
Company Unaudited Financial Statements (the "Company Unaudited Balance Sheet
Date") and do not have, at the date hereof, any liabilities or obligations,
whether accrued, contingent, absolute, determined, determinable or otherwise,
that may have, individually or in the aggregate, a Company Material Adverse
Effect.
SECTION 3.8. ACCOUNTS AND NOTES RECEIVABLES. Schedule 3.8 sets forth an
accurate list as of the Company Unaudited Balance Sheet Date of the accounts and
notes receivable of the Company and the Subsidiaries, including receivables from
and advances to employees of the Company, employees of the Subsidiaries, and the
Company Stockholders. Included in Schedule 3.8 is an aging of all accounts and
notes receivable showing amounts due in 30-day aging categories. The trade and
other accounts receivable of the Company and the Subsidiaries which are
classified as current assets on the balance sheet as of the Company Unaudited
Balance Sheet Date are bona fide receivables, were acquired in the ordinary
course of business, are stated in accordance with GAAP and, subject to the
reserve for doubtful accounts, need not be written-off as uncollectible. Except
to the extent reflected on Schedule 3.8 or as reflected in the reserve for
doubtful accounts, such accounts and notes are collectible in the amount shown
on Schedule 3.8.
SECTION 3.9. ASSETS. Schedule 3.9 sets forth an accurate list of all real
and personal property included in "property and equipment" on the balance sheet
of the Company as of the Company Unaudited Balance Sheet Date and all other
tangible assets of the Company with a book value for federal income tax purposes
in excess of $5,000 (i) owned by the Company or the
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<PAGE> 15
Subsidiaries as of the Company Unaudited Balance Sheet Date and (ii) acquired
since the Company Unaudited Balance Sheet Date, including in each case true,
complete and correct copies of leases for equipment with a term of six months or
more and for all real property leased by the Company or the Subsidiaries and
descriptions of all real property on which buildings, warehouses, workshops,
garages and other structures used in the operation of the business of the
Company and the Subsidiaries are situated. Schedule 3.9 indicates which of such
assets listed on Schedule 3.9 that are currently owned, or were owned within the
twelve (12) months preceding the date of this Agreement, by the Company
Stockholders or affiliates of the Company or the Company Stockholders. IES and
Acquisition are accepting all of the tangible assets, vehicles and other
machinery and equipment of the Company and the Subsidiaries listed on Schedule
3.9 in "As Is, Where Is" condition without regard to any condition of
merchantability or fitness for any particular purpose. All fixed assets used by
the Company and the Subsidiaries that are material to the operation of the
Company's and the Subsidiaries' business are either owned by the Company or the
Subsidiaries or leased under an agreement identified on Schedule 3.9. All leases
set forth on Schedule 3.9 are in full force and effect and constitute valid and
binding agreements of the parties thereto in accordance with their respective
terms subject to the Enforceability Exceptions (hereinafter defined).
Schedule 3.9 contains true, complete and correct copies of all real
property title reports and title insurance policies received or owned by the
Company and the Subsidiaries. Schedule 3.9 also includes a summary description
of all plans or projects involving the opening of new operations, expansion of
existing operations or the acquisition of any real property or existing
business, to which management of the Company and the Subsidiaries has devoted
effort or expenditure in the two-year period prior to the date of this
Agreement, which if pursued by the Company or the Subsidiaries would require
additional expenditures of capital.
The Company and the Subsidiaries have good and marketable title to the
tangible and intangible personal property and the real property owned and used
in their business, including the properties identified on Schedule 3.9, subject
to no mortgage, pledge, Lien, claim, conditional sales agreement, encumbrance or
charge, except for Liens reflected on Schedule 3.9, Liens for current taxes not
yet payable and assessments not in default, easements for utilities serving only
the property, and easements, covenants and restrictions and other exceptions to
title shown of record in the appropriate public records in the jurisdictions in
which the properties, assets and leasehold estates are located, which do not
adversely affect the Company's or the Subsidiaries' use of the property and
except that enforcement thereof may be limited by liquidation, conservatorship,
bankruptcy, insolvency, reorganization, moratorium or similar laws affecting the
enforcement of creditor's rights generally from time to time in effect and
except that equitable remedies are subject to judicial discretion (collectively,
the "Enforceability Exceptions").
SECTION 3.10. MATERIAL CONTRACTS, COMMITMENTS AND CUSTOMERS. Schedule 3.10
sets forth an accurate list as of the Company Unaudited Balance Sheet Date of
(i) all material contracts, commitments and similar agreements to which the
Company or any of the Subsidiaries is a party or by which they or any of their
property is bound (including, but not limited to, joint venture or partnership
agreements, contracts with any labor organizations, loan agreements,
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<PAGE> 16
indemnity or guaranty agreements, bonds, mortgages, Liens, pledges or other
security agreements) which either cannot be canceled within 30 days or has a
value of more than $20,000, and the Company Stockholders have delivered true
copies of such agreements to IES and (ii) all customers representing 5% or more
of the Company's and the Subsidiaries' revenues, taken as a whole, in any of the
periods covered by the Company Audited Financial Statements or the Company
Unaudited Financial Statements. Except as disclosed on Schedule 3.10, all such
agreements are in full force and effect. In the three (3) year period ending on
the date of this Agreement, none of the Company's or the Subsidiaries' customers
or suppliers has canceled service or products, as appropriate. Except to the
extent set forth on Schedule 3.10, (a) the Company and the Subsidiaries have
complied with all material commitments and obligations and are not in default
under any contracts and agreements and no notice of default has been received
and (b) none of the Company's or the Subsidiaries' customers listed pursuant to
(ii) above has canceled or substantially reduced or is currently attempting or,
to the Knowledge of Company Stockholders, threatening to cancel or substantially
reduce its use of the Company's products or services. Except for cost-plus
contracts, neither the Company nor any of the Subsidiaries is a party to any
contract subject to a contractual right to price redetermination or
renegotiation.
SECTION 3.11. OPERATING AUTHORITY. Except as disclosed on Schedule 3.11,
the Company and each of the Subsidiaries, as applicable, possess all material
governmental licenses, permits, franchises, and other authorizations of any
Governmental Authority ("Licenses") that are necessary to the ownership or
operation of their business as currently conducted, and all such Licenses are in
full force and effect, except where the failure to possess any License or the
failure to be in full force and effect is not reasonably expected to have,
individually or in the aggregate, a Company Material Adverse Effect, and neither
the Company nor any of the Subsidiaries is in default in any material respect
relating thereto. Except as disclosed on Schedule 3.11, no proceeding is pending
or, to the Company Stockholders' Knowledge, is threatened seeking the revocation
or limitation of any such License that is reasonably expected to have,
individually or in the aggregate, a Company Material Adverse Effect.
Schedule 3.11 sets forth an accurate list and summary description as of the
Company Unaudited Balance Sheet Date of all Licenses, certificates, trademarks,
trade names, patents, patent applications and copyrights related to the assets
owned or held by the Company or the Subsidiaries. The Licenses and other rights
listed on Schedule 3.11 are valid, and the Company has not received any written
notice that any person intends to cancel, terminate or not renew any such
License or other right. The Company has conducted and is conducting its business
in compliance in all material respects with the requirements, standards,
criteria and conditions set forth in the Licenses and other rights listed on
Schedule 3.11 and is not in violation of any of the foregoing in any material
respect. Except as specifically provided in Schedule 3.11, the consummation of
the transactions contemplated by this Agreement will not result in a default
under or a breach or violation of, or adversely affect in a material respect the
rights and benefits afforded to the Company by, any such Licenses or other
rights.
SECTION 3.12. BANK ACCOUNT INFORMATION. Schedule 3.12 contains an accurate
list of the names and addresses of every bank and other financial institution in
which Company or any of the Subsidiaries maintains an account (whether checking,
savings or otherwise), lock box, or
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safe deposit box, and the account numbers and persons having signature authority
or legal access thereto.
SECTION 3.13. CONDUCT OF BUSINESS SINCE COMPANY UNAUDITED BALANCE SHEET
DATE. Except as expressly contemplated by this Agreement and except as set forth
on Schedule 3.13, since the Company Unaudited Balance Sheet Date, (a) the
business and operations of the Company and the Subsidiaries have been conducted
in the ordinary and usual course in all material respects in accordance with
past practices, (b) neither the Company nor any of the Subsidiaries has paid or
declared any dividend on, or made any distribution with respect to, or purchased
or redeemed any of its capital stock or paid any bonus to any Company
Stockholder and (c) no Company Material Adverse Effect has occurred and is
continuing.
SECTION 3.14. LITIGATION; ORDERS. Except as set forth on Schedule 3.14, as
of the date hereof, there are no Actions pending or, to the Company
Stockholders' Knowledge, threatened against the Company or any of the
Subsidiaries. Except as set forth on Schedule 3.14, as of the date hereof there
are no judgments or outstanding orders, injunctions, decrees, stipulations, or
awards (whether rendered by a court or administrative agency or by arbitration)
against the Company or any of the Subsidiaries.
SECTION 3.15. LABOR MATTERS. Except as set forth on Schedule 3.15, there
are no agreements with labor unions or associations representing employees of
the Company or any of the Subsidiaries. No material work stoppage against the
Company or any of the Subsidiaries is pending or, to the Company Stockholders'
Knowledge, threatened. Neither the Company nor any of the Subsidiaries has been
or is involved in or, to the Company Stockholders' Knowledge, is threatened with
any labor dispute, arbitration, lawsuit, or administrative proceeding relating
to labor matters involving the employees of the Company or the Subsidiaries
(excluding routine workers' compensation claims) that is reasonably expected to
have, individually or in the aggregate, a Company Material Adverse Effect.
SECTION 3.16. COMPLIANCE WITH LAWS. Except as disclosed on Schedule 3.11,
the conduct of the business by the Company and each of the Subsidiaries complies
with all statutes, laws, regulations, ordinances, rules, judgments, orders, or
decrees applicable thereto (other than Environmental Laws (as hereinafter
defined) which are governed solely by Section 3.18), except for violations or
failures so to comply, if any, that would not have, individually or in the
aggregate, a Company Material Adverse Effect.
SECTION 3.17. INSURANCE. Schedule 3.17 sets forth a list of all insurance
policies currently in effect issued in favor of the Company and the Subsidiaries
which relate to their businesses, and all such policies are currently in force
and effect. True and complete copies of all such policies have been delivered to
IES. A true and complete list of all insurance loss runs and workers'
compensation claims received for the past three (3) policy years has been
delivered to IES. The insurance carried by the Company, which the Company
Stockholders believe to be adequate in character and amount, is with insurers
unaffiliated with any of the Company Stockholders or the Company. Except as set
forth on Schedule 3.17, none of such policies is a "claims made" policy. Within
the last five years, Company's insurance has not been canceled
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and the Company has not been denied coverage or experienced a substantial
increase in premiums or substantial reduction in coverage from one policy period
to the next period.
SECTION 3.18. ENVIRONMENTAL MATTERS. Except as disclosed on Schedule 3.18,
other than violations that would not have, individually or in the aggregate, a
Company Material Adverse Effect, the Company and the Subsidiaries are in
compliance with all applicable Environmental Laws. Except as disclosed on
Schedule 3.18, without limitation of the foregoing, there are no past, existing,
pending or, to the Company Stockholders' Knowledge, threatened actions, suits,
investigations, inquiries, proceedings or clean-up obligations by or to any
Governmental Authority relating to any Environmental Laws with respect to the
Company or any of the Subsidiaries, except for actions, suits, investigations,
inquiries, proceedings, and obligations that would not have, individually or in
the aggregate, a Company Material Adverse Effect. Except as indicated on
Schedule 3.18, to the Company Stockholders' Knowledge (i) there are no
underground storage tanks on, in or under any properties owned by the Company
and no underground storage tanks have been closed or removed from any of such
properties during the time such properties were owned or leased by the Company
and (ii) there is no asbestos or asbestos-containing material present in any of
the properties owned by the Company, and no asbestos has been removed from any
of such properties during the time such properties were owned or leased by the
Company. Except as disclosed on Schedule 3.18, neither the Company nor any of
its respective properties are subject to any material liabilities or
expenditures (fixed or contingent) relating to any suit, settlement, court
order, administrative order, regulatory requirement, judgment or claim asserted
or arising under any Environmental Law. All notices, permits, or similar
authorizations, if any, required to be obtained or filed in connection with the
operations of the Company or the Subsidiaries, including, without limitation,
treatment, storage, disposal, or release of a hazardous substance or solid waste
into the environment, have been duly obtained or filed, other than any such
notices, permits, or similar authorizations the failure of which to obtain or
file is not reasonably expected to have, individually or in the aggregate, a
Company Material Adverse Effect. The term "release" has the meaning specified in
CERCLA (as hereinafter defined), and the term "disposal" (or "disposed") has the
meaning specified in RCRA (as hereinafter defined). For the purposes hereof,
"Environmental Laws" shall mean any and all laws, statutes, ordinances, rules,
regulations, orders, or determinations of any Governmental Authority pertaining
to the environment in effect on the date of this Agreement and in effect at such
time in any and all jurisdictions in which the Company or any of the
Subsidiaries operate, including, without limitation, the Clean Air Act, as
amended, the Comprehensive Environmental Response, Compensation and Liability
Act, as amended ("CERCLA"), the Federal Water Pollution Control Act, as amended,
the Resource Conservation and Recovery Act, as amended ("RCRA"), the Safe
Drinking Water Act, as amended, the Toxic Substances Control Act, as amended,
comparable state and local laws and other material environmental protection laws
in effect on the date of this Agreement.
SECTION 3.19. TAXES. (a) Except as set forth on Schedule 3.19, (i) the
Company and each of the Subsidiaries have filed when due all Company Returns (as
defined in Section 10.16), and have, except for Taxes that are being contested
in good faith and set forth on Schedule 3.19, timely paid and discharged all Tax
obligations shown thereon and adequate reserves have been established on the
books of the Company for all Taxes for which the Company is liable but
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payment is not yet due, (ii) the Company Returns correctly and accurately
reflect in all material respects the facts regarding the income, business and
assets, operations, activities, status, or other matters of the Company and the
Subsidiaries, and any other information required to be shown thereon, and are
not subject to penalties under Section 6662 of the Code (as defined in
Section 10.16), relating to accuracy related penalties, or any corresponding
provision of applicable state, local, or foreign Tax law or any predecessor
provision of law, and (iii) neither the Company nor any of the Subsidiaries has
received any notice of any Tax deficiency outstanding, proposed, or assessed
against or allocable to it, nor has either of them executed any waiver of any
statute of limitations on the assessment or collection of any Tax, or executed
or filed with the Internal Revenue Service or any other governmental agency any
agreement now in effect extending the period for assessment or collection of any
Taxes against the Company or any of the Subsidiaries. No Liens for Taxes exist
upon the assets of the Company except Liens for Taxes that are not yet due.
Within the past five (5) years, the Company is not and has not been, subject to
Tax in any jurisdiction outside the United States. Except as disclosed on
Schedule 3.19, no litigation with respect to any Tax for which the Company is
asserted to be liable is pending or, to the Knowledge of the Company or any
Company Stockholder threatened. There are no requests for rulings or
determinations in respect of any Taxes pending between the Company and any
taxing authority. Except as disclosed on Schedule 3.19, no issues have been
raised and remain pending by any taxing authority in connection with the
examination of any Company Return. Except as disclosed on Schedule 3.19, all
deficiencies asserted and assessments made, if any, as a result of or in
connection with any examination have been paid in full or are fully reflected as
a liability in the Company Audited Financial Statements or Company Unaudited
Financial Statements. In the six (6) year period ending on the date of this
Agreement, the Company was not a party to any income tax allocation or sharing
agreement. All amounts required to be withheld by the Company and paid to
governmental agencies for income, social security, unemployment insurance,
sales, excise, use and other Taxes have been collected or withheld and paid to
the proper taxing authority or are not yet due to be paid. For purposes of this
Agreement, "Tax" or "Taxes" means taxes of any kind, levies, or other like
assessments, customs, duties, imposts, charges, or fees, including, without
limitation, income, gross receipts, ad valorem, value added, excise, real or
personal property, asset, sales, use, license, payroll, transaction, capital,
net worth and franchise taxes, estimated taxes, withholding, employment, social
security, workers compensation, utility, severance, production, unemployment
compensation, occupation, premium, windfall profits, transfer, and gains taxes
or other governmental taxes imposed or payable to the United States, or any
state, county, local, or foreign government or subdivision or agency thereof,
and in each instance such term shall include any interest, penalties, or
additions to tax attributable to or imposed with respect to any such Tax,
including penalties for the failure to file any Tax return or report.
(b) Except for the group of which the Company is currently the parent,
neither the Company nor any of the Subsidiaries has within the past six years
been a member of an affiliated group of corporations, within the meaning of
Section 1504 of the Code, other than as a common parent corporation.
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(c) None of the material assets of the Company or any of the
Subsidiaries is property that the Company is required to treat as being owned by
any other Person pursuant to the "safe harbor lease" provisions of former
Section 168(f)(8) of the Code.
(d) None of the assets of the Company or any of the Subsidiaries
directly or indirectly secures any debt the interest on which is Tax-exempt
under Section 103(a) of the Code.
(e) None of the assets of the Company or any of the Subsidiaries is
"tax-exempt use property" within the meaning of Section 168(h) of the Code.
(f) Neither the Company nor any of the Subsidiaries has agreed to
make, nor is any of them required to make, any adjustment under Section 481(a)
of the Code by reason of a change in accounting method or otherwise.
(g) Neither the Company nor any of the Subsidiaries has participated
in, nor will any of them participate in prior to the Closing, an international
boycott within the meaning of Section 999 of the Code.
(h) Neither the Company nor any of the Subsidiaries has or had a
permanent establishment in any foreign country, as defined in any applicable tax
treaty or convention between the United States and such foreign country.
(i) Neither the Company nor any of the Subsidiaries has filed a
consent pursuant to the collapsible corporation provisions of Section 341(f) of
the Code (or any corresponding provision of state, local, or foreign income tax
law) or agreed to have Section 341(f)(2) of the Code (or any corresponding
provision of state, local, or foreign income tax law) apply to any disposition
of any asset owned by it.
(j) None of the Company nor any Company Stockholder is a "foreign
person" as that term is defined in Section 1445(f)(3) of the Code.
(k) The Company has not made, is not obligated to make and is not a
party to any agreement that would require it to make any payment that is not
deductible under Section 280G of the Code.
(l) Other than luxury automobiles, no asset of the Company is subject
to any provision of applicable law that eliminates or reduces the allowance for
depreciation or amortization in respect of that asset below the allowance
generally available to an asset of its type.
(m) The Company is an "S corporation" as that term is defined in
Section 1361(a)(1) of the Code and since becoming an S corporation on October 1,
1995 has not incurred any federal income tax liabilities.
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(n) Schedule 3.19 identifies each Subsidiary that is a "qualified
subchapter S subsidiary" within the meaning of Section 1361(b)(3)(B) of the
Code. Each Subsidiary so identified has been a qualified subchapter S subsidiary
at all times since the date shown on such schedule up to and including the date
of Closing.
(o) Neither the Company nor any qualified subchapter S subsidiary of
the Company has, in the past 10 years, (i) acquired assets from another
corporation in a transaction in which the Company's Tax basis for the acquired
assets was determined, in whole or in part, by reference to the Tax basis of the
acquired assets (or any other property) in the hands of the transferor or
(ii) acquired the stock of any corporation which is a qualified subchapter S
subsidiary.
SECTION 3.20. EMPLOYEE BENEFIT PLANS. (a) Except for oral employment
agreements terminable at will, Schedule 3.20 contains a list of all "employee
pension benefit plans" (as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")) (sometimes referred to herein
as "Company Pension Plans"), "employee welfare benefit plans" (as defined in
Section 3(l) of ERISA, hereinafter a "Company Welfare Plan"), stock option,
stock purchase, incentive, bonus, deferred compensation plans or arrangements,
vacation, change in control, stay-on bonus plans or arrangements, and other
material employee compensation and fringe benefit plans or agreements,
maintained, contributed to, or pursuant to which the Company or any of the
Subsidiaries has or may have any liability, whether or not heretofore terminated
(all the foregoing being herein called "Company Benefit Plans"). The Company has
delivered to IES an accurate list (which is set forth on Schedule 3.20) showing
all officers and directors of the Company, listing all employment agreements
with such officers and directors of the Company, listing all employment
agreements with such officers and directors and the rate of compensation (and
the portions thereof attributable to salary, bonus and other compensation,
respectively) of each of such persons as of (i) December 31, 1997 and (ii) the
date hereof. The Company has provided to IES true, complete and correct copies
of any written employment agreements for persons listed on Schedule 3.20. Since
December 31, 1997, except as disclosed on Schedule 3.20, there have been no
increases in the compensation payable or any special bonuses to any officer,
director, key employee or other employee, except ordinary salary increases
implemented on a basis consistent with past practices. The Company has made
available to IES true, complete, and correct copies of (1) each Company Benefit
Plan and any subsequently adopted amendments thereto (or, in the case of
unwritten Company Benefit Plans, descriptions thereof), (2) the most recent
annual report on Form 5500 filed with respect to each Company Benefit Plan (if
any such report was required), (3) the most recent summary plan description for
each Company Benefit Plan for which such a summary plan description is required
(with all summaries of material modifications provided after the most recent
summary plan description was distributed), (4) each trust agreement, group
annuity contract and service agreement relating to any Company Benefit Plan and
(5) each favorable determination letter from the Internal Revenue Service with
respect to each Company Benefit Plan that is intended to be qualified under
Section 401(a) of the Code.
(b) All Company Benefit Plans are and have been administered in
compliance with their terms and all applicable laws, including, without
limitation, ERISA and the Code,
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except where the failure to so administer the Company Benefit Plans or to comply
with such laws would not have, individually or in the aggregate, a Company
Material Adverse Effect. There are no pending or, to the Company Stockholders'
Knowledge, threatened investigations by any governmental entity, termination
proceedings, or other, suits or proceedings against or involving any Company
Benefit Plan. All such plans that are intended to qualify (the "Qualified
Plans") under Section 401(a) of the Code are, and have been so qualified and
have been determined by the Internal Revenue Service to be so qualified, and
copies of such determination letters are attached to Schedule 3.20. Except as
disclosed on Schedule 3.20, all reports and other documents required to be filed
with any governmental agency or distributed to plan participants or
beneficiaries (including, but not limited to, actuarial reports, audits or tax
returns) have been timely filed or distributed, and copies thereof are included
as part of Schedule 3.20 hereof.
(c) All contributions to, and payments from, the Company Benefit Plans
required to be made in accordance with the Company Benefit Plans or applicable
law have been timely made. All accrued contribution obligations of the Company
with respect to any Company Benefit Plan have either been fulfilled in their
entirety or are fully reflected on the balance sheet in the Company Unaudited
Financial Statements.
(d) No Company Benefit Plan is subject to Section 302 or Title IV of
ERISA or Section 412 of the Code or is a "multiemployer plan" within the meaning
of Section 4001(a)(3) of ERISA or a "multiple employer's plan" within the
meaning of Section 413 of the Code.
(e) (i) No "prohibited transaction" (under Section 4975 of the Code or
Section 406 of ERISA) has occurred with respect to any Company Benefit Plan and
(ii) there has been no breach of any fiduciary duty with respect to any Company
Benefit Plan, other than, in the case of (i) and (ii), those that are not
reasonably expected to have, individually or in the aggregate, a Company
Material Adverse Effect.
(f) Neither the Company nor any of the Subsidiaries maintains or
contributes to any Company Welfare Plan that could not be unilaterally
terminated by the Company or any of the Subsidiaries at any time without
liability.
(g) Except as set forth on Schedule 3.20, there are no assets of any
Company Benefit Plan that are not readily tradeable on a national securities
exchange, including the Nasdaq Stock Market.
SECTION 3.21. BROKERAGE FEES AND COMMISSIONS. Except as set forth on
Schedule 3.21, neither the Company nor the Company Stockholders has incurred any
obligation or entered into any agreement for any investment banking, brokerage
or finder's fee, or commission in respect of the transactions contemplated by
this Agreement for which IES or the Company shall incur any liability.
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF IES
IES represents and warrants to the Company Stockholders as follows
upon execution of this Agreement and as of the Effective Time:
SECTION 4.1. ORGANIZATION AND QUALIFICATION. Each of IES and Acquisition is
a corporation duly organized, validly existing and in good standing under the
laws of the state of its incorporation, and IES has the requisite corporate
power to carry on its business as it is now conducted. IES is duly qualified to
conduct business as a foreign corporation in each jurisdiction in which its
ownership or lease of property or the conduct of its business and operations
makes such qualification necessary, except for such jurisdictions in which IES's
failure to be so qualified is not reasonably expected to have, individually or
in the aggregate, an IES Material Adverse Effect (as defined in Section 10.16).
SECTION 4.2. CAPITALIZATION. (a) The authorized capital stock of IES
consists of 100,000,000 shares of IES Common Stock, 2,655,709 shares of
restricted voting common stock and 10,000,000 shares of preferred stock. As of
March 31, 1998, there were outstanding 21,759,627 shares of IES Common Stock
(including no shares of treasury stock), 2,655,709 shares of restricted voting
common stock, and no shares of preferred stock. All outstanding shares of
capital stock of IES have been duly authorized and validly issued and are fully
paid and non-assessable and free of preemptive rights.
(b) The shares of IES Common Stock to be issued as part of the Merger
Consideration have been duly authorized and, when issued and delivered in
accordance with the terms of this Agreement, will have been validly issued and
will be fully paid and non-assessable, and the issuance thereof is not subject
to any preemptive or other similar right. The delivery of the Merger
Consideration to the Company Stockholders pursuant to the terms of this
Agreement will transfer valid title thereto, free and clear of all Liens.
SECTION 4.3. AUTHORIZATION. The execution, delivery and performance by IES
of this Agreement, and the consummation by IES and Acquisition of the
transactions contemplated hereby, are within the corporate powers of IES and
Acquisition and have been duly authorized by all necessary corporate action. No
other corporate proceedings on the part of IES or Acquisition are necessary to
authorize the execution and delivery of this Agreement or the consummation by
IES and Acquisition of the transaction contemplated hereby. This Agreement has
been duly authorized, executed and delivered by IES and Acquisition and
constitutes the valid and binding obligation of IES and Acquisition enforceable
against IES and Acquisition in accordance with its terms.
SECTION 4.4. CONSENTS AND APPROVAL; NO VIOLATION. Neither the execution and
delivery of this Agreement by IES and Acquisition, nor the consummation by IES
and Acquisition of the transactions contemplated by this Agreement, will: (a)
require any consent, approval, authorization, or permit of, or filing with or
notification to, any Governmental
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Authority, except (i) the filing of articles of merger in accordance with South
Carolina Law, (ii) compliance with any applicable requirements of the 1933 Act,
the Securities Exchange Act of 1934, as amended (the "1934 Act"), and foreign or
state securities or Blue Sky laws, (iii) any regulatory approvals or routine
governmental consents normally acquired after the consummation of transactions
such as transactions of the nature contemplated by this Agreement, (iv) where
the failure to obtain such consent, approval, authorization, or permit, or to
make such filing or notification, is not reasonably expected to have,
individually or in the aggregate, an IES Material Adverse Effect or prevent or
delay, in any material respect, the consummation of the transactions
contemplated by this Agreement or (v) approvals required pursuant to the HSR
Act; (b) result in a default (or give rise to any right of termination,
cancellation, or acceleration) under any of the terms, conditions, or provisions
of any agreement or other instrument binding upon IES or any of its
subsidiaries, except for such defaults (or rights of termination, cancellation,
or acceleration) as to which requisite waivers or consents have been obtained or
which are not reasonably expected to have, individually or in the aggregate, an
IES Material Adverse Effect or prevent or delay, in any material respect, the
consummation of the transactions contemplated by this Agreement; or (c) assuming
compliance with the matters referred to in Section 4.4(a), violate any order,
writ, injunction, decree, statute, rule, or regulation applicable to IES or any
of its subsidiaries or any of their assets, except for violations which are not
reasonably expected to have, individually or in the aggregate, an IES Material
Adverse Effect or prevent or delay, in any material respect, the consummation of
the transactions contemplated by this Agreement. Neither IES nor Acquisition is
in violation of their Articles of Incorporation or Bylaws, and the consummation
of the transactions contemplated by this Agreement will not result in violation
of the Articles of Incorporation or Bylaws of either of them.
SECTION 4.5. SEC FILINGS. (a) IES has filed with the Securities and
Exchange Commission ("SEC") all material forms, statements, reports and
documents (the "IES SEC Filings") required to be filed by it under the 1934 Act
and the rules and regulations thereunder.
(b) As of its filing date, each IES SEC Filing complied as to form in
all material respects with the applicable requirements of the 1934 Act.
(c) As of its filing date, each IES SEC Filing filed pursuant to the
1934 Act did not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
(d) IES has previously delivered to the Company Stockholders copies of
IES's prospectus, dated April 30, 1998, as supplemented (the "Prospectus"). As
of its date, the Prospectus did not contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading.
SECTION 4.6. NO ASSURANCES. IES and Acquisition represent that none of the
following has been represented, guaranteed, or warranted to either of them by
Company or Company Stockholders or their agents or employees, or any other
person, expressly or by implication:
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(a) the profit to be realized, if any, as a result of the acquisition
of the shares of Company Common Stock;
(b) that the past performance or experience on the part of company, or
any officer, director or affiliate, their partners, salesmen, associates,
agents, or employees, or any other person, will in any way guarantee the actual
results of the ownership of the shares of Company Common Stock; or
(c) that any projections, budgets, forecasts or other forward looking
information constitute a guarantee, representation or warranty that such
predictions, forecasts or information can, or will, be achieved.
SECTION 4.7. STOCKHOLDER'S EQUITY. IES and Acquisition represent that they
are aware and understand that the transactions contemplated by this Agreement
will cause a loss to Company and a reduction in Company's stockholder's equity.
ARTICLE V
ADDITIONAL COVENANTS AND AGREEMENTS
SECTION 5.1. REASONABLE BEST EFFORTS. Subject to the terms and conditions
of this Agreement, each party will use its reasonable best efforts to take, or
cause to be taken, all actions and to do, or cause to be done, all things
necessary, proper, or advisable under applicable laws and regulations to
consummate the transactions contemplated by this Agreement.
SECTION 5.2. CERTAIN FILINGS. The Company and IES shall cooperate with one
another (i) in determining whether any action by or in respect of, or filing
with, any Governmental Authority is required, or any actions, consents,
approvals, or waivers are required to be obtained from parties to any material
agreements, in connection with the consummation of the transactions contemplated
by this Agreement and (ii) in taking such actions or making such filings,
furnishing information required in connection therewith and seeking timely to
obtain such actions, consents, approvals, or waivers.
SECTION 5.3. PUBLIC ANNOUNCEMENTS. Prior to Closing, unless required under
law or regulation, without the prior consent of the other, which consent shall
not be unreasonably withheld, none of the parties hereto will issue, or permit
any agent or affiliate to issue, any press releases or otherwise make or permit
any agent or affiliate to make, any public statements with respect to this
Agreement or the transactions contemplated by this Agreement.
SECTION 5.4. FURTHER ASSURANCES. At and after the Effective Time, the
officers and directors of the Surviving Corporation will be authorized to
execute and deliver, in the name and on behalf of the Company or Acquisition,
any deeds, bills of sale, assignments, or assurances and to take and do, in the
name and on behalf of the Company or Acquisition, any other actions and things
to vest, perfect, or confirm of record or otherwise in the Surviving Corporation
any and all
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right, title, and interest in, to, and under any of the rights, properties, or
assets of the Company acquired or to be acquired by the Surviving Corporation as
a result of, or in connection with, the Merger.
SECTION 5.5 NOTICES OF CERTAIN EVENTS. Each of the Company, the Company
Stockholders and IES shall promptly notify the other parties hereto of:
(a) any notice or other communication from any Person alleging
that the consent of such Person is or may be required in connection with
the transactions contemplated by this Agreement;
(b) any notice or other communication from any Governmental
Authority in connection with the transactions contemplated by this
Agreement;
(c) any actions, suits, claims, investigations or proceedings
commenced or, to its knowledge, threatened against, relating to, or
involving or otherwise affecting such party that relate to the consummation
of the transactions contemplated by this Agreement; and
(d) any material failure on its part to comply with or satisfy any
covenant, condition or agreement to be complied with or satisfied by it
hereunder; provided, however, that the delivery of any notice pursuant to
this Section 5.5(d) shall not limit or otherwise affect the remedies
available hereunder to the party receiving such notice.
SECTION 5.6. RELEASE FROM GUARANTEES. Following the Effective Time, IES and
the Surviving Corporation shall use reasonable efforts to have the Company
Stockholders released from the personal guarantees of the Company's indebtedness
identified on Schedule 5.6. In the event that IES cannot obtain releases of any
such guarantees on or prior to thirty (30) days subsequent to the Effective
Time, IES shall pay off or otherwise refinance or retire such indebtedness.
SECTION 5.7. FUTURE COOPERATION. The Company, Company Stockholders and IES
shall each deliver or cause to be delivered to the other following the Effective
Time such additional instruments as the other may reasonably request for the
purpose of fully carrying out this Agreement. The Company Stockholders will
cooperate and use their reasonable best efforts to have the present officers,
directors and employees of and independent accountants to the Company cooperate
with IES at and after Effective Time in furnishing information, evidence,
testimony and other assistance in connection with any actions, proceedings,
arrangements or disputes of any nature with respect to matters pertaining to all
periods prior to the Effective Time, including, without limitation, consent to
the inclusion of any independent auditor's report in documents filed by IES
under the 1933 Act or 1934 Act.
SECTION 5.8. EXPENSES. IES and the Company Stockholders will each pay their
own fees, expenses and disbursements of their respective agents,
representatives, accountants and
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counsel incurred in connection with the execution, delivery and performance of
this Agreement and any amendment thereto; provided, however, that IES shall pay
all expenses, including all attorneys' fees and filing fees, relating to any
filings required pursuant to the HSR Act.
SECTION 5.9. REPAYMENT OF RELATED PARTY INDEBTEDNESS. Concurrently with the
Closing, (i) the Company Stockholders shall repay to the Company all amounts
outstanding as advances to or receivables from the Company Stockholders and
(ii) the Company shall repay all amounts outstanding under loans to the Company
from the Company Stockholders. Such advances, receivables and loans, and the
amounts thereof, are listed on Schedule 5.9.
SECTION 5.10. FIRPTA CERTIFICATE. Each Company Stockholder will deliver to
IES a certificate to the effect that he is not a foreign person pursuant to
Section 1.1445-2(b) of the Treasury regulations.
SECTION 5.11. PREPARATION AND FILING OF TAX RETURNS.
(a) The Company Stockholders shall file or cause to be filed all tax
returns of Company for all taxable periods that end on or before the Closing,
but in each case only after IES has reviewed such filings and consented thereto,
which consent shall not be unreasonably withheld. Such Company tax returns shall
be prepared by Elliott Davis & Company, Greenville, South Carolina.
(b) IES shall file or cause to be filed all tax returns of Company for
all taxable periods ending after the Closing.
(c) Each party hereto shall, and shall cause its subsidiaries and
affiliates to, provide to each of the other parties hereto such cooperation and
information as any of them reasonably may request in filing any tax returns,
amended tax returns or claim for refund, determining a liability for Taxes or a
right to refund of Taxes or in conducting any audit or other proceeding in
respect of Taxes. Such cooperation and information shall include providing
copies of all relevant portions of relevant tax returns, together with relevant
accompanying schedules and relevant work papers, relevant documents relating to
rulings or other determinations by taxing authorities and relevant records
concerning the ownership and Tax basis of property, which such party may
possess. Each party shall make its employees reasonably available on a mutually
convenient basis at its cost to provide explanation of any documents or
information so provided. Subject to the preceding sentence, each party required
to file tax returns pursuant to this Agreement shall bear all costs of filing
such tax returns; provided, however, that the Company shall bear all costs
(other than costs subject to indemnity pursuant to this Agreement) of filing any
such Company tax returns.
(d) At the option of IES, the Company and each of the Company
Stockholders will join with IES in making an election under Section 338(h)(10)
of the Code (and any corresponding election under state, local, and foreign tax
law) with respect to the purchase and sale of the stock of the Company hereunder
(a "Section 338(h)(10) Election"). The Company will be liable for any Tax under
Section 1374 of the Code caused in connection with the deemed
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sale of the Company's assets (including the assets of any qualified subchapter S
subsidiary) caused by a Section 338(h)(10) Election. The Company Stockholders
will include any income, gain, loss, deduction, or other tax item resulting from
the Section 338(h)(10) Election on their Tax returns to the extent permitted by
applicable law. On or before March 15, 1999, the certified public accounting
firm of Elliott Davis & Company, Greenville, South Carolina shall calculate each
Company Stockholder's federal and state income taxes for calendar year 1998 both
with a Section 338(h)(10) election and without a Section 338(h)(10) Election. If
a Company Stockholder's federal and state income taxes calculated with a Section
338(h)(10) Election exceeds the Company Stockholder's federal and state income
taxes without a Section 338(h)(10) Election, then IES shall have the opportunity
to review such calculation and, if in agreement, shall pay the difference to
such Company Stockholder within thirty (30) days following receipt of Elliot
Davis & Company's written calculations to such account as the Company
Stockholder shall direct. If the parties are unable to agree upon such
calculation, they shall mutually pick an independent "Big Six" accounting firm
to make such calculation, which calculation equally shall be binding upon both
parties. The parties shall split equally the fees and expenses of such
accounting firm.
(e) The Company and the Company Stockholders agree that the Merger
Consideration and the liabilities of the Company and its qualified subchapter S
subsidiaries (plus other relevant items) will be allocated to the assets of the
Company and its qualified subchapter S subsidiaries for all purposes (including
Tax and financial accounting) in a manner consistent with the fair market values
set forth in Schedule 5.11 attached hereto. IES, the Company, the Subsidiaries,
and the Company Stockholders will file all Tax returns (including amended
returns and claims for refund) and information reports in a manner consistent
with such values.
(f) The Company and the Company Stockholders will not revoke the
Company's election to be taxed as an S corporation within the meaning of
Sections 1361 and 1362 of the Code. The Company and the Company Stockholders
will not take or allow any action that would result in the termination of the
Company's status as a validly electing S corporation within the meaning of
Sections 1361 and 1362 of the Code. Notwithstanding the previous two sentences,
the parties hereto recognize and acknowledge that the transactions contemplated
by this Agreement will terminate Company's status as an S corporation within the
meaning of Sections 1361 and 1362 of the Code.
(g) The Company income tax returns for the taxable year ending as a
result of the transactions in this Agreement shall be filed in accordance with
Section 1362(e)(3) of the Code and not in accordance with Section 1362(e)(2) of
the Code.
(h) For purposes of (a) filing the Company income Tax returns for the
taxable year ending as a result of the transactions in this Agreement, and
(b) the calculations of each Company Stockholder's federal and state income
Taxes for the calendar year with a Section 338(h)(10) Election, the Company and
the Company Stockholders agree to make the election described in Section
1.1368-1(g)(2) of the Treasury Regulations if such election results in lower
aggregate federal and state income Taxes for all Company Stockholders.
Additionally, for purposes of the calculations of each Company Stockholder's
federal and state income Taxes for
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the calendar year without a Section 338(h)(10) Election, the calculations will
be make by either making or not making the election described in Section
1.1368-1(g)(2), whichever results in the lower aggregate federal and state
income Taxes for all Company Stockholders, without regard to whether or not such
election is actually made in the Company income Tax returns as described in the
first sentence of this paragraph (h).
SECTION 5.12. ANTITRUST LAW COMPLIANCE. Not later than five (5) business
days after the date hereof, (a) the Company, (b) the Company Stockholders and
(c) IES shall prepare and file with the United States Department of Justice (the
"Department") and the Federal Trade Commission (the "FTC") the notification and
report form with respect to the transactions contemplated by this Agreement as
required pursuant to the HSR Act. The Company, the Company Stockholders and IES
shall each cooperate with the other in preparation of such filings and shall
promptly comply with any reasonable request by the Department or the FTC for
supplemental information and shall use their best efforts to obtain early
termination of the waiting period under the HSR Act. IES shall pay all expenses,
including all attorneys' fees and filing fees, relating to any filings required
by the HSR Act.
SECTION 5.13. CONDUCT OF BUSINESS PENDING CLOSING. (a) Between the date of
this Agreement and the Closing, the Company Stockholders will, and will cause
the Company to, except as set forth below on Schedule 5.13:
(i) carry on their respective businesses in substantially the same
manner as they have heretofore;
(ii) use all commercially reasonable efforts to maintain their
properties and facilities, including those held under leases, in as good
working order and condition as at present, ordinary wear and tear excepted;
(iii) perform in all material respects all of their respective
obligations under agreements relating to or affecting their respective
assets, properties or rights;
(iv) use all reasonable efforts to keep in full force and effect
present insurance policies or other comparable insurance coverage;
(v) use their commercially reasonable efforts to maintain and
preserve their business organization intact, retain their respective
present key employees and maintain their respective relationships with
suppliers, customers and others having business relations with the Company;
(vi) use reasonable efforts to maintain compliance with all
material permits, laws, rules and regulations, consent orders, and all
other orders of applicable courts, regulatory agencies and similar
Governmental Authorities;
(vii) maintain present debt and lease instruments in accordance
with their terms and not enter into new or amended debt or lease
instruments without the
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<PAGE> 30
Knowledge and consent of IES (which consent shall not be unreasonably
withheld), provided that debt and/or lease instruments may be replaced
without the consent of IES if such replacement instruments are on terms at
least as favorable to the Company as the instruments being replaced;
(viii) maintain or reduce present salaries and commission levels
for all officers, directors, employees and agents except for ordinary and
customary bonus and salary increases for employees in accordance with past
practices; and
(ix) afford to the officers and authorized representatives of IES
reasonable access during normal business hours to all of the Company's
sites, properties, books and records and will furnish IES with such
additional financial and operating data and other information as to the
business and properties of the Company as IES may from time to time
reasonably request.
(b) Except as disclosed on Schedule 5.13, between the date hereof and
the Closing, the Company will not, without prior written consent of IES:
(i) make any change in their Articles of Incorporation or Bylaws;
(ii) issue any securities, options, warrants, calls, conversion
rights or commitments relating to its securities of any kind;
(iii) declare or pay any dividend, or make any distribution in
respect of its stock whether now or hereafter outstanding, or purchase,
redeem, or otherwise acquire or retire for value any share of its stock;
(iv) enter into any contract or commitment or incur or agree to
incur any liability or make any capital expenditures, except if it is in
the normal course of business (consistent with past practice) or involves
an amount not in excess of two percent (2%) of the Company's revenues for
fiscal year ended September 30, 1997;
(v) create or assume any mortgage, pledge or other Lien or
encumbrance upon any assets or properties whether now owned or hereafter
acquired, except with respect to purchase money Liens incurred in
connection with the acquisition of equipment with an aggregate cost not in
excess of two percent (2%) of the Company's revenues for fiscal 1997
necessary or desirable for the conduct of the businesses of the Company;
(vi) sell, assign, lease or otherwise transfer or dispose of any
property or equipment except in the normal course of business;
(vii) negotiate for the acquisition of any business or the
start-up of any new business;
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<PAGE> 31
(viii) merge or consolidate or agree to merge or consolidate with
or into any other corporation;
(ix) waive any material rights or claims of the Company, provided
that the Company may negotiate and adjust bills and accounts in the course
of good faith disputes with customers in a manner consistent with past
practice;
(x) amend or terminate any material judgment, permit, license or
other right to the Company; or
(xi) enter into any other transaction outside the ordinary course
of its business.
(c) None of the Company Stockholders, the Company, nor any agent,
officer, director, trustee or any representative of any of the foregoing will,
during the period commencing on the date of this Agreement and ending with the
earlier to occur of the Effective Time or the termination of this Agreement in
accordance with its terms, directly or indirectly: (i) solicit or initiate the
submission of proposals or offers from any person for, (ii) participate in any
discussions pertaining to, (iii) enter into any agreement or understanding with
respect to, (iv) furnish any information to any person other than IES or its
authorized agents relating to, or (v) allow to occur, any acquisition, purchase
or sale of all or a material amount of the assets of, or any equity interest in,
the Company or a merger, consolidation or business combination of the Company.
SECTION 5.14. NOTIFICATION OF CERTAIN MATTERS. The Company Stockholders
shall give prompt notice to IES upon obtaining Knowledge of (i) the occurrence
or non-occurrence of any event which would be likely to cause any representation
or warranty of the Company Stockholders contained herein to be untrue or
inaccurate and (ii) any failure of any Company Stockholder or the Company to
comply with or satisfy any covenant, condition or agreement to be complied with
or satisfied by such person hereunder. IES shall give prompt notice to the
Company Stockholders of (i) the occurrence or non-occurrence of any event which
would be likely to cause any representation or warranty of IES contained herein
to be untrue or inaccurate and (ii) any failure of IES to comply with or satisfy
any covenant, condition or agreement to be complied with or satisfied by it
hereunder.
SECTION 5.15. VEHICLES. At Closing the parties to this Agreement agree that
each Company Stockholder may purchase for cash from Company the vehicle used by
such Stockholder as shown on Schedule 5.15 at the purchase price shown on
Schedule 5.15. Ownership of the vehicle that a Company Stockholder purchasers
will be transferred at Closing to such Company Stockholder free and clear of all
Liens by documents of title reasonably satisfactory to legal counsel for Company
Stockholders.
SECTION 5.16. DEFERRED COMPENSATION. Notwithstanding anything in this
Agreement to the contrary, prior to the date of Closing, each party to this
Agreement agrees that the Company shall pay in full all of its deferred
compensation liability pursuant to the Incentive Plan of Davis
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Electrical Constructors, Inc., dated March 6, 1989, as amended, in the amounts
and to the employees shown on Schedule 5.16, subject to applicable withholding
laws. The Company Stockholders receiving such deferred compensation payments
hereby accept such payments in full settlement of all amounts due them pursuant
to the Incentive Plan of Davis Electrical Constructors, Inc. and hereby release
and discharge Company from all further liability under such plan, which plan is
hereby terminated. In the event the Company does not have adequate cash to make
such payments, then notwithstanding anything in this Agreement to the contrary,
the parties to this Agreement agree that the Company may borrow the amount of
money needed in order to pay in full such payments and such payments and
borrowing shall not be deemed a breach of any representation, warranty or
covenant of this Agreement.
SECTION 5.17. STOCK OPTIONS. Effective as of the Closing, IES shall grant
one hundred seventy-five thousand (175,000) options to acquire IES Common Stock
in the amounts and to those employees listed on Schedule 5.17. Further, as soon
as reasonably practicable following the Closing, IES shall deliver to each
employee listed on Schedule 5.17 a stock option agreement in the form attached
hereto as EXHIBIT K to evidence the grant of such options to such employees.
SECTION 5.18. BONUSES. As a condition for IES to enter into this Agreement,
IES has required that certain Company employees obtain a greater percentage of
the Company Common Stock which the Company has effected by paying bonus
compensation in the form of issuing shares of Company Common Stock. Prior to
date of Closing Company shall issue shares of Company Common Stock as bonus
compensation to those employees listed on Schedule 5.18 in the amount of shares
listed on Schedule 5.18, subject to receipt of cash equal to applicable
withholding requirements in accordance with law. The parties to this Agreement
agree that such bonus shall eliminate in their entirety all bonuses that
otherwise would be due any employee listed on Schedule 5.18 from Company for the
fiscal year ended September 30, 1998, including, but not limited to bonuses
payable pursuant to the Company's Amended and Restated Executive Bonus Plan.
Company and Company Stockholders hereby terminate the Amended and Restated
Executive Bonus Plan dated September 24, 1997 in its entirety effective as of
the Closing. The bonused shares of Company Stock issued to employees listed on
Schedule 5.18 will be acquired by Acquisition pursuant to Sections 1.2 and 1.3.
SECTION 5.19. CERTAIN EMPLOYEES AND OFFICES. IES and Company agree that
Surviving Corporation shall continue to employ Scottie Woods and Frank Mew for
at least sixty (60) days following Closing at their same salary; provided,
however, that notwithstanding anything in this Agreement to the contrary, James
B. Stephens may, at anytime after the Closing, offer to employ and employ either
or both Scottie Woods and Frank Mew. IES and Company agree that Scottie Woods
and Frank Mew will continue to perform certain services for James B. Stephens
during such sixty (60) day employment period. Further, during such sixty (60)
day period James B. Stephens and Scottie Woods shall continue to have exclusive
use of their current offices located in the Company office building in
Greenville, South Carolina.
SECTION 5.20. TAX AUDIT. In the event of an Internal Revenue Service, South
Carolina Department of Revenue and Taxation or other tax authority audit of the
Company for any period
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<PAGE> 33
ending on or before the Closing, IES shall promptly notify the Company
Stockholders of the audit. The Company Stockholders shall have the right to
solely conduct the audit as well as the current Internal Revenue Service audit
in existence at the date of this Agreement. However, in the event of a tax
authority audit of the Company for any period for which IES, Acquisition or the
Company may have to indemnify the Company Stockholders, IES and Company
Stockholders shall have the right to jointly conduct the audit. IES shall not
agree, and shall not allow Surviving Corporation to agree, to any adverse tax
adjustment affecting the Company Stockholders without the prior written consent
of James B. Stephens, if living, or the personal representative of his estate if
he is deceased, which consent shall not be unreasonably withheld. The Company
Stockholders shall not agree, and, if deceased, their personal representative
shall not agree to any adverse tax adjustment affecting the Company, IES or
Acquisition or requiring an indemnity payment by such parties without the prior
written consent of IES, which consent shall not be unreasonably withheld.
SECTION 5.21. LIFE INSURANCE. No later than ten (10) days after Closing,
each Company Stockholder may purchase for cash any life insurance policy owned
by the Company and insuring such Company Stockholder's life for such policy's
cash surrender value. Further, no later than ten (10) days after Closing any
Company Stockholder, or their designee, may purchase for cash any life insurance
policy insuring such Company Stockholder's life that is collaterally assigned to
Company for the amount owed to Company pursuant to such collateral assignment.
If such policies are not purchased, the Company may terminate such policies and
retain any proceeds received.
SECTION 5.22. PURCHASE OF ASSETS. At or prior to Closing the parties to
this Agreement agree that James B. Stephens may purchase for cash from Company
the assets shown on Schedule 5.22 at the purchase price shown on Schedule 5.22.
Ownership of such assets will be transferred at Closing to James B. Stephens
free and clear of all Liens by documents of title reasonably satisfactory to
legal counsel for Company Stockholders.
SECTION 5.23. AIRPLANE LEASE. James B. Stephens and the Company hereby
terminate, effective as of the Closing, that certain Airplane Lease Agreement
between such parties relating to the Mitsubishi Solitaire Aircraft, Model
MV2B40.
SECTION 5.24. STOCK PURCHASE AGREEMENT. The Company Stockholders and the
Company agree that the Stock Purchase Agreement dated March 6, 1989 among such
parties is hereby terminated effective at the Closing.
SECTION 5.25. REMOVAL OF STOCK CERTIFICATE LEGEND. At any time on or after
the second anniversary of the Effective Time, IES shall promptly remove the
legend described in Section 8.2 from any stock certificate evidencing the IES
Common Stock upon the written request of the holder of any such stock
certificate.
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ARTICLE VI
INDEMNIFICATION
The Company Stockholders and IES each make the following covenants:
SECTION 6.1. INDEMNIFICATION BY THE COMPANY STOCKHOLDERS. The Company
Stockholders covenant and agree that they, jointly and severally, will
indemnify, defend, and hold harmless IES, the Company, and the Surviving
Corporation, and their respective officers, directors, employees, stockholders,
agents, representatives, and affiliates (the "IES Indemnitees") at all times
from and after the date of this Agreement from and against all claims, damages,
losses, liabilities (joint or several), obligations, penalties, defenses,
actions, lawsuits, proceedings, judgments, demands, assessments, adjustments,
costs, and expenses (including specifically, but without limitation, reasonable
fees, disbursements, and expenses of attorneys, accountants, other professional
advisors and of expert witnesses and costs of investigation and preparation)
(collectively, "Damages"), as they are incurred resulting from, relating to or
arising out of:
(a) any breach of or any allegation or claim by a third party
which, if true, would constitute a breach of any representation or warranty
of Company Stockholders set forth herein or in the Schedules or
certificates delivered in connection herewith;
(b) any breach or non-performance, partial or total, by the
Company or any of the Company Stockholders of any covenant or agreement of
the Company (or any affiliate or subsidiary thereof) or the Company
Stockholders (or any affiliate or subsidiary thereof) contained in this
Agreement, other than Company obligations due after Closing; or
(c) the remediation, cleanup, testing, analysis, removal,
containment, treatment, storage, disposal, release or other action required
by law or expense related to items, if any, set forth or described by
Schedule 3.18.
Notwithstanding anything in this Agreement to the contrary, any
Damages or other indemnification amounts owed or incurred by Company
Stockholders, on the one hand, or IES on the other hand, in this Agreement shall
be reduced by (i) reserves established by Company as of June 30, 1998 with
regard to a specific indemnity obligation, (ii) any insurance proceeds received
by Surviving Corporation or IES, on the one hand, or the Company Stockholders,
on the other hand, under insurance coverage; and (iii) any resulting tax
benefits.
Notwithstanding any provision to the contrary in this Agreement, in no
event whatsoever shall the aggregate liability of the Company Stockholders, on
the one hand, or IES, on the other hand, under this Agreement (including all
costs, expenses and attorneys' fees paid or incurred by IES, the Company and/or
the Company Stockholders in connection therewith or with respect to any
indemnification or the curing of any and all misrepresentations or breaches
under
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<PAGE> 35
this Agreement) exceed $18,000,000; provided, however, that the foregoing
limitation on liability shall not apply with respect to (i) indemnity
obligations under Section 6.1(a) relating to Section 3.2, Section 3.19 hereof or
(ii) with respect to indemnity obligations under Section 6.3(a) relating to
Section 4.2(b) hereof or (iii) the failure of IES and/or Acquisition to pay all
or any part of the Merger Consideration; (iv) with respect to any Damages that
relate to or occur as a result of fraudulent misrepresentations or fraudulent
actions; or (v) with respect to IES's obligations pursuant to Section 5.6.
SECTION 6.2. INDEMNIFICATION RELATED TO TAX LIABILITIES. Except for any Tax
under Section 1374 of the Code, the Company Stockholders shall retain liability,
and shall indemnify IES, for the payment of any Tax liabilities with respect to
the conduct of the business of the Company or the Subsidiaries during all
periods ending as of the day immediately prior to the Effective Time.
Notwithstanding any provision in this Agreement to the contrary, IES and
Surviving Corporation shall pay and be responsible for all taxes under Section
1374 of the Code incurred by Company due to the transactions described in this
Agreement, and Company's failure to have adequate Tax reserves for such Taxes
shall not be deemed a breach of any representation, warranty or covenant in this
Agreement. Further, if Section 5.20 hereof was complied with and a Company
Stockholder's 1998 federal and/or state income Tax liability is subsequently
increased by the Internal Revenue Service or any state income Tax authority
above the greater of the amount of income taxes determined by Elliott Davis &
Company (a) with a Section 338(h)(10) Election and (b) without a Section
338(h)(10) Election, as a result of a successful challenge to a purchase price
reallocation resulting from the Section 338(h)(10) Election, IES will indemnify
and hold harmless each Company Stockholder for any resulting income tax,
penalties and interest within fifteen (15) days after such Company Stockholder
has paid such additional income Tax.
SECTION 6.3. INDEMNIFICATION BY IES. IES covenants and agrees that it will
indemnify, defend, and hold harmless the Company Stockholders (the "Stockholder
Indemnitees") at all times from and after the date of this Agreement from and
against all claims, damages, losses, liabilities (joint or several),
obligations, penalties, defenses, actions, lawsuits, proceedings, judgments,
demands, assessments, adjustments, costs, and expenses (including specifically,
but without limitation, reasonable fees, disbursements, and expenses of
attorneys, accountants, other professional advisors and of expert witnesses and
costs of investigation and preparation), (collectively, "Damages"), as they are
incurred, resulting from, relating to or arising out of:
(a) any breach of or any allegation or claim by a third party
which, if true, would constitute a breach of any representation or warranty
of IES and/or Acquisition set forth herein or in the Schedules or
certificates delivered in connection herewith; and
(b) any breach or non-performance, partial or total, by IES of any
covenant or agreement of IES (or any affiliate or subsidiary thereof)
contained in this Agreement.
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(c) the failure of IES and Surviving Corporation to fulfill their
obligations described in Section 5.6.
SECTION 6.4. INDEMNIFICATION PROCEEDINGS. Promptly after a party
indemnified pursuant to this Article VI ("Indemnitee") has received notice of or
has knowledge of any claim by a person not a party to this Agreement ("third
party") or the commencement of any action or proceeding by a third party, the
Indemnitee shall promptly, and in any event within fifteen (15) days of the
assertion of any claim or the discovery of any fact upon which Indemnitee
intends to base a claim for indemnification under this Agreement ("Indemnitee
Claim"), as a condition precedent to the Indemnitee Claim, give written notice
to the party or parties from whom indemnification is sought ("Indemnitor") of
such claim by the third party. Such notice shall state the nature and the basis
of such claim and a reasonable estimate of the amount thereof. In the event of
any Indemnitee Claim, Indemnitor, at its option, shall have the right to defend
or settle, at its own expense and by its own counsel, any such matter so long as
the Indemnitor pursues the same in good faith and diligently. If the Indemnitor
undertakes to defend or settle, it shall promptly notify the Indemnitee of its
intention to do so, and the Indemnitee shall cooperate with the Indemnitor and
its counsel in the defense thereof and in any settlement thereof.
Notwithstanding the foregoing, the Indemnitee shall have the right to
participate in any matter through counsel of its own choosing at Indemnitee's
own expense; provided that the Indemnitor's counsel shall always be lead counsel
and shall determine all litigation and settlement steps, strategy and the like.
Except as set forth in the preceding sentence, after the Indemnitor has notified
the Indemnitee of its intention to undertake to defend or settle any such
asserted liability, and for so long as the Indemnitor diligently pursues such
defense, the Indemnitor shall not be liable for any additional legal expenses
incurred by the Indemnitee in connection with any defense or settlement of such
asserted liability, except to the extent such participation is requested by the
Indemnitor, in which event the Indemnitee shall be reimbursed by the Indemnitor
for reasonable additional legal expenses and out-of-pocket expenses. If the
Indemnitor desires to accept a final and complete settlement of any such third
party claim and the Indemnitee refuses to consent to any such settlement which
contains a complete and irrevocable release of Indemnitee of all current and
future claims related to or arising out of the matter in dispute, then the
Indemnitor's liability under this Section with respect to such third party claim
shall be limited to the amount so offered in settlement by said third party. If
the Indemnitor does not undertake to defend such matter to which the Indemnitee
is entitled to indemnification hereunder, or fails diligently to pursue such
defense, the Indemnitee may undertake such defense through counsel of its
choice, at the cost and expense of the Indemnitor, and the Indemnitee may settle
such matter, without the consent of the Indemnitor, and the Indemnitor shall
immediately reimburse the Indemnitee for the amount paid in such settlement and
any other liabilities or expenses incurred (including all reasonable legal fees
and expenses) by the Indemnitee in connection therewith as such amounts,
liabilities, expenses and fees are incurred.
SECTION 6.5. SOLE REMEDY. In the absence of fraud or fraudulent
misrepresentation, the indemnification provisions set forth in this Article VI
shall be the exclusive basis for the assertion of a monetary claim pursuant to
the Agreement or for the breach of a representation or warranty made pursuant to
this Agreement.
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SECTION 6.6. LIMITATIONS AND EXCEPTIONS. Notwithstanding any provision of
this Agreement to the contrary, neither Company nor the Company Stockholders
shall be liable or responsible in any manner to IES or Acquisition whether for
indemnification or otherwise, except for the indemnity as expressly provided for
in this Article VI. Neither party nor parties shall have any liability under
this Article VI with respect to any Damages to the extent that such Damages are
caused by the failure of the other party or parties to provide prompt notice as
provided in Section 6.4.
SECTION 6.7. NO THIRD PARTY BENEFICIARIES. The foregoing indemnification is
given solely for the purpose of protecting the IES Indemnitees and the
Stockholder Indemnitees and shall not be deemed extended to, or interpreted in a
manner to confer any benefit, right, or cause of action upon, any other Person.
SECTION 6.8. LIMITATION UPON INDEMNITY. The Company Stockholders, on the
one hand, and IES, on the other hand, shall be entitled to indemnification from
the other under the provisions of this Article VI for all claims subject to
indemnification by such party, but only after such time that the amount of, and
to the extent that, such claims for which the Indemnitee is entitled to be paid
exceed, in the aggregate, $500,000, (the "Indemnification Threshold") at which
time the indemnifying parties shall be liable for all Damages in excess of (but
not including) the Indemnification Threshold; provided, however, that the
foregoing limitation on liability shall not apply with respect to (a) indemnity
obligations under (i) Section 6.1(a) relating to Section 3.2, (ii) any item
disclosed on Schedule 3.18 hereto and (iii) Section 3.19 hereof, or (b)
indemnity obligations under Section 6.3(a) relating to Section 4.2(b), or (c)
indemnity obligations under Section 6.2, or (d) obligations under Section 5.17,
or (e) indemnity obligations under Section 6.3(c) relating to Section 5.6, or
(f) obligations under Section 5.11(d), or (g) the failure of IES and/or
Acquisition to pay all or any part of the Merger Consideration; or (h) with
respect to any Damages that relate to or occur as a result of fraudulent
misrepresentations or fraudulent acts.
SECTION 6.9. PUNITIVE DAMAGES. Notwithstanding anything in this Agreement,
in the absence of fraud or fraudulent acts, no party hereto shall be entitled to
any punitive damages from any other party hereto.
ARTICLE VII
NONCOMPETITION COVENANTS
SECTION 7.1. PROHIBITED ACTIVITIES. The Company Stockholders will not, for
a period of five (5) years following the Effective Time, directly or indirectly,
for themselves or on behalf of or in conjunction with any other Person:
(a) engage, as an officer, director, shareholder, owner, partner,
joint venturer, or in a managerial or advisory capacity, whether as an
employee, independent contractor, consultant, or advisor, or as a sales
representative, in any business offering
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<PAGE> 38
electrical contracting or instrumentation in direct competition with IES or
any of its subsidiaries within 100 miles of where IES or any of its
subsidiaries conducts business, including any territory serviced by IES or
any of its subsidiaries (which subsidiaries, for purposes of this Article
VII, shall include, without limitation, the Company) (the "Territory");
(b) except for Scottie Woods and Frank Mew, call upon any Person
who is, at that time, within the Territory, an employee of IES or any of
its subsidiaries for the purpose or with the intent of enticing such
employee away from or out of the employ of IES or any of its subsidiaries;
(c) call upon any Person who is, at that time, or which has been,
within one (1) year prior to that time, a customer of IES or any of its
subsidiaries within the Territory for the purpose of soliciting or selling
electrical contracting or instrumentation services or products in direct
competition with IES or any of its subsidiaries within the Territory;
(d) call upon any prospective acquisition candidate, on any
Company Stockholder's own behalf or on behalf of any competitor in the
electrical contracting or instrumentation business, which candidate, to the
actual knowledge of such Stockholder after due inquiry, was called upon by
IES or any subsidiary thereof or for which, to the actual knowledge of such
Company Stockholder after inquiry, IES or any subsidiary thereof made an
acquisition analysis, for the purpose of acquiring such entity; or
(e) disclose customers, whether in existence or proposed, of the
Company to any person, firm, partnership, corporation or business for any
reason or purpose whatsoever except to the extent that the Company has in
the past disclosed such information to the public for valid business
reasons or as required by law or legal process.
Notwithstanding the above, the foregoing covenant shall not be deemed
to prohibit any Company Stockholder from acquiring, as a passive investor with
no involvement in the operations of the electrical contracting or
instrumentation business, not more than two percent (2%) of the capital stock of
a business providing services similar to those provided by IES whose stock is
publicly traded on a national securities exchange or over the counter.
SECTION 7.2. EQUITABLE RELIEF. Because of the difficulty of measuring
economic losses to IES as a result of a breach of the foregoing covenant, and
because of the immediate and irreparable damage that could be caused to IES for
which it would have no other adequate remedy, each Company Stockholder agrees
that the foregoing covenant may be enforced by IES by injunctions, restraining
orders, and other equitable actions and agrees to waive any requirement for the
securing or posting of any bond in connection with the obtaining of any such
injunctive or other equitable relief.
SECTION 7.3. REASONABLE RESTRAINT. It is agreed by the parties hereto that
the foregoing covenants in this Article VII impose a reasonable restraint on the
Company
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<PAGE> 39
Stockholders in light of the activities and business of IES on the date of the
execution of this Agreement and the current plans of IES; but it is also the
intent of IES and the Company Stockholders that such covenants be construed and
enforced in accordance with the changing activities, business, and locations of
IES and its subsidiaries throughout the term of this covenant.
SECTION 7.4. SEVERABILITY; REFORMATION. The covenants in this Article VII
are severable and separate, and the unenforceability of any specific covenant
shall not affect the continuing validity and enforceability of any other
covenant. In the event any court of competent jurisdiction shall determine that
the scope, time or territorial restrictions set forth in this Article VII are
unreasonable, then it is the intention of the parties that such restrictions be
enforced to the fullest extent which the court deems reasonable, and this
Agreement shall thereby be reformed.
SECTION 7.5. MATERIAL AND INDEPENDENT COVENANT. The Company Stockholders
acknowledge that their agreements with the covenants set forth in this Article
VII are material conditions to IES's agreement to execute and deliver this
Agreement and to consummate the transactions contemplated hereby. All of the
covenants in this Article VII shall be construed as an agreement independent of
any other provision in this Agreement, and the existence of any claim or cause
of action of any Company Stockholder against IES or one of its subsidiaries,
whether predicated on this Agreement or otherwise, shall not constitute a
defense to the enforcement by IES of such covenants. It is specifically agreed
that the five (5) year period during which the agreements and covenants of each
Company Stockholder made in this Article VII shall survive shall be computed by
excluding from such computation any time during which such Company Stockholder
is in violation of any provision of this Article VII. The covenants contained in
this Article VII shall not be affected by any breach of any other provision
hereby by any party hereto.
SECTION 7.6. MATERIALITY. The Company and the Stockholders hereby agree
that this covenant is a material and substantial part of this transaction.
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<PAGE> 40
ARTICLE VIII
APPLICABLE SECURITIES LAWS/TRANSFER RESTRICTIONS
SECTION 8.1. COMPANY STOCKHOLDERS' REPRESENTATIONS AND WARRANTIES
CONCERNING SECURITIES. As of the date hereof (which is the same date as the
Effective Time), the Company Stockholders hereby make the following
representations and warranties to and for the benefit of IES: (i) that the
Company Stockholders have been provided with copies of the Prospectus and have
been provided as much time and opportunity as they deemed appropriate to review
and study such Prospectus, and to consult with IES regarding the merits and
risks of the transactions contemplated by this Agreement; (ii) that the Company
Stockholders have had adequate opportunity to ask questions of and receive
answers from the officers of IES pertaining to the purchase of the IES Common
Stock pursuant to the Merger, and (iii) all such questions have been answered to
the satisfaction of the Company Stockholders, but receiving such information and
receiving such answers does not diminish in any respect the representations,
warranties and covenants of IES and Acquisition hereunder. The Company
Stockholders acknowledge that the shares of IES Common Stock to be delivered to
the Company Stockholders pursuant to this Agreement have not been registered
under the 1933 Act and therefore may not be resold without compliance with the
1933 Act. The IES Common Stock to be acquired by such Company Stockholders
pursuant to this Agreement is being acquired solely for their own respective
accounts, for investment purposes only, and with no present intention of
distributing, selling or otherwise disposing of it in connection with a
distribution. The Company Stockholders are able to bear the economic risk of an
investment in the IES Common Stock to be acquired pursuant to this Agreement and
can afford to sustain a total loss of such investment. Each Company Stockholder
has substantial knowledge and experience in making investment decisions of this
type (or is relying on qualified purchaser representatives with such knowledge
and experience in making this decision), and is capable, either individually or
with such purchaser representatives, of evaluating the merits and risks of this
investment. Each Company Stockholder is an "accredited investor" as defined in
Rule 501(a) of the 1933 Act.
SECTION 8.2. TRANSFER RESTRICTIONS. Unless otherwise agreed by IES, except
for transfers to immediate family members who agree to be bound by the
restrictions set forth in this Section 8.2 (or trusts for the benefit of the
Company Stockholders or family members, or trusts in which a Company Stockholder
is both the grantor and the beneficiary, the trustees of which so agree) and
except in the event of the death of a Company Stockholder, for a period of two
years from the date of this Agreement, none of the Company Stockholders shall
sell, assign, exchange, transfer, appoint, or otherwise dispose of any shares of
IES Common Stock received by the Company Stockholders pursuant to this
Agreement. The certificates evidencing the IES Common Stock delivered to the
Company Stockholders pursuant to this Agreement will bear a legend substantially
in the form set forth below and containing such other information as IES may
deem necessary or appropriate:
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
EXCHANGED, TRANSFERRED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF
WITHOUT THE WRITTEN CONSENT OF IES, AND THE ISSUER SHALL NOT BE REQUIRED TO
GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO THE SECOND
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<PAGE> 41
ANNIVERSARY OF THE EFFECTIVE TIME. UPON THE WRITTEN REQUEST OF THE HOLDER
OF THIS CERTIFICATE, THE ISSUER AGREES TO REMOVE THIS RESTRICTIVE LEGEND
(AND ANY STOP ORDER PLACED WITH THE TRANSFER AGENT) AFTER THE DATE
SPECIFIED ABOVE.
SECTION 8.3. RESALES. (a) In the event of the death of a Company
Stockholder, to the extent that any Company Stockholder's estate desires to sell
any IES Common Stock received by such Company Stockholder pursuant to this
Agreement within a period of two (2) years from the date of this Agreement, IES
shall, as soon as reasonably practicable, use reasonable efforts to register
such stock for resale under its current acquisition shelf registration statement
(or any successor acquisition shelf registration statement) and ensure that such
registration statement remains available for resales of such stock.
(b) With a view to making available the benefits of certain rules and
regulations of the SEC that may permit the sale of the IES Common Stock received
hereunder to the public without registration, IES agrees to use its reasonable
efforts to:
(i) make and keep public information regarding IES available as
those terms are understood and defined in Rule 144 under the 1933 Act for a
period of two years and 3 months following the Effective Time; and
(ii) file with the SEC in a timely manner all reports and other
documents required of IES under the 1933 Act and the 1934 Act.
ARTICLE IX
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
SECTION 9.1. GENERAL. The Company Stockholders recognize and acknowledge
that they had in the past, currently have, and in the future may possibly have,
access to certain confidential information of the Company or the Surviving
Corporation, such as lists of customers or employees, operational policies, and
pricing and cost policies that are valuable, special, and unique assets of the
Company and will be valuable, special, and unique assets of the Surviving
Corporation. The Company Stockholders agree that for a period of two (2) years
following the Closing they will not disclose such confidential information to
any Person for any purpose or reason whatsoever (except such information as the
Company Stockholders may be required to disclose to any Governmental Authority
or to authorized representatives of IES or in accordance with legal process or
in order to enforce the terms of this Agreement). In the event of a breach or
threatened breach by the Company Stockholders of the provisions of this Section,
IES shall be entitled to an injunction restraining the Company Stockholders from
disclosing, in whole or in part, such confidential information. Nothing herein
shall be construed as prohibiting IES from pursuing any other available remedy
for such breach or threatened breach, including the recovery of damages.
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<PAGE> 42
SECTION 9.2. EQUITABLE RELIEF. Because of the difficulty of measuring
economic losses as a result of the breach of the foregoing covenants, and
because of the immediate and irreparable damage that would be caused for which
the Company, the Surviving Corporation, and/or IES would have no other adequate
remedy, the Company Stockholders agree that the foregoing covenants may be
enforced against them by injunctions, restraining orders, and other equitable
actions and agree to waive any requirement for the securing or posting of any
bond in connection with the obtaining of any such injunctive or other equitable
relief.
SECTION 9.3. NON-PUBLIC INFORMATION. The Company Stockholders hereby
acknowledge that if they become aware of "material non-public information" (as
defined under applicable securities laws) regarding IES, that they will be
required, under applicable securities laws, to refrain from trading in IES
securities or disclosing any such information while such information is
non-public.
SECTION 9.4. SURVIVAL. The obligations of the parties under this Article IX
shall survive the Closing of this Agreement.
ARTICLE X
MISCELLANEOUS
SECTION 10.1. GOVERNING LAW. This Agreement shall be governed by and
construed in accordance with the laws of the State of Texas without reference to
the choice of law principles thereof.
SECTION 10.2. ENTIRE AGREEMENT. This Agreement, together with the Schedules
and Exhibits hereto, constitute the entire agreement between the parties with
respect to the subject matter hereof, and there are no agreements,
understandings, representations, or warranties between the parties other than
those set forth or referred to herein.
SECTION 10.3. EXPENSES AND FEES. All costs and expenses incurred in
connection with this Agreement shall be paid by the party incurring such cost or
expense; provided, however, that IES shall pay all costs, including filing fees
and attorneys' fees, with regard to the HSR filings.
SECTION 10.4. NOTICES. All notices hereunder shall be sufficient upon
receipt for all purposes hereunder if in writing and delivered personally, sent
by documented overnight delivery service or, to the extent receipt is confirmed,
telecopy, telefax, or other electronic transmission service to the appropriate
address or number as set forth below.
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<PAGE> 43
If to IES or Acquisition, to:
Integrated Electrical Services, Inc.
515 Post Oak Blvd., Suite 450
Houston, Texas 77027
Attention: John F. Wombwell
Fax Number: (713) 860-1599
if to the Company or the Company Stockholders, to:
Merline & Thomas, P.A.
665 North Academy Street (before September 12, 1998)
812 East North Street (on or after September 12, 1998)
Greenville, SC 29601
Attention: John R. Thomas
Fax Number: (864) 242-5758
SECTION 10.5. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon
and inure to the benefit of the parties hereto and their respective successors
and assigns; provided, however, that no party may assign, delegate, or otherwise
transfer any of its rights or obligations under this Agreement without the
consent of each other party hereto, except IES or Acquisition may transfer or
assign, in whole or from time to time in part, to one or more of their
affiliates, the right to enter into the transactions contemplated by this
Agreement, but any such transfer or assignment will not relieve IES or
Acquisition of its obligations hereunder. This Agreement is not intended to
confer upon any Person not a party hereto any rights or remedies hereunder, and
no Person other than the parties hereto or such Persons described above is
entitled to rely on any representation, warranty, or covenant contained herein.
SECTION 10.6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The
representations and warranties of the parties made herein and at the time of the
Closing or in writing delivered pursuant to the provisions of this Agreement
shall survive the consummation of the transactions contemplated hereby and any
examination on behalf of the parties for a period of two years, following which
date no party may bring any action or present any claim for a breach of any such
representation or warranty, provided, however, that the representations and
warranties in Sections 3.2, 3.19 and 4.2 and breaches that relate to or occur as
a result of fraudulent misrepresentations or fraudulent acts and the obligations
set forth in Section 5.11 and Section 6.2 will survive until the expiration of
the applicable statute of limitations and be enforceable in accordance with
Article VI; and, provided further, that such limitations will not affect any
claims pending at the time of such expiration for which timely written notice
pursuant to this Agreement has been given.
SECTION 10.7. HEADINGS; DEFINITIONS. The Section and Article headings
contained in this Agreement are inserted for convenience of reference only and
will not affect the meaning or interpretation of this Agreement. All references
to Sections or Articles contained herein mean
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<PAGE> 44
Sections or Articles of this Agreement unless otherwise stated. All capitalized
terms defined herein are equally applicable to both the singular and plural
forms of such terms.
SECTION 10.8. AMENDMENTS AND WAIVERS. This Agreement may not be modified or
amended except by an instrument or instruments in writing signed by the party
against whom enforcement of any such modification or amendment is sought. Any
party hereto may, only by an instrument in writing, waive compliance by any
other party hereto with any term or provision of this Agreement on the part of
such other party hereto to be performed or complied with. The waiver by any
party hereto of a breach of any term or provision of this Agreement shall not be
construed as a waiver of any subsequent breach.
SECTION 10.9. CONSTRUCTION OF CERTAIN PROVISIONS. It is understood and
agreed that the specification of any dollar amount in the representations and
warranties contained in this Agreement or the inclusion of any specific item in
the Schedules or Exhibits is not intended to imply that such amounts or higher
or lower amounts, or the items so included or other items, are or are not
material, and no party shall use the fact of the setting of such amounts or the
fact of the inclusion of any such item in the Schedules in any dispute or
controversy between the parties as to whether any obligation, item, or matter
not described herein or included in a Schedule or Exhibit is or is not material
for purposes of this Agreement. It is agreed that neither party shall allege
that a provision of this Agreement shall be construed against a party because
such party drafted such provision.
SECTION 10.10. SEVERABILITY. If any term or other provision of this
Agreement is invalid, illegal, or incapable of being enforced by any rule of law
or public policy, all other conditions and provisions of this Agreement shall
nevertheless remain in full force and effect. Upon such determination that any
term or other provision is invalid, illegal, or incapable of being enforced, the
parties hereto shall negotiate in good faith to modify this Agreement so as to
effect the original intent of the parties as closely as possible in an
acceptable manner to the end that the transactions contemplated by this
Agreement are fulfilled to the extent possible.
SECTION 10.11. JURISDICTION. Any legal action, suit, or proceeding in law
or equity arising out of or relating to this Agreement and transactions
contemplated by this Agreement may only be instituted in any state or federal
court in Harris County, Houston, Texas, and each party agrees not to assert, by
way of motion, as a defense, or otherwise, in any such action, suit, or
proceeding, any claim that it is not subject personally to the jurisdiction of
such court, that its property is exempt or immune from attachment or execution,
that the action, suit, or proceeding is brought in an inconvenient forum, that
the venue of the action, suit, or proceeding is improper or that this Agreement,
or the subject matter hereof or thereof may not be enforced in or by such court.
Each party further irrevocably submits to the jurisdiction of any such court in
any such action, suit, or proceeding. Any and all service of process and any
other notice in any such action, suit, or proceeding shall be effective against
any party if given by registered or certified mail, return receipt requested, or
by any other means of mail which requires a signed receipt, postage prepaid,
mailed to such party at the address listed in Section 10.4. Nothing herein
contained shall be deemed to affect the right of any party to serve process in
any manner permitted by law.
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<PAGE> 45
SECTION 10.12. WAIVER OF JURY TRIAL. EACH OF THE PARTIES HERETO HEREBY
IRREVOCABLY WAIVES ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING
ARISING OUT OF OR RELATED TO THIS AGREEMENT OR THE TRANSACTIONS CONTEMPLATED
HEREBY.
SECTION 10.13. SPECIFIC PERFORMANCE. The parties hereto agree that
irreparable damage would occur in the event any provision of this Agreement was
not performed in accordance with the terms hereof and that the parties shall be
entitled to specific performance of the terms hereof in addition to any other
remedy to which they are entitled at law or in equity.
SECTION 10.14. COUNTERPARTS; EFFECTIVENESS. This Agreement may be executed
in one or more counterparts, all of which shall be considered one and the same
agreement, and shall become effective when one or more counterparts have been
signed by each of the parties and delivered to the other party. In making proof
of this Agreement, it shall not be necessary to produce or account for more than
one such counterpart. A telecopied facsimile of an executed counterpart of this
Agreement shall be sufficient to evidence the binding agreement of each party to
the terms hereof. However, each party agrees to promptly deliver to the other
parties an original, duly executed counterpart of this Agreement.
SECTION 10.15. MUTUAL INDEMNIFICATION AGAINST CLAIMS OF BROKERS. Each party
agrees to indemnify the other against all loss, cost, damages or expense arising
out of claims for fees or commissions of brokers employed or alleged to have
been employed by such party.
SECTION 10.16. DEFINITIONS AND USAGE. For the purposes of this Agreement:
"1933 Act" shall have the meaning specified in Section 3.5.
"1934 Act" shall have the meaning specified in Section 4.4.
"Acquisition" shall have the meaning specified in the introductory
paragraph of this Agreement.
"Actions" shall mean any actions, suits, arbitrations, inquiries,
proceedings or investigations by or before any Governmental Authority.
"affiliate" means, with respect to any Person, any other Person
directly or indirectly controlling, controlled by, or under common control
with such Person.
"Agreement" shall have the meaning specified in the introductory
paragraph of this Agreement and Plan of Merger.
"CERCLA" shall have the meaning specified in Section 3.18.
"Certificates" shall have the meaning specified in Section 1.3.
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<PAGE> 46
"Certificate of Merger" shall have the meaning specified in
Section 1.1(b).
"Closing" shall have the meaning specified in Section 1.1(a).
"Code" shall mean the Internal Revenue Code of 1986, as amended,
and any successor thereto.
"Commitment" shall have the meaning specified in Section 3.2(a).
"Company" shall have the meaning specified in the introductory
paragraph of this Agreement.
"Company Audited Financial Statements" shall have the meaning
specified in Section 3.6.
"Company Benefit Plans" shall have the meaning specified in
Section 3.20(a).
"Company Common Stock" shall have the meaning specified in Section
1.2(a).
"Company Material Adverse Effect" shall mean any fact,
circumstance, event, or condition which has or would have a materially
adverse effect on the business, operations, properties, condition
(financial or otherwise), assets, liabilities, results of operations or
prospects of the Company and the Subsidiaries, taken as a whole, provided,
however, that Company Material Adverse Effect (and the word "material" and
phrases of like import) shall exclude any adverse changes or conditions as
and to the extent such changes or conditions relate to or result from
general economic conditions or other conditions affecting the industry in
which Company competes as a whole.
"Company Pension Plans" shall have the meaning specified in
Section 3.20(a).
"Company Returns" shall mean all returns, declarations, reports,
statements, and other documents required to be filed by the Company or the
Subsidiaries in respect of Taxes, and the term "Company Return" means any
one of the foregoing Company Returns.
"Company Shares" shall have the meaning specified in Section
3.2(a).
"Company Stockholders" shall have the meaning specified in the
introductory paragraph of this Agreement.
"Company Unaudited Balance Sheet Date" shall have the meaning
specified in Section 3.7.
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<PAGE> 47
"Company Unaudited Financial Statements" shall have the meaning
specified in Section 3.6.
"Company Welfare Plan" shall have the meaning specified in Section
3.20(a).
"Damages" shall have the meaning specified in Section 6.1.
"Delaware Law" shall have the meaning specified in Section 1.1(a).
"Department" shall have the meaning specified in Section 5.12.
"disposal" or "disposed" shall have the meaning specified in
Section 3.18.
"Effective Time" shall have the meaning specified in Section
1.1(b).
"Employment Agreements" shall have the meaning specified in
Section 1.6(a)(i).
"Enforceability Exceptions" shall have the meaning specified in
Section 3.9.
"Environmental Laws" shall have the meaning specified in Section
3.18.
"ERISA" shall have the meaning specified in Section 3.20(a).
"FTC" shall have the meaning specified in Section 5.12.
"GAAP" shall have the meaning specified in Section 3.6.
"Governmental Authority" shall mean (a) the United States of
America, (b) any state, county, municipality, or other governmental
subdivision within the United States of America, and (c) any court or any
governmental department, commission, board, bureau, agency, or other
instrumentality of the United States of America or of any state, county,
municipality, water rights, taxing, or zoning authority, or other
governmental subdivision within the United States of America.
"HSR Act" shall have the meaning specified in Section 1.7(d).
"IES" shall have the meaning specified in the introductory
paragraph of this Agreement.
"IES Common Stock" shall have the meaning specified in Section
1.2(a).
"IES Indemnitees" shall have the meaning specified in Section 6.1.
"IES Material Adverse Effect" shall mean any fact, circumstance,
event, or condition which has or would have a materially adverse effect on
the business,
- 42 -
<PAGE> 48
operations, properties, condition (financial or otherwise), assets,
liabilities, results of operations or prospects of IES and its
subsidiaries, taken as a whole.
"IES SEC Filings" shall have the meaning specified in Section
4.5(a).
"Indemnification Threshold" shall have the meaning specified in
Section 6.8.
"Indemnitee" shall have the meaning specified in Section 6.4.
"Indemnitee Claim" shall have the meaning specified in Section
6.4.
"Indemnitor" shall have the meaning specified in Section 6.4.
"Knowledge" when used in relation to any Person shall mean the
actual (but not constructive) knowledge of such Person or such Person's
officers, without investigation, inquiry or verification.
"Licenses" shall have the meaning specified in Section 3.11.
"Liens" shall mean all liens, mortgages, security interests,
pledges, equities, claims, options, and other encumbrances of any kind.
"Merger" shall have the meaning specified in Section 1.1(a).
"Merger Consideration" shall have the meaning specified in Section
1.2(a).
"NYSE" shall have the meaning specified in Section 1.3.
"officer" means in the case of IES and the Company, any executive
officer of IES or the Company, as applicable, within the meaning of Rule
3b-7 of the 1934 Act.
"Person" shall mean an individual, partnership, corporation,
limited liability company, trust, incorporated or unincorporated
association, joint venture, joint stock company, Governmental Authority or
other legal entity of any kind.
"Prospectus" shall have the meaning specified in Section 4.5(d).
"Qualified Plans" shall have the meaning set forth in Section
3.20(b).
"RCRA" shall have the meaning specified in Section 3.18.
"release" shall have the meaning specified in Section 3.18.
"SEC" shall have the meaning specified in Section 4.5.
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<PAGE> 49
"Section 338(h)(10) Election" shall have the meaning specified in
Section 5.11(d).
"Stockholder Indemnitees" shall have the meaning specified in
Section 6.3.
"Subsidiaries" shall have the meaning specified in Section 3.1.
"subsidiary" means, with respect to any Person, any entity of
which securities or other ownership interests having ordinary voting power
to elect a majority of the board of directors or other Persons performing
similar functions are at any time directly or indirectly owned by such
Person.
"Subsidiary Shares" shall have the meaning specified in Section
3.2(b).
"Subsidiary Stock" shall have the meaning specified in Section
3.2(b).
"Surviving Corporation" shall have the meaning specified in
Section 1.1(a).
"Tax" or "Taxes" shall have the meaning specified in Section
3.19(a).
"Territory" shall have the meaning specified in Section 7.1(a).
"third party" shall have the meaning specified in Section 6.4.
A reference in this Agreement to any statute shall be to such statute
as amended from time to time, and the rules and regulations promulgated
thereunder.
SECTION 10.17. DISCLOSURE SCHEDULE. Anything disclosed at any place in this
Agreement or any Exhibit or Schedule shall be deemed to have been disclosed at
all places for purposes of this Agreement and any and all Exhibits or Schedules
to which said information relates.
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<PAGE> 50
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed by their respective authorized officers as of the day and year
first above written.
INTEGRATED ELECTRICAL SERVICES,
INC.
By: /s/ JOHN F. WOMBWELL
------------------------------------
Name: John F. Wombwell
-------------------------
Title: Secretary
-------------------------
DAVIS ACQUISITION CORPORATION
By: /s JOHN F. WOMBWELL
------------------------------------
Name: John F. Wombwell
-------------------------
Title: President
-------------------------
DAVIS ELECTRICAL CONSTRUCTORS,
INC.
By: /s/ J. MICHAEL STEPHENS
------------------------------------
Name: J. Michael Stephens
-------------------------
Title: President
-------------------------
/s/ JAMES B. STEPHENS
--------------------------------------
James B. Stephens, Company Stockholder
/s/ J. MICHAEL STEPHENS
--------------------------------------
J. Michael Stephens, Company Stockholder
/s/ WILLIAM N. BYRD
--------------------------------------
William N. Byrd, Company Stockholder
/s/ JAMES C. HENDERSON
--------------------------------------
James C. Henderson, Company Stockholder
/s/ J. LOWELL HUGHES
--------------------------------------
J. Lowell Hughes, Company Stockholder
/s/ WILLIAM M. SUMEREL
--------------------------------------
William M. Sumerel, Company Stockholder
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<PAGE> 1
EXHIBIT 10.5
[Execution Version]
CREDIT AGREEMENT
Among
INTEGRATED ELECTRICAL SERVICES, INC.
as Borrower,
THE FINANCIAL INSTITUTIONS
NAMED IN THIS CREDIT AGREEMENT
as Banks,
and
NATIONSBANK, N.A.,
as Agent for the Banks
$175,000,000
July 30, 1998
Arranged By:
NATIONSBANC MONTGOMERY SECURITIES LLC
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C> <C>
ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Computation of Time Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.3 Accounting Terms; Preparation of Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.4 Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
1.5 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
ARTICLE 2. CREDIT FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.1 Revolving Loan Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.2 Letter of Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.3 Swing Line Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.5 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.6 Breakage Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.7 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.8 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.9 Market Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.10 Payment Procedures and Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
2.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
2.12 Change of Lending Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
ARTICLE 3. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
3.1 Conditions Precedent to Initial Extension of Credit . . . . . . . . . . . . . . . . . . . . . . . . 34
3.2 Conditions Precedent to Each Extension of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE 4. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.3 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.4 Absence of Conflicts and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.5 Investment Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.6 Public Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.7 Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.8 Condition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.10 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C>
4.11 Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.12 Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.13 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.15 True and Complete Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
4.16 Year 2000. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
ARTICLE 5. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.2 Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.3 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.4 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.5 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.6 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.7 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.8 Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.9 Corporate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.10 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.11 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.12 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.13 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.14 Lines of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.15 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.16 Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.17 ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.18 Payment of Certain Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
5.19 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
ARTICLE 6. DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
6.2 Termination of Revolving Loan Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.3 Acceleration of Credit Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.4 Cash Collateralization of Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.5 Default Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.6 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.7 Actions Under Credit Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.8 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
6.9 Application of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
</TABLE>
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<TABLE>
<S> <C>
ARTICLE 7. THE AGENT AND THE ISSUING BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
7.1 Authorization and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
7.2 Reliance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
7.3 Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.4 Bank Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.5 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.6 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
7.7 Successor Agent and Issuing Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
ARTICLE 8. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.3 Modifications, Waivers, and Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.4 Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8.5 Assignment and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 54
8.6 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.7 Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.8 Forum Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.9 Service of Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.10 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.11 Amendment and Restatement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.12 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
8.13 No Further Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 58
</TABLE>
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<PAGE> 5
EXHIBITS
Exhibit A - Form of Compliance Certificate
Exhibit B - Form of Revolving Loan Borrowing Request
Exhibit C - Form of Continuation/Conversion Request
Exhibit D - Form of Revolving Loan Note
Exhibit E - Form of Assignment and Acceptance
Exhibit F - Closing Documents List
Exhibit G - Form of Joinder Agreement
Exhibit H - Form of Acquisition Certificate
SCHEDULES
Schedule I - Administrative Information (Borrower; Agent; Banks)
Schedule II - Disclosures (Existing Other Debt; Existing
Subsidiaries)
Schedule III - Subordination Terms (Subordinated Debt)
Schedule IV - Restricted Payment Terms (Qualified Preferred Stock)
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<PAGE> 6
CREDIT AGREEMENT
This Credit Agreement dated as of July 30, 1998, is among Integrated
Electrical Services, Inc., a Delaware corporation, as Borrower, the financial
institutions named herein, as Banks, and NationsBank, N.A., successor in
interest by merger to NationsBank of Texas, N.A., as Agent for the Banks.
The parties hereto agree as follows:
ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS.
1.1 Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (unless otherwise indicated,
such meanings to be equally applicable to both the singular and plural forms of
the terms defined):
"Acquisition" means the direct or indirect purchase or acquisition,
whether in one or more related transactions, of any Person or group of Persons
or any related group of assets, liabilities, or securities of any Person or
group of Persons.
"Acquisition Certificate" means an acquisition certificate executed by
a Responsible Officer of the Borrower in substantially the form of Exhibit H.
"Affiliate" means, as to any Person, any other Person that, directly
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such Person or any Subsidiary of such Person.
The term "control" (including the terms "controlled by" or "under common
control with") means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through ownership, by contract, or otherwise.
"Agent" means NationsBank in its capacity as an agent pursuant to
Article 7 and any successor agent pursuant to Section 7.7.
"Agent Fee Letter" means the confidential letter agreement dated as of
April 30, 1998, between the Borrower, the Agent and the Arranger regarding
certain fees owed by the Borrower to the Agent in connection with this
Agreement.
"Agreement" means this Credit Agreement.
"Applicable Margin" means, with respect to interest rates, unused
commitment fees, and letter of credit fees and as of any date of its
determination, an amount equal to the percentage amount set forth in the table
below opposite the applicable ratio of (a) the consolidated Debt of the
Borrower as of the end of the fiscal quarter then most recently ended to (b)
the consolidated EBITDA of the Borrower for the four fiscal quarters then most
recently ended:
<PAGE> 7
<TABLE>
<CAPTION> Applicable Margin
Debt LIBOR Tranches and Applicable Margin Applicable Margin
to EBITDA Letter of Credit Fee Prime Rate Tranche Commitment Fee
--------- -------------------- ------------------ -----------------
<S> <C> <C> <C>
#1.00 1.00% 0.00% 0.250%
)1.00 but #1.50 1.25% 0.00% 0.250%
)1.50 but #2.00 1.50% 0.00% 0.300%
)2.00 2.00% 0.50% 0.375%
</TABLE>
Until delivery of the first Compliance Certificate, the foregoing ratio shall
be deemed to be 1.01. Thereafter, the ratio and resulting Applicable Margin
shall be based upon Schedule C of the most recent Compliance Certificate
delivered to the Agent pursuant to Section 5.2(a) or Section 5.2(b) (provided
that for the period from the determination of the Applicable Margin based on
the first Compliance Certificate until the date when the Applicable Margin is
reset based upon the Compliance Certificate for the period ending December 31,
1998, the ratio shall be deemed to be the greater of the ratio as so determined
or 1.01 and the Applicable Margin shall be set accordingly).
Any adjustments to the Applicable Margin shall become effective on the 45th
day following the last day of each fiscal quarter or on the 90th day following
the last day of each fiscal year as applicable; provided, however, that if any
such Compliance Certificate is not delivered when required hereunder, the
Applicable Margin shall be deemed to be the maximum percentage amount in each
table from such 45th or 90th day until such Compliance Certificate is received
by the Agent.
Upon any change in the Applicable Margin, the Agent shall promptly notify the
Borrower and the Banks of the new Applicable Margin.
"Applicable Lending Office" means, with respect to each Bank and for
any particular type of transaction, the office of such Bank set forth in
Schedule I to this Agreement (or in the applicable Assignment and Acceptance by
which such Bank joined this Agreement) as its applicable lending office for
such type of transaction or such other office of such Bank as such Bank may
from time to time specify in writing to the Borrower and the Agent for such
particular type of transaction.
"Arranger" means NationsBanc Montgomery Securities LLC, formerly known
as NationsBanc Montgomery Securities, Inc.
"Assignment and Acceptance" means an Assignment and Acceptance in
substantially the form of Exhibit E executed by an assignor Bank, an assignee
Bank, and the Agent, in accordance with Section 8.5.
"Banks" means the lenders listed as Banks on the signature pages of
this Agreement and each Eligible Assignee that shall become a party to this
Agreement pursuant to Section 8.5(b).
"Base Rate" means, for any day, the fluctuating rate per annum of
interest equal to the greater
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<PAGE> 8
of (a) the Prime Rate in effect on such day or (b) the Federal Funds Rate in
effect on such day plus 0.50%.
"Borrower" means Integrated Electrical Services, Inc., a Delaware
corporation.
"Business Day" means any Monday through Friday during which commercial
banks are open for business in Houston, Texas, Dallas, Texas, and, if the
applicable Business Day relates to any LIBOR Tranche, on which dealings are
carried on in the London interbank market.
"Capital Expenditures" means, with respect to any Person and any
period of its determination, the consolidated expenditures of such Person
during such period that are required to be included in or are reflected by the
consolidated property, plant, or equipment accounts of such Person, or any
similar fixed asset or long term capitalized asset accounts of such Person, on
the consolidated balance sheet of such Person in conformity with generally
accepted accounting principles.
"Capital Leases" means, with respect to any Person, any lease of any
property by such Person which would, in accordance with generally accepted
accounting principles, be required to be classified and accounted for as a
capital lease on the balance sheet of such Person.
"Cash Taxes" means, with respect to any Person and for any period of
its determination, the consolidated cash taxes paid by such Person during such
period, or with respect to any Persons which were organized as partnerships or
subchapter S corporations during such period, all amounts owed by the
respective partners or shareholders of such Persons with respect to taxes
payable in connection with such partnership or equity ownership during such
period.
"Change of Control" means, with respect to the Borrower, (a) the
direct or indirect acquisition after the date hereof by any Person or related
Persons constituting a group of (i) beneficial ownership of issued and
outstanding shares of Voting Securities of the Borrower, the result of which
acquisition is that such Person or such group possesses 35% or more of the
combined voting power of all then-issued and outstanding Voting Securities of
the Borrower or (ii) the power to elect, appoint, or cause the election or
appointment of at least a majority of the members of the board of directors of
the Borrower, or (b) the individuals who, at the beginning of any period of 12
consecutive months, constitute the Borrower's board of directors (together with
any new director whose election by the Borrower's board of directors or whose
nomination for election by the Borrower's stockholders entitled to vote thereon
was approved by a vote of at least a majority of the directors then still in
office who either were directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason (other than death or disability) to constitute a majority of the
Borrower's board of directors then in office.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute.
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<PAGE> 9
"Commonly Controlled Entity" means, with respect to any Person, any
other Person which is under common control with such Person within the meaning
of Section 414 of the Code.
"Compliance Certificate" means a compliance certificate executed by a
Responsible Officer of the Borrower in substantially the form of Exhibit A,
including the following attached Schedules:
Schedule A: The applicable financial reports provided under
Section 5.2(a) or 5.2(b) ending on the date of the computation of the
financial covenants.
Schedule B: A schedule of any adjustments to the financial
reports in Schedule A to the Compliance Certificate, listed on a
company-by-company basis, that are requested by the Borrower to
reflect the financial results of Acquisitions made prior to the end of
the applicable period, together with the supporting financial reports
of the Acquisitions from which the Borrower prepared such adjustments,
prepared in accordance with Section 1.3(c) and otherwise in a form
acceptable to the Agent.
Schedule C: The computation of the financial covenants under this
Agreement based upon the financial reports in Schedule B to the
Compliance Certificate in a form acceptable to the Agent.
"Consent" means the Consent, dated as of July 30, 1998, made by the
Subsidiaries of the Borrower in favor of the Agent, consenting to the security
interests granted to the Agent under the Pledge Agreements, together with any
future agreements made by any Subsidiaries of the Borrower consenting to the
grant to the Agent of any such security interests.
"Continuation/Conversion Request" means a Continuation/Conversion
Request in substantially the form of Exhibit C executed by a Responsible
Officer of the Borrower and delivered to the Agent.
"Contract Status Report" means a report, in form and substance
acceptable to the Agent, detailing the status of each contract of any
Restricted Entity which contract has a value equal to or greater than
$7,500,000.
"Credit Documents" means this Agreement, the Revolving Loan Notes, the
Swing Line Note, the Fee Letter, the Agent Fee Letter, the Letter of Credit
Documents, the Guaranty, the Security Documents, the Interest Hedge Agreements,
and each other agreement, instrument, or document executed at any time in
connection with this Agreement.
"Credit Obligations" means all principal, interest, fees,
reimbursements, indemnifications, and other amounts now or hereafter owed by
the Borrower to the Agent and the Banks (or with respect to the Interest Hedge
Agreements, any Affiliates of the Banks) under this Agreement, the Revolving
Loan Notes, the Swing Line Note, the Letter of Credit Documents, and the other
Credit
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<PAGE> 10
Documents and any increases, extensions, and rearrangements of those
obligations under any amendments, supplements, and other modifications of the
documents and agreements creating those obligations.
"Credit Parties" means the Borrower and the Guarantors.
"Debt" means, with respect to any Person, without duplication, (a)
indebtedness of such Person for borrowed money, (b) obligations of such Person
evidenced by bonds, debentures, notes, or other similar instruments, (c)
obligations of such Person to pay the deferred purchase price of property or
services (other than trade debt and normal operating liabilities incurred in
the ordinary course of business), (d) obligations of such Person as lessee
under Capital Leases, (e) obligations of such Person under or relating to
letters of credit, guaranties, purchase agreements, or other creditor
assurances, in each case, assuring a creditor against loss in respect of
indebtedness or obligations of others of the kinds referred to in clauses (a)
through (d) of this definition, (f) nonrecourse indebtedness or obligations of
others of the kinds referred to in clauses (a) through (e) of this definition
secured by any Lien on or in respect of any property of such Person, and (g)
obligations of such Person evidenced by preferred stock or other equity
interests in such Person which provide for mandatory redemption, mandatory
payment of dividends, or similar rights to the payment of money. For the
purposes of determining the amount of any Debt, the amount of any Debt
described in clause (e) of the definition of Debt shall be valued at the
maximum amount of the contingent liability thereunder, the amount of any Debt
described in clause (f) that is not covered by clause (e) shall be valued at
the lesser of the amount of the Debt secured or the book value of the property
securing such Debt, and the amount of any Debt described in clause (g) shall be
valued at the stated redemption value of such Debt as of the date of
determination.
"Default" means (a) an Event of Default or (b) any event or condition
which with notice or lapse of time or both would, unless cured or waived,
become an Event of Default.
"Default Rate" means, with respect to any amount due hereunder, a per
annum interest rate equal to (a) if such amount is either outstanding principal
accruing interest based upon a rate established elsewhere in this Agreement or
accrued but unpaid interest thereon, the sum of (i) the interest rate
established elsewhere in this Agreement from time to time for such principal
amount, including any applicable margin, plus (ii) 2.00% per annum or (b) in
all other cases, the Base Rate in effect from time to time plus the Applicable
Margin for the Prime Rate Tranche in effect from time to time plus 2.00% per
annum.
"Derivatives" means any swap, hedge, cap, collar, or similar
arrangement providing for the exchange of risks related to price changes in any
commodity, including money.
"Dollars or $" means lawful money of the United States of America.
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<PAGE> 11
"EBITDA" means, with respect to any Person and for any period of its
determination, the consolidated net income of such Person for such period, plus
the consolidated interest expense and income taxes of such Person for such
period, plus the consolidated depreciation and amortization of such Person for
such period, minus all extraordinary gains and all other non-cash income added
to the consolidated net income of such Person for such period, and further,
excluding the $17,036,000 non-cash, non-recurring compensation charge in
connection with the Acquisition disclosed in the Borrower's March 31, 1998,
Form 10-Q.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Eligible Assignee" means, with respect to any assignment hereunder at
the time of such assignment, any commercial bank organized under the laws of
the United States or any of the countries parties to the Organization for
Economic Cooperation and Development or any political subdivision of any
thereof which has primary capital (or its equivalent) of not less than
$250,000,000, is approved by the Agent, and, so long as no Event of Default
exists, is approved by the Borrower, in either case, such approval not to be
unreasonably withheld.
"Environmental Law" means all federal, state, and local laws, rules,
regulations, ordinances, orders, decisions, agreements, and other requirements
now or hereafter in effect relating to the pollution, destruction, loss, or
injury of the environment, the presence of any contaminant in the environment,
the protection, cleanup, remediation, or restoration of the environment, the
creation, handling, transportation, use, or disposal of any waste product in
the environment, exposure of persons to any contaminant, waste, or hazardous
substance in the environment, and the health and safety of employees in
relation to their environment.
"Event of Default" has the meaning specified in Section 6.1.
"Federal Funds Rate" means, for any period, a fluctuating per annum
interest rate equal for each day during such period to the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day
(or, if such day is not a Business Day, for the next preceding Business Day) by
the Federal Reserve Bank of New York, or, if such rate is not so published for
any day which is a Business Day, the average of the quotations for any such day
on such transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System or any of its successors.
"Fee Letter" means the letter agreement dated as of July 30, 1998,
made by the Borrower in favor of the Banks, regarding the upfront fee payable
to each Bank based upon such Bank's Revolving Loan Commitment.
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<PAGE> 12
"Guaranty" means the Guaranty dated as of July 30, 1998, made by the
Subsidiaries of the Borrower in favor of the Agent guaranteeing the Credit
Obligations.
"Guarantors" means (a) the Subsidiaries of the Borrower that have
executed the Guaranty in connection with the execution of this Agreement and
(b) any future Subsidiaries of the Borrower that join the Guaranty pursuant to
Section 5.19.
"Hazardous Materials" means any substance or material identified as a
hazardous substance pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended and as now or hereafter in
effect; any substance or material regulated as a hazardous waste pursuant to
the Resource Conservation and Recovery Act of 1976, as amended and as now or
hereafter in effect; and any substance or material designated as a hazardous
substance or hazardous waste pursuant to any other Environmental Law.
"Highest Lawful Rate" means the maximum lawful interest rate, if any,
that at any time or from time to time may be contracted for, charged, or
received under the laws applicable to the relevant Bank which are presently in
effect or, to the extent allowed by law, under such applicable laws which may
hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow. The maximum lawful rate under this
Agreement shall be the weekly indicated rate ceiling under Chapter 1D of
Article 5069 of the Texas Revised Civil Statutes, as amended, unless any other
lawful rate ceiling exceeds the rate ceiling so determined, and then the higher
rate ceiling shall apply.
"Interest Expense" means, with respect to any Person and for any
period of its determination, the consolidated interest expense of such Person
during such period.
"Interest Hedge Agreements" means any swap, hedge, cap, collar, or
similar arrangement between the Borrower and any Bank (or any Affiliate of any
Bank) providing for the exchange of risks related to price changes in the
interest rate on the Revolving Loan Advances under this Agreement.
"Interest Period" means, with respect to each LIBOR Tranche, the
period commencing on the date of such LIBOR Tranche and ending on the last day
of the period selected by the Borrower pursuant to the provisions below. The
duration of each such Interest Period shall be one, two, three, or six months,
in each case as the Borrower may select in the applicable Revolving Loan
Borrowing Request or Continuation/Conversion Request (unless there shall exist
any Default or Event of Default, in which case the Borrower may only select one
month Interest Periods); provided, however, that:
(a) whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such Interest Period
shall be extended to occur on the next succeeding Business Day; provided that
if such extension would cause the last day of such Interest
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<PAGE> 13
Period to occur in the next following calendar month, the last day of such
Interest Period shall occur on the next preceding Business Day;
(b) any Interest Period which begins on the last Business Day of
the calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall end on the
last Business Day of the calendar month in which it would have ended if there
were a numerically corresponding day in such calendar month; and
(c) the Borrower may not select an Interest Period for any LIBOR
Tranche which ends after the Revolving Loan Maturity Date.
"Interim Financial Statements" means the consolidated financial
statements of the Borrower dated as of March 31, 1998, including the
consolidated balance sheets of the Borrower as of the end of such fiscal
quarter and the consolidated statements of income and cash flows for such
fiscal quarter and for the fiscal year to date period ending on the last day of
such fiscal quarter.
"Issuing Bank" means NationsBank and any successor issuing bank
pursuant to Section 7.7.
"LIBOR" means, for any LIBOR Tranche for any Interest Period therefor,
the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
appearing on Telerate Page 3750 (or any successor page) as the London interbank
offered rate for deposits in Dollars at approximately 11:00 a.m. (London time)
two Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period. If for any reason such rate is not
available, the term "LIBOR" shall mean, for any LIBOR Tranche for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London
interbank offered rate for deposits in Dollars at approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest Period
for a term comparable to such Interest Period; provided, however, if more than
one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be
the arithmetic mean of all such rates.
"LIBOR Tranche" shall mean any Tranche which bears interest based upon
the LIBOR, as determined in accordance with Section 2.5.
"Letter of Credit" means any commercial or standby letter of credit
issued by the Issuing Bank for the account of the Borrower pursuant to the
terms of this Agreement.
"Letter of Credit Application" means the Issuing Bank's standard form
letter of credit application for either a commercial or standby letter of
credit, as the case may be, which has been executed by the Borrower and
accepted by the Issuing Bank in connection with the issuance of a Letter of
Credit.
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<PAGE> 14
"Letter of Credit Application Amendment" means the Issuing Bank's
standard form application to amend a letter of credit for either a commercial
or standby letter of credit, as the case may be, which has been executed by a
Borrower and accepted by the Issuing Bank in connection with the increase or
extension of a Letter of Credit.
"Letter of Credit Collateral Account" means a special cash collateral
account pledged to the Agent containing cash deposited pursuant to Sections
2.2(d) or 6.4 to be maintained with the Agent in accordance with Section
2.2(g).
"Letter of Credit Documents" means all Letters of Credit, Letter of
Credit Applications, Letter of Credit Application Amendments, and agreements,
documents, and instruments entered into in connection with or relating thereto.
"Letter of Credit Exposure" means, as of any date of its
determination, the aggregate outstanding undrawn amount of Letters of Credit
plus the aggregate of the reimbursement obligations of the Borrower under the
Letter of Credit Applications and this Agreement.
"Letter of Credit Sublimit" means $15,000,000.
"Lien" means any mortgage, lien, pledge, charge, deed of trust,
security interest, encumbrance, or other type of preferential arrangement to
secure or provide for the payment of any obligation of any Person, whether
arising by contract, operation of law, or otherwise (including any title
retention for such purposes under any conditional sale agreement, any Capital
Lease, or any other title transfer or retention agreement).
"Majority Banks" means, at any time, Banks holding more than 50% of
the then aggregate unpaid principal amount of the Revolving Loan Notes held by
the Banks and the Letter of Credit Exposure of the Banks at such time; provided
that if no such principal amount or Letter of Credit Exposure is then
outstanding, "Majority Banks" shall mean Banks having more than 50% of the
aggregate amount of the Revolving Loan Commitments at such time.
"Material Adverse Change" means any material adverse change in the
business, operations, or financial condition of the Borrower and its
Subsidiaries on a consolidated basis.
"NationsBank" means NationsBank, N.A., successor in interest by merger
to NationsBank of Texas, N.A., in its individual capacity.
"Net Worth" means, with respect to any Person and as of any date of
its determination, the excess of (a) the assets of such Person over (b) the
liabilities of such Person.
"Partnership Pledge Agreement" means the Pledge Agreement dated as of
July 30, 1998, made by the respective limited and general partners of each
limited partnership Subsidiary of the
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<PAGE> 15
Borrower, in favor of the Agent granting the Agent a security interest in the
partnership interests of such partners in such limited partnerships, to secure
the Credit Obligations.
"PBGC" means Pension Benefit Guaranty Corporation or its successor.
"Permitted Debt" means all of the following Debt:
(a) Debt in the form of the Credit Obligations;
(b) Debt in the form of indebtedness for borrowed money
and letters of credit owed by any Subsidiary of the Borrower prior to
the acquisition of such Subsidiary by the Borrower in an Acquisition
transaction, or owed by any Person that is the subject of any
Acquisition assumed by the Borrower or any Subsidiary of the Borrower
in connection with such Acquisition, provided that with respect to any
such indebtedness, arrangements satisfactory to the Agent for the
repayment of such indebtedness within 30 days following the closing of
the Acquisition are made prior to the closing of the Acquisition and
such arrangements are executed;
(c) Debt in the form of (i) purchase money indebtedness
and Capital Leases, (ii) indebtedness for borrowed money and letters
of credit owed by any Subsidiary of the Borrower prior to the
acquisition of such Subsidiary by the Borrower in an Acquisition
transaction, or owed by any Person that is the subject of any
Acquisition assumed by the Borrower or any Subsidiary of the Borrower
in connection with such Acquisition, and (iii) other indebtedness,
which Debt under clauses (i), (ii), and (iii) together are in an
aggregate outstanding amount not to exceed $7,500,000;
(d) Debt in the form of Subordinated Debt;
(e) Debt in the form of Qualified Preferred Stock; and
(f) Debt in the form of reimbursement obligations for
performance bonds issued in the ordinary course of business.
"Permitted Investments" means all of the following investments:
(a) investments (including investments in the form of
loans) in wholly-owned Subsidiaries of the Borrower;
(b) investments in the form of loans, guaranties, open
accounts, and other extensions of trade credit in the ordinary course
of business;
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<PAGE> 16
(c) investments in commercial paper, bankers'
acceptances, loan participation agreements, and other similar
investments, in each case, maturing in twelve months or less from the
date of issuance and which, at the time of acquisition are rated A-2
or better by Standard & Poor's Corporation and P-2 or better by
Moody's Investors Services, Inc;
(d) investments in direct obligations of the United
States, or investments in any Person which investments are guaranteed
by the full faith and credit of the United States, in either case
maturing in twelve months or less from the date of acquisition thereof
and repurchase agreements having a term of less than one year and
fully collateralized by such obligations which are entered into with
banks or trust companies described in clause (e) below or brokerage
companies having net worth in excess of $250,000,000;
(e) investments in time deposits or certificates of
deposit maturing within one year from the date such investment is
made, issued by a bank or trust company organized under the laws of
the United States or any state thereof having capital, surplus, and
undivided profits aggregating at least $250,000,000 or a foreign
branch thereof and whose long-term certificates of deposit are, at the
time of acquisition thereof, rated A-2 by Standard & Poor's
Corporation or Prime-2 by Moody's Investors Services, Inc.;
(f) investments in money market funds which invest solely
in the types of investments described in paragraphs (c) through (e)
above; and
(g) loans and advances to directors, officers, and
employees of the Credit Parties made in the ordinary course of
business in an aggregate outstanding amount not to exceed $250,000.
In valuing any investments for the purpose of applying the limitations set
forth in this Agreement, such investments shall be taken at the original cost
thereof (but without reduction for any subsequent appreciation or depreciation
thereof) less any amount actually repaid or recovered on account of capital or
principal (but without reduction for any offsetting investments made by the
investee in the investor). For purposes of this Agreement, at any time when a
corporation becomes a Subsidiary of the Borrower, all investments of such
corporation at such time shall be deemed to have been made by such corporation
at such time.
"Permitted Liens" means all of the following Liens:
(a) Liens securing the Credit Obligations;
(b) Liens securing purchase money debt, Capital Leases,
and assumed or acquired indebtedness for borrowed money and letters of
credit permitted under clause (b) of the definition of Permitted Debt
provided that no such Lien is spread to cover any property not (i)
purchased in connection with the incurrence of such Debt, in the case
of purchase money
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<PAGE> 17
debt, or (ii) covered by such Lien at the time of the assumption or
acquisition of the indebtedness secured thereby, in the case of
assumed or acquired indebtedness for borrowed money and letters of
credit; and
(c) Liens arising in the ordinary course of business
which are not incurred in connection with the borrowing of money, the
obtaining of advances or credit, or payment of legal judgments and
which do not materially detract from the value of any Restricted
Entity's assets or materially interfere with any Restricted Entity's
business, including such (i) Liens for taxes, assessments, or other
governmental charges or levies; (ii) Liens in connection with worker's
compensation, unemployment insurance, or other social security, old
age pension, or public liability obligations; (iii) Liens in the form
of legal or equitable encumbrances deemed to exist by reason of
negative pledge covenants and other covenants or undertakings of like
nature; (iv) Liens in the form of vendors', carriers', warehousemen's,
repairmen's, mechanics', workmen's, materialmen's, construction, or
other like Liens arising by operation of law in the ordinary course of
business or incident to the construction or improvement of any
property, including liens securing reimbursement obligations for
performance bonds issued in the ordinary course of business; and (v)
Liens in the form of zoning restrictions, easements, licenses, and
other restrictions on the use of real property or minor irregularities
in title thereto which do not materially impair the use of such
property in the operation of the business of the applicable Restricted
Entity or the value of such property.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association, joint
venture, or other entity, or a government or any political subdivision or
agency thereof, or any trustee, receiver, custodian, or similar official.
"Plan" means any (a) employee medical benefit plan under Section 3(1)
of ERISA, (b) employee pension benefit plan under Section 3(2) of ERISA, (c)
multiemployer plan under Section 4001(a)(3) of ERISA, and (d) employee account
benefit plan under Section 3(2) of ERISA.
"Pledge Agreements" means, collectively (i) the Stock Pledge
Agreement, (ii) the Partnership Pledge Agreement, and (iii) any future
agreements granting the Agent a security interest in capital stock, partnership
interests, or other membership interests of any Subsidiary (direct or indirect)
of the Borrower, in each case, to secure the Credit Obligations.
"Prime Rate" means, for any day, the fluctuating per annum interest
rate in effect on such day equal to the rate of interest publicly announced by
the Agent as its prime rate, whether or not the Borrower has notice thereof.
"Prime Rate Borrowing" shall mean that portion of any Revolving Loan
Borrowing which bears interest based upon the Base Rate as determined in
accordance with Section 2.5.
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<PAGE> 18
"Prime Rate Tranche" shall mean the Tranche which bears interest based
upon the Base Rate, as determined in accordance with Section 2.5.
"Prohibited Transaction" means any transaction set forth in Section
406 of ERISA or Section 4975 of the Code.
"Qualified Preferred Stock" means, with respect to the Borrower and as
of any date of its issuance, any shares of preferred stock of the Borrower that
(a) is issued after the date of this Agreement, (b) provides for its mandatory
redemption on a date, if at all, that is on or after the first anniversary of
the latest maturity of any of the Credit Obligations at the time issued, and
(c) provides in the applicable certificate of designation for the redemption of
such shares and for the blockage of Restricted Payments in respect of such
shares during the existence of a Default or an Event of Default (i) on the
terms and conditions set forth on Schedule IV, or (ii) on terms approved by the
Agent and the Majority Banks in their sole discretion, all such provisions to
be in form and content satisfactory to the Agent and the Majority Banks in
their sole discretion.
"ratable share" or "pro rata share" means, with respect to any Bank
and as of any date of its determination, either (a) the ratio of such Bank's
Revolving Loan Commitment at such time to the aggregate Revolving Loan
Commitments at such time or (b) if the Revolving Loan Commitments have been
terminated, the ratio of such Bank's aggregate outstanding Revolving Loan
Advances and share of the Letter of Credit Exposure at such time to the
aggregate outstanding Revolving Loan Advances and Letter of Credit Exposure at
such time.
"Registration Statement" means the public offering registration
statement of the Borrower as filed with the Securities and Exchange Commission
on October 24, 1997, and as refiled on November 28, 1997, under Registration
Number 333-38715.
"Related Parties" means, with respect to any Person, such Person's
stockholders, directors, officers, employees, agents, Affiliates, successors,
and assigns, and their respective stockholders, directors, officers, employees,
and agents, and, with respect to any Person that is an individual, such
Person's family relations and heirs.
"Reportable Event" means any of the events set forth in Section 4043
of ERISA.
"Responsible Officer" means, with respect to any Person, such Person's
Chief Executive Officer, President, Chief Financial Officer, Secretary, Chief
Accounting Officer, or any other officer of such Person designated by any of
the foregoing in writing from time to time.
"Restricted Entities" means the Borrower and each Subsidiary of the
Borrower.
"Restricted Payment" means the declaration or making by any Person of
any (a) dividends; (b) purchase, redemption, retirement, or other acquisition
for value any of its capital stock now or
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<PAGE> 19
hereafter outstanding, or any distribution of assets to its stockholders as
such, whether in cash, assets, or in obligations of it; (c) allocation or other
setting apart of any sum for the payment of any dividend or distribution on, or
for the purchase, redemption, or retirement of, any shares of its capital
stock; or (d) making of any other distribution by reduction of capital or
otherwise in respect of any shares of its capital stock; in each case, other
than any such dividends, distributions, and payments payable in such Person's
common stock.
"Revolving Loan" means the aggregate outstanding principal amount of
the Revolving Loan Borrowings.
"Revolving Loan Advance" means the outstanding principal from a Bank
which represents such Bank's ratable share of a Revolving Loan Borrowing.
"Revolving Loan Borrowing" means any aggregate amount of principal
advanced on the same day and pursuant to the same Revolving Loan Borrowing
Request under the revolving loan facility created in Section 2.1.
"Revolving Loan Borrowing Request" means a Revolving Loan Borrowing
Request in substantially the form of Exhibit B executed by a Responsible
Officer of the Borrower and delivered to the Agent.
"Revolving Loan Commitment" means, for any Bank, the amount set forth
below such Bank's name on the signature pages of this Agreement as its
Revolving Loan Commitment, or if such Bank has entered into any Assignment and
Acceptance since the date of this Agreement, as set forth for such Bank as its
Revolving Loan Commitment in the Register maintained by the Agent pursuant to
Section 8.5(c), in each case as such amount may be terminated pursuant to
Section 6.2.
"Revolving Loan Maturity Date" means July 30, 2001.
"Revolving Loan Note" means a promissory note of the Borrower payable
to the order of a Bank, in substantially the form of Exhibit D, evidencing the
indebtedness of the Borrower to such Bank resulting from Revolving Loan
Advances made by such Bank to the Borrower.
"Security Agreement" means the Security Agreement dated as of July 30,
1998, made by the Borrower and the Subsidiaries of the Borrower in favor of the
Agent granting the Agent a security interest in the accounts receivable of each
such Credit Party to secure the Credit Obligations.
"Security Documents" means the Security Agreement, the Pledge
Agreements, the Consent, and any other document creating or consenting to Liens
in favor of the Agent securing Credit Obligations.
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<PAGE> 20
"Stock Pledge Agreement" means, the Pledge Agreement, dated as of July
30, 1998, made by Borrower and certain Subsidiaries of Borrower in favor of the
Agent granting the Agent a security interest in the capital stock or membership
interests, as applicable, of each Subsidiary (whether direct or indirect) of
Borrower, to secure the Credit Obligations.
"Subordinated Debt" means, with respect to the Borrower and as of any
date of its issuance, any unsecured indebtedness for borrowed money for which
the Borrower is directly and primarily obligated that (a) arises after the date
of this Agreement, (b) does not have any stated maturity before the latest
maturity of any of the Credit Obligations at the time incurred, (c) has terms
that are no more restrictive than the terms of the Credit Documents, and (d) is
expressly subordinated to the Credit Obligations (i) on the terms and
conditions set forth on Schedule III, or (ii) on terms approved by the Agent
and the Majority Banks in their sole discretion, including payment
subordination, remedy subordination, and related terms satisfactory to the
Agent and the Majority Banks in their sole discretion.
"Subsidiary" means, with respect to any Person, any other Person, a
majority of whose outstanding Voting Securities (other than directors'
qualifying shares) shall at any time be owned by such Person or one or more
Subsidiaries of such person.
"Swing Line Lender" means NationsBank.
"Swing Line Loan" means the aggregate outstanding principal amount of
the advances made under the Swing Line Note.
"Swing Line Note" means the promissory note of the Borrower in the
principal amount of $5,000,000 payable to the order of the Swing Line Lender
evidencing the indebtedness of the Borrower to the Swing Line Lender resulting
from advances to the Borrower under the line of credit created thereunder.
"Tranche" means any tranche of principal outstanding under the
Revolving Loan accruing interest on the same basis whether created in
connection with new advances of principal under the Revolving Loan pursuant to
Section 2.5(a)(i) or by the continuation or conversion of existing tranches of
principal under such Loan pursuant to Section 2.5(a)(ii) and shall include the
Prime Rate Tranche or any LIBOR Tranche.
"Type" has the meaning set forth in Section 1.4.
"Voting Securities" means (a) with respect to any corporation, any
capital stock of the corporation having general voting power under ordinary
circumstances to elect directors of such corporation, (b) with respect to any
partnership, any partnership interest having general voting power under
ordinary circumstances to elect the general partner or other management of the
partnership, and (c) with respect to any other Person, such ownership interests
in such Person having general
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<PAGE> 21
voting power under ordinary circumstances to elect the management of such
Person, in each case irrespective of whether at the time any other class of
stock, partnership interests, or other ownership interest might have special
voting power or rights by reason of the happening of any contingency.
1.2 Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding."
1.3 Accounting Terms; Preparation of Financials.
(a) All accounting terms, definitions, ratios, and other
tests described herein shall be construed in accordance with United States
generally accepted accounting principles applied on a consistent basis with
those applied in the preparation of the Registration Statement, except as
expressly set forth in this Agreement.
(b) The Restricted Entities shall prepare their financial
statements in accordance with United States generally accepted accounting
principles applied on a consistent basis with those applied in the preparation
of the Registration Statement, unless otherwise approved in writing by the
Agent. In accordance with the foregoing, (i) any Acquisition which is
permitted to be treated as a pooling transaction shall be treated as a pooling
transaction, and following such an Acquisition the consolidated financial
statements of the Borrower shall be adjusted to reflect the results of such
Acquisition during the periods prior to such Acquisition in accordance with
generally accepted accounting principles and (ii) any Acquisition which is not
permitted to be treated as a pooling transaction shall be treated as an asset
purchase, without adjustment for prior periods.
(c) Where expressly permitted in this Agreement, the
Borrower may elect to use the compliance calculations set forth in Schedule C
of a Compliance Certificate to calculate the Applicable Margin or compliance
with a financial covenant under this Agreement. In such case the accounting
terms, definitions, ratios, and other tests used in making such calculation
shall be construed as required by paragraph (a) above except that the
consolidated financial results of the Borrower shall be deemed to be the
adjusted consolidated financial results of the Borrower set forth in Schedule B
of the Compliance Certificate. The Borrower shall prepare Schedule B and C of
the Compliance Certificate in accordance with the following provisions:
(i) The Borrower may select one or more
Acquisitions for inclusion in the adjustments permitted in Schedule B
or C of the Compliance Certificate; provided that if the inclusion of
any Acquisition results in an increase in the consolidated EBITDA of
the Borrower over the consolidated EBITDA of the Borrower required to
be reported in Schedule A of the Compliance Certificate, then the
Borrower must include all Acquisitions which would cause a decrease in
the consolidated EBITDA of the Borrower in Schedule B and C of the
Compliance Certificate.
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<PAGE> 22
(ii) If the Acquisition is treated as a pooling
transaction, the Borrower shall adjust the pooling accounting
treatment of the Acquisition to reflect nonrecurring items (both
positive and negative) that are permitted to be adjusted in accordance
with the pro forma financial statement guidelines established by the
Securities and Exchange Commission for acquisition accounting for
reported acquisitions by public companies or as approved by the Agent.
(iii) If the Acquisition is not treated as a
pooling transaction, the financial results of the acquired Person or
assets shall be added to the applicable financial results of the
Borrower in the same manner as if such transaction were a pooling
transaction with such adjustments thereto as are required to reflect
nonrecurring items (both positive and negative) that are permitted to
be adjusted in accordance with the pro forma financial statement
guidelines established by the Securities and Exchange Commission for
acquisition accounting for reported acquisitions by public companies
or as approved by the Agent.
(iv) No Acquisition may be included in Schedule B
or C of the Compliance Certificate at the request of the Borrower
unless the financial reports of the acquired Person or assets from
which Schedule B and C are prepared are (A) audited financial reports
prepared by an independent certified public accounting firm, or (B)
with respect to unaudited financial reports, are otherwise approved by
the Agent.
1.4 Types. The "Type" of a Tranche refers to the determination
whether such tranche is a LIBOR Tranche or the Prime Rate Tranche.
1.5 Interpretation. Article, Section, Schedule, and Exhibit
references are to this Agreement, unless otherwise specified. All references
to instruments, documents, contracts, and agreements are references to such
instruments, documents, contracts, and agreements as the same may be amended,
supplemented, and otherwise modified from time to time, unless otherwise
specified. The word "including" shall mean "including but not limited to."
The word "or" shall mean "and/or" wherever necessary to prevent interpretation
of any provision against the Agent or the Banks. Whenever the Borrower has an
obligation under this Agreement and the Credit Documents the expense of
complying with that obligation shall be an expense of the Borrower unless
otherwise specified. Whenever any determination is to be made by the Agent or
any Bank, such determination shall be in such Person's sole discretion unless
otherwise specified in this Agreement. If any provision in this Agreement and
the Credit Documents is held to be illegal, invalid, not binding, or
unenforceable, such provision shall be fully severable and this Agreement and
the Credit Documents shall be construed and enforced as if such illegal,
invalid, not binding, or unenforceable provision had never comprised a part of
this Agreement and the Credit Documents, and the remaining provisions shall
remain in full force and effect. This Agreement and the Credit Documents have
been reviewed and negotiated by sophisticated parties with access to legal
counsel and shall not be construed against the drafter. In the event of a
conflict between this Agreement and any other Credit Documents, this Agreement
shall control.
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ARTICLE 2. CREDIT FACILITIES.
2.1 Revolving Loan Facility.
(a) Revolving Loan Commitments. Each Bank severally
agrees, on the terms and conditions set forth in this Agreement and for the
purposes set forth in Section 5.4, to make Revolving Loan Advances to the
Borrower as such Bank's ratable share of Revolving Loan Borrowings requested by
the Borrower from time to time on any Business Day during the period from the
date of this Agreement until the Revolving Loan Maturity Date provided that the
aggregate outstanding principal amount of Revolving Loan Advances made by such
Bank plus such Bank's ratable share of the Swing Line Loan plus such Bank's
ratable share of the Letter of Credit Exposure shall not exceed such Bank's
Revolving Loan Commitment. Revolving Loan Borrowings must be made in an amount
equal to or greater than $1,000,000, in the case of any Revolving Loan
Borrowing comprised of a LIBOR Tranche, or $1,000,000, in the case of any Prime
Rate Borrowing, and be made in multiples of $500,000, in the case of any
Revolving Loan Borrowing comprised of a LIBOR Tranche, or $100,000, in the case
of any Prime Rate Borrowing. Within the limits expressed in this Agreement,
the Borrower may from time to time borrow, prepay, and reborrow Revolving Loan
Borrowings. The indebtedness of the Borrower to the Banks resulting from the
Revolving Loan Advances made by the Banks shall be evidenced by Revolving Loan
Notes made by the Borrower.
(b) Method of Advancing
(i) Each Revolving Loan Borrowing shall be made
pursuant to a Revolving Loan Borrowing Request given by the Borrower to the
Agent in writing or by telecopy not later than the time required pursuant to
Section 2.5(a)(i) to select the interest rate basis for the Revolving Loan
Borrowing. Each Revolving Loan Borrowing Request shall be fully completed and
shall specify the information required therein, and shall be irrevocable and
binding on the Borrower. Upon receipt of the Revolving Loan Borrowing Request
by the Agent, the Agent shall promptly forward notice of the Revolving Loan
Borrowing to the Banks. Each Bank shall, before 1:00 p.m. (local time at the
Applicable Lending Office of the Agent) on the date of the requested Revolving
Loan Borrowing, make available from its Applicable Lending Office to the Agent
at the Agent's Applicable Lending Office, in immediately available funds, such
Bank's ratable share of such Revolving Loan Borrowing. Subject to the
satisfaction of all applicable conditions precedent, after receipt by the Agent
of such funds, the Agent shall, by 4:00 p.m. (local time at the Applicable
Lending Office of the Agent), on the date requested for such Revolving Loan
Borrowing make such Revolving Loan Borrowing available to the Borrower in
immediately available funds at any account of Borrower which is designated in
writing by the Borrower to the Agent.
(ii) Unless the Agent shall have received notice
from a Bank before the date of any Revolving Loan Borrowing that such Bank
shall not make available to the Agent such Bank's ratable share of such
Revolving Loan Borrowing, the Agent may assume that such Bank has
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made its ratable share of such Revolving Loan Borrowing available to the Agent
on the date of such Revolving Loan Borrowing in accordance with paragraph (i)
above and the Agent may, in reliance upon such assumption, make available to
the Borrower on such date a corresponding amount. If and to the extent that
such Bank shall not have so made its ratable share of such Revolving Loan
Borrowing available to the Agent, such Bank agrees that it shall pay interest
on such amount for each day from the date such amount is made available to the
Borrower by the Agent until the date such amount is paid to the Agent by such
Bank at the Federal Funds Rate in effect from time to time, provided that with
respect to such Bank if such amount is not paid by such Bank by the end of the
second day after the Agent makes such amount available to the Borrower, the
interest rates specified above shall be increased by a per annum amount equal
to 2.00% on the third day and shall remain at such increased rate thereafter.
Interest on such amount shall be due and payable by such Bank upon demand by
the Agent. If such Bank shall pay to the Agent such amount and interest as
provided above, such amount so paid shall constitute such Bank's Revolving Loan
Advance as part of such Revolving Loan Borrowing for all purposes of this
Agreement even though not made on the same day as the other Revolving Loan
Advances comprising such Revolving Loan Borrowing. In the event that such Bank
has not repaid such amount by the end of the fifth day after such amount was
made available to the Borrower, the Borrower agrees to repay to the Agent on
demand such amount, together with interest on such amount for each day from the
date such amount was made available to the Borrower until the date such amount
is repaid to the Agent at the interest rate charged to the Borrower for such
Revolving Loan Borrowing under the terms of this Agreement.
(iii) The failure of any Bank to make available its
ratable share of any Revolving Loan Borrowing shall not relieve any other Bank
of its obligation, if any, to make available its ratable share of such
Revolving Loan Borrowing. No Bank shall be responsible for the failure of any
other Bank to honor such other Bank's obligations hereunder, including any
failure to make available any funds as part of any Revolving Loan Borrowing.
(c) Prepayment.
(i) The Borrower may prepay the outstanding
principal amount of the Revolving Loan pursuant to written notice given by the
Borrower to the Agent in writing or by telecopy not later than (A) 1:00 p.m.
(local time at the Applicable Lending Office of the Agent) on the third
Business Day before the date of the proposed prepayment, in the case of the
prepayment of any portion of the Revolving Loan which is comprised of LIBOR
Tranches, or (B) 11:00 a.m. (local time at the Applicable Lending Office of the
Agent) on the same Business Day of the proposed prepayment, in the case of the
prepayment of any portion of the Revolving Loan comprised solely of the Prime
Rate Tranche. Each such notice shall specify the principal amount and Tranche
or Tranches of the Revolving Loan which shall be prepaid, the date of the
prepayment, and shall be irrevocable and binding on the Borrower. Prepayments
of the Revolving Loan shall be made in integral multiples of $500,000, in the
case of prepayments of any LIBOR Tranches, or $100,000, in the case of
prepayments of the Prime Rate Tranche. If the prepayment would cause the
aggregate outstanding principal amount of any LIBOR Tranche comprising all or
any part of the Revolving
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Loan or the aggregate outstanding principal amount of the Prime Rate Tranche
comprising all or any part of the Revolving Loan, to be less than $1,000,000,
in the case of any such LIBOR Tranche, or $1,000,000, in the case of the Prime
Rate Tranche, the prepayment must be in an amount equal to the entire
outstanding principal amount of such LIBOR Tranche under the Revolving Loan or
the entire outstanding principal amount of the Prime Rate Tranche under the
Revolving Loan, as the case may be. Upon receipt of any notice of prepayment,
the Agent shall give prompt notice of the intended prepayment to the Banks.
For each such notice given by the Borrower, the Borrower shall prepay the
Revolving Loan in the specified amount on the specified date as set forth in
such notice. The Borrower shall have no right to prepay any principal amount
of the Revolving Loan except as provided in this Section 2.1(c)(i).
(ii) Each prepayment of principal of any LIBOR
Tranche under the Revolving Loan pursuant to this Section 2.1(c) shall be
accompanied by payment of all accrued but unpaid interest on the principal
amount prepaid and any amounts required to be paid pursuant to Section 2.6 as a
result of such prepayment.
(d) Repayment. The Borrower shall pay to the Agent for
the ratable benefit of the Banks the aggregate outstanding principal amount of
the Revolving Loan on the Revolving Loan Maturity Date.
(e) Reduction of Commitments. The Borrower shall have
the right, upon at least three Business Days' irrevocable notice to the Agent,
to terminate in whole or reduce ratably in part the unused portion of the
Commitments; provided that each partial reduction shall be in the aggregate
amount of $5,000,000 or in integral multiples of $5,000,000 in excess thereof.
Any reduction or termination of the Commitments pursuant to this Section 2.1(e)
shall be permanent, with no obligation of the Banks to reinstate such
Commitments and the commitment fees provided for in Section 2.4(a) shall
thereafter be computed on the basis of the Commitments, as so reduced.
2.2 Letter of Credit Facility.
(a) Commitment for Letters of Credit. The Issuing Bank
shall, on the terms and conditions set forth in this Agreement and for the
purposes set forth in Section 5.4, issue, increase, and extend Letters of
Credit at the request of the Borrower from time to time on any Business Day
during the period from the date of this Agreement until the Revolving Loan
Maturity Date provided that (i) the Letter of Credit Exposure shall not exceed
the Letter of Credit Sublimit and (ii) the aggregate outstanding principal
amount of Revolving Loan Borrowings plus the Letter of Credit Exposure plus the
Swing Line Loan shall not exceed the aggregate amount of the Revolving Loan
Commitments. No Letter of Credit may have an expiration date later than 12
months after its issuance date, and each Letter of Credit which is
self-extending beyond its expiration date must be cancelable upon no more than
30 days notice prior to each extension period given by the Issuing Bank to the
beneficiary of such Letter of Credit. No Letter of Credit may have an
expiration date later than 12 months after the Revolving Loan Maturity Date
unless approved by the Issuing Bank,
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<PAGE> 26
the Agent, and the Banks. Each Letter of Credit must be in form and substance
acceptable to the Issuing Bank. The indebtedness of the Borrower to the
Issuing Bank resulting from Letters of Credit requested by the Borrower shall
be evidenced by the Letter of Credit Applications made by the Borrower.
(b) Requesting Letters of Credit. Each Letter of Credit
shall be issued, increased, or extended pursuant to a Letter of Credit
Application or Letter of Credit Application Amendment, as applicable, given by
the Borrower to the Issuing Bank in writing or by telecopy promptly confirmed
in writing, such Letter of Credit Application or Letter of Credit Application
Amendment being given not later than 1:00 p.m. (local time at the Applicable
Lending Office of the Agent) on the third Business Day before the date of the
proposed issuance, increase, or extension of the Letter of Credit. Each Letter
of Credit Application or Letter of Credit Application Amendment shall be fully
completed and shall specify the information required therein (including the
proposed form of the Letter of Credit or change thereto), and shall be
irrevocable and binding on the Borrower. Upon receipt by the Issuing Bank of
the Letter of Credit Application or Letter of Credit Application Amendment, the
Issuing Bank shall give prompt notice thereof to the Agent, and the Agent shall
promptly inform the Banks of the proposed Letter of Credit or change thereto.
Subject to the satisfaction of all applicable conditions precedent, the Issuing
Bank shall, by 4:00 p.m. (local time at the Applicable Lending Office of the
Agent), on the date requested by the Borrower for the issuance, increase, or
extension of such Letter of Credit issue, increase, or extend such Letter of
Credit to the specified beneficiary. Upon the date of the issuance, increase,
or extension of a Letter of Credit, the Issuing Bank shall be deemed to have
sold to each other Bank and each other Bank shall be deemed to have purchased
from the Issuing Bank a ratable participation in the related Letter of Credit
or change thereto. The Issuing Bank shall notify the Agent of each Letter of
Credit issued, increased, or extended and the date and amount of each Bank's
participation in such Letter of Credit, and the Agent shall in turn notify the
Banks.
(c) Reimbursements for Letters of Credit. With respect
to any Letter of Credit and in accordance with the related Letter of Credit
Application, the Borrower agrees to pay to the Issuing Bank on demand fees due
with respect to such Letter of Credit as specified in Section 2.4(b)). If the
Borrower does not pay upon demand of the Issuing Bank any amount due to the
Issuing Bank under any Letter of Credit Application, in addition to any rights
the Issuing Bank may have under such Letter of Credit Application, the Issuing
Bank may upon written notice to the Agent request the satisfaction of such
obligation by the making of a Revolving Loan Borrowing. Concurrently with such
notice to the Agent, the Issuing Bank will use reasonable efforts provide like
notice to the Borrower, provided that failure to provide such notice to the
Borrower at such time shall not invalidate the effectiveness of such request
for a Revolving Loan Borrowing. Upon such request, the Borrower shall be
deemed to have requested the making of a Revolving Loan Borrowing in the amount
of such obligation and the transfer of the proceeds thereof to the Issuing
Bank. Such Revolving Loan Borrowing shall be a Prime Rate Borrowing. The
Agent shall promptly forward notice of such Revolving Loan Borrowing to the
Borrower and the Banks, and each Bank shall, in accordance with the procedures
of Section 2.1(b), other than limitations on the size of Revolving
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Loan Borrowings, and notwithstanding the failure of any conditions precedent,
make available such Bank's ratable share of such Revolving Loan Borrowing to
the Agent, and the Agent shall promptly deliver the proceeds thereof to the
Issuing Bank for application to such Bank's share of the obligations under such
Letter of Credit. The Borrower hereby unconditionally and irrevocably
authorizes, empowers, and directs the Issuing Bank to make such requests for
Revolving Loan Borrowings on behalf of the Borrower, and the Banks to make
Revolving Loan Advances to the Agent for the benefit of the Issuing Bank in
satisfaction of such obligations. The Agent and each Bank may record and
otherwise treat the making of such Revolving Loan Borrowings as the making of
Revolving Loan Borrowings to the Borrower under this Agreement as if requested
by the Borrower. Nothing herein is intended to release the Borrower's
obligations under any Letter of Credit Application, but only to provide an
additional method of payment therefor. The making of any Revolving Loan
Borrowing under this Section 2.2(c) shall not constitute a cure or waiver of
any Default or Event of Default, other than the payment Default or Event of
Default which is satisfied by the application of the amounts deemed advanced
hereunder, caused by the Borrower's failure to comply with the provisions of
this Agreement or any Letter of Credit Application.
(d) Prepayments of Letters of Credit. In the event that
any Letters of Credit shall be outstanding according to their terms after the
Revolving Loan Maturity Date, the Borrower shall pay to the Agent an amount
equal to the Letter of Credit Exposure allocable to such Letters of Credit to
be held in the Letter of Credit Collateral Account and applied in accordance
with paragraph (g) below.
(e) Obligations Unconditional. The obligations of the
Borrower and each Bank under this Agreement and the Letter of Credit
Applications to make payments as required to reimburse the Issuing Bank for
draws under Letters of Credit and to make other payments due in respect of
Letters of Credit shall be unconditional and irrevocable, and shall be paid
strictly in accordance with the terms of this Agreement and the Letter of
Credit Applications under all circumstances, including: (i) any lack of
validity or enforceability of any Letter of Credit Document; (ii) any
amendment, waiver, or consent to departure from any Letter of Credit Document;
(iii) the existence of any claim, set-off, defense, or other right which the
Borrower or any Bank may have at any time against any beneficiary or transferee
of any Letter of Credit (or any Persons for whom any such beneficiary or any
such transferee may be acting), the Issuing Bank, or any other person or
entity, whether in connection with the transactions contemplated in this
Agreement or any unrelated transaction; (iv) any statement or any other
document presented under such Letter of Credit proving to be forged,
fraudulent, invalid, or insufficient in any respect or any statement therein
being untrue or inaccurate in any respect; or (v) payment by the Issuing Bank
under any Letter of Credit against presentation of a draft or certificate which
does not comply with the terms of such Letter of Credit; provided, however,
that nothing contained in this paragraph (d) shall be deemed to constitute a
waiver of any remedies of the Borrower or any Bank in connection with the
Letters of Credit or the Borrower's or such Bank's rights under paragraph (e)
below.
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(f) Liability of Issuing Bank. The Issuing Bank shall not be
liable or responsible for: (i) the use which may be made of any Letter of
Credit or any acts or omissions of any beneficiary or transferee in connection
therewith; (ii) the validity, sufficiency, or genuineness of documents related
to Letters of Credit, or of any endorsement thereon, even if such documents
should prove to be in any or all respects invalid, insufficient, fraudulent, or
forged; (iii) payment by the Issuing Bank against presentation of documents
which do not strictly comply with the terms of a Letter of Credit, including
failure of any documents to bear any reference or adequate reference to the
relevant Letter of Credit; or (iv) any other circumstances whatsoever in making
or failing to make payment under any Letter of Credit (INCLUDING THE ISSUING
BANK'S OWN NEGLIGENCE); except that the Issuing Bank shall be liable to the
Borrower or any Bank to the extent of any direct, as opposed to consequential,
damages suffered by the Borrower or such Bank which the Borrower or such Bank
proves were caused by (A) the Issuing Bank's gross negligence or willful
misconduct in determining whether documents presented under a Letter of Credit
comply with the terms of such Letter of Credit, (B) the Issuing Bank's willful
failure to make or delay in making lawful payment under any Letter of Credit
after the presentation to it of documentation strictly complying with the terms
and conditions of such Letter of Credit or the Issuing Bank's payment of
greater than the maximum amount permitted under any Letter of Credit, or (C)
the Issuing Bank's negligence in the handling of money.
(g) Letter of Credit Collateral Account.
(i) If the Borrower is required to deposit funds in the
Letter of Credit Collateral Account pursuant to Sections 2.2(d) or 6.4, then
the Borrower and the Agent shall establish the Letter of Credit Collateral
Account and the Borrower shall execute any documents and agreements, including
the Agent's standard form assignment of deposit accounts, that the Agent
reasonably requests in connection therewith to establish the Letter of Credit
Collateral Account and grant the Agent a first priority security interest in
such account and the funds therein. The Borrower hereby pledges to the Agent
and grants the Agent a security interest in the Letter of Credit Collateral
Account, whenever established, all funds held in the Letter of Credit
Collateral Account from time to time, and all proceeds thereof as security for
the payment of the Obligations.
(ii) Funds held in the Letter of Credit Collateral Account
shall be held as cash collateral for obligations with respect to Letters of
Credit and promptly applied by the Agent at the request of the Issuing Bank to
any reimbursement or other obligations under Letters of Credit that exist or
occur. To the extent that any surplus funds are held in the Letter of Credit
Collateral Account above the Letter of Credit Exposure, during the existence of
an Event of Default the Agent may (A) hold such surplus funds in the Letter of
Credit Collateral Account as cash collateral for the Credit Obligations or (B)
apply such surplus funds to any Credit Obligations in accordance with Section
6.9. If no Default exists, the Agent shall release to the Borrower at the
Borrower's written request any funds held in the Letter of Credit Collateral
Account above the amounts required by Section 2.2(d).
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(iii) Funds held in the Letter of Credit Collateral Account
shall be invested in money market funds of the Agent or in another investment
if mutually agreed upon by the Borrower and the Agent, but the Agent shall have
no other obligation to make any other investment of the funds therein. The
Agent shall exercise reasonable care in the custody and preservation of any
funds held in the Letter of Credit Collateral Account and shall be deemed to
have exercised such care if such funds are accorded treatment substantially
equivalent to that which the Agent accords its own property, it being
understood that the Agent shall not have any responsibility for taking any
necessary steps to preserve rights against any parties with respect to any such
funds.
2.3 Swing Line Facility.
(a) Commitment. The Swing Line Lender agrees, on the
terms and conditions set forth in the Swing Line Note, to make advances to the
Borrower under the Swing Line Note. No Bank shall have any rights thereunder
(but each Bank shall have the obligation to reimburse the Swing Line Lender in
accordance with paragraph (b) below). The indebtedness of the Borrower to the
Swing Line Lender resulting from the advances under the Swing Line Note made by
the Swing Line Lender shall be evidenced by the Swing Line Note made by the
Borrower.
(b) Reimbursements for Swing Line Loan Obligations. With
respect to the Swing Line Loan and the interest, premium, fees, and other
amounts owed by the Borrower to the Swing Line Lender in connection with the
Swing Line Note, and in accordance with the terms of the Swing Line Note, the
Borrower agrees to pay to the Swing Line Lender such amounts when due and
payable to the Swing Line Lender under the Swing Line Note. If the Borrower
does not pay to the Swing Line Lender any such amounts when due and payable to
the Swing Line Lender under the Swing Line Note, in addition to any rights the
Swing Line Lender may have under such Swing Line Note, the Swing Line Lender
may upon written notice to the Agent request the satisfaction of such
obligation by the making of a Revolving Loan Borrowing in the amount of any
such amounts not paid when due and payable. Concurrently with such notice to
the Agent, the Swing Line Lender will use reasonable efforts provide like
notice to the Borrower, provided that failure to provide such notice to the
Borrower at such time shall not invalidate the effectiveness of such request
for a Revolving Loan Borrowing. Upon such request, the Borrower shall be deemed
to have requested the making of a Revolving Loan Borrowing in the amount of
such obligation and the transfer of the proceeds thereof to the Swing Line
Lender. Such Revolving Loan Borrowing shall be a Prime Rate Borrowing. The
Agent shall promptly forward notice of such Revolving Loan Borrowing to the
Borrower and the Banks, and each Bank shall, in accordance with the procedures
of Section 2.1(b), other than limitations on the size of Revolving Loan
Borrowings, and notwithstanding the failure of any conditions precedent, make
available such Bank's ratable share of such Revolving Loan Borrowing to the
Agent, and the Agent shall promptly deliver the proceeds thereof to the Swing
Line Lender for application to such amounts owed to the Swing Line Lender. The
Borrower hereby unconditionally and irrevocably authorizes, empowers, and
directs the Swing Line Lender to make such requests for Revolving Loan
Borrowings on behalf of the Borrower, and the Banks to make Revolving Loan
Advances to the Agent for the benefit of the Swing Line Lender in satisfaction
of
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<PAGE> 30
such obligations. The Agent and each Bank may record and otherwise treat the
making of such Revolving Loan Borrowings as the making of a Revolving Loan
Borrowing to the Borrower under this Agreement as if requested by the Borrower.
Nothing herein is intended to release the Borrower's obligations under the
Swing Line Note, but only to provide an additional method of payment therefor.
The making of any Borrowing under this Section 2.3(b) shall not constitute a
cure or waiver of any Default or Event of Default, other than the payment
Default or Event of Default which is satisfied by the application of the
amounts deemed advanced hereunder, caused by the Borrower's failure to comply
with the provisions of this Agreement or the Swing Line Note.
2.4 Fees.
(a) Commitment Fees. The Borrower shall pay to the Agent
for the ratable benefit of the Banks an unused commitment fee in an amount
equal to the product of the Applicable Margin for unused commitment fees in
effect from time to time multiplied by the average daily amount by which (i)
the aggregate amount of the Revolving Loan Commitments exceeds (ii) the
aggregate outstanding principal amount of the Revolving Loan plus the Letter of
Credit Exposure. The unused commitment fee shall be due and payable in arrears
on the last day of each calendar quarter and on the Revolving Loan Maturity
Date.
(b) Fees for Letters of Credit. For each Letter of
Credit issued by the Issuing Bank, the Borrower shall pay to the Agent for the
ratable benefit of the Banks a letter of credit fee equal to the Applicable
Margin for letter of credit fees per annum on the face amount of such Letter of
Credit for the stated term of such Letter of Credit, with a minimum fee of
$500. In addition, for each Letter of Credit issued by the Issuing Bank, the
Borrower shall pay to the Agent for the benefit of the Issuing Bank a fronting
fee of 0.125% per annum on the face amount of such Letter of Credit for the
stated term of such Letter of Credit, with a minimum fee of $500. The Borrower
shall pay each such letter of credit fee for each Letter of Credit quarterly in
arrears within ten days after when billed therefor by the Issuing Bank.
(c) Agent Fee Letter. The Borrower shall pay to the
parties specified therein the fees and other amounts payable under the Agent
Fee Letter.
(d) Fee Letter. The Borrower shall pay to the Banks the
upfront fee payable to each Bank under the Fee Letter, based upon such Bank's
commitment amount.
2.5 Interest.
(a) Election of Interest Rate Basis. The Borrower may
select the interest rate basis for the Revolving Loan in accordance with the
terms of this Section 2.5(a):
(i) Under the Revolving Loan Borrowing Request
provided to the Agent in connection with the making of each Revolving Loan
Borrowing, the Borrower shall select the
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amount and the Type of the Tranches, and for each LIBOR Tranche selected, any
permitted Interest Period for each such LIBOR Tranche, which will comprise such
Revolving Loan Borrowing, provided that (A) at no time shall there be more than
ten separate LIBOR Tranches outstanding and (B) each LIBOR Tranche must be in a
principal amount equal to or greater than $1,000,000 and be made in multiples
of $500,000, and the Prime Rate Tranche must be in a principal amount equal to
or greater than$1,000,000 and be made in multiples of $100,000. Such interest
rate elections must be provided to the Agent in writing or by telecopy not
later than 1:00 p.m. (local time at the Applicable Lending Office of the Agent)
on the third Business Day before the date of any proposed Revolving Loan
Borrowing comprised of a LIBOR Tranche or 11:00 a.m. (local time at the
Applicable Lending Office of the Agent) on the same day of any proposed
Revolving Loan Borrowing which is a Prime Rate Borrowing. The Agent shall
promptly forward copies of such interest rate elections to the Banks. In the
case of any Revolving Loan Borrowing comprised of a LIBOR Tranche, upon
determination by the Agent, the Agent shall promptly notify the Borrower and
the Banks of the applicable interest rate for such Tranche.
(ii) With respect to any Tranche, the Borrower may
continue or convert any portion of any LIBOR Tranche or the Prime Rate Tranche
to form new LIBOR Tranches or increase or decrease the amount of the Prime Rate
Tranche in accordance with this paragraph. Each such continuation or
conversion shall be deemed to create a new LIBOR Tranche or increase or
decrease the amount of the Prime Rate Tranche, as applicable, for all purposes
of this Agreement. Each such continuation or conversion shall be made pursuant
to a Continuation/Conversion Request given by the Borrower to the Agent in
writing or by telecopy not later than 1:00 p.m. (local time at the Applicable
Lending Office of the Agent) on the third Business Day before the date of the
proposed continuation or conversion. Each Continuation/Conversion Request
shall be fully completed and shall specify the information required therein,
and shall be irrevocable and binding on the Borrower. The Agent shall promptly
forward notice of the continuation or conversion to the Banks. In the case of
any continuation or conversion into LIBOR Tranches, upon determination by the
Agent, the Agent shall notify the Borrower and the Banks of the applicable
interest rate. Continuations and conversions of LIBOR Tranches shall be made
in integral multiples of $500,000, and continuations and conversions of the
Prime Rate Tranche shall be made in integral multiples of $100,000. No
continuation or conversion shall be permitted if such continuation or
conversion would cause the aggregate outstanding principal amount of any LIBOR
Tranche which would remain outstanding to be less than $1,000,000, or the
aggregate outstanding principal amount of the Prime Rate Tranche which would
remain outstanding to be less than $1,000,000. At no time shall there be more
than ten separate LIBOR Tranches outstanding. Any conversion of an existing
LIBOR Tranche is subject to Section 2.5. Subject to the satisfaction of all
applicable conditions precedent, the Agent and the Banks shall before close of
business on the date requested by the Borrower for the continuation or
conversion, make such continuation or conversion.
(iii) At the end of the Interest Period for any
LIBOR Tranche if the Borrower has not continued or converted such LIBOR Tranche
into new Tranches as provided for in paragraph (ii) above, the Borrower shall
be deemed to have continued such LIBOR Tranche as
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<PAGE> 32
a new LIBOR Tranche with an Interest Period of one month. All of the Prime
Rate Tranche shall continue as the Prime Rate Tranche unless the Borrower
converts such Prime Rate Tranche as provided for in paragraph (ii) above.
(b) LIBOR Tranches. Each LIBOR Tranche shall bear
interest during its Interest Period at a per annum interest rate equal to the
sum of the LIBOR for such Tranche plus the Applicable Margin for LIBOR Tranches
in effect from time to time. The Borrower shall pay to the Agent for the
ratable benefit of the Banks all accrued but unpaid interest on each LIBOR
Tranche on the last day of the applicable Interest Period for such LIBOR
Tranche (and with respect to LIBOR Tranches with Interest Periods of greater
than three months, on the date which is three months after the first date of
the Interest Period for such LIBOR Tranche), when required upon prepayment as
specified elsewhere in this Agreement, on any date when such LIBOR Tranche is
prepaid in full, and on the Revolving Loan Maturity Date.
(c) Prime Rate Tranche. The Prime Rate Tranche shall
bear interest at a per annum interest rate equal to the Base Rate in effect
from time to time plus the Applicable Margin for the Prime Rate Tranche in
effect from time to time. The Borrower shall pay to the Agent for the ratable
benefit of the Banks all accrued but unpaid interest on the aggregate
outstanding principal amount of the Prime Rate Tranche on the last day of each
calendar quarter, when required upon prepayment as specified elsewhere in this
Agreement, on any date the Prime Rate Tranche is prepaid in full, and on the
Revolving Loan Maturity Date.
(d) Usury Protection.
(i) If, with respect to any Bank and the
Borrower, the effective rate of interest contracted for by such Bank with the
Borrower under the Credit Documents, including the stated rates of interest
contracted for hereunder and any other amounts contracted for under the Credit
Documents which are deemed to be interest, at any time exceeds the Highest
Lawful Rate, then the outstanding principal amount of the loans made by such
Bank to the Borrower hereunder shall bear interest at a rate which would make
the effective rate of interest on the loans made by such Bank to the Borrower
under the Credit Documents equal the Highest Lawful Rate until the difference
between the amounts which would have been due by the Borrower to such Bank at
the stated rates and the amounts which were due by the Borrower to such Bank at
the Highest Lawful Rate (the "Lost Interest") has been recaptured by such Bank.
If, when the loans made hereunder are repaid in full, the Lost Interest has not
been fully recaptured by such Bank pursuant to the preceding paragraph, then,
to the extent permitted by law, the interest rates charged by such Bank to the
Borrower hereunder shall be retroactively increased such that the effective
rate of interest on the loans made by such Bank to the Borrower under the
Credit Documents was at the Highest Lawful Rate since the effectiveness of this
Agreement to the extent necessary to recapture the Lost Interest not recaptured
pursuant to the preceding sentence and, to the extent allowed by law, the
Borrower shall pay to such Bank the amount of the Lost Interest remaining to be
recaptured by such Bank.
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(ii) In calculating all sums paid or agreed to be
paid to any Bank by the Borrower for the use, forbearance, or detention of
money under the Credit Documents, such amounts shall, to the extent permitted
by applicable law, be amortized, prorated, allocated, and spread in equal parts
throughout the term of the Credit Documents.
(iii) NOTWITHSTANDING THE FOREGOING OR ANY OTHER
TERM IN THIS AGREEMENT AND THE CREDIT DOCUMENTS TO THE CONTRARY, it is the
intention of each Bank and the Borrower to conform strictly to any applicable
usury laws. Accordingly, if any Bank contracts for, charges, or receives any
consideration from the Borrower which constitutes interest in excess of the
Highest Lawful Rate, then any such excess shall be canceled automatically and,
if previously paid, shall at such Bank's option be applied to the outstanding
amount of the loans made hereunder by such Bank to the Borrower or be refunded
to the Borrower.
2.6 Breakage Costs. If (i) any payment of principal on or any
conversion of any LIBOR Tranche is made on any date other than the last day of
the Interest Period for such LIBOR Tranche, whether as a result of any
voluntary or mandatory prepayment (other than a prepayment upon the occurrence
of any event subject to Section 2.8 or 2.9), any acceleration of maturity, or
any other cause, (ii) any payment of principal on any LIBOR Tranche is not made
when due, or (iii) any LIBOR Tranche is not borrowed, converted, or prepaid in
accordance with the respective notice thereof provided by the Borrower to the
Agent, whether as a result of any failure to meet any applicable conditions
precedent for borrowing, conversion, or prepayment, the permitted cancellation
of any request for borrowing, conversion, or prepayment, the failure of the
Borrower to provide the respective notice of borrowing, conversion, or
prepayment, or any other cause not specified above which is created by the
Borrower, then the Borrower shall pay to each Bank upon demand any amounts
required to compensate such Bank for any losses, costs, or expenses, including
lost profits and administrative expenses, which are reasonably allocable to
such action, including losses, costs, and expenses related to the liquidation
or redeployment of funds acquired or designated by such Bank to fund or
maintain such Bank's ratable share of such LIBOR Tranche or related to the
reacquisition or redesignation of funds by such Bank to fund or maintain such
Bank's ratable share of such LIBOR Tranche following any liquidation or
redeployment of such funds caused by such action. Such Bank need not prove
matched funding of any particular funds, and a certificate as to the amount of
such loss, cost, or expense detailing the calculation thereof and certifying
that such Bank customarily charges such amounts to its other customers in
similar circumstances submitted by such Bank to the Borrower shall be
conclusive and binding for all purposes, absent manifest error.
2.7 Increased Costs.
(a) Cost of Funds. If due to either (i) any introduction
of, change in, or change in the interpretation of any law or regulation, in
each case, after the date of this Agreement or (ii) compliance with any
guideline or request from any central bank or other governmental authority
having appropriate jurisdiction (whether or not having the force of law) given
after the date of this
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Agreement, there shall be any increase in the costs of any Bank attributable to
(x) committing to make any Revolving Loan Advance or obtaining funds for the
making, funding, or maintaining of such Bank's ratable share of any LIBOR
Tranche in the relevant interbank market or (y) committing to make Letters of
Credit or issuing, funding, or maintaining Letters of Credit (including any
increase in any applicable reserve requirement specified by the Federal Reserve
Board, including those for emergency, marginal, supplemental, or other
reserves), then the Borrower shall pay to such Bank upon demand any amounts
required to compensate such Bank for such increased costs, such amounts being
due and payable upon demand by such Bank. A certificate as to the cause and
amount of such increased cost detailing the calculation of such cost and
certifying that such Bank customarily charges such amounts to its other
customers in similar circumstances submitted by such Bank to the Borrower shall
be conclusive and binding for all purposes, absent manifest error. No Bank may
make any claim for compensation under this Section 2.7(a) for increased costs
incurred before 90 days prior to the delivery of any such certificate.
(b) Capital Adequacy. If, due to either (i) any
introduction of, change in, or change in the interpretation of any law or
regulation, in each case, after the date of this Agreement or (ii) compliance
with any guideline or request from any central bank or other governmental
authority having appropriate jurisdiction (whether or not having the force of
law) given after the date of this Agreement, there shall be any increase in the
capital requirements of any Bank or its parent or holding company attributable
to (x) committing to make Revolving Loan Advances or making, funding, or
maintaining Revolving Loan Advances or (y) committing to make Letters of Credit
or issuing, funding, or maintaining Letters of Credit, as such capital
requirements are allocated by such Bank, then the Borrower shall pay to such
Bank upon demand any amounts required to compensate such Bank or its parent or
holding company for such increase in costs (including an amount equal to any
reduction in the rate of return on assets or equity of such Bank or its parent
or holding company), such amounts being due and payable upon demand by such
Bank. A certificate as to the cause and amounts detailing the calculation of
such amounts and certifying that such Bank customarily charges such amounts to
its other customers in similar circumstances submitted by such Bank to the
Borrower shall be conclusive and binding for all purposes, absent manifest
error. No Bank may make any claim for compensation under this Section 2.7(b)
for increased costs incurred before 90 days prior to the delivery of any such
certificate.
2.8 Illegality. Notwithstanding any other provision in this
Agreement, if it becomes unlawful for any Bank to obtain deposits or other
funds for making or funding such Bank's ratable share of any LIBOR Tranche in
the relevant interbank market, such Bank shall so notify the Borrower and the
Agent and such Bank's commitment to create LIBOR Tranches shall be suspended
until such condition has passed, all LIBOR Tranches applicable to such Bank
shall be converted to the Prime Rate Tranche as of the end of each applicable
Interest Period or earlier if necessary, and all subsequent requests for LIBOR
Tranches shall be deemed to be requests for Prime Rate Borrowings or
continuations and conversions of the Prime Rate Tranche, as applicable, with
respect to such Bank.
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2.9 Market Failure. Notwithstanding any other provision in this
Agreement, if the Agent determines that: (a) quotations of interest rates for
the relevant deposits referred to in the definition of "LIBOR" are not being
provided in the relevant amounts, or maturities for purposes of determining the
rate of interest referred to in the definition of "LIBOR" or (b) the relevant
rates of interest referred to in the definition of "LIBOR" which are used as
the basis to determine the rate of interest for LIBOR Tranches will not
adequately cover the cost to any Bank of making or maintaining such Bank's
ratable share of any LIBOR Tranche, then if the Agent so notifies the Borrower,
the Agent and the Banks' commitment to create LIBOR Tranches shall be suspended
until such condition has passed, all LIBOR Tranches shall be converted to the
Prime Rate Tranche as of the end of each applicable Interest Period or earlier
if necessary, and all subsequent requests for LIBOR Tranches shall be deemed to
be requests for Prime Rate Borrowings or continuations and conversions of the
Prime Rate Tranche, as applicable, with respect to such Bank.
2.10 Payment Procedures and Computations.
(a) Payment Procedures. Time is of the essence in this
Agreement and the Credit Documents. All payment hereunder shall be made in
Dollars. The Borrower shall make each payment under this Agreement and under
the Revolving Loan Notes not later than 12:00 noon (local time at the
Applicable Lending Office of the Agent) on the day when due to the Agent at the
Agent's Applicable Lending Office in immediately available funds. All payments
by the Borrower hereunder shall be made without any offset, abatement,
withholding, deduction, counterclaim, or reduction. Upon receipt of payment
from the Borrower of any principal, interest, or fees due to the Banks, the
Agent shall promptly after receipt thereof distribute to the Banks their
ratable share of such payments for the account of their respective Applicable
Lending Offices. If and to the extent that the Agent shall not have so
distributed to any Bank its ratable share of such payments, the Agent agrees
that it shall pay interest on such amount for each day after the day when such
amount is made available to the Agent by the Borrower until the date such
amount is paid to such Bank by the Agent at the Federal Funds Rate in effect
from time to time, provided that if such amount is not paid by the Agent by the
end of the third day after the Borrower makes such amount available to the
Agent, the interest rates specified above shall be increased by a per annum
amount equal to 2.00% on the fourth day and shall remain at such increased rate
thereafter. Interest on such amount shall be due and payable by the Agent upon
demand by such Bank. Upon receipt of other amounts due solely to the Agent,
the Issuing Bank, the Swing Line Lender, or a specific Bank, the Agent shall
distribute such amounts to the appropriate party to be applied in accordance
with the terms of this Agreement.
(b) Agent Reliance. Unless the Agent shall have received
written notice from the Borrower prior to any date on which any payment is due
to the Banks that the Borrower shall not make such payment in full, the Agent
may assume that the Borrower has made such payment in full to the Agent on such
date and the Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such date an amount equal to the amount then due
such Bank. If and to the extent the Borrower shall not have so made such
payment in full to the Agent, each Bank shall repay to the Agent forthwith on
demand such amount distributed to such Bank, together with interest
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thereon from the date such amount is distributed to such Bank until the date
such Bank repays such amount to the Agent, at an interest rate equal to, the
Federal Funds Rate in effect from time to time, provided that with respect to
such Bank, if such amount is not repaid by such Bank by the end of the second
day after the date of the Agent's demand, the interest rates specified above
shall be increased by a per annum amount equal to 2.00% on the third day after
the date of the Agent's demand and shall remain at such increased rate
thereafter.
(c) Sharing of Payments. Each Bank agrees that if it
should receive any payment (whether by voluntary payment, by realization upon
security, by the exercise of the right of setoff or banker's lien, by
counterclaim or cross action, by the enforcement of any right under the Credit
Documents, or otherwise) in respect of any obligation of the Borrower to pay
principal, interest, fees, or any other obligation incurred under the Credit
Documents in a proportion greater than the total amount of such principal,
interest, fees, or other obligation then owed and due by the Borrower to such
Bank bears to the total amount of principal, interest, fees, or other
obligation then owed and due by the Borrower to all of the Banks immediately
prior to such receipt, then such Bank receiving such excess payment shall
purchase for cash without recourse from the other Banks an interest in the
obligations of the Borrower to such Banks in such amount as shall result in a
participation by all of the Banks, in proportion with the Banks' respective pro
rata shares, in the aggregate unpaid amount of principal, interest, fees, or
any such other obligation, as the case may be, owed by the Borrower to all of
the Banks; provided that if all or any portion of such excess payment is
thereafter recovered from such Bank, such purchase shall be rescinded and the
purchase price restored to the extent of such recovery, in proportion with the
Banks' respective pro rata shares, but without interest.
(d) Authority to Charge Accounts. The Agent, if and to
the extent payment owed to the Agent or any Bank is not made when due, may
charge from time to time against any account of the Borrower with the Agent any
amount so due. The Agent agrees promptly to notify the Borrower after any such
charge and application made by the Agent provided that the failure to give such
notice shall not affect the validity of such charge and application.
(e) Interest and Fees. Unless expressly provided for in
this Agreement, (i) all computations of interest based on the Prime Rate
(including the Base Rate, when applicable) shall be made on the basis of a
365/366 day year, as the case may be, (ii) all computations of interest based
on the Federal Funds Rate (including the Base Rate, when applicable) shall be
made on the basis of a 360 day year, (iii) all computations of interest based
upon the LIBOR shall be made on the basis of a 360 day year, and (iv) all
computations of fees shall be made on the basis of a 360 day year, in each case
for the actual number of days (including the first day, but excluding the last
day) occurring in the period for which such interest or fees are payable. Each
determination by the Agent of an interest rate or fee shall be conclusive and
binding for all purposes, absent manifest error.
(f) Payment Dates. Whenever any payment shall be stated
to be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest or
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fees, as the case may be. If the time for payment for an amount payable is not
specified in this Agreement or in any other Credit Document, the payment shall
be due and payable on demand by the Agent or the applicable Bank.
2.11 Taxes.
(a) No Deduction for Certain Taxes. Any and all payments
by the Borrower shall be made free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges, or
withholdings, and all liabilities with respect thereto, other than taxes
imposed on the income and franchise taxes imposed on the Agent, any Bank, or
the Applicable Lending Office thereof by any jurisdiction in which any such
entity is a citizen or resident or any political subdivision of such
jurisdiction (all such nonexcluded taxes, levies, imposts, deductions, charges,
withholdings, and liabilities being hereinafter referred to as "Taxes"). If
the Borrower shall be required by law to deduct any Taxes from or in respect of
any sum payable to the Agent, any Bank, or the Applicable Lending Office
thereof, (i) the sum payable shall be increased as may be necessary so that,
after making all required deductions (including deductions applicable to
additional sums payable under this Section 2.11), such Person receives an
amount equal to the sum it would have received had no such deductions been
made; (ii) the Borrower shall make such deductions; and (iii) the Borrower
shall pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable law.
(b) Other Taxes. The Borrower agrees to pay any present
or future stamp or documentary taxes or any other excise or property taxes,
charges, or similar levies which arise from any payment made or from the
execution, delivery, or registration of, or otherwise with respect to, this
Agreement or the other Credit Documents (other than those which become due as a
result of any Bank joining this Agreement as a result of any Assignment and
Acceptance, which shall be paid by the Bank which becomes a Bank hereunder as a
result of such Assignment and Acceptance).
(c) Foreign Bank Withholding Exemption. Each Bank and
Issuing Bank that is not incorporated under the laws of the United States of
America or a state thereof agrees that it shall deliver to the Borrower and the
Agent (i) two duly completed copies of United States Internal Revenue Service
Form 1001 or 4224 or successor applicable form, as the case may be, certifying
in each case that such Bank is entitled to receive payments under this
Agreement and the Revolving Loan Notes payable to it, without deduction or
withholding of any United States federal income taxes, (ii) if applicable, an
Internal Revenue Service Form W-8 or W-9 or successor applicable form, as the
case may be, to establish an exemption from United States backup withholding
tax, and (iii) any other governmental forms which are necessary or required
under an applicable tax treaty or otherwise by law to reduce or eliminate any
withholding tax, which have been reasonably requested by the Borrower. Each
Bank which delivers to the Borrower and the Agent a Form 1001 or 4224 and Form
W-8 or W-9 pursuant to the next preceding sentence further undertakes to
deliver to the Borrower and the Agent two further copies of the said letter and
Form 1001 or 4224 and Form W-8 or W-9, or successor applicable forms, or other
manner of certification, as the case may be, on or
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before the date that any such letter or form expires or becomes obsolete or
after the occurrence of any event requiring a change in the most recent letter
and form previously delivered by it to the Borrower and the Agent, and such
extensions or renewals thereof as may reasonably be requested by the Borrower
and the Agent certifying in the case of a Form 1001 or 4224 that such Bank is
entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes. If an event (including
without limitation any change in treaty, law or regulation) has occurred prior
to the date on which any delivery required by the preceding sentence would
otherwise be required which renders all such forms inapplicable or which would
prevent any Bank from duly completing and delivering any such letter or form
with respect to it and such Bank advises the Borrower and the Agent that it is
not capable of receiving payments without any deduction or withholding of
United States federal income tax, and in the case of a Form W-8 or W-9,
establishing an exemption from United States backup withholding tax, such Bank
shall not be required to deliver such letter or forms. The Borrower shall
withhold tax at the rate and in the manner required by the laws of the United
States with respect to payments made to a Bank failing to provide the requisite
Internal Revenue Service forms in a timely manner. Each Bank which fails to
provide to the Borrower in a timely manner such forms shall reimburse the
Borrower upon demand for any penalties paid by the Borrower as a result of any
failure of the Borrower to withhold the required amounts that are caused by
such Bank's failure to provide the required forms in a timely manner.
2.12 Change of Lending Office.
(a) Each Bank agrees that if it makes any demand for payment under
Section 2.7 or 2.11(a), or if any adoption or change of the type described in
Section 2.8 shall occur with respect to it, it will use reasonable efforts
(consistent with its internal policy and legal and regulatory restrictions and
so long as such efforts would not be disadvantageous to it, as determined in
its sole discretion) to designate a different lending office if the making of
such a designation would reduce or obviate the need for the Borrower to make
payments under Section 2.7 or 2.11(a), or would eliminate or reduce the effect
of any adoption or change described in Section 2.8.
(b) If any Bank (including any participant Bank under Section 8.5)
shall assert that any adoption or change of the type described in Section 2.8
hereof has occurred with respect to it, or if any Bank (including any
participant Bank under Section 8.5) requests compensation under Section 2.7, or
if the Borrower is required to pay any additional amount to any Bank or any
authority for the account of any Bank pursuant to Section 2.11, then the
Borrower may, at its expense and effort, upon notice to such Bank and the
Agent, require such Bank to, and such Bank promptly shall, assign and delegate,
without recourse (in accordance with and subject to the restrictions contained
in Section 8.5), all its interests, rights, and obligations under this
Agreement to an assignee that shall assume such obligations (which assignee may
be another Bank, if a Bank accepts such assignment); provided that (i) if such
assignee is not a Bank or an Affiliate thereof, the Borrower shall have
received the prior written consent of the Agent and the Issuing Bank which
consents shall not unreasonably be withheld or delayed, (ii) such Bank shall
have received payment of an amount equal to the aggregate
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outstanding principal of such Bank's Revolving Loan Advances and its
participations in Letters of Credit, accrued interest thereon, accrued fees and
all other amounts payable to it hereunder, from the assignee (at least to the
extent of such outstanding principal) and the Borrower (in the case of all
other amounts), and (iii) in the case of any such assignment resulting from a
claim for compensation under Section 2.7 or payment required to be made
pursuant to Section 2.11, such assignment will result in a reduction in such
compensation or payments compared to the compensation or payments payable to
the assigning Bank. A Bank shall not be required to make any such assignment
and delegation if, prior thereto, as a result of a waiver by such Bank or
otherwise, the circumstances entitling the Borrower to require such assignment
and delegation no longer exist or cease to apply.
ARTICLE 3. CONDITIONS PRECEDENT.
3.1 Conditions Precedent to Initial Extension of Credit. The
obligation of each Bank to make the initial extension of credit under this
Agreement, including the making of any Revolving Loan Advances and the issuance
of any Letters of Credit, and the obligation of the Swing Line Lender to make
any advances under the Swing Line Loan shall be subject to the following
conditions precedent:
(a) Documents. The Borrower shall have delivered or
shall have caused to be delivered the documents and other items listed on
Exhibit F, together with any other documents requested by the Agent to document
the agreements and intent of the Credit Documents, each in form and with
substance satisfactory to the Agent;
(b) Material Adverse Change. No Material Adverse Change
shall have occurred since March 31, 1998.
3.2 Conditions Precedent to Each Extension of Credit. The
obligation of each Bank to make any extension of credit under this Agreement,
including the making of any Revolving Loan Advances and the issuance, increase,
or extension of any Letters of Credit, and the obligation of the Swing Line
Lender to make any advances under the Swing Line Loan shall be subject to the
further conditions precedent that on the date of such extension of credit:
(a) Representations and Warranties. As of the date of
the making of any extension of credit hereunder, the representations and
warranties contained in each Credit Document shall be true and correct in all
material respects as of such date (and the Borrower's request for the making of
any extension of credit hereunder shall be deemed to be a restatement,
representation, and additional warranty of the representations and warranties
contained in each Credit Document as of such date); and
(b) Default. As of the date of the making of any
extension of credit hereunder, there shall exist no Default or Event of
Default, and the making of the extension of credit would not cause a Default or
Event of Default.
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ARTICLE 4. REPRESENTATIONS AND WARRANTIES. The Borrower represents and
warrants to the Agent and each Bank, and with each request for any extension of
credit hereunder, including the making of any Revolving Loan Advances, and the
issuance, increase, or extension of any Letters of Credit, again represents and
warrants to the Agent and each Bank, as follows:
4.1 Organization. As of the date of this Agreement, each
Restricted Entity (a) is duly organized, validly existing, and in good standing
under the laws of such Person's respective jurisdiction of organization and (b)
is duly licensed, qualified to do business, and in good standing in each
jurisdiction in which such Person is organized, owns property, or conducts
operations to the extent that any failure to be so licensed, qualified, or in
good standing in accordance with this clause (b) could reasonably be expected
to cause a Material Adverse Change.
4.2 Authorization. The execution, delivery, and performance by
each Credit Party of the Credit Documents to which such Credit Party is a party
and the consummation of the transactions contemplated thereby (a) do not
contravene the organizational documents of such Credit Party, (b) have been
duly authorized by all necessary corporate action of each Credit Party, and (c)
are within each Credit Party's corporate powers.
4.3 Enforceability. Each Credit Document to which any Credit
Party is a party has been duly executed and delivered by each Credit Party
which is a party to such Credit Document and constitutes the legal, valid, and
binding obligation of each such Credit Party, enforceable against each such
Credit Party in accordance with such Credit Document's terms, except as limited
by applicable bankruptcy, insolvency, reorganization, moratorium, or similar
laws at the time in effect affecting the rights of creditors generally and
subject to the availability of equitable remedies.
4.4 Absence of Conflicts and Approvals. The execution, delivery,
and performance by each Credit Party of the Credit Documents to which such
Credit Party is a party and the consummation of the transactions contemplated
thereby, (a) do not result in any violation or breach of any provisions of, or
constitute a default under, any note, indenture, credit agreement, security
agreement, credit support agreement, or other similar agreement to which such
Credit Party is a party or any other material contract or agreement to which
such Credit Party is a party, (b) do not violate any law or regulation binding
on or affecting such Credit Party, (c) do not require any authorization,
approval, or other action by, or any notice to or filing with, any governmental
authority, and (d) do not result in or require the creation or imposition of
any Lien prohibited by this Agreement.
4.5 Investment Companies. No Restricted Entity or Affiliate
thereof is an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
4.6 Public Utilities. No Restricted Entity or Affiliate thereof
is a "holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding
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Company Act of 1935, as amended. No Restricted Entity or Affiliate thereof is
a regulated public utility.
4.7 Financial Condition.
(a) The Borrower has delivered to the Agent the
Registration Statement, including therein the proforma combined balance sheet
of the Borrower following the public offering of securities contemplated
therein and proforma combined statement of income for the periods shown
therein, which accurately and completely, in all material respects, present
fairly the financial condition of Borrower as of such date. The Borrower has
delivered to the Agent the Interim Financial Statements, and the Interim
Financial Statements are accurate and complete in all material respects and
present fairly the financial condition of Borrower as of their date and for
their period in accordance with generally accepted accounting principles, as
applicable to interim financial reports.
(b) As of the date of the Registration Statement and the
Interim Financial Statements, there were no material contingent obligations,
liabilities for taxes, unusual forward or long-term commitments, or unrealized
or anticipated losses of the Borrower or any of the Borrower's Subsidiaries,
except as disclosed in the Registration Statement and the Interim Financial
Statements, and adequate reserves for such items have been made in accordance
with generally accepted accounting principles. No Material Adverse Change has
occurred since the date of the Registration Statement or the Interim Financial
Statements. No Default exists.
4.8 Condition of Assets. Each Restricted Entity has good and
indefeasible title to substantially all of its owned property and valid
leasehold rights in all of its leased property, as reflected in the financial
statements most recently provided to the Agent free and clear of all Liens
except Permitted Liens. Each Restricted Entity possesses and has properly
approved, recorded, and filed, where applicable, all permits, licenses,
patents, patent rights or licenses, trademarks, trademark rights, trade names
rights, and copyrights which are useful in the conduct of its business and
which the failure to possess could reasonably be expected to cause a Material
Adverse Change. The material properties used in the operations of each
Restricted Entity are in good repair, working order, and condition, normal wear
and tear excepted. The properties of each Restricted Entity have not been
adversely affected as a result of any fire, explosion, earthquake, flood,
drought, windstorm, accident, strike or other labor disturbance, embargo,
requisition or taking of property or cancellation of contracts, permits, or
concessions by a governmental authority, riot, activities of armed forces, or
acts of God or of any public enemy in any manner which (after giving effect to
any insurance proceeds) could reasonably be expected to cause a Material
Adverse Change.
4.9 Litigation. There are no actions, suits, or proceedings
pending or, to the knowledge of the Borrower, threatened against any Restricted
Entity at law, in equity, or in admiralty, or by or before any governmental
department, commission, board, bureau, agency, instrumentality, domestic or
foreign, or any arbitrator which could reasonably be expected to cause a
Material Adverse Change.
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4.10 Subsidiaries. As of the date of this Agreement, the Borrower
has no Subsidiaries except as disclosed in Schedule II. The Borrower has no
Subsidiaries which have not been disclosed in writing to the Agent.
4.11 Laws and Regulations. Each Restricted Entity is in compliance
with all federal, state, and local laws and regulations which are applicable to
the operations and property of such Person where the failure to comply with the
same could reasonably be expected to cause a Material Adverse Change.
4.12 Environmental Compliance. Each Restricted Entity has been and
is in compliance with all Environmental Laws and has obtained and is in
compliance with all related permits necessary for the ownership and operation
of any such Person's properties, in each case, where the failure to be in
compliance with the same could reasonably be expected to cause a Material
Adverse Change. Each Restricted Entity has not received notice of and has not
been investigated for any violation or alleged violation of any Environmental
Law in connection with any such Person's presently or previously owned
properties which currently threaten action or suggest liabilities which could
reasonably be expected to cause a Material Adverse Change. Each Restricted
Entity does not and has not created, handled, transported, used, or disposed of
any Hazardous Materials on or about any such Person's properties (nor has any
such Person's properties been used for those purposes); has never been
responsible for the release of any Hazardous Materials into the environment in
connection with any such Person's operations and has not contaminated any
properties with Hazardous Materials; and does not and has not owned any
properties contaminated by any Hazardous Materials, in each case in any manner
which could reasonably be expected to cause a Material Adverse Change.
4.13 ERISA. Each Restricted Entity and each of their respective
Commonly Controlled Entities are in compliance with all provisions of ERISA to
the extent that the failure to be in compliance could reasonably be expected to
cause a Material Adverse Change. No Restricted Entity nor any of their
respective Commonly Controlled Entities participates in or during the past five
years has participated in any employee pension benefit plan covered by Title IV
of ERISA or any multiemployer plan under Section 4001(a)(3) of ERISA. With
respect to the Plans of the Restricted Entities, no Material Reportable Event
or Prohibited Transaction has occurred and exists that could reasonably be
expected to cause a Material Adverse Change.
4.14 Taxes. Each Restricted Entity has filed all United States
federal, state, and local income tax returns and all other domestic and foreign
tax returns which are required to be filed by such Person and has paid, or
provided for the payment before the same became delinquent of, all taxes due
pursuant to such returns or pursuant to any assessment received by such Person
except for tax payments being contested in good faith, for which adequate
reserves have been established and reported in accordance with general accepted
accounting principals, and which could not reasonably be expected to cause a
Material Adverse Change. The charges, accruals, and reserves on the books
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of the Restricted Entities in respect of taxes are adequate in accordance with
generally accepted accounting principles.
4.15 True and Complete Disclosure. All factual information
furnished by or on behalf of any Credit Party in writing to the Agent or any
Bank in connection with the Credit Documents and the transactions contemplated
thereby is true and accurate in all material respects on the date as of which
such information was dated or certified and does not contain any untrue
statement of material fact or omit to state any material fact necessary to make
the statements contained therein not misleading. All projections, estimates,
and pro forma financial information furnished by any Credit Party were prepared
on the basis of assumptions, data, information, tests, or conditions believed
to be reasonable at the time such projections, estimates, and pro forma
financial information were furnished.
4.16 Year 2000.
(a) Except to the extent that a failure to do so could
not reasonably be expected to cause a Material Adverse Change, the Borrower (i)
has begun analyzing the operations of the Restricted Entities that could be
adversely affected by failure to become Year 2000 compliant (that is, that
computer applications, imbedded microchips and other systems will be able to
perform date-sensitive functions prior to and after December 31, 1999); and
(ii) is developing a plan for becoming Year 2000 compliant in a timely manner.
The Borrower reasonably believes that it will become Year 2000 compliant for
its operations and those of its Subsidiaries and Affiliates on a timely basis
except to the extent that a failure to do so could not reasonably be expected
to cause a Material Adverse Change.
(b) The Borrower will promptly notify the Bank in the
event the Borrower determines that any computer application which is material
to the operations of the Borrower, its Subsidiaries, or its Affiliates or any
of its material vendors or suppliers will not be fully Year 2000 compliant on a
timely basis, except to the extent that such failure could not reasonably be
expected to cause a Material Adverse Change.
ARTICLE 5. COVENANTS. Until the Agent and the Banks receive irrevocable
payment of the Credit Obligations and have terminated this Agreement and each
other Credit Document, the Borrower shall comply with and cause compliance with
the following covenants:
5.1 Organization. The Borrower shall cause each Restricted Entity
to (a) maintain itself as an entity duly organized, validly existing, and in
good standing under the laws of such Person's respective jurisdiction of
organization and (b) be duly licensed, qualified to do business, and in good
standing in each jurisdiction in which such Person is organized, owns property,
or conducts operations and which requires such licensing or qualification where
failure to be so licensed, qualified, or in good standing as required by this
clause (b) could reasonably be expected to cause
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a Material Adverse Change; provided, however, that nothing in this Section 5.1
shall be interpreted to be violated as a result of a transaction permitted by
Section 5.9.
5.2 Reporting. The Borrower shall furnish to the Agent all of the
following:
(a) Annual Reports. As soon as available and in any
event not later than 90 days after the end of each fiscal year of the Borrower,
(i) a copy of the annual audit report for such fiscal year for the Borrower,
including therein the consolidated balance sheets of the Borrower as of the end
of such fiscal year and the consolidated statements of income, stockholders'
equity, and cash flows for the Borrower for such fiscal year, setting forth the
consolidated financial position and results of the Borrower for such fiscal
year and certified, without any qualification or limit of the scope of the
examination of matters relevant to the financial statements, by a nationally
recognized certified public accounting firm, (ii) a completed Compliance
Certificate duly certified by a Responsible Officer of the Borrower, and (iii)
a completed Contract Status Report duly certified by a Responsible Officer of
the Borrower;
(b) Quarterly Reports. As soon as available and in any
event not later than 45 days after the end of each of the first three fiscal
quarters of the Borrower of each year, and in each case in form and substance
acceptable to the Agent, (i) a copy of the internally prepared consolidated
financial statements of the Borrower for such fiscal quarter and for the fiscal
year to date period ending on the last day of such fiscal quarter, including
therein the consolidated balance sheets of the Borrower as of the end of such
fiscal quarter and the consolidated statements of income, and cash flows for
such fiscal quarter and for such fiscal year to date period, setting forth the
consolidated financial position and results of the Borrower for such fiscal
quarter and fiscal year to date period, all in reasonable detail and duly
certified by a Responsible Officer of the Borrower as having been prepared in
accordance with generally accepted accounting principles, including those
applicable to interim financial reports which permit normal year end
adjustments and do not require complete financial notes, (ii) a completed
Compliance Certificate duly certified by a Responsible Officer of the Borrower,
and (iii) a completed Contract Status Report duly certified by a Responsible
Officer of the Borrower;
(c) Semi-annual Subsidiary Update. As soon as available
and in any event not later than 45 days after the end of the second fiscal
quarter of the Borrower of each year and 90 days after the end of the fourth
fiscal quarter of the Borrower of each year, an update of the information
included in Schedule II, including all Subsidiaries acquired by the Borrower
since the previous update of such scheduled information.
(d) Acquisition Information. As soon as available prior
to the closing of any Acquisition requiring approval of the Majority Banks, and
on or prior to the closing of any Acquisition not requiring such approval, a
completed Acquisition Certificate duly certified by a Responsible Officer of
the Borrower, which the Agent shall forward to the Banks for any Acquisition
requiring approval of the Majority Banks (and prior to the consummation of the
Acquisition, the
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Borrower shall, upon request by the Agent, make available to the Agent at the
Borrower's offices in Houston, Texas, the acquisition documents regarding the
acquired assets, including schedules reflecting litigation liabilities,
environmental liabilities, and other assumed liabilities, and any other
information regarding the acquired assets as the Agent may reasonably request);
(e) SEC Filings. As soon as available and in any event
not later than thirty days after the filing or delivery thereof, copies of all
financial statements, reports, and proxy statements which the Borrower shall
have sent to its stockholders generally and copies of all regular and periodic
reports, if any, which any Restricted Entity shall have filed with the
Securities and Exchange Commission;
(f) Defaults. Promptly, but in any event within five
Business Days after the discovery thereof, a notice of any facts known to a
Responsible Officer of any Restricted Entity which constitute a Default,
together with a statement of a Responsible Officer of the Borrower setting
forth the details of such facts and the actions which the Borrower has taken
and proposes to take with respect thereto (and the Agent shall, promptly upon
receipt from the Borrower of a notice pursuant to this Section 5.2(e), forward
a copy of such notice to each Bank);
(g) Litigation. Promptly, but in any event within 10
Business Days after the commencement thereof, notice of all actions, suits, and
proceedings before any court or governmental department, commission, board,
bureau, agency, or instrumentality, domestic or foreign, affecting any
Restricted Entity which, if determined adversely, could reasonably be expected
to cause a Material Adverse Change;
(h) Material Agreement Default. Promptly, but in any
event within 10 Business Days after a Responsible Officer obtains knowledge
thereof, notice of any breach by any Restricted Entity of any contract or
agreement which breach could reasonably be expected to cause a Material Adverse
Change;
(i) Material Changes. Prompt written notice of any other
condition or event of which a Responsible Officer of any Restricted Entity has
knowledge, which condition or event has resulted or could reasonably be
expected to cause a Material Adverse Change; and
(j) Other Information. Such other information respecting
the business operations or property of any Restricted Entity, financial or
otherwise, as the Agent or the Majority Banks may from time to time reasonably
request.
5.3 Inspection. The Borrower shall cause each Restricted Entity
to permit the Agent and the Banks to visit and inspect any of the properties of
such Restricted Entity, to examine all of such Person's books of account,
records, reports, and other papers, to make copies and extracts therefrom, and
to discuss their respective affairs, finances, and accounts with their
respective officers, employees, and independent public accountants all at such
reasonable times and as often as may be
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reasonably requested, provided that the Borrower is given at least 3 Business
Days' advance notice thereof and reasonable opportunity to be present when
independent public accountants or other third parties are contacted, and
provided further that so long as no Default or Event of Default exists, the
Agent and the Banks shall not exercise the foregoing inspection right more
often than once in any calendar year.
5.4 Use of Proceeds. The proceeds of the Revolving Loan
Borrowings shall be used by the Borrower for Acquisitions, working capital
needs, Capital Expenditures, and for other lawful corporate purposes. The
Borrower shall not, directly or indirectly, use any part of such proceeds for
any purpose which violates, or is inconsistent with, Regulations T, U, or X of
the Board of Governors of the Federal Reserve System.
5.5 Financial Covenants. The Agent shall determine compliance
with the following financial covenants based upon the applicable Schedule of
the most recent Compliance Certificate delivered to the Agent pursuant to
Section 5.2(a) or 5.2(b).
(a) Net Worth. The Borrower shall not permit the
consolidated Net Worth of the Borrower as of the last day of each fiscal
quarter to be less than the sum of (i) $187,500,000, plus (ii) 90% of the
cumulative quarterly consolidated net income of the Borrower after March 31,
1998, for each fiscal quarter of the Borrower during which the Borrower has
positive consolidated net earnings; plus (iii) 100% of the net proceeds
received by Borrower after March 31, 1998, from any sale or issuance of any
equity securities of, or any other additions to capital by, the Borrower or its
Subsidiaries; plus (iv) to the extent that the required consolidated Net Worth
under this Section 5.5(a) was not increased in clauses (i) through (iii) above
as a result of any Acquisition, 100% of any increase in the consolidated Net
Worth of the Borrower resulting from any Acquisition. Compliance with this
paragraph (a) shall be determined based upon Schedule C of the applicable
Compliance Certificate.
(b) Maximum Debt to EBITDA Ratio. As of the last day of
each fiscal quarter of the Borrower, the Borrower shall not permit the ratio of
(i) the consolidated Debt of the Borrower as of end of such fiscal quarter to
(ii) the consolidated EBITDA of the Borrower for the preceding four fiscal
quarters then ended, to be greater than 2.50 to 1.00. Compliance with this
paragraph (b) shall be determined based upon Schedule C of the applicable
Compliance Certificate.
(c) Minimum Fixed Charge Coverage Ratio. As of the last
day of each fiscal quarter, the Borrower shall not permit the ratio of (i) the
consolidated EBITDA of the Borrower for the preceding four fiscal quarters then
ended less consolidated Cash Taxes paid by the Borrower during such period to
(ii) (A) the consolidated Interest Expense of the Borrower for the preceding
four fiscal quarters then ended plus (B) the aggregate amount of Restricted
Payments declared or paid by the Borrower during such period plus (C) the
consolidated Capital Expenditures (other than Capital Expenditures that are
deemed to occur solely because of the making of an Acquisition) of the Borrower
during such period plus (D) the consolidated current maturities of the Borrower
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(including Capital Leases) plus (E) the greater of (1) 20% of the outstanding
amount of the Revolving Loan as of the last day of such fiscal quarter or (2)
$4,000,000, to be less than 1.75 to 1.00; provided, that with respect to a
determination for which any component of such determination involves Persons
which were not Restricted Entities for the entire applicable period of
determination, the Cash Taxes paid by each such Person during such period may,
at the election of the Borrower, be deemed to be equal to the product of (a)
the EBITDA of such Person for the applicable period multiplied by (b) 39%.
Compliance with this paragraph (c) shall be determined based upon Schedule C of
the applicable Compliance Certificate.
(d) Capital Expenditures. The Borrower shall not permit
the consolidated Capital Expenditures (other than Capital Expenditures that are
deemed to occur because of the making of an Acquisition) of the Borrower during
any four quarter period to exceed an amount equal to 6% of the consolidated Net
Worth of the Borrower as of the end of the applicable four quarter period;
provided, that with respect to a determination including any fiscal quarter
which involves Persons which were not Restricted Entities for the entire
applicable period of determination, the Capital Expenditures of each such
Person for each such quarterly period shall be deemed to be equal to the
quotient of (i) the consolidated Capital Expenditures of such Person for the
fiscal year then most recently ended, divided by (ii) 4. Compliance with this
paragraph (d) shall be determined based upon Schedule C of the applicable
Compliance Certificate.
5.6 Debt.
(a) The Borrower shall not permit any Restricted Entity
to create, assume, incur, suffer to exist, or in any manner become liable,
directly, indirectly, or contingently in respect of, any Debt other than
Permitted Debt.
(b) The Borrower shall, as soon as available but in any
event not less than 10 Business Days prior to the issuance of any preferred
stock or subordinated indebtedness, deliver to the Agent a copy of the
certificate of designation or subordinated debt documents, as applicable,
together with a certificate, signed by a Responsible Officer of the Borrower,
certifying that such preferred stock or subordinated indebtedness constitutes
Qualified Preferred Stock or Subordinated Debt pursuant to the terms of this
Agreement.
5.7 Liens. The Borrower shall not permit any Restricted Entity to
create, assume, incur, or suffer to exist any Lien on any of its real or
personal property whether now owned or hereafter acquired, or assign any right
to receive its income, except for Permitted Liens.
5.8 Other Obligations.
(a) The Borrower shall not permit any Restricted Entity
to create, incur, assume, or suffer to exist any obligations in respect of
unfunded vested benefits under any pension Plan or deferred compensation
agreement in an aggregate outstanding amount in excess of $1,000,000.
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(b) The Borrower shall not permit any Restricted Entity
to create, incur, assume, or suffer to exist any obligations in respect of
Derivatives, other than Derivatives used by any Restricted Entity in such
Restricted Entity's respective business operations in aggregate notional
quantities not to exceed the reasonably anticipated consumption of such
Restricted Entity of the underlying commodity for the relevant period, but no
Derivatives which are speculative in nature.
5.9 Corporate Transactions. The Borrower shall not, without the
Agent's consent, permit any Restricted Entity to (a) merge, consolidate, or
amalgamate with another Person, or liquidate, wind up, or dissolve itself (or
take any action towards any of the foregoing), (b) convey, sell, lease, assign,
transfer, or otherwise dispose of any of its property, businesses, or other
assets outside of the ordinary course of business, or (c) make any Acquisition
except that:
(i) Any Subsidiary of the Borrower may merge,
consolidate, or amalgamate into the Borrower or any wholly owned
Subsidiary of the Borrower, or convey, sell, lease, assign, transfer,
or otherwise dispose of any of its assets to the Borrower or any
wholly-owned Subsidiary of the Borrower (and if such disposition
transfers all or substantially all of the assets of transferring
Subsidiary, such subsidiary may then liquidate, wind up, or dissolve
itself); provided that the Borrower or the wholly-owned Subsidiary, as
applicable, is the surviving or acquiring entity; and
(ii) The Borrower or any Subsidiary of the Borrower may
make any Acquisition (by purchase or merger) provided that (A) the
Borrower or such Subsidiary of the Borrower is the acquiring or
surviving entity, (B) the aggregate of all consideration (other than
common stock of the Borrower) paid by the Restricted Entities in
connection with any Acquisition made on or after the date of this
Agreement does not exceed $10,000,000 without the prior consent of the
Majority Banks, (C) the aggregate of all consideration (other than
common stock of the Borrower) paid by the Restricted Entities in
connection with all Acquisitions during any calendar year (exclusive
of any such consideration paid prior to the date of this Agreement)
does not exceed $30,000,000 without the prior consent of the Majority
Banks, (D) no Default or Event of Default exists and the Acquisition
would not reasonably be expected to cause a Default or Event of
Default (including any default under Section 5.5 with respect to
historical and future proforma financial status and results), and (E)
the acquired assets are in substantially the same business as the
Borrower; provided that to the extent that the Borrower obtains the
consent of the Majority Banks to an Acquisition pursuant to
subsections (B) or (C) above, the consideration paid by the Restricted
Entities in connection with such Acquisition shall not be included in
the calculations of the limitations contained in such subsections.
5.10 Distributions. The Borrower shall not (a) declare or pay any
dividends; (b) purchase, redeem, retire, or otherwise acquire for value any of
its capital stock now or hereafter outstanding; or make any distribution of
assets to its stockholders as such, whether in cash, assets, or in obligations
of it; (c) allocate or otherwise set apart any sum for the payment of any
dividend or
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distribution on, or for the purchase, redemption, or retirement of, any shares
of its capital stock; or (d) make any other distribution by reduction of
capital or otherwise in respect of any shares of its capital stock, except that
the Borrower may make payments of dividends on Qualified Preferred Stock.
5.11 Transactions with Affiliates. The Borrower shall not permit
any Restricted Entity to enter into any transaction directly or indirectly with
or for the benefit of an Affiliate except transactions with an Affiliate for
the leasing of property, the rendering or receipt of services, or the purchase
or sale of inventory or other assets in the ordinary course of business if the
monetary or business consideration arising from such a transaction would be
substantially as advantageous to such Restricted Entity as the monetary or
business consideration which such Restricted Entity would obtain in a
comparable arm's length transaction.
5.12 Insurance.
(a) The Borrower shall cause each Restricted Entity to
maintain insurance with responsible and reputable insurance companies or
associations reasonably acceptable to the Agent in such amounts and covering
such risks as are usually carried by companies engaged in similar businesses
and owning similar properties in the same general areas in which such Persons
operate. Without limiting the foregoing, the Borrower shall maintain insurance
coverage for the Restricted Entities equal to or better than, on an item by
item basis for each item, the coverage for the Restricted Entities existing on
the date of this Agreement. The Borrower shall deliver to the Agent
certificates evidencing such policies or copies of such policies at the Agent's
request following a reasonable period to obtain such certificates taking into
account the jurisdiction where the insurance is maintained.
(b) All policies representing liability insurance of the
Restricted Entities shall name the Agent and the Banks as additional named
insureds in a form satisfactory to the Agent. All proceeds of such liability
insurance coverage for the Agent and the Banks shall be paid as directed by the
Agent to indemnify the Agent or the applicable Bank for the liability covered.
In the event that proceeds of property or liability insurance are paid to any
Restricted Entity in violation of the foregoing, the Restricted Entity shall
hold the proceeds in trust for the Agent, segregate the proceeds from the other
funds of such Restricted Entity, and promptly pay the proceeds to the Agent
with any necessary endorsement. The Agent shall have the right, but not the
obligation, during the existence of an Event of Default, to make proof of loss
under, settle and adjust any claim under, and receive the proceeds under the
insurance, and the reasonable expenses incurred by the Agent in the adjustment
and collection of such proceeds shall be paid by the Borrower. The Borrower
irrevocably appoints the Agent as its attorney in fact to take such actions in
its name. If the Agent does not take such actions, the Borrower may take such
actions subject to the approval of any final action by the Agent. The Agent
shall not be liable or responsible for failure to collect or exercise diligence
in the collection of any proceeds.
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5.13 Investments. The Borrower shall not permit any Restricted
Entity to make or hold any direct or indirect investment in any Person,
including capital contributions to the Person, investments in the debt or
equity securities of the Person, and loans, guaranties, trade credit, or other
extensions of credit to the Person, except for Permitted Investments.
5.14 Lines of Business. The Borrower shall not permit the
Restricted Entities to change the character of their business as conducted on
the date of this Agreement, or engage in any type of business not reasonably
related to such business as presently and normally conducted.
5.15 Compliance with Laws. The Borrower shall cause each
Restricted Entity to comply with all federal, state, and local laws and
regulations which are applicable to the operations and property of such
Persons, in each case, where the failure to comply could reasonably be expected
to cause a Material Adverse Change.
5.16 Environmental Compliance. The Borrower shall cause each
Restricted Entity to comply with all Environmental Laws and obtain and comply
with all related permits necessary for the ownership and operation of any such
Person's properties, in each case, where the failure to comply could reasonably
be expected to cause a Material Adverse Change. The Borrower shall cause each
Restricted Entity to promptly disclose to the Agent any notice to or
investigation of such Persons for any violation or alleged violation of any
Environmental Law in connection with any such Person's presently or previously
owned properties which represent liabilities which could reasonably be expected
to cause a Material Adverse Change. The Borrower shall not permit any
Restricted Entity to create, handle, transport, use, or dispose of any
Hazardous Materials on or about any such Person's properties; release any
Hazardous Materials into the environment in connection with any such Person's
operations or contaminate any properties with Hazardous Materials; or own
properties contaminated by any Hazardous Materials, in each case in any manner
that could reasonably be expected to cause a Material Adverse Change.
5.17 ERISA Compliance. The Borrower shall cause each Restricted
Entity to (i) comply in all material respects with all applicable provisions of
ERISA and prevent the occurrence of any Reportable Event or Prohibited
Transaction with respect to, or the termination of, any of their respective
Plans, in each case, where the failure to do so could reasonably be expected to
cause a Material Adverse Change and (ii) not create or participate in any
employee pension benefit plan covered by Title IV of ERISA or any multiemployer
plan under Section 4001(a)(3) of ERISA.
5.18 Payment of Certain Claims. The Borrower shall cause each
Restricted Entity to pay and discharge, before the same shall become
delinquent, (a) all taxes, assessments, levies, and like charges imposed upon
any such Person or upon any such Person's income, profits, or property by
authorities having competent jurisdiction prior to the date on which penalties
attach thereto except for tax payments being contested in good faith for which
adequate reserves have been established and reported in accordance with
generally accepted accounting principals which could not reasonably be expected
to cause a Material Adverse Change and (b) all trade payables and current
operating
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liabilities, unless the same are less than 90 days past due or are being
contested in good faith, have adequate reserves established and reported in
accordance with general accepted accounting principals, and could not
reasonably be expected to cause a Material Adverse Change.
5.19 Subsidiaries. Upon the formation or acquisition of any new
Subsidiary, the Borrower shall and shall cause such Subsidiary to promptly, but
in any event within 30 days after the formation or acquisition of such new
Subsidiary, execute and deliver to the Agent such guaranties, security
agreements, pledge agreements, amendment agreements, consents, and other
documents and agreements as the Agent requests so that such Subsidiary
guarantees and secures the Credit Obligations on the same terms as the existing
Subsidiaries of the Borrower (including the execution and delivery of a Joinder
Agreement in substantially the form of Exhibit G for the purpose of joining
such Subsidiary as a party to the Guaranty, the Security Agreement, and, if
applicable, the Stock Pledge Agreement or the Partnership Pledge Agreement, or
the execution of such new guaranties, pledge agreements, security agreements,
and consents as the Agent determines are necessary to have the same effect in
different jurisdictions). In connection therewith and within 30 days after the
formation or acquisition of such new Subsidiary, the Borrower shall provide
corporate documentation and opinion letters reasonably satisfactory to the
Agent reflecting the corporate status of such new Subsidiary of the Borrower
and the enforceability of such agreements.
ARTICLE 6. DEFAULT AND REMEDIES.
6.1 Events of Default. Each of the following shall be an "Event
of Default" for the purposes of this Agreement and for each of the Credit
Documents:
(a) Payment Failure. The Borrower (i) fails to pay when
due any principal amounts due under this Agreement or any other Credit Document
or (ii) fails to pay when due any interest, fees, reimbursements,
indemnifications, or other amounts due under this Agreement or any other Credit
Document and such failure has not been cured within five Business Days;
(b) False Representation. Any written representation or
warranty made by any Credit Party or any Responsible Officer thereof in this
Agreement or in any other Credit Document proves to have been false or
erroneous in any material respect at the time it was made or deemed made;
(c) Breach of Covenant. (i) Any breach by the Borrower
of any of the covenants contained in Sections 5.1(a) (with respect to the
Borrower), 5.2, 5.3, 5.4, 5.6, 5.7, 5.8, 5.9, 5.10, 5.13 or 5.19 or (ii) any
breach by any Credit Party of any other covenants contained in this Agreement,
or any other Credit Document and such breach is not cured within 30 days
following the earlier of knowledge of such breach by a Responsible Officer of
such Credit Party or the receipt of written notice thereof from the Agent;
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(d) Security and Support Documents. Any Security
Document shall at any time and for any reason (other than one within the
reasonable control of any Bank) cease to create the Lien on the property
purported to be subject to such agreement in accordance with the terms of such
agreement, or cease to be in full force and effect, or shall be contested by
any party thereto;
(e) Guaranty. (i) the Guaranty shall at any time and for
any reason cease to be in full force and effect with respect to any Guarantor
(except as permitted under Section 5.9 hereof) or shall be contested by any
Guarantor, or any Guarantor shall deny it has any further liability or
obligation thereunder, or (ii) any breach by any Guarantor of any of the
covenants contained in Section 1 of the Guaranty;
(f) Material Debt Default. (i) Any principal, interest,
fees, or other amounts due on any Debt of any Restricted Entity (other than the
Credit Obligations) is not paid when due, whether by scheduled maturity,
required prepayment, acceleration, demand, or otherwise, and such failure is
not cured within the applicable grace period, if any, and the aggregate amount
of all Debt of such Persons so in default exceeds $250,000; (ii) any other
event shall occur or condition shall exist under any agreement or instrument
relating to any Debt of any such Person (other than the Credit Obligations) the
effect of which is to accelerate or to permit the acceleration of the maturity
of any such Debt, whether or not any such Debt is actually accelerated, and
such event or condition shall not be cured within the applicable grace period,
if any, and the aggregate amount of all Debt of such Persons so in default
exceeds $1,000,000; (iii) any Debt of any such Person shall be declared to be
due and payable, or required to be prepaid (other than by a regularly scheduled
prepayment) prior to the stated maturity thereof, and the aggregate amount of
all Debt of such Persons so accelerated exceeds $1,000,000; or (iv) any default
or event of default, however denominated, occurs under the Swing Line Note;
(g) Material Agreement Default. There shall occur any
breach by any Restricted Entity of any contract or agreement which breach could
reasonably be expected to cause a Material Adverse Change and such breach is
not cured within the applicable grace period, if any;
(h) Bankruptcy and Insolvency. (i) there shall have been
filed against any Restricted Entity or any such Person's properties, without
such Person's consent, any petition or other request for relief seeking an
arrangement, receivership, reorganization, liquidation, or similar relief under
bankruptcy or other laws for the relief of debtors and such request for relief
(A) remains in effect for 60 or more days, whether or not consecutive, or (B)
is approved by a final nonappealable order, or (ii) any such Person consents
to or files any petition or other request for relief of the type described in
clause (i) above seeking relief from creditors, makes any assignment for the
benefit of creditors or other arrangement with creditors, or admits in writing
such Person's inability to pay such Person's debts as they become due (the
occurrence of any Event of Default under clause (i) or (ii) of this paragraph
being a "Bankruptcy Event of Default");
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(h) Adverse Judgment. The aggregate outstanding amount
of judgments against the Restricted Parties not discharged or stayed pending
appeal or other court action within 30 days following entry is greater than
$250,000; or
(i) Change of Control. There shall occur any Change of
Control.
6.2 Termination of Revolving Loan Commitments. Upon the
occurrence of any Bankruptcy Event of Default, all of the commitments of the
Agent and the Banks hereunder shall terminate. During the existence of any
Event of Default other than a Bankruptcy Event of Default, the Agent shall at
the request of the Majority Banks declare by written notice to the Borrower all
of the commitments of the Agent and the Banks hereunder terminated, whereupon
the same shall immediately terminate.
6.3 Acceleration of Credit Obligations. Upon the occurrence of
any Bankruptcy Event of Default, the aggregate outstanding principal amount of
all loans made hereunder, all accrued interest thereon, and all other Credit
Obligations shall immediately and automatically become due and payable. During
the existence of any Event of Default other than a Bankruptcy Event of Default,
the Agent shall at the request of the Majority Banks declare by written notice
to the Borrower the aggregate outstanding principal amount of all loans made
hereunder, all accrued interest thereon, and all other Credit Obligations to be
immediately due and payable, whereupon the same shall immediately become due
and payable. In connection with the foregoing, except for the notice provided
for above in this Article VI, the Borrower waives notice of any Default or
Event of Default, grace, notice of intent to accelerate, notice of
acceleration, presentment, demand, notice of nonpayment, protest, and all other
notices.
6.4 Cash Collateralization of Letters of Credit. Upon the
occurrence of any Bankruptcy Event of Default, the Borrower shall pay to the
Agent an amount equal to the Letter of Credit Exposure to be held in the Letter
of Credit Collateral Account for disposition in accordance with Section 2.2(g).
During the existence of any Event of Default other than a Bankruptcy Event of
Default, the Agent shall at the request of the Majority Banks require by
written notice to the Borrower that the Borrower pay to the Agent an amount
equal to the Letter of Credit Exposure to be held in the Letter of Credit
Collateral Account for disposition in accordance with Section 2.2(g), whereupon
the Borrower shall pay to the Agent such amount for such purpose.
6.5 Default Interest. If any Event of Default exists based upon a
default in the payment of any amounts owing hereunder, the Agent shall at the
request of the Majority Banks declare by written notice to the Borrower that
the Credit Obligations specified in such notice shall bear interest beginning
on the date specified in such notice until paid in full at the applicable
Default Rate for such Credit Obligations, whereupon the Borrower shall pay such
interest to the Agent for the benefit of the Agent and the Banks, as
applicable, upon demand by the Agent. If any other Event of Default exists,
the Agent shall at the request of the Majority Banks declare by written notice
to the Borrower that, unless such Event of Default is cured to the satisfaction
of the Agent and the Majority Banks
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on or before the 30th day following the occurrence of such Event of Default,
the Credit Obligations specified in such notice shall bear interest beginning
on such 30th day until paid in full at the applicable Default Rate for such
Credit Obligations, whereupon the Borrower shall, if such Event of Default is
not cured by such date, pay such interest to the Agent for the benefit of the
Agent and the Banks, as applicable, upon demand by the Agent after such date.
6.6 Right of Setoff. During the existence of an Event of Default,
the Agent and each Bank is hereby authorized at any time, to the fullest extent
permitted by law, to set off and apply any indebtedness owed by the Agent or
such Bank to the Borrower against any and all of the obligations of the
Borrower under this Agreement and the Credit Documents, irrespective of whether
or not the Agent or such Bank shall have made any demand under this Agreement
or the Credit Documents and although such obligations may be contingent and
unmatured. The Agent and each Bank, as the case may be, agrees promptly to
notify the Borrower after any such setoff and application made by such party
provided that the failure to give such notice shall not affect the validity of
such setoff and application.
6.7 Actions Under Credit Documents. Following an Event of
Default, the Agent shall at the request of the Majority Banks take any and all
actions permitted under the other Credit Documents, including the Guaranty and
the Security Documents.
6.8 Remedies Cumulative. No right, power, or remedy conferred to
the Agent or the Banks in this Agreement and the Credit Documents, or now or
hereafter existing at law, in equity, by statute, or otherwise, shall be
exclusive, and each such right, power, or remedy shall to the full extent
permitted by law be cumulative and in addition to every other such right,
power, or remedy. No course of dealing and no delay in exercising any right,
power, or remedy conferred to the Agent or the Banks in this Agreement and the
Credit Documents, or now or hereafter existing at law, in equity, by statute,
or otherwise, shall operate as a waiver of or otherwise prejudice any such
right, power, or remedy.
6.9 Application of Payments. Prior to the Revolving Loan Maturity
Date or any acceleration of the Credit Obligations, all payments made hereunder
shall be applied to the Credit Obligations as directed by the Borrower, subject
to the rules regarding the application of payments to certain Credit
Obligations provided for hereunder and in the Credit Documents. Following the
Revolving Loan Maturity Date or any acceleration of the Credit Obligations, all
payments and collections shall be applied to the Credit Obligations in the
following order:
First, to the payment of the costs, expenses, reimbursements
(other than reimbursement obligations with respect to draws
under Letters of Credit), and indemnifications of the Agent
that are due and payable under the Credit Documents;
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Then, ratably to the payment of the costs, expenses,
reimbursements (other than reimbursement obligations with
respect to draws under Letters of Credit), and
indemnifications of the Banks that are due and payable under
the Credit Documents;
Then, ratably to the payment of all accrued but unpaid
interest and fees and obligations under Interest Hedge
Agreements due and payable under the Credit Documents;
Then, ratably to the payment of all outstanding principal and
reimbursement obligations for draws under Letters of Credit
due and payable under the Credit Documents;
Then, ratably to the payment of any other amounts due and
owing with respect to the Credit Obligations; and
Finally, any surplus held by the Agent and remaining after
payment in full of all the Credit Obligations and reserve for
Credit Obligations not yet due and payable shall be promptly
paid over to the Borrower or to whomever may be lawfully
entitled to receive such surplus. All applications shall be
distributed in accordance with Section 2.10(a).
ARTICLE 7. THE AGENT AND THE ISSUING BANK
7.1 Authorization and Action. Each Bank hereby appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof and of the other Credit Documents, together with such powers as are
reasonably incidental thereto. Statements under the Credit Documents that the
Agent may take certain actions, without further qualification, means that the
Agent may take such actions with or without the consent of the Banks or the
Majority Banks, but where the Credit Documents expressly require the
determination of the Banks or the Majority Banks, the Agent shall not take any
such action without the prior written consent thereof. As to any matters not
expressly provided for by this Agreement or any other Credit Document
(including, without limitation, enforcement or collection of the Revolving Loan
Notes), the Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the written
instructions of the Majority Banks, and such instructions shall be binding upon
all Banks and all holders of Revolving Loan Notes; provided, however, that the
Agent shall not be required to take any action which exposes the Agent to
personal liability or which is contrary to this Agreement, any other Credit
Document, or applicable law.
7.2 Reliance, Etc. Neither the Agent, the Issuing Bank, nor any
of their respective Related Parties (for the purposes of this Section 7.2,
collectively, the "Indemnified Parties") shall be liable for any action taken
or omitted to be taken by any Indemnified Party under or in connection
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with this Agreement or the other Credit Documents, INCLUDING ANY INDEMNIFIED
PARTY'S OWN NEGLIGENCE, except for any Indemnified Party's gross negligence or
willful misconduct. Without limitation of the generality of the foregoing, the
Agent and the Issuing Bank: (a) may treat the payee of any Revolving Loan Note
as the holder thereof until the Agent receives written notice of the assignment
or transfer thereof signed by such payee and in form satisfactory to the Agent;
(b) may consult with legal counsel (including counsel for the Borrower),
independent public accountants, and other experts selected by it and shall not
be liable for any action taken or omitted to be taken in good faith by it in
accordance with the advice of such counsel, accountants, or experts; (c) makes
no warranty or representation to any Bank and shall not be responsible to any
Bank for any statements, warranties, or representations made in or in
connection with this Agreement or the other Credit Documents; (d) shall not
have any duty to ascertain or to inquire as to the performance or observance of
any of the terms, covenants, or conditions of this Agreement or any other
Credit Document on the part of the Credit Parties or to inspect the property
(including the books and records) of the Credit Parties; (e) shall not be
responsible to any Bank for the due execution, legality, validity,
enforceability, genuineness, sufficiency, or value of this Agreement or any
other Credit Document; and (f) shall incur no liability under or in respect of
this Agreement or any other Credit Document by acting upon any notice, consent,
certificate, or other instrument or writing (which may be by telecopier or
telex) reasonably believed by it to be genuine and signed or sent by the proper
party or parties.
7.3 Affiliates. With respect to its Revolving Loan Commitments,
the Revolving Loan Advances made by it, its interests in the Letters of Credit,
and the Revolving Loan Notes issued to it, the Agent and the Issuing Bank shall
have the same rights and powers under this Agreement as any other Bank and may
exercise the same as though it were not the Agent. The term "Bank" or "Banks"
shall, unless otherwise expressly indicated, include the Agent and the Issuing
Bank in their individual capacity. The Agent, the Issuing Bank, and their
respective Affiliates may accept deposits from, lend money to, act as trustee
under indentures of, and generally engage in any kind of business with, any
Credit Party, and any Person who may do business with or own securities of any
Credit Party, all as if the Agent were not an agent hereunder and the Issuing
Bank were not the issuer of Letters of Credit hereunder and without any duty to
account therefor to the Banks.
7.4 Bank Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank and based
on the Registration Statement, the Interim Financial Statements, and such other
documents and information as it has deemed appropriate, made its own credit
analysis and decision to enter into this Agreement. Each Bank also
acknowledges that it shall, independently and without reliance upon the Agent
or any other Bank and based on such documents and information as it shall deem
appropriate at the time, continue to make its own credit decisions in taking or
not taking action under this Agreement.
7.5 Expenses. To the extent not paid by the Borrower, each Bank
severally agrees to pay to the Agent and the Issuing Bank on demand such Bank's
ratable share of the following: (a) all reasonable out-of-pocket costs and
expenses of the Agent and the Issuing Bank in connection with
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the preparation, execution, delivery, administration, modification, and
amendment of this Agreement and the other Credit Documents, including the
reasonable fees and expenses of outside counsel for the Agent and the Issuing
Bank with respect to advising the Agent and the Issuing Bank as to their
respective rights and responsibilities under this Agreement and the Credit
Documents, and (b) all out-of-pocket costs and expenses of the Agent and the
Issuing Bank in connection with the preservation or enforcement of the rights
of the Agent, the Issuing Bank, and the Banks under this Agreement and the
other Credit Documents, whether through negotiations, legal proceedings, or
otherwise, including fees and expenses of counsel for the Agent and the Issuing
Bank. The provisions of this paragraph shall survive the repayment and
termination of the credit provided for under this Agreement and any purported
termination of this Agreement which does not expressly refer to this paragraph.
7.6 Indemnification. To the extent not reimbursed by the
Borrower, each Bank severally agrees to protect, defend, indemnify, and hold
harmless the Agent, the Issuing Bank, and each of their respective Related
Parties (for the purposes of this Section 7.6, collectively, the "Indemnified
Parties"), from and against all demands, claims, actions, suits, damages,
judgments, fines, penalties, liabilities, and out-of-pocket costs and expenses,
including reasonable costs of attorneys and related costs of experts such as
accountants (collectively, the "Indemnified Liabilities"), actually incurred by
any Indemnified Party which are related to any litigation or proceeding
relating to this Agreement, the Credit Documents, or the transactions
contemplated thereunder, INCLUDING ANY INDEMNIFIED LIABILITIES CAUSED BY ANY
INDEMNIFIED PARTY'S OWN NEGLIGENCE, but not Indemnified Liabilities which are a
result of any Indemnified Party's gross negligence or willful misconduct. The
provisions of this paragraph shall survive the repayment and termination of the
credit provided for under this Agreement and any purported termination of this
Agreement which does not expressly refer to this paragraph.
7.7 Successor Agent and Issuing Bank. The Agent or the Issuing
Bank may resign at any time by giving written notice thereof to the Banks and
the Borrower and may be removed at any time with or without cause by the
Majority Banks upon receipt of written notice from the Majority Banks to such
effect. Upon receipt of notice of any such resignation or removal, the
Majority Banks shall have the right to appoint a successor Agent or Issuing
Bank with the consent of the Borrower, which consent shall not be unreasonably
withheld. If no successor Agent or Issuing Bank shall have been so appointed
by the Majority Banks with the consent of the Borrower, and shall have accepted
such appointment, within 30 days after the retiring Agent's or Issuing Bank's
giving of notice of resignation or the Majority Banks' removal of the retiring
Agent or Issuing Bank, then the retiring Agent or Issuing Bank may, on behalf
of the Banks and the Borrower, appoint a successor Agent or Issuing Bank, which
shall be, in the case of a successor agent, a commercial bank organized under
the laws of the United States of America or of any State thereof and having a
combined capital and surplus of at least $500,000,000 and, in the case of the
Issuing Bank, a Bank. Upon the acceptance of any appointment as Agent or
Issuing Bank by a successor Agent or Issuing Bank, such successor Agent or
Issuing Bank shall thereupon succeed to and become vested with all the rights,
powers, privileges, and duties of the retiring Agent or Issuing Bank, and the
retiring Agent or Issuing Bank
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shall be discharged from any duties and obligations under this Agreement and
the other Credit Documents after such acceptance, except that the retiring
Issuing Bank shall remain the Issuing Bank with respect to any Letters of
Credit outstanding on the effective date of its resignation or removal and the
provisions affecting the Issuing Bank with respect to such Letters of Credit
shall inure to the benefit of the retiring Issuing Bank until the termination
of all such Letters of Credit. After any Agent's or Issuing Bank's resignation
or removal hereunder as Agent or Issuing Bank, the provisions of this Article 7
shall inure to such Person's benefit as to any actions taken or omitted to be
taken by such Person while such Person was Agent or Issuing Bank under this
Agreement and the other Credit Documents.
ARTICLE 8. MISCELLANEOUS.
8.1 Expenses. The Borrower shall pay on demand of the applicable
party specified herein (a) all reasonable out-of-pocket costs and expenses of
the Agent and the Issuing Bank in connection with the preparation, execution,
delivery, administration, modification, and amendment of this Agreement and the
other Credit Documents, including the reasonable fees and expenses of outside
counsel for the Agent and the Issuing Bank, and (b) all out-of-pocket costs and
expenses of the Agent, the Issuing Bank, and each Bank in connection with the
preservation or enforcement of their respective rights under this Agreement and
the other Credit Documents, whether through negotiations, legal proceedings, or
otherwise, including fees and expenses of counsel for the Agent, the Issuing
Bank, and each Bank. The provisions of this paragraph shall survive the
repayment and termination of the credit provided for under this Agreement and
any purported termination of this Agreement which does not expressly refer to
this paragraph.
8.2 Indemnification. The Borrower agrees to protect, defend,
indemnify, and hold harmless the Agent, the Issuing Bank, each Bank, and each
of their respective Related Parties (for the purposes of this Section 8.2,
collectively, the "Indemnified Parties"), from and against all demands, claims,
actions, suits, damages, judgments, fines, penalties, liabilities, and
out-of-pocket costs and expenses, including reasonable costs of attorneys and
related costs of experts such as accountants (collectively, the "Indemnified
Liabilities"), actually incurred by any Indemnified Party which are related to
any litigation or proceeding relating to this Agreement, the Credit Documents,
or the transactions contemplated thereunder, INCLUDING ANY INDEMNIFIED
LIABILITIES CAUSED BY ANY INDEMNIFIED PARTY'S OWN NEGLIGENCE, but not
Indemnified Liabilities which are a result of any Indemnified Party's gross
negligence or willful misconduct. The provisions of this paragraph shall
survive the repayment and termination of the credit provided for under this
Agreement and any purported termination of this Agreement which does not
expressly refer to this paragraph.
8.3 Modifications, Waivers, and Consents. No modification or
waiver of any provision of this Agreement or the Revolving Loan Notes, nor any
consent required under this Agreement or the Revolving Loan Notes, shall be
effective unless the same shall be in writing and signed by the Majority Banks
and the Borrower, and then such modification, waiver, or consent shall be
effective
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only in the specific instance and for the specific purpose for which given;
provided, however, that no modification, waiver, or consent shall, unless in
writing and signed by all the Banks and the Borrower do any of the following:
(a) waive any of the conditions specified in Section 3.1 or 3.2, (b) increase
the Revolving Loan Commitments of the Banks, (c) forgive or reduce the amount
or rate of any principal, interest, or fees payable under the Credit Documents,
or postpone or extend the time for payment thereof, (d) release any Guaranty or
any material collateral securing the Credit Obligations (except as otherwise
permitted or required herein), or (e) change the percentage of Banks required
to take any action under this Agreement, the Revolving Loan Notes, or the
Security Documents, including any amendment of the definition of "Majority
Banks" or this Section 8.3. No modification, waiver, or consent shall, unless
in writing and signed by the Agent or the Issuing Bank affect the rights or
obligations of the Agent or the Issuing Bank, as the case may be, under the
Credit Documents. The Agent shall not modify or waive or grant any consent
under any other Credit Document of such action would be prohibited under this
Section 8.3 with respect to the Credit Agreement or the Revolving Loan Notes.
8.4 Survival of Agreements. All representations, warranties, and
covenants of the Borrower in this Agreement and the Credit Documents shall
survive the execution of this Agreement and the Credit Documents and any other
document or agreement.
8.5 Assignment and Participation. This Agreement and the Credit
Documents shall bind and inure to the benefit of the Borrower and their
respective successors and assigns and the Agent and the Banks and their
respective successors and assigns. The Borrower may not assign its rights or
delegate its duties under this Agreement or any Credit Document.
(a) Assignments. Any Bank may assign to one or more
banks or other entities all or any portion of its rights and obligations under
this Agreement (including, without limitation, all or a portion of its
Revolving Loan Commitments, the Revolving Loan Advances owing to it, the
Revolving Loan Notes held by it, and the participation interest in the Letters
of Credit owned by it); provided, however, that (i) each such assignment shall
be of a constant, and not a varying, percentage of all of such Bank's rights
and obligations under this Agreement, (ii) assignments of Revolving Loan
Commitments shall be made in minimum amounts of $5,000,000 and be made in
integral multiples of $1,000,000 and the assigning Bank, if it retains any
Revolving Loan Commitments, shall maintain at least $5,000,000 in Revolving
Loan Commitments, (iii) each such assignment shall be to an Eligible Assignee,
(iv) the parties to each such assignment shall execute and deliver to the
Agent, for its acceptance and recording in the Register, an Assignment and
Acceptance, together with the Revolving Loan Notes subject to such assignment,
and (v) each Eligible Assignee (other than the Eligible Assignee of the Agent)
shall pay to the Agent a $3,500 administrative fee. Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment and Acceptance, which effective date shall be at least three
Business Days after the execution thereof, (A) the assignee thereunder shall be
a party hereto for all purposes and, to the extent that rights and obligations
hereunder have been assigned to it pursuant to such Assignment and Acceptance,
have the rights and obligations of a Bank hereunder and (B) such Bank
thereunder
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shall, to the extent that rights and obligations hereunder have been assigned
by it pursuant to such Assignment and Acceptance, relinquish its rights and be
released from its obligations under this Agreement (and, in the case of an
Assignment and Acceptance covering all or the remaining portion of such Bank's
rights and obligations under this Agreement, such Bank shall cease to be a
party hereto).
(b) Term of Assignments. By executing and delivering an
Assignment and Acceptance, the Bank thereunder and the assignee thereunder
confirm to and agree with each other and the other parties hereto as follows:
(i) other than as provided in such Assignment and Acceptance, such Bank makes
no representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency of value of this Agreement or any other instrument or document
furnished pursuant hereto; (ii) such Bank makes no representation or warranty
and assumes no responsibility with respect to the financial condition of any
Credit Party or the performance or observance by any Credit Party of any of its
obligations under this Agreement or any other instrument or document furnished
pursuant hereto; (iii) such assignee confirms that it has received a copy of
this Agreement, together with copies of the Registration Statement and such
other documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into such Assignment and Acceptance; (iv)
such assignee shall, independently and without reliance upon the Agent, such
Bank or any other Bank and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement; (v) such assignee appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to the Agent by the
terms hereof, together with such powers as are reasonably incidental thereto;
and (vi) such assignee agrees that it shall perform in accordance with their
terms all of the obligations which by the terms of this Agreement are required
to be performed by it as a Bank.
(c) The Register. The Agent shall maintain at its
address referred to in Section 8.6 a copy of each Assignment and Acceptance
delivered to and accepted by it and a register for the recordation of the names
and addresses of the Banks and the Revolving Loan Commitments of each Bank from
time to time (the "Register"). The entries in the Register shall be conclusive
and binding for all purposes, absent manifest error, and the Borrower, the
Agent, the Issuing Bank, and the Banks may treat each Person whose name is
recorded in the Register as a Bank hereunder for all purposes of this
Agreement. The Register shall be available for inspection by the Borrower or
any Bank at any reasonable time and from time to time upon reasonable prior
notice.
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(d) Procedures. Upon its receipt of an Assignment and
Acceptance executed by a Bank and an Eligible Assignee, together with the
Revolving Loan Notes subject to such assignment, the Agent shall, if such
Assignment and Acceptance has been completed in the appropriate form, (i)
accept such Assignment and Acceptance, (ii) record the information contained
therein in the Register, and (iii) give prompt notice thereof to the Borrower.
Within five Business Days after its receipt of such notice, the Borrower shall
execute and deliver to the Agent in exchange for the surrendered Revolving Loan
Notes a new Revolving Loan Note to the order of such Eligible Assignee in an
amount equal to the Revolving Loan Commitment assumed by it pursuant to such
Assignment and Acceptance and, if such Bank has retained any Revolving Loan
Commitment hereunder, a new Revolving Loan Note to the order of such Bank in an
amount equal to the Revolving Loan Commitment retained by it hereunder. Such
new Revolving Loan Notes shall be dated the effective date of such Assignment
and Acceptance and shall be in the appropriate form.
(e) Participation. Each Bank may sell participation to
one or more banks or other entities in or to all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of its Revolving Loan Commitments, the Revolving Loan Advances owing to
it, its participation interest in the Letters of Credit, and the Revolving Loan
Notes held by it); provided, however, that (i) such Bank's obligations under
this Agreement (including, without limitation, its Revolving Loan Commitments
to the Borrower hereunder) shall remain unchanged, (ii) such Bank shall remain
solely responsible to the other parties hereto for the performance of such
obligations, (iii) such Bank shall remain the holder of any such Revolving Loan
Notes for all purposes of this Agreement, (iv) the Borrower, the Agent, and the
Issuing Bank and the other Banks shall continue to deal solely and directly
with such Bank in connection with such Bank's rights and obligations under this
Agreement, and (v) such Bank shall not require the participant's consent to any
matter under this Agreement, except that upon 10 days' written notice of such
participation to the Agent and the Borrower, such Bank may permit the
participant to possess consent rights with respect to changes in the principal
amount of the Revolving Loan Notes, reductions in fees or interest, extensions
of the applicable maturity date, or releases of any collateral or guarantor
(except to the extent otherwise permitted herein or in any of the other Credit
Documents). The Borrower hereby agrees that participants shall have the same
rights under Sections 2.6, 2.7, 2.8, 2.9, 2.10, and 8.2 as a Bank to the extent
of their respective participation.
(f) Assignments or Pledges to Federal Reserve Banks. In
addition to the foregoing rights of assignment and participation, any Bank may
assign or pledge any portion of its rights under this Agreement (including the
Revolving Loan Advances owed to such Bank) to any Federal Reserve Bank in
accordance with applicable law without notice to or the consent of the Borrower
or the Agent, provided that (i) such Bank shall not be relieved of its
obligations under this Agreement as
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a result thereof and (ii) in no event shall the Federal Reserve Bank be
entitled to direct the actions of the pledging or assigning Bank under this
Agreement.
8.6 Notice. All notices and other communications under this
Agreement and the Revolving Loan Notes shall be in writing and mailed by
certified mail (return receipt requested), telecopied, telexed, hand delivered,
or delivered by a nationally recognized overnight courier, to the address for
the appropriate party specified in Schedule I or at such other address as shall
be designated by such party in a written notice to the other parties. Mailed
notices shall be effective when received. Telecopied or telexed notices shall
be effective when transmission is completed or confirmed by telex answerback.
Delivered notices shall be effective when delivered by messenger or courier.
Notwithstanding the foregoing, notices and communications to the Agent pursuant
to Article 2 or 7 shall not be effective until received by the Agent.
8.7 Choice of Law. This Agreement and the Revolving Loan Notes
have been prepared, are being executed and delivered, and are intended to be
performed in the State of Texas, and the substantive laws of the State of Texas
and the applicable federal laws of the United States shall govern the validity,
construction, enforcement, and interpretation of this Agreement and the
Revolving Loan Notes; provided however, Chapter 15 of the Texas Credit Code
does not apply to this Agreement or the Revolving Loan Notes. Each Letter of
Credit shall be governed by the Uniform Customs and Practice for Documentary
Credits, International Chamber of Commerce Publication No. 500 (1993 version).
8.8 Forum Selection. THE BORROWER IRREVOCABLY CONSENTS TO THE
JURISDICTION OF THE COURTS OF THE STATE OF TEXAS AND OF ANY FEDERAL COURT
LOCATED IN SUCH STATE IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATED THERETO.
THE BORROWER AGREES AND SHALL NOT CONTEST THAT PROPER FORUM AND VENUE FOR ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE CREDIT DOCUMENTS OR ANY
TRANSACTIONS RELATING THERETO ARE IN THE COURTS OF THE STATE OF TEXAS IN HARRIS
COUNTY, TEXAS, AND THE FEDERAL COURTS LOCATED IN HARRIS COUNTY, TEXAS. THE
BORROWER IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE FOREGOING BASED UPON CLAIMS THAT THE FOREGOING COURTS ARE AN INCONVENIENT
FORUM.
8.9 Service of Process. IN ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATING THERETO,
THE BORROWER WAIVES PERSONAL SERVICE OF ANY SUMMONS,
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COMPLAINT, OR OTHER PROCESS OR NOTICE AND AGREES THAT SERVICE BY FIRST CLASS
MAIL, RETURN RECEIPT REQUESTED, TO THE BORROWER AT ITS ADDRESS FOR NOTICES
HEREUNDER, OR ANY OTHER FORM OF SERVICE PROVIDED FOR IN THE TEXAS CIVIL
PRACTICE LAW AND RULES THEN IN EFFECT SHALL CONSTITUTE GOOD AND SUFFICIENT
SERVICE UPON THE BORROWER.
8.10 Waiver of Jury Trial. THE BORROWER IRREVOCABLY WAIVES ANY
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATING THERETO.
8.11 Amendment and Restatement. This Agreement represents a full
and complete amendment and restatement of the Credit Agreement dated as of
January 30, 1998, among the Borrower, NationsBank of Texas, N.A., as
predecessor in interest to NationsBank, N.A., as the Agent, and the Banks named
therein, and that prior version is deemed replaced hereby as of the
effectiveness of this Agreement. The indebtedness under such prior version of
this Agreement continues under this Agreement (as reallocated among the Banks
in connection with the effectiveness of this Agreement) and the execution of
this Agreement does not indicate a payment, satisfaction, novation, or
discharge thereof. All security and support for the indebtedness under the
prior version of this Agreement continues to secure and support the
indebtedness hereunder. Upon the effectiveness of this Agreement, all
outstanding Revolving Loan Advances shall be reallocated among the Banks
ratably in accordance with their Commitments. Amounts payable under the prior
version of this Agreement shall accrue thereunder until the effectiveness of
this Agreement and the Agent shall arrange with the Borrower and the Banks to
prorate and ratably distribute to the Agent and the Banks all amounts payable
under the prior version of this Agreement for the periods prior to the
effectiveness of this Agreement.
8.12 Counterparts. This Agreement may be executed in multiple
counterparts which together shall constitute one and the same instrument.
8.13 No Further Agreements. THIS WRITTEN AGREEMENT AND THE CREDIT
DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
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<PAGE> 64
EXECUTED as of the date first above written.
BORROWER:
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ JIM P. WISE
---------------------------------
Jim P. Wise
Senior Vice President and
Chief Financial Officer
AGENT:
NATIONSBANK, N.A., as Agent
By: /s/ ALBERT L. WELCH
---------------------------------
Albert L. Welch
Vice President
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<PAGE> 65
BANKS:
NATIONSBANK, N.A.
Revolving Loan Commitment: By: /s/ ALBERT L. WELCH
$30,000,000 ---------------------------------
Albert L. Welch
Vice President
BANK OF SCOTLAND
Revolving Loan Commitment: By: /s/ ANNIE CHIN TAT
$25,000,000 ---------------------------------
Annie Chin Tat
Senior Vice President
COMERICA BANK - TEXAS
Revolving Loan Commitment: By: /s/ BART BEARDEN
$25,000,000 ---------------------------------
Bart Bearden
Vice President
NATIONAL CITY BANK OF KENTUCKY
Revolving Loan Commitment: By: /s/ TOM GURBACH
$15,000,000 ---------------------------------
Tom Gurbach
Vice President
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<PAGE> 66
PARIBAS
Revolving Loan Commitment: By: /s/ ROSINE K. MATHEWS
$15,000,000 -----------------------------
Name: Rosine K. Mathews
---------------------------
Title: Vice President
--------------------------
By: /s/ LARRY ROBINSON
-----------------------------
Name: Larry Robinson
---------------------------
Title: Vice President
--------------------------
THE BANK OF NOVA SCOTIA
Revolving Loan Commitment: By: /s/ F.C.H. ASHBY
$15,000,000 -----------------------------
Name: F.C.H. Ashby
---------------------------
Title: Senior Manager Loan
Operations
--------------------------
CENTURA BANK
Revolving Loan Commitment: By: /s/ LOWRY D. PERRY
$15,000,000 -----------------------------
Name: Lowry D. Perry
---------------------------
Title: Bank Officer
--------------------------
CREDIT LYONNAIS NEW YORK BRANCH
Revolving Loan Commitment: By: /s/ PASCAL POUPELLE
$15,000,000 -----------------------------
Name: Pascal Poupelle
---------------------------
Title: Executive Vice President
--------------------------
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<PAGE> 67
FIRST AMERICAN NATIONAL BANK
Revolving Loan Commitment: By: /s/ STEPHEN ARNOLD
$10,000,000 --------------------------
Name: Stephen Arnold
------------------------
Title: A.V.P.
-----------------------
SUNTRUST BANK
Revolving Loan Commitment: By: /s/ JOHN A. FIELDS, JR.
$10,000,000 -------------------------------
Name: John A. Fields, Jr.
-----------------------------
Title: Vice President
----------------------------
By: /s/ STEVEN NEWBY
-------------------------------
Name: Steven Newby
-----------------------------
Title: Corporate Banking Officer
----------------------------
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<PAGE> 68
[Execution Version]
GUARANTY
(Subsidiaries of Integrated Electrical Services, Inc.)
This Guaranty dated as of July 30, 1998 ("Agreement"), is made by the
undersigned subsidiaries of Integrated Electrical Services, Inc., a Delaware
corporation (each a "Guarantor"), in favor of NationsBank, N.A., successor in
interest by merger to NationsBank of Texas, N.A., in its capacity as agent
("Agent") for certain financial institutions which are or may become parties to
the Credit Agreement described below.
INTRODUCTION
This Agreement is given in connection with the Credit Agreement dated
as of July 30, 1998 (as modified from time to time, the "Credit Agreement"),
among Integrated Electrical Services, Inc., a Delaware corporation
("Borrower"), certain financial institutions which are or may become parties
thereto, and the Agent, the defined terms of which are used herein unless
otherwise defined herein. It is a condition precedent to the obligation of the
Banks to make any extension of credit under the Credit Agreement that the
Guarantors execute and deliver this Agreement to the Agent. Each Guarantor is
a Subsidiary of the Borrower. Because each Guarantor receives and, as a result
of its ownership by the Borrower, expects to continue to receive financial and
management support from the Borrower, each Guarantor will obtain substantial
benefit from the extensions of credit expected to be made to the Borrower under
the Credit Agreement.
Therefore, to induce the Agent and such financial institutions to
enter into the Credit Agreement, the Guarantors jointly and severally agree
with the Agent as follows:
Section 1. Guaranty. The Guarantors irrevocably and jointly and
severally guarantee to the Agent the full payment when due of (a) all
principal, interest, fees, reimbursements, indemnifications, and other amounts
now or hereafter owed by the Borrower to the Agent and the Banks (and with
respect to the Interest Hedge Agreements, the Affiliates of the Banks) under
the terms of the Credit Agreement and the other Credit Documents, including
amounts owed under the terms of the Credit Agreement and the other Credit
Documents for which the Borrower has obtained relief under bankruptcy or other
laws providing for relief from creditors, and (b) any increases, extensions,
and rearrangements of the foregoing obligations under any amendments,
supplements, and other modifications of the documents and agreements creating
the foregoing obligations (collectively, the "Guaranteed
<PAGE> 69
Obligations"). This is a guaranty of payment and not merely a guaranty of
collection, and each Guarantor is liable as a primary obligor. If any of the
Guaranteed Obligations are not punctually paid when due, whether by maturity,
acceleration, or otherwise, and the Agent shall notify any Guarantor of such
default and make demand for payment hereunder, such Guarantor shall immediately
pay to the Agent the full amount of the Guaranteed Obligations which are due
and payable. Each Guarantor shall make each payment to the Agent in U.S.
Dollars in immediately available funds as directed by the Agent. The Agent is
hereby authorized at any time following any demand for payment hereunder to set
off and apply any indebtedness owed by the Agent to any Guarantor against any
and all of the obligations of such Guarantor under this Agreement. The Agent
agrees to promptly notify such Guarantor after any such setoff and application,
but the failure to give such notice shall not affect the validity of such
setoff and application.
Section 2. Guaranty Absolute.
2.1 This Agreement shall be deemed accepted by the Agent upon
receipt, and the obligations of the Guarantors under this Agreement are
effective immediately and are continuing and cover all Guaranteed Obligations
arising prior to and after the date hereof. This Agreement may not be revoked
by any Guarantor and shall continue to be effective with respect to Guaranteed
Obligations arising or created after any attempted revocation by any Guarantor.
2.2 Each Guarantor guarantees that the Guaranteed Obligations will
be paid strictly in accordance with the terms of the Credit Agreement and the
other Credit Documents, regardless of any law, regulation, or order now or
hereafter in effect in any jurisdiction affecting any of such terms or the
rights of the Agent or the Banks with respect thereto. Each Guarantor agrees
that such Guarantor's obligations under this Agreement shall not be released,
diminished, or impaired by, and waives any rights which such Guarantor might
otherwise have which relate to:
(a) Any lack of validity or enforceability of the
Guaranteed Obligations, any Credit Document, or any other agreement or
instrument relating thereto; any increase, reduction, extension, or
rearrangement of the Guaranteed Obligations; any amendment, supplement, or
other modification of the Credit Documents; any waiver or consent granted under
the Credit Documents, including waivers of the payment and performance of the
Guaranteed Obligations; or any sale, assignment, delegation, or other transfer
of the Guaranteed Obligations or the Credit Documents;
(b) Any grant of any security or support for the
Guaranteed Obligations or any impairment of any security or support for the
Guaranteed Obligations, including any
<PAGE> 70
full or partial release, exchange, subordination, or waste of any collateral
for the Guaranteed Obligations or any full or partial release of the Borrower,
any Guarantor, or any other Person liable for the payment or performance of the
Guaranteed Obligations; any change in the organization or structure of the
Borrower, any Guarantor, or any other Person liable for the payment or
performance of the Guaranteed Obligations; or the insolvency, bankruptcy,
liquidation, or dissolution of the Borrower, any Guarantor, or any other Person
liable for the payment or performance of the Guaranteed Obligations;
(c) The manner of applying payments on the Guaranteed
Obligations or the proceeds of any security or support for the Guaranteed
Obligations against the Guaranteed Obligations;
(d) The failure to give notice of the occurrence of any
of the events or actions referred to in this Section 2.2, notice of any default
or event of default, however denominated, under the Credit Documents, notice of
intent to demand, notice of demand, notice of presentment for payment, notice
of nonpayment, notice of intent to protest, notice of protest, notice of grace,
notice of dishonor, notice of intent to accelerate, notice of acceleration,
notice of bringing of action to enforce the payment or performance of the
Guaranteed Obligations, notice of any sale or foreclosure of any collateral for
the Guaranteed Obligations, notice of any transfer of the Guaranteed
Obligations, notice of the financial condition of or other circumstances
regarding the Borrower, any Guarantor, or any other Person liable for the
Guaranteed Obligations, or any other notice of any kind relating to the
Guaranteed Obligations (and the parties intend that no Guarantor shall be
considered a "Debtor" as defined in Section 9.105 of the Texas Business and
Commerce Code for the purpose of notices required to be given to a Debtor
thereunder); or
(e) Any other action taken or omitted which affects the
Guaranteed Obligations, whether or not such action or omission prejudices any
Guarantor or increases the likelihood that any Guarantor will be required to
pay the Guaranteed Obligations pursuant to the terms hereof--it is the
unambiguous and unequivocal intention of each Guarantor that such Guarantor
shall be obligated to pay the Guaranteed Obligations when due, notwithstanding
any occurrence, circumstance, event, action, or omission whatsoever, whether
contemplated or uncontemplated, and whether or not particularly described
herein.
2.3 This Agreement shall continue to be effective or be
reinstated, as the case may be, if any payment on the Guaranteed Obligations
must be refunded for any reason including any bankruptcy proceeding. In the
event that the Agent or any Bank must refund any payment received against the
Guaranteed Obligations, any prior release from the terms of this Agreement
given to any Guarantor by the Agent shall be without effect, and this Agreement
shall be reinstated in full force and effect. It is the intention of each
Guarantor that such
-3-
<PAGE> 71
Guarantor's obligations hereunder shall not be discharged except by final
payment of the Guaranteed Obligations.
2.4 (a) Each Guarantor is a Subsidiary of the Borrower and
receives and, because of its ownership by the Borrower, expects to continue to
receive business opportunities, financial support, and management support from
the Borrower. Each Guarantor has agreed to enter into this Agreement so that
the Borrower can receive the benefits of the Guaranteed Obligations and
continue to provide these services to such Guarantor.
(b) In consummating the transactions contemplated by the
Credit Documents, no Guarantor intends to disturb, delay, hinder, or defraud
either present or future creditors of such Guarantor. Each Guarantor is
familiar with, and has independently reviewed books and records regarding, the
financial condition of the Borrower and is familiar with the value of the
security and support for the payment and performance of the Guaranteed
Obligations. Based upon such examination, and taking into account the fairly
discounted value of such Guarantor's contingent obligations under this
Agreement and the value of the subrogation and contribution claims such
Guarantor could make in connection with this Agreement, and assuming each of
the transactions contemplated by the Credit Documents is consummated and the
Borrower makes full use of the credit facilities thereunder, the present
realizable fair market value of the assets of such Guarantor exceeds the total
obligations of such Guarantor, and such Guarantor is able to realize upon its
assets and pay its obligations as such obligations mature in the normal course
of business.
(c) If notwithstanding the foregoing it is judicially
determined with respect to any Guarantor that entering into this Agreement
would violate Section 548 of the United States Bankruptcy Code or any
comparable provisions of any state law, then such Guarantor shall be liable
under this Guaranty only for amounts aggregating up to the largest amount that
would not render such Guarantor's obligations hereunder subject to avoidance
under Section 548 of the United States Bankruptcy Code or any comparable
provisions of any state law.
(d) Each Guarantor agrees that each Guarantor shall have
rights of contribution and subrogation against each other Guarantor with
respect to any payments made in connection with the Guaranteed Obligations.
Section 3. Unimpaired Collection.
3.1 There are no conditions precedent to the enforcement of this
Agreement, except as expressly contained herein. It shall not be necessary for
the Agent, in order to
-4-
<PAGE> 72
enforce payment by any Guarantor under this Agreement, to show any proof of the
Borrower's default, to exhaust the Agent's remedies against the Borrower, any
Guarantor, or any other Person liable for the payment or performance of the
Guaranteed Obligations, to enforce any security or support for the payment or
performance of the Guaranteed Obligations, or to enforce any other means of
obtaining payment or performance of the Guaranteed Obligations. Each Guarantor
waives any rights under Chapter 34 of the Texas Business and Commerce Code,
Section 17.001 of the Texas Civil Practice and Remedies Code, and Rule 31 of
the Texas Rules of Civil Procedure related to the foregoing. Neither the Agent
nor the Banks shall be required to mitigate damages or take any other action to
reduce, collect, or enforce the Guaranteed Obligations.
3.2 With respect to each Guarantor, all Subordinated Obligations
of such Guarantor (as defined below) shall be subordinate and junior in right
of payment and collection to the payment and collection in full of all
Guaranteed Obligations as described below:
(a) As used herein, the term "Subordinated Obligations" for
such Guarantor means: (i) all present and future indebtedness, liabilities, and
obligations of any kind owed by the Borrower, any Guarantor, or any other
Person liable for the payment or performance of the Guaranteed Obligations to
such Guarantor, including debt obligations, equity obligations, and other
contractual obligations requiring payments of any kind to be made to such
Guarantor and including any right of subrogation (including any statutory
rights of subrogation under Section 509 of the Bankruptcy Code, 11 U.S.C.
Section 509, or under Chapter 34 of the Texas Business and Commerce Code),
contribution, indemnification, reimbursement, exoneration, or any right to
participate in any claim or remedy of the Agent against the Borrower, any
Guarantor, or any Person liable for the payment or performance of the
Guaranteed Obligations, or any collateral which the Agent now has or may
acquire, and (ii) any increases, extensions, and rearrangements of the
foregoing obligations under any amendments, supplements, and other
modifications of the documents and agreements creating the foregoing
obligations.
(b) Until all Guaranteed Obligations have been
irrevocably paid in full (and therefore the payment thereof is no longer
subject to being set aside or returned under the law), such Guarantor agrees
not to take any action to enforce payment of such the Subordinated Obligations
of such Guarantor, but this standstill is not intended as a permanent waiver of
the subrogation, contribution, indemnification, reimbursement, exoneration,
participation, or other rights of such Guarantor.
(c) Upon any receivership, insolvency proceeding,
bankruptcy proceeding, assignment for the benefit of creditors, reorganization,
arrangement with creditors, sale of
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<PAGE> 73
assets for creditors, dissolution, liquidation, or marshaling of the assets of
the Borrower, any Guarantor, or any other Person liable for the payment or
performance of the Guaranteed Obligations, all amounts due with respect to the
Guaranteed Obligations shall be paid in full before such Guarantor shall be
entitled to collect or receive any payment with respect to the Subordinated
Obligations of such Guarantor, and all payments to which such Guarantor would
be entitled to collect or receive on the Subordinated Obligations of such
Guarantor shall be paid over to the Agent for application to the Guaranteed
Obligations.
(d) Following notice from the Agent to the Borrower that
an Event of Default exists and that no further payments shall be made on the
Subordinated Obligations of such Guarantor until (i) all amounts due with
respect to the Guaranteed Obligations shall be paid in full or (ii) the Agent
revokes such notice, such Guarantor shall not be entitled to collect or receive
any payment with respect to the Subordinated Obligations of such Guarantor.
(e) Any lien, security interest, or assignment securing
the repayment of the Subordinated Obligations of such Guarantor shall be fully
subordinate to any lien, security interest, or assignment in favor of the Agent
which secures the Guaranteed Obligations. At the request of the Agent, such
Guarantor will take any and all steps necessary to fully evidence the
subordination granted hereunder, including amending or terminating financing
statements and executing and recording subordinations of liens.
(f) This is an absolute and irrevocable agreement of
subordination and the Agent may, without notice to such Guarantor, take any
action described in Section 2.2 without impairing or releasing the obligations
of such Guarantor hereunder.
(g) Such Guarantor shall not assign or otherwise transfer
to any other Person any interest in the Subordinated Obligations of such
Guarantor unless such Guarantor causes the assignee or other transferee to
execute and deliver to the Agent a subordination agreement in substantially the
form of the subordination provisions in this Agreement.
(h) If any amount shall be paid to such Guarantor in
violation of this Section 3.2, such amount shall be held in trust for the
benefit of the Agent and immediately turned over to the Agent, with any
necessary endorsement, to be applied to the Guaranteed Obligations.
Section 4. Miscellaneous.
4.1 Each Guarantor hereby affirms and shall comply with the
representations, warranties, and covenants made by the Borrower in the Credit
Agreement to the extent that
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<PAGE> 74
such representations, warranties, and covenants are applicable to such
Guarantor, including all of the representations and warranties in Section 4 of
the Credit Agreement and all of the covenants in Section 5 of the Credit
Agreement.
4.2 Each Guarantor shall pay to the Agent on demand (a) all
reasonable out-of-pocket costs and expenses of the Agent in connection with the
preparation, execution, delivery, administration, modification, and amendment
of this Agreement and the other Credit Documents to which such Guarantor is a
party, including the reasonable fees and out-of-pocket expenses of outside
counsel for the Agent with respect to advising the Agent as to its rights and
responsibilities under this Agreement and the Credit Documents to which such
Guarantor is a party, and (b) all costs and expenses of the Agent in connection
with the enforcement of the Agent's rights under this Agreement and the other
Credit Documents to which such Guarantor is a party, whether through
negotiations, legal proceedings, or otherwise, including fees and expenses of
counsel for the Agent. The provisions of this paragraph shall survive any
purported termination of this Agreement and the Credit Documents that does not
expressly reference this paragraph.
4.3 Each Guarantor agrees to protect, defend, indemnify, and hold
harmless the Agent, each Bank, and each of their respective Related Parties
(collectively, the "Indemnified Parties"), from and against all demands,
claims, actions, suits, damages, judgments, fines, penalties, liabilities, and
costs and expenses, including reasonable costs of attorneys and related costs
of experts such as accountants (collectively, the "Indemnified Liabilities"),
actually incurred by the Indemnified Parties which are related to any
litigation or proceeding relating to this Agreement, the Credit Documents, or
the transactions contemplated thereunder, INCLUDING INDEMNIFIED LIABILITIES
CAUSED BY ANY INDEMNIFIED PARTIES' OWN NEGLIGENCE, but not Indemnified
Liabilities which are a result of any Indemnified Parties' gross negligence or
willful misconduct or negligence in the handling of money. The provisions of
this paragraph shall survive any purported termination of this Agreement and
the Credit Documents that does not expressly reference this paragraph.
4.4 Each Guarantor agrees that this Agreement shall be governed by
the laws of the State of Texas. If any provision in this Agreement is held to
be unenforceable, such provision shall be severed and the remaining provisions
shall remain in full force and effect. All representations, warranties, and
covenants of any Guarantor in this Agreement shall survive the execution of
this Agreement and any other contract or agreement. The Agent's remedies under
this Agreement and the Credit Documents to which any Guarantor is a party shall
be cumulative, and no delay in enforcing this Agreement and the Credit
Documents to which such Guarantor is a party shall act as a waiver of the
Agent's rights thereunder. The provisions of this Agreement may be waived or
amended only in a writing signed by the
-7-
<PAGE> 75
party against whom enforcement is sought. This Agreement shall bind and inure
to the benefit of each Guarantor and the Agent and their respective successors
and assigns. Each Guarantor may not assign its rights or delegate its duties
under this Agreement. The Agent may assign its rights and delegate its duties
under this Agreement in accordance with the terms of the Credit Agreement.
This Agreement may be executed in multiple counterparts each of which shall
constitute one and the same agreement. Unless otherwise specified, all notices
and other communications between such Guarantor and the Agent provided for in
this Agreement and the Credit Documents to which such Guarantor is a party
shall be in writing, including telecopy, and delivered or transmitted to the
addresses set forth below, or to such other address as shall be designated by
such Guarantor or the Agent in written notice to the other party. Notice sent
by telecopy shall be deemed to be given and received when receipt of such
transmission is acknowledged, and delivered notice shall be deemed to be given
and received when receipted for by, or actually received by, an authorized
officer of such Guarantor or the Agent, as the case may be.
If to any Guarantor:
[Guarantor]
c/o Integrated Electrical Services, Inc.
2301 Preston
Houston, Texas 77003
Attn: Jim P. Wise
telephone: 713-222-1875
telecopier: 713-222-1214
If to the Agent:
NationsBank, N.A.,
as Agent under the Credit Agreement
dated as of July 30, 1998, among
Integrated Electrical Services, Inc., the financial
institutions parties thereto, and the Agent
700 Louisiana, 7th Floor
Houston, Texas 77002
Attn: Mr. Albert L. Welch, Vice President
telephone: 713-247-6631
telecopier: 713-247-7748
4.5 Any present or future Subsidiary of the Borrower may become a
Guarantor under and a party to this Agreement by executing and delivering to
the Agent a Joinder
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<PAGE> 76
Agreement in accordance with Section 5.19 of the Credit Agreement or by
otherwise assuming in writing in favor of the Agent the liabilities of a
Guarantor under this Agreement. Upon execution and delivery of a Joinder
Agreement or otherwise assuming the liabilities of a Guarantor under this
Agreement such Subsidiary shall be deemed to be a Guarantor under this
Agreement and a party to this Agreement for all purposes hereunder.
4.6 WAIVER OF JURY TRIAL. EACH GUARANTOR IRREVOCABLY WAIVES ANY
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATING THERETO.
THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT
AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
-9-
<PAGE> 77
EXECUTED as of the date first above written.
ACE ELECTRIC, INC.
H.R. ALLEN, INC.
AMBER ELECTRIC, INC.
BW CONSOLIDATED, INC.
BW/CEC, INC.
BW/BEC, INC.
BW/CEC, L.L.C.
BW/BEC, L.L.C.
CHARLES P. BAGBY COMPANY, INC.
DANIEL ELECTRICAL CONTRACTORS, INC.
DANIEL ELECTRICAL OF TREASURE COAST INC.
FLORIDA INDUSTRIAL ELECTRIC, INC.
GENERAL PARTNER, INC.
J.W. GRAY ELECTRIC CO., INC.
J.W. GRAY MANAGEMENT LLC
HATFIELD ELECTRIC, INC.
HAYNES ELECTRICAL SUPPLY, INC.
MARK HENDERSON, INCORPORATED
HOLLAND ELECTRICAL SYSTEMS, INC.
SPECTROL, INC.
HOUSTON-STAFFORD ELECTRIC, INC.
HOUSTON-STAFFORD MANAGEMENT LLC
MENNIGA ELECTRIC, INC.
MID-STATES ELECTRIC COMPANY, INC.
MILLS ELECTRICAL CONTRACTORS, INC.
MILLS MANAGEMENT LLC
MUTH ELECTRIC, INC.
PAULIN ELECTRIC COMPANY, INC.
THOMAS POPP & COMPANY
REYNOLDS ELECTRIC CORP.
RODGERS ELECTRIC COMPANY, INC.
STARK INVESTMENTS, INC.
THURMAN & O'CONNELL CORPORATION
WRIGHT ELECTRICAL CONTRACTORS, INC.
By: /s/ JOHN F. WOMBWELL
-------------------------------------
John F. Wombwell
Assistant Secretary
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<PAGE> 78
ALADDIN-WARD ELECTRIC & AIR, INC.
CYPRESS ELECTRICAL CONTRACTORS, INC.
HAMER ELECTRIC ACQUISITION
CORPORATION
HOWARD BROTHERS ELECTRIC CO., INC.
INTEGRATED ELECTRICAL FINANCE, INC.
INTEGRATION COMMUNICATION SERVICES,
INC.
POLLOCK ELECTRIC INC.
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
By: /s/ JOHN F. WOMBWELL
-------------------------------------
John F. Wombwell
Secretary
J.W. GRAY HOLDINGS LLC
HOUSTON-STAFFORD HOLDINGS LLC
IES HOLDINGS LLC
MILLS ELECTRICAL HOLDINGS LLC
POLLOCK SUMMIT HOLDINGS, INC.
By: /s/ TERRY EARNHART
-------------------------------------
Terry Earnhart
Manager
BEXAR ELECTRIC COMPANY, LTD.
By: BW/BEC, INC., its General Partner
BW/BEC, LLC, its Limited Partner
By: /s/ JOHN F. WOMBWELL
------------------------------
John F. Wombwell
Assistant Secretary
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<PAGE> 79
CALHOUN ELECTRIC COMPANY, LTD.
By: BW/CEC, INC., its General Partner
BW/CEC, LLC, its Limited Partner
By: /s/ JOHN F. WOMBWELL
-------------------------------------------
John F. Wombwell
Assistant Secretary
J.W. GRAY ELECTRICAL CONTRACTORS LP
By: J.W. GRAY MANAGEMENT LLC, its General Partner
By: /s/ JOHN F. WOMBWELL
-------------------------------------------
John F. Wombwell
Assistant Secretary
By: J.W. GRAY HOLDINGS LLC, its Limited Partner
By: /s/ TERRY EARNHART
-------------------------------------------
Terry Earnhart
Manager
HATFIELD REYNOLDS ELECTRIC CO.
By: HATFIELD ELECTRIC, INC., its General Partner
REYNOLDS ELECTRIC, CORP., its General Partner
By: /s/ JOHN F. WOMBWELL
-------------------------------------------
John F. Wombwell
Assistant Secretary
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<PAGE> 80
HAYMAKER ELECTRIC, LTD
By: GENERAL PARTNER, INC., its General Partner
CHARLES P. BAGBY COMPANY, INC., its
Limited Partner
By: /s/ JOHN F. WOMBWELL
---------------------------------------
John F. Wombwell
Assistant Secretary
HOUSTON-STAFFORD ELECTRICAL CONTRACTORS LP
By: HOUSTON-STAFFORD MANAGEMENT LLC, its
General Partner
By: /s/ JOHN F. WOMBWELL
---------------------------------------
John F. Wombwell
Assistant Secretary
By: HOUSTON-STAFFORD HOLDINGS LLC, its
Limited Partner
By: /s/ TERRY EARNHART
---------------------------------------
Terry Earnhart
Manager
IES MANAGEMENT LP
By: INTEGRATED ELECTRICAL FINANCE, INC., its
General Partner
By: /s/ JOHN F. WOMBWELL
---------------------------------------
John F. Wombwell
Secretary
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By: IES HOLDINGS, LLC , its Limited Partner
By: /s/ TERRY EARNHART
--------------------------------------------
Terry Earnhart
Manager
MILLS ELECTRIC LP
By: MILLS MANAGEMENT LLC, its General Partner
By: /s/ JOHN F. WOMBWELL
--------------------------------------------
John F. Wombwell
Assistant Secretary
By: MILLS ELECTRICAL HOLDINGS LLC, its Limited
Partner
By: /s/ TERRY EARNHART
--------------------------------------------
Terry Earnhart
Manager
POLLOCK SUMMIT ELECTRIC LP
By: POLLOCK ELECTRIC INC., its General Partner and
its Limited Partner
SUMMIT ELECTRIC OF TEXAS,
INCORPORATED, its General Partner
By: /s/ JOHN F. WOMBWELL
--------------------------------------------
John F. Wombwell
Secretary
NATIONSBANK, N.A., as Agent
By: /s/ ALBERT L. WELCH
--------------------------------------------
Albert L. Welch
Vice President
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<PAGE> 82
[Execution Version]
Exhibit D
FORM OF
PROMISSORY NOTE
([Bank Name])
$[Amount] Houston, Texas [date]
For value received, the undersigned INTEGRATED ELECTRICAL SERVICES,
INC., a Delaware corporation ("Borrower"), hereby promises to pay to the order
of [Bank Name] ("Bank"), the principal amount of [Amount] ($[ ]) or, if less,
the aggregate outstanding principal amount of the Revolving Loan Advances (as
defined in the Credit Agreement referred to below) made by the Bank to the
Borrower, together with accrued but unpaid interest on the principal amount of
each such Revolving Loan Advance from the date of such Revolving Loan Advance
until such principal amount is paid in full, at such interest rates, and at such
times, as are specified in the Credit Agreement.
This Note is one of the Notes referred to in, and is entitled to the
benefits of, and is subject to the terms of, the Credit Agreement dated as of
July 30, 1998 (as the same may be modified from time to time, the "Credit
Agreement"), among the Borrower, the financial institutions parties thereto
("Banks"), and NationsBank, N.A., successor in interest by merger to NationsBank
of Texas, N.A., as agent for the Banks ("Agent"). Capitalized terms used herein
but not defined herein shall have the meanings specified by the Credit
Agreement. The Credit Agreement, among other things, (a) provides for the making
of Revolving Loan Advances by the Bank to the Borrower from time to time, the
indebtedness of the Borrower resulting from each such Revolving Loan Advance
being evidenced by this Note, and (b) contains provisions for acceleration of
the maturity of this Note upon the happening of certain events stated in the
Credit Agreement and for prepayments of principal prior to the maturity of this
Note upon the terms and conditions specified in the Credit Agreement.
Both principal and interest are payable to the Agent in the currency,
at the times, in the locations, and in the manner specified in the Credit
Agreement. The Bank shall record all Revolving Loan Advances and payments of
principal made under this Note, but no failure of the Bank to make such
recordings shall affect the Borrower's repayment obligations under this Note.
<PAGE> 83
It is contemplated that because of prepayments there may be times when
no indebtedness is owed under this Note. Notwithstanding such prepayments, this
Note shall remain valid and shall be in force as to Revolving Loan Advances made
pursuant to the Credit Agreement after such prepayments.
It is the intention of the Bank and the Borrower to conform strictly to
any applicable usury laws. Accordingly, the terms of the Credit Agreement
relating to the prevention of usury will be strictly followed.
No Further Agreements. THIS WRITTEN AGREEMENT AND THE CREDIT
DOCUMENTS REPRESENT THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first above written.
INTEGRATED ELECTRICAL SERVICES,
INC.
By:
-----------------------------
Name:
---------------------------
Title:
--------------------------
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<PAGE> 84
[Execution Version]
PROMISSORY NOTE
(Swing Line)
$5,000,000.00 July 30, 1998
INTEGRATED ELECTRICAL SERVICES, INC., a Delaware corporation
("Borrower"), for value received, hereby promises to pay to the order of
NATIONSBANK, N.A., successor in interest by merger to NationsBank of Texas,
N.A. ("Lender"), the principal sum of FIVE MILLION AND NO/100 DOLLARS
($5,000,000.00) or, if less, the outstanding principal amount advanced under
this Promissory Note ("Note") and interest thereon, all as required by this
Note.
This Note is the Swing Line Note referred to in, and is entitled to
the benefits of, and is subject to the terms of, the Credit Agreement dated as
of July 30, 1998 (as modified from time to time, the "Credit Agreement"), among
the Borrower, the financial institutions parties thereto ("Banks"), and
NationsBank, N.A., successor in interest by merger to NationsBank of Texas,
N.A., as agent for the Banks ("Agent"). Capitalized terms used herein but not
defined herein shall have the meanings specified by the Credit Agreement.
Subject to the terms of this Note, the Lender shall from time to time
prior to the Maturity Date (hereinafter defined) make advances ("Advances") to
the Borrower under this Note. The aggregate outstanding principal amount of
such advances shall not exceed the face amount of this Note. The Borrower
shall request Advances by providing the Lender with notice not later than 11:00
a.m., Houston, Texas, time on the date of the requested Advance. The request
must specify the amount of the requested Advance and the date of funding for
such Advance. The Lender shall, before 4:00 p.m., Houston, Texas, time on the
date of such Advance, make such Advance available to the Borrower in
immediately available funds at the Borrower's account with the Lender.
Subject to the terms hereof, the Borrower may prepay the Advances on
this Note by providing the Lender with notice of the intended prepayment not
later than 11:00 a.m., Houston, Texas, time on the date of prepayment,
specifying the amount and the date of such prepayment. Each partial prepayment
of the Advances shall be in a minimum amount of $100,000 or an integral
multiple thereof or, if the aggregate outstanding principal amount of the
Advances would be less than $100,000 following the prepayment, in the remaining
aggregate outstanding principal amount of the Advances, together with accrued
interest to the date of such prepayment on the principal amount prepaid.
Amounts prepaid shall be applied in the inverse order of maturity.
Notwithstanding anything herein to the contrary, the Borrower shall
pay to the Lender the outstanding principal balance of this Note on July 30,
2001 ("Maturity Date").
<PAGE> 85
It is contemplated that because of prepayments there may be times when
no indebtedness is owed under this Note. Notwithstanding such prepayments,
this Note shall remain valid and shall be in force as to Advances made pursuant
to the Credit Agreement after such prepayments.
The Advances shall bear interest at a per annum rate equal to the
difference of (a) (i) the Adjusted Base Rate in effect from time to time plus
(ii) the Applicable Margin for the Prime Rate Tranche in effect from time to
time, calculated on the basis of a 365/366-day year for the actual number of
days elapsed, minus (b) the Applicable Margin for Commitment Fees in effect
from time to time, calculated on the basis of a 360-day year for the actual
number of days elapsed.
The Borrower shall pay to the Lender all accrued but unpaid interest
on the aggregate outstanding principal amount of the Advances on the last day
of each calendar quarter, when the Advances are prepaid in full, and on the
Maturity Date.
The Lender shall record in its records all Advances made under this
Note and all payments of principal and interest on the Advances. Any failure
of the Lender to make such recordings, however, shall not affect the Borrower's
repayment obligations. The Lender's records shall be presumptive evidence of
the principal and interest owed by the Borrower.
The Borrower shall make each payment required under this Note not
later than 12:00 noon, Houston, Texas, time on the date when due in Dollars to
the Lender at such location as is specified by the Lender in writing in
immediately available funds. During the existence of an Event of Default, the
Borrower hereby authorizes the Lender, if and to the extent payment is not made
when due under this Note, to charge from time to time against any account of
the Borrower with the Lender any amount so due. Whenever any payment to be
made under this Note shall be stated to be due on a day other than a day on
which the Lender is open for business in Houston, Texas ("Business Day"), such
payment shall be made on the next succeeding Business Day, and such extension
of time shall in such case be included in the computation of the payment of
interest. All payments shall be applied as directed by the Borrower or, if not
directed by the Borrower, as determined by the Lender.
Each of the following shall be an "Event of Default" for the purposes
of this Note: (a) the Borrower (i) fails to pay when due any principal amounts
due under this Note or (ii) fails to pay when due any interest or other amounts
due under this Note and such failure has not been cured within five Business
Days, (b) there shall occur any Event of Default under the Credit Agreement, or
(c) the Lender shall resign or be removed as Agent under the Credit Agreement.
During the continuation of any Event of Default, the Lender may
declare by written notice to the Borrower all of the commitments of the Lender
hereunder terminated (whereupon the same shall terminate) and the Lender may
declare by written notice to the Borrower the aggregate outstanding principal
amount of the Advances, all accrued interest thereon, and all other amounts
payable by the Borrower under this Note to be immediately due and payable
(whereupon the same shall immediately and automatically become due and
payable). Upon the occurrence of any Event
<PAGE> 86
of Default relating to bankruptcy or insolvency, all of the commitments of the
Lender hereunder shall terminate, and the aggregate outstanding principal
amount of all Advances made under this Note, all accrued interest thereon, and
all other amounts payable by the Borrower under this Note shall immediately and
automatically become due and payable.
Except for the notices provided for above and in the Credit Agreement,
the Borrower waives notice of intent to demand, demand, presentment for
payment, notice of nonpayment, protest, notice of setoff, notice of protest,
notice of dishonor, notice of intent to accelerate, notice of acceleration, and
all other notices in connection with the foregoing.
During the existence of an Event of Default, the Lender is authorized
at any time, to the fullest extent permitted by law, to setoff and apply any
indebtedness owed by the Lender to the Borrower against any and all of the
obligations of the Borrower under this Note, irrespective of whether or not the
Lender shall have made any demand under this Note and although such obligations
may be contingent and unmatured. Following an Event of Default, the Lender may
exercise (a) all of its rights under this Note and the Credit Agreement
(including Section 2.3(b) thereof) (such agreements being the "Loan Documents")
and (b) all other rights at law or in equity. During the existence of an Event
of Default, all payments and collections shall be applied in the order
determined by the Lender.
No right, power, or remedy conferred to the Lender in the Credit
Agreement or any Loan Document, or now or hereafter existing at law, in equity,
by statute, or otherwise shall be exclusive, and each such right, power, or
remedy shall to the full extent permitted by law be cumulative and in addition
to every other such right, power or remedy. No course of dealing and no delay
in exercising any right, power, or remedy conferred to the Lender in this Note,
or now or hereafter existing at law, in equity, by statute, or otherwise shall
operate as a waiver of or otherwise prejudice any such right, power, or remedy.
No notice to or demand upon the Borrower shall entitle the Borrower to similar
notices or demands in the future.
If the Borrower fails to pay when due any amount payable under this
Note, at the request of the Lender the amount not paid when due shall bear
interest beginning on the date due until paid in full at the rate otherwise set
for outstanding principal hereunder plus 2.00%.
It is the intention of the Lender and the Borrower to conform strictly
to any applicable usury laws. Accordingly, the terms of the Credit Agreement
relating to the prevention of usury will be strictly followed.
This Note shall be governed by the laws of the State of Texas without
regard to any principles of conflicts of laws. If any provision in this Note
is held to be unenforceable, such provision shall be severed and the remaining
provisions shall remain in full force and effect. All representations,
warranties, and covenants of the Borrower in this Note shall survive the
execution of this Note, the other Loan Documents, and any other contract or
agreement. The Lender's remedies under this Note and the Loan Documents shall
be cumulative, and no delay in enforcing this Note or the other Loan Documents
shall act as a waiver of the Lender's rights hereunder. The provisions
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<PAGE> 87
of this Note may be waived or amended only in a writing signed by the party
against whom enforcement of such waiver or amendment is sought. This Note
shall bind the Borrower and the Borrower's successors and assigns and shall
inure to the benefit of the Lender and the Lender's successors and assigns.
The Borrower may not assign the Borrower's rights or delegate the Borrower's
duties under this Note or the other Loan Documents. The Lender may assign and
participate the Lender's rights and delegate the Lender's duties under this
Note. Unless otherwise specified, all notices provided for in this Note shall
be made in accordance with the terms of the Credit Agreement.
This Note evidences a modification and extension of certain
indebtedness previously evidenced by that certain promissory note of the
Borrower in favor of NationsBank of Texas, N.A., predecessor in interest to
NationsBank, N.A., dated as of January 30, 1998, in the maximum principal
amount of $5,000,000 (such promissory note is referred to as the "Original
Note"). The indebtedness represented by the Original Note continues under this
Note and the execution of this Note does not indicate a payment, satisfaction,
novation, or discharge thereof. All security and support for the Original Note
and the indebtedness represented thereby continues to secure and support this
Note and the indebtedness hereunder.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first above written.
INTEGRATED ELECTRICAL SERVICES, INC.
By:
-----------------------------------------
Jim P. Wise
Senior Vice President and
Chief Financial Officer
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[Execution Version]
SECURITY AGREEMENT
(Integrated Electrical Services, Inc., and Subsidiaries)
This Security Agreement dated as of July 30, 1998 ("Agreement"), is
made by Integrated Electrical Services, Inc., a Delaware corporation
("Borrower"), and the undersigned subsidiaries of the Borrower (the Borrower
and such undersigned subsidiaries being the "Debtors") in favor of NationsBank,
N.A., successor in interest by merger to NationsBank of Texas, N.A., in its
capacity as agent ("Secured Party") for certain financial institutions which
are or may become parties to the Credit Agreement described below.
INTRODUCTION
Reference is made to the Credit Agreement dated as of July 30, 1998
(as modified from time to time, the "Credit Agreement"), among the Borrower,
certain financial institutions which are or may become parties thereto, and the
Secured Party. Each of the undersigned subsidiaries of the Borrower has
entered into the Guaranty dated as of July 30, 1998 (as modified from time to
time, the "Guaranty"), in favor of the Secured Party guaranteeing the payment
of the obligations of the Borrower under the Credit Agreement. It is a
condition precedent to the effectiveness of the Credit Agreement that the
Debtors secure the Credit Agreement and the Guaranty with this Agreement.
Therefore, for the consideration expressed in the Credit Agreement and
the Guaranty, and in order to induce the Secured Party to enter into the Credit
Agreement, the Debtors jointly and severally agree with the Secured Party as
follows:
Section 1. Interpretation; Definitions.
1.1 Terms defined above and elsewhere in this Agreement shall have
their specified meanings. Capitalized terms used herein but not defined herein
shall have the meanings specified by the Credit Agreement. Terms defined in
Article 9 of the UCC shall have the meanings specified in Article 9 of the UCC.
1.2 The following terms shall have the following meanings:
"Chief Executive Office Location" means, with respect to each Debtor,
the location of the chief executive office of such Debtor as specified in
Schedule I.
<PAGE> 89
"Collateral" has the meaning specified in Section 2.1.
"Collateral Account" means any deposit account with the Secured Party
which is designated, maintained, and under the sole control of the Secured
Party and is pledged to the Secured Party which has been established pursuant
to the provisions of this Agreement for the purposes described in this
Agreement including collecting, holding, disbursing, or applying certain funds,
all in accordance with this Agreement. Each Debtor agrees to execute any
documents reasonably requested by the Secured Party to create any Collateral
Account and pledge it to the Secured Party.
"Proceeds" means all of each Debtor's present and future (a) proceeds
of the Collateral, whether arising from the collection, sale, lease, exchange,
assignment, licensing, or other disposition of the Collateral, (b) proceeds of
any casualty or condemnation of the Collateral (including insurance proceeds
and condemnation awards), (c) claims against third parties for impairment,
loss, damage, or impairment of the value of the Collateral, and (d) rights
under any insurance, indemnity, warranty, or guaranty of or for any of the
foregoing, in each case whether represented as money, deposit accounts,
accounts, general intangibles, securities, instruments, documents, chattel
paper, inventory, equipment, fixtures, or goods.
"Receivables" means all of each Debtor's present and future accounts,
accounts from governmental agencies, instruments, chattel paper, income tax
refunds, and any other rights to the payment of money.
"Related Rights" means all of each Debtor's present and future sale
contracts, chattel paper, licenses, permits, contracts, ledgers, files,
records, computer files, computer programs, and general intangibles related to
any other items of Collateral.
"Secured Obligations" means (a) all principal, interest, fees,
reimbursements, indemnifications, and other amounts now or hereafter owed by
the Borrower to the Secured Party and the Banks (and with respect to the
Interest Hedge Agreements, any Affiliates of the Banks) under the Credit
Agreement and the other Credit Documents; (b) all amounts now or hereafter owed
by the Debtors to the Secured Party and the Banks (and with respect to the
Interest Hedge Agreements, any Affiliates of the Banks) under the Guaranty,
this Agreement, and the other Credit Documents; and (c) any increases,
extensions, and rearrangements of the foregoing obligations under any
amendments, supplements, and other modifications of the agreements creating the
foregoing obligations.
"UCC" means the Uniform Commercial Code as in effect on the date
hereof in the State of Texas, as amended from time to time, and any successor
statute.
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Section 2. Grant of Security Interest.
2.1 Grant of Security Interest. Each Debtor hereby grants to the
Secured Party, for the benefit of the holders of the Secured Obligations, a
security interest in all of such Debtor's right, title, and interest in and to
the following property (the "Collateral") to secure the payment and performance
of the Secured Obligations:
All Receivables;
All Related Rights; and
All Proceeds.
To the extent that the Collateral is not subject to the UCC, each Debtor
collaterally assigns all of such Debtor's right, title, and interest in and to
such Collateral to the Secured Party to secure the payment and performance of
the Secured Obligations to the full extent that such a collateral assignment is
possible under the relevant law.
2.2 Debtor Remains Liable. Anything herein to the contrary
notwithstanding: (a) each Debtor shall remain liable under any contracts and
agreements included in the Collateral to the extent set forth therein to
perform such Debtor's obligations thereunder to the same extent as if this
Agreement had not been executed; (b) the exercise by Secured Party of any
rights hereunder shall not release any Debtor from any obligations under any
contracts and agreements included in the Collateral; and (c) Secured Party
shall not have any obligation under any contracts and agreements included in
the Collateral by reason of this Agreement, nor shall Secured Party be
obligated to perform or fulfill any of the obligations of any Debtor
thereunder, including any obligation to make any inquiry as to the nature or
sufficiency of any payment any Debtor may be entitled to receive thereunder, to
present or file any claim, or to take any action to collect or enforce any
claim for payment thereunder.
Section 3. General Provisions. Each Debtor represents and warrants to
and agrees with the Secured Party as follows:
3.1 Ownership. Such Debtor has good and indefeasible title to the
assets which comprise the Collateral of such Debtor as reflected in such
Debtor's financial statements free from any liens, security interests,
assignments, adverse claims, restrictions, or other encumbrances whatsoever
except the Permitted Liens. No effective recorded interest, financing
statement, or similar recording or filing covering any part of the Collateral
of such Debtor is on file in any recording office, except those filed in
connection with Permitted Liens. Such Debtor shall not, without the prior
written consent of the Secured Party, grant
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any lien, security interest, assignment, restriction, claim, or other
encumbrance on or against the Collateral, or lease, sell, or otherwise transfer
any of such Debtor's rights in the Collateral except as otherwise permitted
under this Agreement.
3.2 Perfection.
(a) General.
(i) As of the date of this Agreement, the true
and correct name of such Debtor as listed on such Debtor's certificate of
incorporation is the name specified for such Debtor on the signature pages of
this Agreement. Such Debtor has had no prior names other than those listed for
such Debtor in Schedule I. Such Debtor has not used and does not use any trade
names other than those listed in Schedule I. Without ten days' advance written
notice to the Secured Party, such Debtor shall not change such Debtor's name.
(ii) As of the date of this Agreement, such
Debtor's chief executive office is located at the Chief Executive Office
Location for such Debtor. Without ten days' advance written notice to the
Secured Party, such Debtor shall not change the location of such Debtor's chief
executive office from the Chief Executive Office Location for such Debtor.
(iii) A carbon, photographic, or other reproduction
of this Agreement shall be sufficient as a financing statement and may be filed
in any appropriate office in lieu thereof.
(b) Perfection of Receivables.
(i) Such Debtor shall provide the Secured Party
with advance written notice of any material increase in the amount of
Receivables in the form of accounts or general intangibles for the payment of
money from governmental agencies that require consents or other actions to
assign, perfect, or realize upon (including Receivables from the federal
government that are subject to the Federal Assignment of Claims Act),
instruments, and chattel paper and the opportunity to perfect a first priority
security interest (subject only to Permitted Liens) in any such Receivables of
such Debtor. Upon written request of the Secured Party, such Debtor shall take
such actions as the Secured Party may reasonably request to permit the Secured
Party to perfect a first priority security interest in any such Receivables of
such Debtor, including obtaining necessary consents from governmental agencies,
delivery of instruments to the Secured Party with all necessary endorsements,
and delivery of assignment agreements requested by the Secured Party.
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(ii) With respect to Receivables of such Debtor in
the form of chattel paper, such Debtor shall, upon written request from the
Agent, mark conspicuously all such Collateral with a legend, in form and
substance reasonably satisfactory to the Secured Party, indicating that such
Collateral is subject to the security interests granted hereunder. Such Debtor
shall, during the existence of an Event of Default and upon request by the
Secured Party, promptly deliver to the Secured Party possession of the
Receivables of such Debtor in the form of chattel paper.
(iii) No authorization, consent, or other action is
necessary to allow such Debtor to perform such Debtor's obligations hereunder
with respect to the Receivables of such Debtor in the form of accounts and
general intangibles for the payment of money.
3.3 Priority.
(a) The security interests created by this Agreement are
or, with respect to any security interest in Collateral of any Subsidiary
acquired by the Borrower in an Acquisition transaction, will be within 30 days
following the closing of such Acquisition, first priority except as set forth
below, subject only to the Permitted Liens, and such Debtor shall preserve and
maintain the status of such security interests to the end that such security
interests remain first priority security interests, except as set forth below,
in the Collateral subject only to the Permitted Liens. Permitted Liens for
taxes, assessments, or other governmental charges or levies may be first
priority to the extent required by applicable law.
(b) If the proceeds of the Secured Obligations are used
to pay any indebtedness secured by prior liens, the Secured Party is subrogated
to all of the rights and liens of the holders of such indebtedness.
3.4 Further Assurances.
(a) There are no actions, suits, proceedings, or
investigations pending or, to the knowledge of such Debtor, threatened against
or affecting any material portion of the Collateral, or involving the validity
or enforceability of this Agreement or the priority of the liens, security
interests, or assignments created hereunder with respect to any material
portion of the Collateral. If the validity or priority of this Agreement or of
any liens, security interests, or assignments created or purported to be
created hereunder or the title of such Debtor to any Collateral of such Debtor
shall be endangered, questioned, or attacked in any material respect or if any
material legal proceedings are instituted against such Debtor with respect
thereto, such Debtor shall give prompt written notice thereof to the Secured
Party, and the action proposed to be taken by such Debtor in connection
therewith. During the existence of an Event of Default, such Debtor shall not
initiate any action with respect to
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such material matters without granting the Secured Party advance written notice
of such Debtor's intent to initiate such actions and the opportunity to consult
with such Debtor regarding such Debtor's proposed actions (unless immediate
action is necessary to prevent loss to such Debtor). At the Secured Party's
request, during the existence of an Event of Default, such Debtor shall take
any actions reasonably requested by the Secured Party with respect to such
matters, including diligently endeavoring to cure any material defect existing
or claimed, and taking all reasonably necessary and desirable steps for the
defense of any legal proceedings, including the employment of counsel, the
prosecution or defense of litigation, and the release or discharge of all
adverse claims. During the existence of an Event of Default, the Secured
Party, whether or not named as a party to any legal proceedings, is authorized
to take any additional steps as the Secured Party deems necessary or desirable
for the defense of any such legal proceedings or the protection of the validity
or priority of this Agreement and the liens, security interests, and
assignments created hereunder, including the employment of independent counsel,
the prosecution or defense of litigation, the compromise or discharge of any
adverse claims made with respect to any Collateral of such Debtor and the
payment or removal of prior liens or security interests, and the reasonable
expenses of the Secured Party in taking such action shall be paid by such
Debtor. Provided, that the Secured Party shall first request in writing that
such Debtor take such additional steps and such Debtor shall, after reasonable
opportunity, have failed to do so.
(b) Such Debtor agrees that at any time such Debtor shall
promptly execute and deliver all further agreements, and take all further
action, that the Secured Party may reasonably request, in order to further
evidence the liens, security interests, and assignments granted or purported to
be granted hereunder and perfect and protect the same or to enable the Secured
Party to exercise and enforce the Secured Party's rights and remedies
hereunder. Without limiting the foregoing, such Debtor shall at the Secured
Party's reasonable request execute financing statements, assignments, notices,
certificates of title and applications therefor, and such other documents and
agreements as the Secured Party may reasonably request in order to perfect and
preserve the security interests granted or purported to be granted hereunder.
Such Debtor shall furnish to the Secured Party from time to time any statements
and schedules further identifying and describing any Collateral of such Debtor
and such other reports in connection with the Collateral of such Debtor as the
Secured Party may reasonably request.
(c) During the existence of an Event of Default, such
Debtor agrees that, if such Debtor fails to perform under this Agreement, the
Secured Party may, but shall not be obligated to, after written request to such
Debtor to perform, perform such Debtor's obligations under this Agreement, and
any reasonable expenses incurred by the Secured Party in performing such
Debtor's obligations shall be paid by such Debtor. Any such performance
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by the Secured Party may be made by the Secured Party in reasonable reliance on
any statement, invoice, or claim, without inquiry into the validity or accuracy
thereof. The amount and nature of any expense of the Secured Party hereunder
shall be conclusively established by a certificate of any officer of the
Secured Party absent manifest error.
(d) Such Debtor irrevocably appoints the Secured Party as
such Debtor's attorney in fact, with full authority to act during the existence
of an Event of Default for such Debtor and in the name of such Debtor, to take
any action and execute any agreement which the Secured Party deems necessary or
advisable to accomplish the purposes of this Agreement, including the matters
that the Secured Party is expressly authorized to take pursuant to this
Agreement (including the matters described in paragraph (c) above), and
instituting proceedings the Secured Party deems necessary or desirable to
enforce the rights of the Secured Party with respect to this Agreement.
Provided, that the Secured Party shall first request in writing that such
Debtor take such actions and such Debtor shall, after reasonable opportunity,
have failed to do so.
(e) The powers conferred on the Secured Party under this
Agreement are solely to protect the Secured Party's rights under this Agreement
and shall not impose any duty upon it to exercise any such powers. Except as
elsewhere provided hereunder, the Secured Party shall have no duty as to any of
the Collateral or as to the taking of any necessary steps to preserve rights
against prior parties or any other rights pertaining to the Collateral.
3.5 Insurance. With respect to any casualty or condemnation to
the Collateral, all proceeds of such casualty or condemnation which are due to
such Debtor, including any property insurance proceeds, condemnation awards,
proceeds from actions, and any other proceeds, are assigned to the Secured
Party and shall be paid directly to the Secured Party for disposition in
accordance with Section 5.12 of the Credit Agreement.
3.6 Value of Receivables. Such Debtor shall use such Debtor's
commercially reasonable efforts to collect payments on the Receivables of such
Debtor when due. Unless otherwise specified herein, such Debtor shall use
commercially reasonable efforts to perform such Debtor's obligations under each
contract giving rise to any Receivables of such Debtor.
Section 4. General Remedies. During the existence of an Event of
Default, the Secured Party may, at the Secured Party's option, exercise one or
more of the remedies specified elsewhere in this Agreement or the following
remedies:
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4.1 Interim Remedies.
(a) To the extent permitted by law, the Secured Party may
exercise all the rights and remedies of a secured party under the UCC.
(b) The Secured Party may prosecute actions in equity or
at law for the specific performance of any covenant or agreement herein
contained or in aid of the execution of any power herein granted or for the
enforcement of any other appropriate legal or equitable remedy.
(c) The Secured Party may occupy any premises owned or
leased by any Debtor where any Collateral is assembled for a reasonable period
in order to effectuate the Secured Party's rights and remedies hereunder or
under law, without obligation to any Debtor with respect to such occupation.
4.2 Remedies - Receivables.
(a) During the existence of an Event of Default, the
Secured Party may establish Collateral Accounts for the purpose of collecting
the Receivables of such Debtor and holding the proceeds thereof, and may direct
such Debtor to instruct all account debtors and obligors on the Receivables of
such Debtor to make all payments on the Receivables of such Debtor directly to
the Secured Party for deposit into such Collateral Account. After such
direction to such Debtor and until such direction has been rescinded (i) all
collections and proceeds of the Receivables of such Debtor shall be directed to
such Collateral Accounts, (ii) all proceeds of the Receivables of such Debtor
which may from time to time come into the possession of such Debtor shall be
held in trust for the Secured Party, segregated from the other funds of such
Debtor, and delivered immediately to the Secured Party in the form received
with any necessary endorsement for deposit into such Collateral Account, such
delivery in no event to be later than one Business Day after receipt thereof by
such Debtor, and (iii) such Debtor shall not adjust, settle, or compromise the
amount or payment of any Receivable of such Debtor, release wholly or partly
any account debtor or obligor for any Receivable of such Debtor, or allow any
credit or discount on any Receivable of such Debtor, without the advanced
written consent of the Secured Party.
(b) In connection with the foregoing, the Secured Party
shall have the right at any time during the existence of an Event of Default to
take any of the following actions, in the Secured Party's own name or in the
name of such Debtor: change the accounts which shall be the Collateral
Accounts for the Receivables of such Debtor; compromise or extend the time for
payment of the Receivables of such Debtor upon such terms as the Secured Party
may determine; endorse the name of such Debtor on checks, instruments, or other
evidences of payment on the Receivables of such Debtor; make written or verbal
requests for verification of amount owing on the Receivables of such Debtor
from
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<PAGE> 96
any Persons which the Secured Party believes are account debtors or obligors on
the Receivables of such Debtor; open mail addressed to such Debtor and, to the
extent of checks or other proceeds of the Receivables of such Debtor, dispose
of same in accordance with this Agreement; take action in the Secured Party's
name or such Debtor's name to enforce collection; and take all other action
necessary to carry out this Agreement and give effect to the Secured Party's
rights hereunder. Costs and expenses incurred by the Secured Party in
collection and enforcement of the Receivables of such Debtor, including
attorneys' fees and out-of-pocket expenses, shall be reimbursed by such Debtor
to the Secured Party on demand.
4.3 Foreclosure.
(a) The Secured Party may foreclose on any Collateral in
any manner permitted by the courts of or in the State of Texas or the State in
which any Collateral is located. If the Secured Party should institute a suit
for the collection of the Secured Obligations and for foreclosure under this
Agreement, the Secured Party may at any time before the entry of a final
judgment dismiss the same, and take any other action permitted by this
Agreement.
(b) To the extent permitted by law, the Secured Party may
exercise all the foreclosure rights and remedies of a secured party under the
UCC. In connection therewith, the Secured Party may sell any Collateral at
public or private sale, at the office of the Secured Party or elsewhere, for
cash or credit and upon written notice to such Debtor, such other terms as the
Secured Party deems commercially reasonable. The Secured Party may sell any
Collateral at one or more sales, and the security interest granted hereunder
shall remain in effect as to the unsold portion of the Collateral. Each Debtor
hereby deems ten days advance notice of the time and place of any public or
private sale reasonable notification, recognizing that if the Collateral is
perishable or threatens to decline speedily in value or is of a type
customarily sold on a recognized market, shorter notice may be reasonable. The
Secured Party shall not be obligated to make any sale of Collateral regardless
of notice of sale having been given. The Secured Party may adjourn any sale by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was adjourned. In
the event that any sale hereunder is not completed or is defective in the
opinion of the Secured Party, the Secured Party shall have the right to cause
subsequent sales to be made hereunder. Any statements of fact or other
recitals made in any bill of sale, assignment, or other document representing
any sale hereunder, including statements relating to the occurrence of an Event
of Default, acceleration of the Secured Obligations, notice of the sale, the
time, place, and terms of the sale, and other actions taken by the Secured
Party in relation to the sale may be conclusively relied upon by the purchaser
at any sale hereunder. The Secured Party may delegate to any agent the
performance of any
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acts in connection with any sale hereunder, including the sending of notices
and the conduct of the sale.
4.4 Application of Proceeds. Unless otherwise specified herein,
any cash proceeds received by the Secured Party from the sale of, collection
of, or other realization upon any part of the Collateral or any other amounts
received by the Secured Party hereunder may be, at the discretion of the
Secured Party (a) held by the Secured Party in one or more Collateral Accounts
as cash collateral for the Secured Obligations or (b) applied to the Secured
Obligations. Amounts applied to the Secured Obligations shall be applied in
the following order:
First, to the payment of the costs and expenses of exercising
the Secured Party's rights hereunder, whether expressly provided for
herein or otherwise; and
Second, to the payment of the Secured Obligations in the order
set forth in Section 6.9 of the Credit Agreement.
Any surplus cash collateral or cash proceeds held by the Secured Party after
payment in full of the Secured Obligations and the termination of all
commitments of the Secured Party to all Debtors shall be paid over by the
Secured Party to the Borrower for distribution to the Debtors entitled to
receive such surplus or to any other Persons that may be lawfully entitled to
receive such surplus.
4.5 Waiver of Certain Rights. To the full extent each Debtor may
do so, such Debtor shall not insist upon, plead, claim, or take advantage of
any law providing for any appraisement, valuation, stay, extension, or
redemption, and such Debtor hereby waives and releases the same, and all rights
to a marshaling of the assets of such Debtor, including the Collateral, or to a
sale in inverse order of alienation in the event of foreclosure of the liens
and security interests hereby created. Such Debtor shall not assert any right
under any law pertaining to the marshaling of assets, sale in inverse order of
alienation, the administration of estates of decedents or other matters
whatever to defeat, reduce, or affect the right of the Secured Party under the
terms of this Agreement.
Section 5. Miscellaneous.
5.1 Choice of Law. Except to the extent that the validity,
perfection, or effect of perfection or nonperfection of the security interests
created hereunder, or the remedies hereunder, in respect of any particular
Collateral are required to be governed by the laws of a jurisdiction other than
the State of Texas, this Agreement shall be subject to and construed and
enforced in accordance with the substantive laws of the State of Texas.
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5.2 Notice. Unless otherwise specified, all notices and other
communications between each Debtor and the Secured Party provided for in this
Agreement and the Credit Documents to which such Debtor is a party shall be in
writing, including telecopy, and delivered or transmitted to the addresses set
forth below, or to such other address as shall be designated by such Debtor or
the Secured Party in written notice to the other party. Notice sent by
telecopy shall be deemed to be given and received when receipt of such
transmission is acknowledged, and delivered notice shall be deemed to be given
and received when receipted for by, or actually received by, an authorized
officer of such Debtor or the Secured Party, as the case may be.
If to any Debtor:
[Debtor]
c/o Integrated Electrical Services, Inc.
2301 Preston
Houston, Texas 77003
Attn: Jim P. Wise
telephone: 713-222-1875
telecopier: 713-222-1214
If to the Secured Party:
NationsBank, N.A.,
as Agent under the Credit Agreement
dated as of July 30, 1998, among
Integrated Electrical Services, Inc., the financial
institutions parties thereto, and the Agent
700 Louisiana, 7th Floor
Houston, Texas 77002
Attn: Mr. Albert L. Welch, Vice President
telephone: 713-247-6631
telecopier: 713-247-7748
5.3 General. If any provision in this Agreement is held to be
unenforceable, such provision shall be severed and the remaining provisions
shall remain in full force and effect. All representations, warranties, and
covenants of any Debtor in this Agreement shall survive the execution of this
Agreement and any other contract or agreement. If a due date for an amount
payable is not specified in this Agreement, the due date shall be the date on
which the Secured Party demands payment therefor. The Secured Party's remedies
under this Agreement and the Credit Documents shall be cumulative, and no delay
in enforcing this
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<PAGE> 99
Agreement and the Credit Documents shall act as a waiver of the Secured Party's
rights thereunder. The provisions of this Agreement may be waived or amended
only in a writing signed by the party against whom enforcement is sought. This
Agreement shall bind and inure to the benefit of each Debtor and the Secured
Party and their respective successors and assigns. Each Debtor may not assign
its rights or delegate its duties under this Agreement. The Secured Party may
assign its rights and delegate its duties under this Agreement in accordance
with the terms of the Credit Agreement. This Agreement may be executed in
multiple counterparts each of which shall constitute one and the same
agreement.
5.4 Joinder. Any present or future Subsidiary of the Borrower may
become a Debtor under and a party to this Agreement by executing and delivering
to the Secured Party a Joinder Agreement in accordance with Section 5.19 of the
Credit Agreement or by otherwise assuming in writing in favor of the Secured
Party the liabilities of a Debtor under this Agreement. Upon execution and
delivery of a Joinder Agreement or otherwise assuming the liabilities of a
Debtor under this Agreement such Subsidiary shall be deemed to be a Debtor
under this Agreement and a party to this Agreement for all purposes hereunder.
5.5 Amendment and Restatement. This Agreement represents an
amendment and restatement of the Security Agreement dated as of January 30,
1998, made by certain of the Debtors in favor of NationsBank of Texas, N.A.,
predecessor in interest to NationsBank, N.A., as Secured Party, and all
previous versions are deemed replaced hereby. The indebtedness secured under
the prior versions of this Agreement continues to be secured under this version
of this Agreement and the execution of this Agreement does not indicate a
payment, satisfaction, novation, or discharge thereof. All security interests
under the prior versions of this Agreement continue to secure such indebtedness
under this version of this Agreement without impairment or interruption.
THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT
BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO
UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first above written.
INTEGRATED ELECTRICAL SERVICES, INC.
By: /s/ JIM P. WISE
-----------------------------------------
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<PAGE> 100
Jim P. Wise
Senior Vice President and
Chief Financial Officer
[signatures continued on next page]
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<PAGE> 101
ACE ELECTRIC, INC.
H.R. ALLEN, INC.
AMBER ELECTRIC, INC.
BW CONSOLIDATED, INC.
BW/CEC, INC.
BW/BEC, INC.
BW/CEC, L.L.C.
BW/BEC, L.L.C.
CHARLES P. BAGBY COMPANY, INC.
DANIEL ELECTRICAL CONTRACTORS, INC.
DANIEL ELECTRICAL OF TREASURE COAST INC.
FLORIDA INDUSTRIAL ELECTRIC, INC.
GENERAL PARTNER, INC.
J.W. GRAY ELECTRIC CO., IN.C
J.W. GRAY MANAGEMENT LLC
HATFIELD ELECTRIC, INC.
HAYNES ELECTRICAL SUPPLY, INC.
MARK HENDERSON, INCORPORATED
HOLLAND ELECTRICAL SYSTEMS, INC.
SPECTROL, INC.
HOUSTON-STAFFORD ELECTRIC, INC.
HOUSTON-STAFFORD MANAGEMENT LLC
MENNIGA ELECTRIC, INC.
MID-STATES ELECTRIC COMPANY, INC.
MILLS ELECTRICAL CONTRACTORS, INC.
MILLS MANAGEMENT LLC
MUTH ELECTRIC, INC.
PAULIN ELECTRIC COMPANY, INC.
THOMAS POPP & COMPANY
REYNOLDS ELECTRIC CORP.
RODGERS ELECTRIC COMPANY, INC.
STARK INVESTMENTS, INC.
THURMAN & O'CONNELL CORPORATION
WRIGHT ELECTRICAL CONTRACTORS, INC.
By: /s/ JOHN F. WOMBWELL
-------------------------------------
John F. Wombwell
Assistant Secretary
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<PAGE> 102
ALADDIN-WARD ELECTRIC & AIR, INC.
CYPRESS ELECTRICAL CONTRACTORS, INC.
HAMER ELECTRIC ACQUISITION CORPORATION
HOWARD BROTHERS ELECTRIC CO., INC.
INTEGRATED ELECTRICAL FINANCE, INC.
INTEGRATION COMMUNICATION SERVICES, INC.
POLLOCK ELECTRIC INC.
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
By: /s/ JOHN F. WOMBWELL
---------------------------------------
John F. Wombwell
Secretary
J.W. GRAY HOLDINGS LLC
HOUSTON-STAFFORD HOLDINGS LLC
IES HOLDINGS LLC
MILLS ELECTRICAL HOLDINGS LLC
POLLOCK SUMMIT HOLDINGS, INC.
By: /s/ TERRY EARNHART
---------------------------------------
Terry Earnhart
Manager
BEXAR ELECTRIC COMPANY, LTD.
By: BW/BEC, INC., its General Partner
BW/BEC, LLC, its Limited Partner
By /s/ JOHN F. WOMBWELL
-------------------------------
John F. Wombwell
Assistant Secretary
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<PAGE> 103
CALHOUN ELECTRIC COMPANY, LTD.
By: BW/CEC, INC., its General Partner
BW/CEC, LLC, its Limited Partner
By: /s/ JOHN F. WOMBWELL
----------------------------------
John F. Wombwell
Assistant Secretary
J.W. GRAY ELECTRICAL CONTRACTORS LP
By: J.W. GRAY MANAGEMENT LLC, its
General Partner
By: /s/ JOHN F. WOMBWELL
----------------------------------
John F. Wombwell
Assistant Secretary
By: J.W. GRAY HOLDINGS LLC, its Limited
Partner
By: /s/ TERRY EARNHART
----------------------------------
Terry Earnhart
Manager
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<PAGE> 104
HATFIELD REYNOLDS ELECTRIC CO.
By: HATFIELD ELECTRIC, INC., its General
Partner
REYNOLDS ELECTRIC, CORP., its General
Partner
By: /s/ JOHN F. WOMBWELL
----------------------------------
John F. Wombwell
Assistant Secretary
HAYMAKER ELECTRIC, LTD
By: GENERAL PARTNER, INC., its General
Partner
CHARLES P. BAGBY COMPANY, INC., its
Limited Partner
By: /s/ JOHN F. WOMBWELL
----------------------------------
John F. Wombwell
Assistant Secretary
HOUSTON-STAFFORD ELECTRICAL CONTRACTORS LP
By: HOUSTON-STAFFORD MANAGEMENT LLC, its
General Partner
By: /s/ JOHN F. WOMBWELL
----------------------------------
John F. Wombwell
Assistant Secretary
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<PAGE> 105
By: HOUSTON-STAFFORD HOLDINGS LLC,
its Limited Partner
By: /s/ TERRY EARNHART
----------------------------------
Terry Earnhart
Manager
IES MANAGEMENT LP
By: INTEGRATED ELECTRICAL FINANCE, INC.,
its General Partner
By: /s/ JOHN F. WOMBWELL
----------------------------------
John F. Wombwell
Secretary
By: IES HOLDINGS, LLC , its Limited
Partner
By: /s/ TERRY EARNHART
----------------------------------
Terry Earnhart
Manager
MILLS ELECTRIC LP
By: MILLS MANAGEMENT LLC, its General
Partner
By: /s/ JOHN F. WOMBWELL
----------------------------------
John F. Wombwell
Assistant Secretary
By: MILLS ELECTRICAL HOLDINGS LLC, its
Limited Partner
By: /s/ TERRY EARNHART
----------------------------------
Terry Earnhart
Manager
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<PAGE> 106
POLLOCK SUMMIT ELECTRIC LP
By: POLLOCK ELECTRIC INC., its General
Partner and its Limited Partner
SUMMIT ELECTRIC OF TEXAS,
INCORPORATED, its General Partner
By: /s/ JOHN F. WOMBWELL
----------------------------------
John F. Wombwell
Secretary
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<PAGE> 107
NATIONSBANK, N.A., as Agent
By: /s/ ALBERT L. WELCH
------------------------------------------
Albert L. Welch
Vice President
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<PAGE> 108
Schedule I
to Security Agreement
Collateral Information
(For Each Debtor)
[Note: To be supplied by Borrower.]
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<PAGE> 109
PLEDGE AGREEMENT
This Pledge Agreement dated as of July 30, 1998 ("Agreement"), is made
by the undersigned partners of the Partnerships described below (each of the
undersigned, individually, a "Pledgor," and collectively, the "Pledgors"), in
favor of NationsBank, N.A., successor in interest by merger to NationsBank of
Texas, N.A., as agent under the Credit Agreement described below ("Secured
Party").
INTRODUCTION
Reference is made to the Credit Agreement dated as of July 30, 1998
(as modified from time to time, the "Credit Agreement"), among Integrated
Electrical Services, Inc., a Delaware corporation ("Borrower"), certain
financial institutions which are or may become parties thereto (the "Banks"),
and the Secured Party. It is a condition precedent to the obligation of the
Banks to make any extension of credit under the Credit Agreement that the
Pledgors shall have entered into this Agreement. Therefore, in consideration of
the credit expected to be received in connection with the Credit Agreement, the
Pledgors jointly and severally agree with the Secured Party as follows:
Section 1. Definitions. The terms "deposit account," "account," "general
intangible," "security," "instrument," "document," "chattel paper,"
"equipment," "fixture," "inventory," "goods," and "proceeds" shall have the
meanings specified by Article 9 of the Uniform Commercial Code ("UCC").
Capitalized terms used but not defined herein shall have the meanings set forth
in the Credit Agreement. As used herein, the following terms shall have the
following meanings:
"Collateral" means the Partnership Agreements, Pledged Interests,
Records, and Proceeds.
"Partnerships" means Haymaker Electric, Ltd., an Alabama limited
partnership, Calhoun Electric Company, Ltd., a Texas limited partnership, Bexar
Electric Company, Ltd., a Texas limited partnership, J.W. Gray Electrical
Contractors, LP, a Texas limited partnership, Hatfield Reynolds Electric
Company, a Delaware partnership, Houston-Stafford Electrical Contractors LP, a
Texas limited partnership, IES Management LP, a Texas limited partnership,
Mills Electric LP, a Texas limited partnership, Pollock-Summit Electric LP, a
<PAGE> 110
Texas limited partnership, and any partnership the interests in which are
hereafter pledged by any Pledgor to the Secured Party to secure the payment and
performance of the Secured Obligations.
"Partnership Agreements" means (a) the Agreement of Limited
Partnership of Haymaker Electric, Ltd., dated as of December 30, 1992, (b) the
Second Amended and Restated Limited Partnership Agreement of Calhoun Electric
Company, Ltd., dated as of October 1, 1997, (c) the Amended and Restated
Limited Partnership Agreement of the Partnership, dated as of January 2, 1996,
as amended by the First Amendment to Amended and Restated Limited Partnership
Agreement, dated as of May 1, 1997, (d) the Agreement of Limited Partnership of
J.W. Gray Electrical Contractors LP, dated as of June 1, 1998, (e) the
Agreement of General Partnership of Hatfield Reynolds Electric Company, dated
as of February 2, 1998, (f) the Agreement of Limited Partnership of
Houston-Stafford Electrical Contractors LP, dated as of June 5, 1998, (g) the
agreement of limited partnership of IES Management LP, (h) the Agreement of
Limited Partnership of Mills Electric LP, dated as of June 3, 1998, (i) the
Agreement of Limited Partnership of Pollock Summit Electric LP, dated as of May
4, 1998, and (j) any partnership agreement of any future Partnership, in each
case, as the same may be amended, restated, supplemented, or otherwise modified
from time to time.
"Pledged Interests" means all of the outstanding limited and general
partnership interests in the Partnerships, together with all distributions,
cash, instruments, and other proceeds from time to time received or otherwise
distributed in respect of the foregoing, including partnership interest rights,
options, liquidating distributions, new partnership interests, or other
properties or benefits to which any Pledgor may become entitled to receive on
account of such property.
"Proceeds" means all present and future proceeds of the Pledged
Interests, whether arising from the collection, sale, exchange, assignment, or
other disposition of any Pledged Interests, the realization upon any Pledged
Interests, or any other transaction or occurrence, including all claims of such
Pledgor against third parties for impairment, loss, or damage to any Pledged
Interests, all proceeds payable under any put, call, hedge, or other protection
for the value of any Pledged Interests, and all rights under any indemnity,
warranty, or guaranty of or for any of the foregoing, whether such proceeds are
represented as money, deposit accounts, accounts, general intangibles,
securities, instruments, documents, chattel paper, inventory, equipment,
fixtures, or goods.
"Records" means all present and future contracts, accounting records,
files, computer files, computer programs, and other records relating to the
Partnership Agreements, Pledged Interests, and Proceeds.
<PAGE> 111
"Secured Obligations" means (a) all principal, interest, premium,
fees, reimbursements, indemnifications, and other amounts now or hereafter owed
by the Borrower to the Secured Party and the Banks (and with respect to the
Interest Hedge Agreements, any Affiliates of the Banks) under the Credit
Agreement and the other Credit Documents, (b) all amounts now or hereafter owed
by the Pledgors to the Secured Party and the Banks (and with respect to the
Interest Hedge Agreements, any Affiliates of the Banks) under the Guaranty,
this Agreement, and the other Credit Documents, and (c) any increases,
extensions, renewals, replacements, and rearrangements of the foregoing
obligations under any amendments, supplements, and other modifications of the
agreements creating the foregoing obligations.
"UCC" means the Uniform Commercial Code as in effect on the date
hereof in the State of Texas, as amended from time to time, and any successor
statute.
Section 2. Grant of Security Interest. Each Pledgor hereby grants to the
Secured Party a security interest in all of such Pledgor's right, title, and
interest in and to the Collateral to secure the payment and performance of the
Secured Obligations.
Section 3. General Provisions. Each Pledgor represents and warrants to
and agrees with the Secured Party as follows:
3.1 Ownership. Such Pledgor owns all of its rights in the Pledged
Interests as set forth next to its name on Schedule I attached hereto, free and
clear of any liens, security interests, assignments, options, adverse claims,
restrictions, and other encumbrances whatsoever, and has the capacity to enter
into modifications of the Partnership Agreement applicable to the Pledged
Interests of such Pledgor without the consent of any other party other than the
Secured Party. The Pledged Interests are duly authorized and validly issued and
are fully paid and nonassessable. The Pledged Interests constitute 100% of the
limited and general partnership interests in the Partnerships. No effective
pledge or other transfer regarding the Pledged Interests of such Pledgor is in
effect. No recorded financing statement or similar recording or filing covering
any part of the Collateral is in effect or on file in any recording office,
except those filed in connection with this Agreement. No Pledgor shall, without
the prior written consent of the Secured Party, grant any lien, security
interest, assignment, option, restriction, claim, or other encumbrance on or
against the Collateral, or lease, sell, or otherwise transfer any of its rights
in the Collateral, except (a) as permitted under the Credit Agreement, or (b)
to the Secured Party pursuant to the terms of this Agreement.
3.2 Perfection.
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<PAGE> 112
(a) Such Pledgor waives any provision of the Partnership
Agreement applicable to the Pledged Interests of such Pledgor prohibiting or
otherwise restricting the grant of the security interest hereunder. No consent
of any Person is required for the grant by such Pledgor of the security
interest in the Collateral granted hereunder or for the exercise by the Secured
Party of its rights hereunder.
(b) As of the date of this Agreement, the true and
correct name of such Pledgor as listed on such Pledgor's certificate of
incorporation or formation is the name specified for such Pledgor on the
signature pages of this Agreement. Such Pledgor has had no prior names other
than those listed for such Pledgor in Schedule I to the Credit Agreement. Such
Pledgor has not used and does not use any trade names other than those listed
in Schedule I to the Credit Agreement. Without advance written notice to the
Secured Party and reasonable opportunity for the Secured Party to take action
to protect the Secured Party's interests hereunder, such Pledgor shall not
change such Pledgor's name.
(c) As of the date of this Agreement, such Pledgor's
chief executive office is located at the address listed for such Pledgor in
Schedule I to the Credit Agreement. Without advance written notice to the
Secured Party and reasonable opportunity for the Secured Party to take action
to protect the Secured Party's interests hereunder, such Pledgor shall not
change the location of such Pledgor's chief executive office.
(d) A carbon, photographic, or other reproduction of this
Agreement shall be sufficient as a financing statement and may be filed in any
appropriate office in lieu thereof.
3.3 Priority. The security interest created by this Agreement is
first priority (except to the extent otherwise permitted in the Credit
Agreement), and each Pledgor shall preserve and maintain the status of such
security interest to the end that this Agreement shall remain a first priority
security interest in the Collateral.
3.4 Value.
(a) The Partnership Agreement applicable to the Pledged
Interests of such Pledgor has been duly authorized, executed, and delivered by
all parties thereto, and is in full force and effect, enforceable against all
parties thereto in accordance with its terms, subject to bankruptcy and general
principles of equity. An accurate and complete copy of such Partnership
Agreement has been made available for review by the Secured Party in connection
with the execution of this Agreement, and such Partnership Agreement has not
been amended, supplemented, or otherwise modified, or performance thereunder
waived.
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<PAGE> 113
(b) Such Pledgor shall furnish to the Secured Party
promptly upon the giving or receipt thereof, copies of all material notices,
requests, and other documents given to any party to the Partnership Agreement
applicable to the Pledged Interests of such Pledgor or received by such Pledgor
under such Partnership Agreement, and from time to time furnish to the Secured
Party such information and reports regarding the Collateral as the Secured
Party may reasonably request.
(c) Such Pledgor has performed all of its obligations
under the Partnership Agreement applicable to the Pledged Interests of such
Pledgor, and has no liability with respect to any additional capital
contributions or other payment obligations thereunder. Such Pledgor shall use
its commercially reasonable efforts to maintain the Partnership Agreement
applicable to the Pledged Interests of such Pledgor in full force and effect.
(d) Such Pledgor shall not without the advance written
consent of the Secured Party amend, supplement, or otherwise modify the
Partnership Agreement applicable to the Pledged Interests of such Pledgor as in
effect on the date hereof, waive performance under or terminate any provisions
thereof, or consent to any of those actions. Such Pledgor shall not take any
action in connection with such Partnership Agreement which materially impairs
the value of the rights of the Secured Party therein, or consent to any such
actions. If the Secured Party so requests, such Pledgor shall withhold from
taking any action under such Partnership Agreement, or shall take such actions
under such Partnership Agreement as the Secured Party may request.
(e) Such Pledgor shall not initiate any remedies or take
any action to enforce such Pledgor's rights under the Partnership Agreement
applicable to the Pledged Interests of such Pledgor without giving the Secured
Party advance written notice of such Pledgor's intent to initiate such remedies
or take such actions thereunder and the opportunity to consult with such
Pledgor regarding such Pledgor's proposed actions.
3.5 Use and Condition.
(a) So long as no Default or Event of Default shall exist
and be continuing and until the Borrower has received notice from the Secured
Party pursuant to Section 4.1(c) of this Agreement (which notice the Borrower
shall promptly forward to the Pledgors), each Pledgor shall be entitled to
receive and retain any cash dividends or distributions distributed in respect
of the Pledged Interests of such Pledgor, provided that any: (i) non-cash
dividends, distributions, instruments, and other property received or otherwise
distributed in respect of or in substitution for any such Pledged Interests;
(ii) cash dividends and other distributions in connection with a partial or
total liquidation or dissolution of any Partnership or in
-5-
<PAGE> 114
connection with a reduction of capital, capital surplus, or paid-in-surplus of
any Partnership; and (iii) cash distributed in respect of a redemption of
principal of, or in exchange for, any such Pledged Interests, shall be promptly
delivered to the Secured Party for disposition in accordance with Section 4.3
and shall, if received by any Pledgor, be received in trust for the benefit of
the Secured Party, be segregated from the other property or funds of such
Pledgor, and be promptly delivered to the Secured Party as Collateral in the
same form as so received, with any necessary endorsement.
(b) With regard to the Pledged Interests of each Pledgor,
so long as no Default or Event of Default shall exist and be continuing and
until the Borrower has received notice from the Secured Party pursuant to
Section 4.1(d) of this Agreement (which notice the Borrower shall promptly
forward to the Pledgors), each Pledgor shall be entitled to exercise any voting
and other consensual rights pertaining to the Pledged Interests of such Pledgor
for any purpose not inconsistent with the terms of this Agreement. The Secured
Party shall execute and deliver (or cause to be executed and delivered) to such
Pledgor any instruments that such Pledgor may reasonably request to enable such
Pledgor to exercise the voting and other rights which it is entitled to
exercise hereunder and to receive the dividends, distributions, or interest
payments which it is authorized to receive and retain hereunder.
3.6 Further Assurances.
(a) Each Pledgor agrees that at any time such Pledgor
shall promptly execute and deliver all further agreements, and take all further
action, that may be necessary or that the Secured Party may reasonably request,
in order to further evidence the security interests granted or purported to be
granted hereunder and perfect and protect the same or to enable the Secured
Party to exercise and enforce its rights and remedies hereunder. Without
limiting the foregoing, each Pledgor shall at the Secured Party's reasonable
request: (i) mark conspicuously any tangible Collateral with a legend, in form
and substance satisfactory to the Secured Party, indicating that such
Collateral is subject to the security interest granted or purported to be
granted hereunder; and (ii) execute financing statements, amendments and
continuations of financing statements, and such other documents and agreements
as the Secured Party may reasonably request in order to perfect and preserve
the security interests granted or purported to be granted hereunder. Each
Pledgor shall furnish to the Secured Party from time to time any statements and
schedules further identifying and describing any of the Collateral and such
other reports in connection with the Collateral as the Secured Party may
reasonably request.
(b) During the existence of an Event of Default, each
Pledgor agrees that, if such Pledgor fails to perform under this Agreement, the
Secured Party may, but shall not be obligated to, after written request to such
Pledgor to perform, perform such Pledgor's
-6-
<PAGE> 115
obligations under this Agreement and any expenses reasonably incurred by the
Secured Party in performing such Pledgor's obligations shall be paid by such
Pledgor. Any such performance by the Secured Party may be made by the Secured
Party in reasonable reliance on any statement, invoice, or claim, without
inquiry into the validity or accuracy thereof. The amount and nature of any
expense of the Secured Party hereunder shall be conclusively established,
absent manifest error, by a certificate of any officer of the Secured Party.
(c) Each Pledgor irrevocably appoints the Secured Party
as such Pledgor's attorney in fact, with full authority to act during the
existence of an Event of Default for such Pledgor and in the name of such
Pledgor, to take any action and execute any agreement which the Secured Party
deems necessary or advisable to accomplish the purposes of this Agreement,
including taking actions the Secured Party is expressly authorized to take
pursuant to this Agreement (such as the matters described in paragraph (b)
above), instituting proceedings the Secured Party deems necessary or desirable
to enforce the rights of the Secured Party with respect to this Agreement, and
taking actions with respect to receiving, endorsing, and collecting instruments
made payable to such Pledgor representing any dividend, interest payment, or
other distribution in respect of the Pledged Interests of such Pledgor and
giving full discharge for the same. Provided, that the Secured Party shall
first request in writing that such Pledgor take actions and such Pledgor shall,
after reasonable opportunity, have failed to do so.
(d) The powers conferred on the Secured Party under this
Agreement are solely to protect its rights under this Agreement and shall not
impose any duty upon it to exercise any such powers. Except as elsewhere
provided hereunder, the Secured Party shall have no duty as to any of the
Collateral or as to the taking of any necessary steps to preserve rights
against prior parties or any other rights pertaining to the Collateral. The
Secured Party shall have no responsibility for (i) ascertaining or taking
action with respect to calls, conversions, exchanges, rights of first refusal,
or other matters relative to any Pledged Interests, whether or not the Secured
Party has or is deemed to have knowledge of such matters, or (ii) taking any
necessary steps to preserve rights against any parties with respect to any
Pledged Interests.
3.7 Pledgor Remains Liable. Anything herein to the contrary
notwithstanding: (a) such Pledgor shall remain liable under the Partnership
Agreement applicable to the Pledged Interests of such Pledgor to the extent set
forth therein to perform such Pledgor's obligations thereunder to the same
extent as if this Agreement had not been executed; (b) the exercise by Secured
Party of any rights hereunder shall not release such Pledgor from any
obligations under such Partnership Agreement; and (c) Secured Party shall not
have any obligation under such Partnership Agreement by reason of this
Agreement, nor shall Secured Party be obligated to perform or fulfill any of
the obligations of such Pledgor thereunder,
-7-
<PAGE> 116
including any obligation to make any inquiry as to the nature or sufficiency of
any payment such Pledgor may be entitled to receive thereunder, to present or
file any claim, or to take any action to collect or enforce any claim for
payment thereunder.
Section 4. Remedies. During the continuation of any Event of Default:
4.1 Interim Remedies.
(a) The Secured Party may exercise all the rights and
remedies of a secured party under the UCC.
(b) The Secured Party may prosecute actions in equity or
at law for the specific performance of any covenant or agreement herein
contained or in aid of the execution of any power herein granted or for the
enforcement of any other appropriate legal or equitable remedy.
(c) During the continuance of an Event of Default,
following written notice to the Borrower (which notice the Borrower shall
promptly forward to the Pledgors) and to the extent specified in such written
notice, all rights of the Pledgors to receive cash dividends or distributions
shall cease, and all such rights shall thereupon become vested in the Secured
Party who shall thereupon have the sole right to receive such cash dividends.
All cash dividends or distributions received by any Pledgor in violation of the
foregoing shall be received in trust for the benefit of the Secured Party,
shall be segregated from other funds of such Pledgor, and shall be promptly
paid over to the Secured Party to be held as Pledged Interests in the same form
as so received (with any necessary endorsement).
(d) During the continuance of an Event of Default,
following written notice to the Borrower (which notice the Borrower shall
promptly forward to the Pledgors) and to the extent specified in such written
notice, all rights of the Pledgors to exercise the voting and other consensual
rights which they would otherwise be entitled to exercise under the Partnership
Agreements and pursuant to this Agreement shall cease, and all such rights
shall thereupon become vested in the Secured Party who shall thereupon have the
sole right to exercise such voting and other consensual rights, and the Secured
Party may instruct each Pledgor to take or not take action under the applicable
Partnership Agreements. Following such notice from the Secured Party, each
Pledgor authorizes all other parties to the Partnership Agreement applicable to
the Pledged Interests of such Pledgor to follow the instructions of the Secured
Party and ignore the instructions of such Pledgor with respect to such
Pledgor's rights under such Partnership Agreement.
(e) During the continuance of an Event of Default,
following written
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<PAGE> 117
notice to the Borrower (which notice the Borrower shall promptly forward to the
Pledgors) and to the extent specified in such written notice, the Secured Party
shall have the right, without further notice to any Pledgor, to transfer or to
register, in the name of the Secured Party or any of its nominees, any of the
Pledged Interests.
(f) The Secured Party may require any Pledgor to promptly
assemble any tangible Collateral of such Pledgor and make it available to the
Secured Party at a place to be designated by the Secured Party. The Secured
Party may occupy any premises owned or leased by any Pledgor where the
Collateral is assembled for a reasonable period in order to effectuate its
rights and remedies hereunder or under law, without obligation to such Pledgor
with respect to such occupation. The Secured Party shall have no obligation to
take any action to assemble or otherwise take control of the Collateral,
whether for the purposes of sale or otherwise.
(g) The Secured Party may take any action permitted under
the Credit Agreement or other Credit Documents, including declaring the unpaid
portion of the Secured Obligations to be immediately due and payable under the
terms of the Credit Agreement.
4.2 Foreclosure.
(a) The Secured Party may foreclose on the Collateral in
any manner permitted by the courts of or in the State of Texas. If the Secured
Party should institute a suit for the collection of the Secured Obligations and
for the foreclosure of this Agreement, the Secured Party may at any time before
the entry of a final judgment dismiss the same, and take any other action
permitted by this Agreement.
(b) The Secured Party may exercise all the rights and
remedies of a secured party under the UCC, including foreclosure.
(i) If, in the opinion of the Secured Party,
there is any question that a public or semipublic sale or distribution of any
Collateral will violate any state or federal securities law, the Secured Party
in its discretion (A) may offer and sell the Pledged Interests privately to
purchasers who will agree to take them for investment purposes and not with a
view to distribution, or (B) may, if lawful, sell such securities in an
intrastate offering under Section 3(a)(11) of the Securities Act of 1933, as
amended, and no sale so made in good faith by the Secured Party shall be deemed
to be not "commercially reasonable" because so made. Each Pledgor shall
cooperate fully with Secured Party in all respects in selling or realizing upon
all or any part of the Collateral. In addition, each Pledgor shall fully comply
-9-
<PAGE> 118
with the securities laws of the United States, the State of Texas, and other
states and take such actions as may be necessary to permit the Secured Party to
sell or otherwise dispose of any partnership interests pledged hereunder in
compliance with such laws; provided that this Section 4.2(b)(i) shall not
require any Pledgor to file a registration statement with respect to such
partnership interests.
(ii) The Secured Party may sell, after notice to
the Pledgor, any Collateral at public or private sale, at the office of the
Secured Party or elsewhere, for cash or credit and upon such other terms as the
Secured Party deems commercially reasonable. The Secured Party may sell any
Collateral at one or more sales, and the security interest granted hereunder
shall remain in effect as to the unsold portion of the Collateral. Each Pledgor
hereby deems ten days advance notice of the time and place of any public or
private sale reasonable notification, recognizing that if the Collateral is
perishable or threatens to decline speedily in value or is of a type
customarily sold on a recognized market, shorter notice may be reasonable. The
Secured Party shall not be obligated to make any sale of Collateral regardless
of notice of sale having been given. The Secured Party may adjourn any sale by
announcement at the time and place fixed therefor, and such sale may, without
further notice, be made at the time and place to which it was adjourned. In the
event that any sale hereunder is not completed or is defective in the opinion
of the Secured Party, the Secured Party shall have the right to cause
subsequent sales to be made hereunder. Any statements of fact or other recitals
made in any bill of sale, assignment, or other document representing any sale
hereunder, including statements relating to the occurrence of an Event of
Default, acceleration of the Secured Obligations, notice of the sale, the time,
place, and terms of the sale, and other actions taken by the Secured Party in
relation to the sale shall be conclusive evidence of the truth of the matters
so stated. The Secured Party may delegate to any agent the performance of any
acts in connection with any sale hereunder, including the sending of notices
and the conduct of the sale.
4.3 Application of Proceeds. Unless otherwise specified herein,
any cash proceeds received by the Secured Party from the sale of, collection
of, or other realization upon any part of the Collateral shall be applied by
the Secured Party in accordance with and in the manner specified by Section 6.9
of the Credit Agreement.
4.4 Waiver of Certain Rights. To the full extent each Pledgor may
do so, no Pledgor shall insist upon, plead, claim, or take advantage of any law
providing for any appraisement, valuation, stay, extension, or redemption, and
each Pledgor hereby waives and releases the same, and all rights to a
marshaling of the assets of such Pledgor, including the Collateral, or to a
sale in inverse order of alienation in the event of foreclosure of the liens
and security interests hereby created. No Pledgor shall assert any right under
any law pertaining to the marshaling of assets, sale in inverse order of
alienation, the administration
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<PAGE> 119
of estates of decedents or other matters whatever to defeat, reduce, or affect
the right of the Secured Party under the terms of this Agreement.
Section 5. Miscellaneous.
5.1 Notices. All notices and other communications from the Secured
Party to any Pledgor provided for in this Agreement shall be delivered or
transmitted to the Borrower, and shall be deemed delivered to any such Pledgor
upon delivery to the Borrower. All notices and other communications between the
parties provided for in this Agreement shall be delivered or transmitted as
provided in the Credit Agreement to the applicable address set forth therein.
5.2 General. This miscellaneous provisions contained in Article 8
of the Credit Agreement are incorporated herein as if fully set forth herein.
This Agreement may be executed in multiple counterparts each of which shall
constitute one and the same agreement.
5.3 Amendment and Restatement. This Agreement represents an
amendment, restatement, and consolidation of the Pledge Agreements, each dated
as of January 30, 1998, made by certain of the Pledgors in favor of NationsBank
of Texas, N.A., predecessor in interest to NationsBank, N.A., as Secured Party,
and all previous versions are deemed replaced hereby. The indebtedness secured
under the prior versions of this Agreement continues to be secured under this
version of this Agreement and the execution of this Agreement does not indicate
a payment, satisfaction, novation, or discharge thereof. All security interests
under the prior versions of this Agreement continue to secure such indebtedness
under this version of this Agreement without impairment or interruption.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
-11-
<PAGE> 120
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
Executed as of the date first above written.
Pledgors:
BW/BEC, INC.
BW/BEC, LLC
BW/CEC, INC.
BW/CEC, LLC
J.W. GRAY MANAGEMENT LLC
HATFIELD ELECTRIC, INC.
REYNOLDS ELECTRIC, CORP.
GENERAL PARTNER, INC.
CHARLES P. BAGBY COMPANY, INC.
HOUSTON-STAFFORD MANAGEMENT LLC
MILLS MANAGEMENT LLC
By: /s/ JOHN F. WOMBWELL
----------------------------------
John F. Wombwell
Assistant Secretary
J.W. GRAY HOLDINGS LLC
HOUSTON-STAFFORD HOLDINGS LLC
IES HOLDINGS, LLC
MILLS ELECTRICAL HOLDINGS LLC
By: /s/ TERRY EARNHART
----------------------------------
Terry Earnhart
Manager
INTEGRATED ELECTRICAL FINANCE, INC.
-12-
<PAGE> 121
POLLOCK ELECTRIC INC.
SUMMIT ELECTRIC OF TEXAS,
INCORPORATED
By: /s/ JOHN F. WOMBWELL
----------------------------------
John F. Wombwell
Secretary
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<PAGE> 122
Secured Party:
NATIONSBANK, N.A., as Agent
By: /s/ ALBERT L. WELCH
----------------------------------
Albert L. Welch
Vice President
-14-
<PAGE> 123
Schedule I
----------
Pledged Interests of each Pledgor
[NOTE: to be provided by Borrower]
-15-
<PAGE> 1
EXHIBIT 21.1
Integrated Electrical Services, Inc. operates in the electrical contracting and
maintenance industry through 64 subsidiaries, all of which are located in the
United States.
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated September 11, 1998 on the financial statements of the following
businesses included in or made a part of this registration statement:
Integrated Electrical Services, Inc. and Subsidiaries, BW Consolidated, Inc.
and Subsidiaries; Integrated Electrical Services, Inc.; Mills Electrical
Contractors, Inc. and Subsidiary; Muth Electric, Inc.; Amber Electric, Inc.;
Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure Coast
Inc.; Pollock Electric Inc.; Thurman & O'Connell Corporation; Charles P. Bagby,
Co., Inc.; Summit Electric of Texas, Incorporated; and Rodgers Electric Company,
Inc.; and to all references to our firm included in this registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
September 14, 1998
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated December 19, 1997, on the financial statements of Mark Henderson, Inc. and
Subsidiaries included in or made a part of this registration statement and to
all references to our firm in this registration statement.
Bradshaw, Pope & Franklin, LLP
/s/ BRADSHAW, POPE & FRANKLIN, LLP
Norcross, Georgia
September 11, 1998
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated December 2, 1997, on the financial statements of Davis Electrical
Constructors, Inc. included in or made a part of this registration statement
and to all references to our firm in this registration statement.
Elliot, Davis & Company, L.L.P.
Greenville, South Carolina
September 11, 1998 /s/ ELLIOT, DAVIS & COMPANY, L.L.P.
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated February 11, 1998, on the financial statements of Florida Industrial
Electric, Inc. included in or made a part of this registration statement and to
all references to our firm in this registration statement.
Sapp & Sapp P.A.
Winter Park, Florida
September 11, 1998 /s/ SAPP & SAPP P.A.
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated April 1, 1998, on the financial statements of Mid-States Electric
Company, Inc. included in or made a part of this registration statement and to
all references to our firm in this registration statement.
/s/ PHILHOURS, RICH & FLETCHER, P.L.L.C.
Philhours, Rich & Fletcher, P.L.L.C.
Jackson, Tennessee
September 11, 1998
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated February 27, 1998, on the financial statements of Galbraith Acquisition
Company, Inc. and Subsidiary included in or made a part of this registration
statement and to all references to our firm in this registration statement.
Wolfe and Company, P.C.
/s/ WOLFE AND COMPANY, P.C.
Abilene, Texas
September 11, 1998
<PAGE> 1
EXHIBIT 23.8
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
As independent certified public accountants, we hereby consent to the use of
our report, dated August 27, 1998, on the financial statements of Arc Electric,
Incorporated as of and for the year ended December 31, 1997, included in or made
a part of this registration statement, and to all references to our firm in
this registration statement.
Edmondson, Ledbetter & Ballard, LLP
/s/ EDMONDSON, LEDBETTER & BALLARD LLP
Norfolk, Virginia
September 11, 1998
<PAGE> 1
EXHIBIT 23.9
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated May 28, 1998, on the financial statements of Brink Electric Construction
Co. included in or made a part of this registration statement and to all
references to our firm in this registration statement.
/s/ KETEL THORSTENSON, LP
Ketel Thorstenson, LP
Rapid City, South Dakota
September 11, 1998
<PAGE> 1
EXHIBIT 23.10
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated August 25, 1998, on the financial statements of Goss Electric Company,
Inc. included in or made a part of this registration statement and to all
references to our firm in this registration statement.
Wear, Howell, Strickland & Quinn, L.L.C.
/s/ WEAR, HOWELL, STRICKLAND & QUINN, L.L.C.
Decatur, Alabama
September 11, 1998
<PAGE> 1
EXHIBIT 23.11
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated December 18, 1997, on the financial statements of T & H Electrical
Corporation for the year ended September 30, 1997 included in or made a part of
this registration statement and to all references to our firm in this
registration statement.
/s/ DEES, JACKSON, WATSON & ASSOCIATES, P.A.
Dees, Jackson, Watson & Associates, P.A.
Smithfield, North Carolina
September 11, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF INTEGRATED ELECTRICAL SERVICES, INC. AS OF JUNE 30,
1998, AND FOR THE NINE MONTHS ENDED JUNE 30, 1998 AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 20,264
<SECURITIES> 0
<RECEIVABLES> 140,376
<ALLOWANCES> 4,127
<INVENTORY> 6,571
<CURRENT-ASSETS> 178,807
<PP&E> 27,811
<DEPRECIATION> 4,113
<TOTAL-ASSETS> 492,544
<CURRENT-LIABILITIES> 97,899
<BONDS> 0
0
0
<COMMON> 308
<OTHER-SE> 295,190
<TOTAL-LIABILITY-AND-EQUITY> 492,544
<SALES> 553,355
<TOTAL-REVENUES> 553,355
<CGS> 442,475
<TOTAL-COSTS> 504,780
<OTHER-EXPENSES> (368)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 4,063
<INCOME-PRETAX> 44,880
<INCOME-TAX> 18,874
<INCOME-CONTINUING> 26,006
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,006
<EPS-PRIMARY> .85
<EPS-DILUTED> .84
</TABLE>