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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 28, 1997
REGISTRATION NO. 333-38715
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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INTEGRATED ELECTRICAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 1731 76-0542208
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
2301 PRESTON
HOUSTON, TEXAS 77003
(713) 222-1875
(Address, including zip code, and telephone number,
including area code, of registrant's principal executive offices)
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JIM P. WISE
SENIOR VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
2301 PRESTON
HOUSTON, TEXAS 77003
(713) 222-1875
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
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copy to:
MELINDA H. BRUNGER T. MARK KELLY
ANDREWS & KURTH L.L.P. VINSON & ELKINS L.L.P.
4200 TEXAS COMMERCE TOWER 2300 FIRST CITY TOWER
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 220-4200 (713) 758-2222
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after the Registration Statement becomes effective.
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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. [ ]
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. [ ]
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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. [ ]
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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.
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EXPLANATORY NOTE
This Registration Statement contains two forms of prospectus: one (the
"U.S. Prospectus") to be used in connection with a United States and Canadian
offering and one (the "International Prospectus") to be used in connection with
a concurrent international offering. The U.S. Prospectus and the International
Prospectus are identical except that they contain different front, inside front
and back cover pages and different descriptions of the plan of distribution
(contained under the caption "Underwriting" in both prospectuses). The form of
U.S. Prospectus is included herein and is followed by those pages to be used in
the International Prospectus which differ from those used in the U.S.
Prospectus. Each of the pages for the International Prospectus included herein
is labeled "Alternate Page for International Prospectus."
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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
PRELIMINARY PROSPECTUS DATED NOVEMBER 28, 1997
PROSPECTUS
7,000,000 SHARES
INTEGRATED ELECTRICAL SERVICES, INC.
[INTEGRATED LOGO]
COMMON STOCK
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All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby are being offered by Integrated Electrical Services,
Inc. ("IES" or the "Company").
Of the shares of Common Stock being offered hereby, 5,600,000 shares (the
"U.S. Shares") are being offered initially in the United States and Canada (the
"U.S. Offering") by the U.S. Underwriters and 1,400,000 shares (the
"International Shares") are being offered initially outside the United States
and Canada (the "International Offering" and, together with the U.S. Offering,
the "Offerings") by the International Managers. The price to public and
underwriting discount per share are identical for both Offerings and the
closings for both Offerings are conditioned upon each other. See "Underwriting."
Prior to the Offerings there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price.
Shares of Common Stock are being reserved for sale to certain employees,
directors and business associates of, and certain other persons designated by,
the Company, at the initial public offering price. Such employees, directors,
and other persons are expected to purchase, in the aggregate, not more than 10%
of the Common Stock offered in the Offerings. See "Underwriting."
The Company intends to make application to list the Common Stock on The New
York Stock Exchange ("NYSE") under the symbol "IEE."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
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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.
========================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
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Per Share......................................... $ $ $
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Total(3).......................................... $ $ $
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(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the U.S. Underwriters and International Managers
options, exercisable within 30 days after the date hereof, to purchase up to
840,000 and 210,000 additional shares of Common Stock, respectively, solely
to cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
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The shares of Common Stock offered hereby are offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
the Underwriters against payment therefor, subject to certain conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the share
certificates representing the Common Stock will be made in New York, New York on
or about , 1997.
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MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
EQUITABLE SECURITIES CORPORATION
SANDERS MORRIS MUNDY
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The date of this Prospectus is , 1997.
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[MAP OF LOCATIONS AND OTHER GRAPHICS]
Certain persons participating in the Offerings may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock. Such
transactions may include stabilizing, the purchase of Common Stock to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
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[Map of the Continental United States depicting locations in which the Company
maintains offices. Map also denotes states in which the Company conducts
business.]
[Photograph of a two-story, glass residential structure]
[Photograph of modern office building.]
[Photograph of a contemporary home.]
[Photograph of an end of an exposed cable. A number of the individual strands
running through the cable are exposed and illuminated.]
[Photograph of a 2-story apartment facility.]
[Photograph of hotel. Photo shows the entrance side of the hotel.]
[Photograph of showroom of a car dealership.]
[Photograph of concession stand in movie theater.]
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PROSPECTUS SUMMARY
Concurrently with the closing of the Offerings, Integrated Electrical
Services, Inc. plans to acquire, in separate transactions (collectively, the
"Acquisitions"), for consideration including cash and shares of Common Stock
(the "Acquisitions Consideration"), the following 16 companies engaged in all
facets of electrical contracting and maintenance services: Houston-Stafford
Electric, Inc. and Stark Investments, Inc., a related electrical supply company
(such two companies, collectively, "Houston-Stafford"), Mills Electrical
Contractors, Inc. ("Mills"), BW Consolidated, Inc., including Bexar Electric
Company, Ltd., and Calhoun Electric Company, Ltd. (collectively,
"Bexar-Calhoun"), Pollock Electric, Inc. ("Pollock"), Muth Electric, Inc.
("Muth"), Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure
Coast Inc. (collectively, "Daniel"), Amber Electric, Inc. ("Amber"), Charles P.
Bagby Company, Inc. and General Partner, Inc. (collectively referred to herein
as "Haymaker"), Summit Electric of Texas, Inc. ("Summit"), Thurman & O'Connell
Corp. ("Thurman & O'Connell"), Rodgers Electric Co., Inc. ("Rodgers"), Hatfield
Electric, Inc. ("Hatfield"), Ace Electric, Inc. ("Ace"), Reynolds Electric Corp.
("Reynolds") and Thomas Popp & Co., Inc. ("Popp") (the foregoing companies
referred to herein as the "Founding Companies"). Unless otherwise indicated,
references herein to "IES" mean Integrated Electrical Services, Inc., and
references to "IES" or the "Company" mean IES and the Founding Companies
collectively.
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.
Unless otherwise indicated, the information, share and per share data in this
Prospectus (i) give effect to the Acquisitions, (ii) assume the Underwriters'
over-allotment options are not exercised and (iii) give effect to a
2,329.6-for-one stock split of the Common Stock effected in October 1997.
THE COMPANY
IES was founded in June 1997 to create a leading national provider of
electrical contracting and maintenance services to the commercial, industrial
and residential markets. Concurrently with the closing of the Offerings, IES
will acquire 15 electrical contracting and maintenance service companies and a
related supply company with pro forma combined year ended September 30, 1997
revenues of $312.7 million, making it one of the largest providers of electrical
contracting and maintenance services in the United States. Of such 1997 pro
forma revenues, approximately 63% was derived from commercial and industrial
contracting, approximately 25% was derived from residential contracting and
approximately 12% was derived from electrical maintenance work. Combined
revenues of the Founding Companies, which have been in business an average of 18
years, increased at an average compound annual growth rate of approximately 20%
from fiscal 1994 through 1996.
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 Founding Companies specialize in either commercial and industrial
or residential work, although a few of the Founding 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 Founding 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 contracting and maintenance services to the full range of commercial
and industrial customers.
From fiscal 1994 through 1996, the Founding Companies' revenues from
electrical contracting for commercial and industrial customers have grown at an
average compound annual rate of approximately 22% 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
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 by providing services in diverse geographic markets
as construction activity shifts to new locations. The Founding Companies'
residential electrical contracting revenues have grown at an average compound
annual rate of approximately 19% from fiscal 1994 through 1996.
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 will have greater
ability to compete for larger jobs that require greater
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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 will provide increased efficiency in materials
purchasing, computer system development, employee benefits, bonding, insurance
and financing. The Company believes that the diversity of its operations will
diminish the effects of regional and market downturns, offer opportunities to
pursue growth in its existing markets and create a base of expertise to expand
into new markets and serve new customers.
The Company plans to leverage 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 Founding 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 Founding Companies are members of the
IEC and other trade organizations, and the Company intends to expand the
practice of sharing best practices among the Founding Companies and with 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 Founding Companies. The Company will identify and
share 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 Founding 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 Founding 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
Founding 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 Founding 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.
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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 Founding Companies. The Company also will be structured to allow it
to capitalize on the considerable local and regional market knowledge and
customer relationships possessed by each Founding 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 and the Offerings will provide
competitive advantages in this regard. The Company intends to attract and
develop 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 will
be centralized following the Offerings. In addition, by combining
overlapping operations of certain of the Founding Companies, the Company
expects to realize savings in overhead and other expenses. The Company
intends to use 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 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 Founding Companies. At some locations,
the larger combined workforce will provide 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 intends to focus 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 service businesses that lack the capital
necessary to expand operations will become acquisition candidates. For these
acquisition candidates, the Company will provide (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 Founding 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 will pursue 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 will seek 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
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acquisitions, the Company intends to maintain existing business names and
identities to retain goodwill for marketing purposes.
THE OFFERINGS
Common Stock offered:
U.S. Offering..................... 5,600,000
International Offering............ 1,400,000
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Total..................... 7,000,000
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Common Stock to be outstanding after
the Offerings(1).................... 23,365,336 shares
Use of proceeds..................... To pay the cash portion of the
Acquisitions Consideration, to repay
certain historical indebtedness of the
Founding Companies, to provide working
capital and to use for general
corporate purposes, which are expected
to include acquisitions. See "Use of
Proceeds."
Proposed NYSE trading symbol........ "IEE"
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(1) Includes (i) 12,313,025 shares to be issued to the owners of the Founding
Companies, (ii) 7,000,000 shares to be sold in the Offerings, (iii)
1,396,602 shares issued to the management of IES and (iv) 2,655,709 shares
of Restricted Common Stock issued to the founder of IES. Excludes options to
purchase 300,000 shares which are currently outstanding and options to
purchase 2,328,600 shares which are expected to be granted upon consummation
of the Offerings. See "Management -- 1997 Stock Plan," "Management -- 1997
Directors Stock Plan," "Certain Transactions" and "Description of Capital
Stock."
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SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
IES will acquire the Founding Companies simultaneously with and as a
condition to the consummation of the Offerings. For financial statement
presentation purposes, Houston-Stafford has been identified as the "accounting
acquirer." The following summary unaudited pro forma combined financial data
present certain data for the Company, as adjusted for (i) the effects of the
Acquisitions, (ii) the effects of certain other pro forma adjustments to the
historical financial statements and (iii) the consummation of the Offerings and
the application of the net proceeds therefrom. The unaudited pro forma combined
income statement data assume that the Acquisitions, the Offerings 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
then occurred or of the Company's future results. During the periods presented
below, the Founding 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
"Selected Financial Data," the Unaudited Pro Forma Combined Financial Statements
and notes thereto, and the historical financial statements for certain of the
Founding Companies and the notes thereto, all included elsewhere in this
Prospectus.
PRO FORMA
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YEAR ENDED
SEPTEMBER 30, 1997
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INCOME STATEMENT DATA:
Revenues.................................................. $ 312,747
Cost of services (including depreciation)................. 247,772
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Gross profit.............................................. 64,975
Selling, general and administrative expenses(a)........... 35,938
Goodwill amortization(b).................................. 3,069
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Income from operations.................................... 25,968
Interest and other income (expense), net(c)............... (86)
-----------
Income before income taxes................................ 25,882
Provision for income taxes................................ 11,026
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Net income(d)............................................. $ 14,856
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Net income per share...................................... $ .68
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Shares used in computing pro forma net income per
share(e)............................................... 21,884,523
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PRO FORMA(F)(G)
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AS OF SEPTEMBER 30, 1997
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COMBINED AS ADJUSTED(H)
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BALANCE SHEET DATA:
Working capital........................................... $(33,071)(i) $ 51,341
Total assets.............................................. 216,422 237,273
Long-term debt, net of current maturities................. 20,763 18,885
Total stockholders' equity................................ 79,504 165,793
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(a) The unaudited pro forma combined income statement data reflect an aggregate
of approximately $6.1 million in pro forma reductions in salary, bonus and
benefits of the owners of the Founding Companies to which they have agreed
prospectively, and the effect of revisions of certain lease agreements
between the Founding Companies and certain stockholders of the Founding
Companies. See "Certain Transactions."
(b) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period and computed on the basis described in
the notes to the Unaudited Pro Forma Combined Financial Statements.
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(c) Reflects the reduction for interest expense of $0.8 million attributable to
the repayment of $8.1 million of historical debt with proceeds from the
Offerings and other debt distributed prior to the Acquisitions, net of
additional interest expense of $1.4 million related to the debt discussed in
(g) below. Additionally, reflects 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 to be 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 of IES and
(iv) 5,399,187 of the 7,000,000 shares to be sold in the Offerings necessary
to pay the cash portion of the Acquisitions Consideration and the offering
expenses. Also, includes 120,000 shares computed under the treasury stock
method related to 300,000 options which are currently outstanding, but
excludes any effects from options to purchase 2,328,600 shares which are
expected to be granted at the Offering price upon consummation of the
Offerings. See "Description of Capital Stock."
(f) Reflects the Acquisitions and related transactions as if they had occurred
on September 30, 1997 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 $29.8 million of previously undistributed earnings and nonoperating
assets and liabilities that will be transferred in connection with the
Acquisitions to the owners of the Founding Companies. This amount will be
funded through transfers of approximately (i) $4.2 million of nonoperating
assets, net of liabilities, (ii) $7.4 million of available cash of the
Founding Companies and (iii) $18.2 million of notes payable to certain
owners of the Founding Companies (such transfers, collectively, the "Owner
Amounts"). See "Certain Transactions."
(h) Reflects the closing of the Offerings and the Company's application of the
net proceeds therefrom to fund the cash portion of the Acquisitions
Consideration and to repay certain indebtedness of the Founding Companies.
See "Use of Proceeds" and "Certain Transactions."
(i) Includes the estimated $57.5 million of notes payable to owners of the
Founding Companies, representing the cash portion of the Acquisitions
Consideration to be paid from a portion of the net proceeds from the
Offerings. See "Pro Forma -- As Adjusted" amounts. The cash portion of the
Acquisitions Consideration will be adjusted based on the initial public
offering price of the Common Stock offered hereby.
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SUMMARY INDIVIDUAL FOUNDING COMPANY HISTORICAL FINANCIAL DATA
(IN THOUSANDS)
The following table presents certain summary historical income statement
data of the Founding Companies for each of their three most recent fiscal years
and the year ended September 30, 1997. The historical income statement data
below have not been adjusted for the pro forma adjustments related to
contractually agreed reductions in salaries and benefits, or any other pro forma
adjustments, reflected in the Unaudited Pro Forma Combined Financial Statements,
included elsewhere in this Prospectus. The income statement data presented below
have been audited for certain of the Founding Companies and for the periods as
reflected in the historical financial statements of such Founding Companies,
included elsewhere in this Prospectus. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
FISCAL YEARS(A) YEAR ENDED
----------------------------- SEPTEMBER 30,
1994 1995 1996 1997(B)
------- ------- ------- -------------
HOUSTON-STAFFORD:
Revenues.................................................. $48,001 $54,082 $70,493 $81,575
Income from operations.................................... 519 1,343 5,021 5,270
MILLS:
Revenues.................................................. $25,544 $35,250 $65,439 $74,399
Income from operations.................................... 1,216 3,137 7,261 5,049
BEXAR-CALHOUN:
Revenues.................................................. $23,168 $27,730 $33,023 $32,165
Income from operations.................................... 2,110 3,129 4,320 3,423
POLLOCK:
Revenues.................................................. $11,847 $13,002 $15,816 $20,291
Income/(Loss) from operations............................. 455 251 (181) 726
MUTH:
Revenues.................................................. $13,466 $16,012 $16,830 $18,779
Income from operations.................................... 983 900 1,039 1,194
DANIEL:
Revenues.................................................. $12,198 $12,049 $12,585 $18,409
Income/(Loss) from operations............................. 219 (1,178) 988 2,575
AMBER:
Revenues.................................................. $ 8,735 $ 9,728 $13,878 $16,386
Income from operations.................................... 281 136 503 1,592
HAYMAKER:
Revenues.................................................. $ 5,736 $ 7,571 $ 7,634 $11,772
Income from operations.................................... 220 376 542 712
SUMMIT:
Revenues.................................................. $ 9,243 $ 9,233 $10,565 $10,995
Income from operations.................................... 166 159 68 78
THURMAN & O'CONNELL:
Revenues.................................................. $ 3,658 $ 4,729 $ 4,551 $ 4,049
Income from operations.................................... 502 908 989 1,365
RODGERS:
Revenues.................................................. $ 1,820 $ 1,582 $ 3,325 $ 3,325
Income from operations.................................... 154 43 466 466
ALL OTHER FOUNDING COMPANIES(C):
Revenues.................................................. $17,759 $20,418 $19,914 $20,602
Income from operations.................................... 996 1,391 840 519
- ---------------
(a) The fiscal years presented above are the years ended December 31, 1994,
1995 and 1996, except for Pollock for which the fiscal years presented are
the years ended October 31, 1994, 1995 and 1996; Summit for which the
fiscal years presented are the years ended March 31, 1995, 1996 and 1997;
and Rodgers for which the fiscal years presented are the years ended
September 30, 1995, 1996 and 1997.
(b) Represents the year ended September 30, 1997 for all Founding Companies,
except that the amounts included for Ace, Hatfield, Popp and Reynolds are
for the year ended June 30, 1997.
(c) The other Founding Companies are Hatfield, Ace, Reynolds and Popp, and the
fiscal years presented for such other Founding Companies are for December
31, 1994, 1995 and 1996, in the case of Ace, Reynolds and Popp; and October
31, 1994, 1995 and 1996, in the case of Hatfield.
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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
IES was founded in June 1997 but has conducted no operations and generated
no revenue to date. IES has entered into agreements to acquire the Founding
Companies simultaneously with the closing of the Offerings. The Founding
Companies have been operating and will continue to operate 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 Founding
Companies cover periods during which the Founding 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 Founding Companies and other
future acquisitions into one organization in a profitable manner. The inability
of the Company to successfully integrate the Founding 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 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
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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 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."
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 reached an agreement in principle to obtain a bank line of
credit for $65 million for working capital and acquisitions. The line of credit
will be subject to customary drawing conditions and the completion of
negotiations with the lenders and the execution of appropriate loan
documentation. See
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"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
Following the completion of the Acquisitions and the Offerings, the
Company's executive officers, directors and affiliates will beneficially own
approximately 41% 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."
PROCEEDS OF OFFERINGS AND BENEFITS TO AFFILIATES
Approximately $57.5 million, or approximately 67%, of the net proceeds of the
Offerings (net of estimated offering costs, including underwriting discounts
and commissions and costs to be incurred by the Company which have been funded
by advances from Mr. Snyder) will be paid in cash to the owners of the Founding
Companies (who will generally become officers, directors or employees of the
Company). In addition, approximately $6.4 million, or approximately 7% of the
net proceeds of the Offerings, will be used to repay historical indebtedness of
the Founding Companies. Net proceeds available for acquisitions, working
capital and general corporate purposes will be approximately $22.4 million, or
26% of the net proceeds of the Offerings. In connection with the Acquisitions,
the Company expects to incur approximately $18.2 million in indebtedness to
fund the transfer of a portion of the Owner Amounts. Advances to the Company
from Mr. Snyder amounted to approximately $1.6 million as of September 30,
1997. See "Use of Proceeds" and "Certain Transactions.
BENEFITS TO FOUNDER AND MANAGEMENT
In connection with the formation of the Company, C. Byron Snyder, the
founder of IES, and management received in the aggregate 4,052,311 shares of
Common Stock for nominal consideration. These shares will represent, in the
aggregate, approximately 17.3% of the total outstanding Common Stock following
the consummation of the Offerings. Of these shares of Common Stock, the
2,655,709 shares held by Mr. Snyder are Restricted Common Stock, which 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 and will control in the aggregate 5.7% of the
votes of all shares of Common Stock. See "Principal Stockholders." Mr. Snyder
will also be reimbursed for advances made to the Company to fund expenses of the
Offerings estimated to total approximately $4.8 million. See "Use of Proceeds."
NO PRIOR MARKET, POSSIBLE VOLATILITY OF STOCK
Prior to the Offerings, no public market for the Common Stock has existed,
and the initial public offering price, which will be determined by negotiations
between the Company and representatives of the Underwriters, may not be
indicative of the price at which the Common Stock will trade after the
Offerings. See "Underwriting" for the factors to be considered in determining
the initial public offering price. The Company intends to make application to
list the Common Stock on the NYSE, but no assurance can be given that an
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active trading market for the Common Stock will develop or, if developed,
continue after the Offerings. The market price of the Common Stock after the
Offerings 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.
DEPENDENCE ON KEY PERSONNEL
The Company's operations are dependent on the continued efforts of its
executive officers and senior management of the Founding Companies. Furthermore,
the Company will be dependent on the senior management of companies that may be
acquired in the future. Although the Company will enter 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 October 20, 1997, 4,052,311 shares of Common Stock were issued and
outstanding. Simultaneously with the closing of the Offerings, the stockholders
of the Founding Companies will receive, in the aggregate, 12,313,025 shares of
Common Stock as a portion of the Acquisitions Consideration. None of these
16,365,336 shares was or will be 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 current stockholders of the Company and the
owners of the Founding Companies have agreed with the Company not to sell,
contract to sell or otherwise dispose of any shares of Common Stock owned as of
the consummation of the Acquisitions, including shares 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. The current stockholders of the Company and
the stockholders of the Founding Companies have certain piggy-back registration
rights with respect to their shares of Common Stock, which may be exercised
during the two-year period referred to above.
As of the closing of the Offerings, the Company also will have outstanding
options to purchase up to a total of approximately 2,628,600 shares of Common
Stock issued pursuant to the Company's 1997 Stock Option Plan (the "1997 Stock
Plan"). A total of 3,500,000 shares will be issuable pursuant to the 1997 Stock
Plan. The Company intends to file a registration statement covering all such
shares under the Securities Act. See "Management -- 1997 Stock Plan."
The Company currently intends to file a registration statement covering up
to an additional 6,000,000 shares of Common Stock under the Securities Act for
its use in connection with future acquisitions. These shares generally will be
freely tradeable after their issuance by persons not affiliated with the Company
unless the Company contractually restricts their resale.
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.
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
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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.
IMMEDIATE AND SUBSTANTIAL DILUTION
The purchasers of the shares of Common Stock offered hereby will experience
immediate dilution in the net tangible book value of their shares of $12.21 per
share (assuming an initial public offering price of $14.00 per share). See
"Dilution." In the event the Company issues additional shares of Common Stock in
the future, including shares which may be issued in connection with acquisitions
or other public or private financings, purchasers of Common Stock in the
Offerings may experience further dilution in the net tangible book value per
share of the Common Stock. See "Dilution."
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THE COMPANY
IES was founded in June 1997 to create a leading national provider of
electrical contracting and maintenance services. Concurrently with and as a
condition to the closing of the Offerings, IES will acquire the 16 Founding
Companies. The Founding Companies, which have been in business for an average of
18 years, had pro forma combined year ended September 30, 1997 revenues of
approximately $312.7 million. The Acquisitions Consideration to be paid by the
Company consists of approximately $57.5 million in cash (subject to adjustment
based on the initial public offering price of the Common Stock offered hereby)
and 12,313,025 shares of Common Stock. The Acquisitions Consideration was
determined by negotiations among the Company and representatives of the Founding
Companies. See "Certain Transactions." A brief description of each of the
Founding Companies is set forth below.
HOUSTON-STAFFORD. Houston-Stafford was founded in 1973 and is headquartered
in Stafford, Texas, near Houston. It operates primarily in Texas, with other
significant operations in Georgia, Virginia, Tennessee and Maryland.
Houston-Stafford had revenues of approximately $81.6 million for the year ended
September 30, 1997, primarily from residential contracting and, to a lesser
extent, from commercial and industrial contracting. Because Houston-Stafford has
developed ongoing relationships with developers and homebuilders that have
regional and national operations, Houston-Stafford has experience in
establishing business operations in different locations to meet the demands of
its national clientele for electrical contracting in various regions.
Houston-Stafford has approximately 1,000 employees. In April 1997
Houston-Stafford financed the acquisition of an electrical supply company
located in Houston. Ben Mueller, executive vice president of Houston-Stafford,
will become Senior Vice President and Chief Operating Officer -- Residential and
a director of the Company following consummation of the Offering. Roy D. Brown,
president of Houston-Stafford, will sign a five-year employment agreement with
IES to continue in his position as president of Houston-Stafford following
consummation of the Offering. John Wagner, who is vice president of
Houston-Stafford and president of the electrical supply company, will sign a
five-year employment agreement with IES to continue in his position as president
of the electrical supply company following consummation of the Offerings.
MILLS. Mills was founded in 1972 and conducts most of its business in the
greater Dallas-Fort Worth area. Mills had revenues of approximately $74.4
million for the year ended September 30, 1997, primarily from commercial and
industrial contracting and, to a lesser extent, from maintenance services. Mills
has specialized expertise in data cabling, fire alarm systems and
computer-aided-design for electrical contracting, and a significant portion of
revenues for the year ended September 30, 1997 was attributable to design-and-
build projects. Mills has approximately 570 employees. Jerry Mills, president
and founder of Mills, will become Senior Vice President and Chief Operating
Officer -- Commercial and Industrial and a director of the Company following
consummation of the Offerings.
BEXAR-CALHOUN. Bexar was founded in 1962 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. On a
combined basis, Bexar-Calhoun had revenues of approximately $32.2 million for
the year ended September 30, 1997, relatively balanced between commercial and
industrial contracting, residential contracting and maintenance services.
Bexar-Calhoun has approximately 450 employees. Bob Weik, president of BW
Consolidated, Inc., will sign a five-year employment agreement with IES to
continue his present position and will be a director of the Company following
consummation of the Offerings.
POLLOCK. Pollock was founded in 1983 and is headquartered in Houston,
Texas. Pollock had revenues of approximately $20.3 million for the year ended
September 30, 1997, primarily from commercial and industrial contracting. For
projects located outside of Houston, Pollock generally works with another
electrical service contractor based near the project. Pollock has specialized
design-and-build and computer-aided-design expertise, and, on certain projects,
Pollock prefabricates materials to reduce costs and time required at the work
site. Pollock has approximately 230 employees. Jon Pollock, founder and
president of Pollock and a former president of the IEC, will become President
and Chief Executive Officer and a director of the Company following consummation
of the Offerings.
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MUTH. Muth was founded in 1970 and has seven offices located in South
Dakota, including its headquarters in Mitchell. Muth also operates from time to
time in Wyoming, Montana, Nebraska and Minnesota. Muth had revenues of
approximately $18.8 million for the year ended September 30, 1997, primarily
from commercial and industrial contracting and, to a lesser extent, from
residential contracting and maintenance services. Muth has expertise in
design-and-build projects, computer-aided-design technology and prefabrication
of electrical components. Muth has approximately 180 employees. Richard Muth,
founder and president of Muth, will sign a five-year employment agreement with
IES to continue his present position and will become a director of the Company
following consummation of the Offerings.
DANIEL. 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. Daniel had combined revenues of approximately $18.4 million
for the year ended September 30, 1997, primarily from commercial and industrial
contracting (including high-rise condominiums). Because developers generally
presell a certain percentage of condominiums prior to commencing construction,
Daniel has experience in meeting the accelerated contracting schedules that are
often required to meet mandated closing periods for condominium sales. Daniel
has approximately 240 employees. Thomas Daniel, founder and president of Daniel,
will sign a five-year employment agreement with IES to continue his present
position following consummation of the Offerings.
AMBER. Amber was founded in 1979 and operates from its base near Orlando,
Florida. Amber had revenues of approximately $16.4 million for the year ended
September 30, 1997, primarily from commercial and industrial contracting. Amber
has approximately 230 employees. Danniel J. Petro, founder and president of
Amber, will sign a five-year employment agreement with IES to continue his
present position following consummation of the Offerings.
HAYMAKER. Haymaker was founded in 1981. Haymaker is headquartered in
Birmingham, Alabama, and operates in Alabama, northwest Florida and North
Carolina. Haymaker had revenues of approximately $11.8 million for the year
ended September 30, 1997, primarily from commercial and industrial contracting.
Haymaker has expertise in design-and-build projects, lightning protection and
fire alarms, and its largest existing contracts involve new construction of
high-rise office buildings. Haymaker has approximately 110 employees. Charles P.
Bagby, founder and president of Haymaker, will sign a five-year employment
agreement with IES to continue his present position following consummation of
the Offerings.
SUMMIT. Summit was founded in 1987 and is located in Houston, Texas. Summit
had revenues of approximately $11.0 million for the year ended September 30,
1997, primarily from commercial and industrial contracting and, to a lesser
extent, from maintenance services. Summit has specialized expertise in data
cable design and installation and lighting design. Summit has approximately 150
employees. Steve Jackson, president of Summit, will sign a five-year employment
agreement with IES to continue his present position following consummation of
the Offerings.
THURMAN & O'CONNELL. 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 had revenues of approximately $4.0
million for the year ended September 30, 1997, primarily from commercial and
industrial contracting. Thurman & O'Connell bids primarily on larger projects
and out-of-budget projects for which it can apply in-house value engineering,
lowering costs to its customers and typically increasing its margins. Thurman &
O'Connell has approximately 70 employees. James Thurman, president of Thurman &
O'Connell and a member of the executive committee of the IEC, will sign a
five-year employment agreement with IES to continue his present position
following consummation of the Offerings.
RODGERS. Rodgers was founded in 1977, is headquartered in Everett,
Washington and operates in Everett and the north Puget Sound area. Rodgers had
revenues of approximately $3.3 million in the year ended September 30, 1997,
primarily from electrical maintenance and service work and commercial and
industrial contracting. Rodgers has specialized expertise in
computer-aided-design technology and focuses on design-and-build projects
undertaken on negotiated rather than bid terms. Rodgers has approximately 20
employees. Terry Earnheart, president of Rodgers, will sign a five-year
employment agreement with IES to continue his present position following
consummation of the Offerings.
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HATFIELD. Hatfield was founded in 1984 and operates in the greater Phoenix
area from its offices in Scottsdale, Arizona. Hatfield had revenues of
approximately $6.0 million for the year ended September 30, 1997, primarily from
commercial and industrial contracting and, to a lesser extent, from commercial
and industrial maintenance services. Hatfield has specialized expertise in
electrical contracting for cellular telephone sites and maintains the necessary
state licenses to perform such services in Arizona and four adjacent states.
Hatfield has approximately 80 employees. Harvey Friedman, founder and president
of Hatfield and a member of the executive committee of the IEC, will sign a
five-year employment agreement with IES to continue his present position
following consummation of the Offerings.
ACE. Ace was founded in 1975 in Valdosta, Georgia. Ace had revenues of
approximately $6.3 million for the year ended September 30, 1997, primarily from
commercial and industrial contracting and, to a lesser extent, from commercial
and industrial maintenance services. Ace has specialized expertise in
prefabrication of electrical components, which it uses to accelerate the
completion time for its construction projects. Ace has approximately 70
employees. Thomas Stalvey, founder and president of Ace, and Robert Stalvey,
vice president of Ace, will sign five-year employment agreements with IES to
continue their present positions following consummation of the Offerings. Robert
Stalvey will also become a director of the Company following consummation of the
Offerings.
REYNOLDS. Reynolds was founded in 1973 in Phoenix, Arizona. Reynolds had
revenues of approximately $6.4 million for the year ended September 30, 1997,
primarily from commercial and industrial contracting. Reynolds has specialized
expertise in value engineering for design-and-build projects. Reynolds has
approximately 90 employees. Ernie Reynolds, president of Reynolds, will sign a
five-year employment agreement with IES to continue his present position
following consummation of the Offerings.
POPP. Popp was founded in 1984 in Cincinnati, Ohio, and operates in Ohio
and northern Kentucky. Popp had revenues of approximately $3.5 million for the
year ended September 30,1997, primarily from commercial and industrial
contracting. Design-and-build projects accounted for a significant portion of
revenues for the year ended September 30, 1997. Popp uses computer-aided-design
technology and has also developed software enhancements for its design-and-build
projects. Popp has approximately 50 employees. Thomas Popp, co-founder and
president of Popp, and William Beischel, co-founder and vice president of Popp,
will sign five-year employment agreements with IES to continue their present
positions following consummation of the Offerings.
Integrated Electrical Services, Inc. was incorporated in Delaware in June
1997. Its executive offices are located at 2301 Preston, Houston, Texas 77003,
and its telephone number is (713) 222-1875.
16
22
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby (assuming an initial public offering price of $14.00 per share
and after deducting estimated underwriting discounts and commissions and
estimated offering expenses payable by the Company which have been funded by
advances from Mr. Snyder) are estimated to be approximately $86.3 million
(approximately $100.0 million if the Underwriters' over-allotment options are
exercised in full).
Of the $86.3 million net proceeds, the Company estimates that approximately
$57.5 million (subject to adjustment based on the initial public offering price
of the Common Stock) will be used to pay the cash portion of the Acquisitions
Consideration, all of which will be paid to former stockholders and other equity
owners of the Founding Companies. In addition, approximately $6.4 million of the
net proceeds will be used to repay the estimated outstanding indebtedness of the
Founding Companies at the closing of the Offerings. The estimated outstanding
indebtedness to be repaid from the proceeds of the Offerings bears interest at a
weighted average interest rate of approximately 8.8% and matures at various
dates from December 1997 through October 2012. In connection with the
Acquisitions, the Company expects to incur approximately $18.2 million in
indebtedness to fund the transfer of a portion of the Owner Amounts. The
Company will use a portion of the proceeds received from the Offerings to repay
Mr. Snyder for the $4.8 million estimated offering costs expected to be
advanced by him to the Company. Such advances amounted to approximately $1.6
million as of September 30, 1997. See "Certain Transactions."
The approximately $22.4 million of remaining net proceeds will be used for
working capital and for general corporate purposes, which are expected to
include future acquisitions. Pending such uses, the Company intends to invest
the net proceeds of the Offerings in short-term, investment-grade,
interest-bearing securities. While the Company is continuously considering
possible acquisition prospects as part of its growth strategy, the Company is
not presently engaged in active negotiations with respect to any particular
acquisition. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Combined Liquidity and Capital Resources."
The Company has reached an agreement in principle to obtain a bank line of
credit for $65 million for working capital and acquisitions. The line of credit
will be subject to customary drawing conditions and the completion of
negotiations with the lenders and the execution of appropriate loan
documentation. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Combined Liquidity and Capital Resources."
DIVIDEND POLICY
The Company currently intends to retain its future earnings, if any, to
finance the growth, development and expansion of its business and, accordingly,
does not currently intend to declare or pay any dividends on the Common Stock
for the foreseeable future. The declaration, payment and amount of future
dividends, if any, will be at the discretion of the Company's Board of Directors
after taking into account various factors, including, among others, the
Company's financial condition, results of operations, cash flows from
operations, current and anticipated capital requirements and expansion plans,
the income tax laws then in effect and the requirements of Delaware law. In
addition, the terms of the Company's proposed credit facility will prohibit the
payment of dividends by the Company. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Combined Liquidity and
Capital Resources."
17
23
CAPITALIZATION
The following table sets forth the current maturities of long-term debt and
the capitalization as of September 30, 1997 of (i) the Company on a pro forma
combined basis after giving effect to the Acquisitions and related transactions,
and (ii) the Company on a pro forma basis, as adjusted to give effect to the
Offerings and the application of the estimated net proceeds therefrom. See "Use
of Proceeds." This table should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Combined Liquidity and Capital Resources" and the Unaudited Pro
Forma Financial Statements of the Company and the notes thereto, included
elsewhere in this Prospectus.
PRO FORMA
------------------------------
AS OF SEPTEMBER 30, 1997
------------------------------
COMBINED(A) AS ADJUSTED(B)
----------- --------------
(IN THOUSANDS)
Current maturities of long-term debt........................ $ 62,366(c) $ 365
======== ========
Long-term debt, net of current maturities(d)................ $ 20,763 $ 18,885
-------- --------
Stockholders' equity:
Preferred Stock: $0.01 par value, 10,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common Stock: $0.01 par value, 100,000,000 shares
authorized; 13,709,627 issued and outstanding, pro
forma combined; and 20,709,627 shares issued and
outstanding, as adjusted(e)............................ 137 207
Restricted Common Stock: $0.01 par value, 2,655,709 shares
authorized, issued and outstanding(f).................. 26 26
Additional paid-in capital................................ 70,138 156,358
Retained earnings......................................... 9,202 9,202
-------- --------
Total stockholders' equity........................ 79,503 165,793
-------- --------
Total capitalization.............................. $100,266 $184,678
======== ========
- ---------------
(a) Combines the respective accounts of IES and the Founding Companies as
reflected in the Unaudited Pro Forma Combined Balance Sheet as of September
30, 1997 prior to the Offerings.
(b) Adjusted to reflect the sale of 7,000,000 shares of Common Stock offered
hereby and the application of the estimated net proceeds therefrom. See "Use
of Proceeds."
(c) Includes $57.5 million of notes payable to owners of the Founding Companies,
representing the cash portion of the Acquisitions Consideration to be paid
from a portion of the net proceeds of the Offerings. The cash portion of the
Acquisitions Consideration will be adjusted based on the initial public
offering price of the Common Stock offered hereby.
(d) Includes $18.2 million in long-term debt from the transfer of the Owner
Amounts to certain owners of the Founding Companies. See "Certain
Transactions."
(e) Excludes 300,000 shares related to stock options which are currently
outstanding and shares related to approximately 2,328,600 stock options
which are expected to be granted upon consummation of the Offerings.
(f) All of such shares of Restricted Common Stock have been issued to the
founder of IES. See "Description of Common Stock."
18
24
DILUTION
At September 30, 1997, after giving effect to the Acquisitions as if they
had occurred at such date, the deficit in pro forma combined net tangible book
value of the Company would have been $44.4 million, or approximately $2.71 per
share. The deficit in pro forma combined net tangible book value is equal to the
aggregate net tangible book value (tangible assets less total liabilities) of
the Company after giving effect to the Acquisitions. The number of shares used
for the per share calculation includes the 16,365,336 shares outstanding after
the Acquisitions but prior to the Offerings. After giving effect to the
Acquisitions and the sale by the Company of the 7,000,000 shares of Common Stock
offered hereby (assuming an initial public offering price of $14.00 per share
and after deducting underwriting discounts and commissions and estimated
offering expenses payable by the Company), the pro forma combined net tangible
book value of the Company would have been $41.9 million, or $1.79 per share.
This represents an immediate increase in pro forma net tangible book value of
$4.50 per share to existing stockholders and an immediate dilution in net
tangible book value of $12.21 per share to new investors purchasing the shares
of Common Stock in the Offerings. The following table illustrates this per share
dilution:
Assumed initial public offering price per share............. $14.00
Pro forma combined net tangible book value per share prior
to
the Offerings.......................................... $(2.71)
Increase in pro forma net tangible book value per share
attributable to new investors.......................... 4.50
------
Pro forma combined net tangible book value per share after
the Offerings............................................. 1.79
------
Dilution in net tangible book value per share to new
investors................................................. $12.21
======
The following table sets forth on a pro forma basis, after giving effect to
the Acquisitions as of September 30, 1997, the number of shares of Common Stock
purchased from the Company, the total consideration to the Company and the
average price per share paid to the Company by (i) existing stockholders, (ii)
owners of the Founding Companies and (iii) the new investors purchasing Common
Stock from the Company in the Offerings at the assumed initial offering price of
$14.00 per share (before deducting underwriting discounts and commissions and
estimated offering expenses):
SHARES PURCHASED
---------------------- TOTAL AVERAGE PRICE
NUMBER PERCENT CONSIDERATION PER SHARE
----------- ------- ------------- -------------
Existing stockholders and owners of
Founding Companies(a)(b)................. 16,365,336 70.0% $(44,328,922) $(2.71)
New investors.............................. 7,000,000 30.0 98,000,000 14.00
----------- ----- ------------
Total.................................... 23,365,336 100.0% $ 53,671,078
=========== ===== ============
- ---------------
(a) See "Certain Transactions" for a discussion of the issuance of Restricted
Common Stock and Common Stock to the founders of IES and certain management
of IES, respectively.
(b) Total consideration paid by Founding Company owners represents the combined
owners' equity of the Founding Companies before the Offerings, adjusted to
reflect: (i) the payment of the estimated $57.5 million in cash to the
owners of the Founding Companies as part of the Acquisitions Consideration
and (ii) the transfer of the Owner Amounts. See "Certain Transactions."
19
25
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
IES will acquire the Founding Companies simultaneously with and as a
condition to the consummation of the Offerings. For financial statement
presentation purposes, however, Houston-Stafford has been designated as the
"accounting acquirer." The following selected historical financial data for
Houston-Stafford 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 audited financial statements of
Houston-Stafford 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 for the nine
months ended September 30, 1996 and 1997, and as of December 31, 1992, 1993 and
1994, and for the years ended December 31, 1992 and 1993, have been derived from
the unaudited financial statements of Houston-Stafford, 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 nine months ended September 30, 1997 should not be regarded
as indicative of the results that may be expected for the full year.
The summary unaudited pro forma combined financial data below present
certain data for the Company, adjusted for (i) the effects of the Acquisitions,
(ii) the effects of certain other pro forma adjustments to the historical
financial statements and (iii) the consummation of the Offerings and the
application of the net proceeds therefrom. The unaudited pro forma combined
income statement data assume that the Acquisitions, the Offerings 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 Founding 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.
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
----------------------------------------------- SEPTEMBER 30, -----------------
1992 1993 1994 1995 1996 1997 1996 1997
------- ------- ------- ------- ------- ------------- ------- -------
(UNAUDITED)
HISTORICAL INCOME STATEMENT
DATA (HOUSTON-STAFFORD):
Revenues............... $28,939 $32,363 $48,001 $54,082 $70,493 $81,575 $53,062 $64,144
Cost of services
(including
depreciation)........ 25,781 29,307 42,163 46,712 57,662 64,831 44,485 51,654
------- ------- ------- ------- ------- ------- ------- -------
Gross profit........... 3,158 3,056 5,838 7,370 12,831 16,744 8,577 12,490
Selling, general and
administrative
expenses............. 2,892 2,720 5,319 6,027 7,810 11,474 4,404 8,068
------- ------- ------- ------- ------- ------- ------- -------
Income from
operations........... 266 336 519 1,343 5,021 5,270 4,173 4,422
Interest and other
income (expense),
net.................. (66) (83) (71) (196) (40) 238 (41) 237
------- ------- ------- ------- ------- ------- ------- -------
Income before income
taxes................ 200 253 448 1,147 4,981 5,508 4,132 4,659
Provision for income
taxes................ 14 56 186 416 1,934 2,192 1,544 1,802
------- ------- ------- ------- ------- ------- ------- -------
Net income............. $ 186 $ 197 $ 262 $ 731 $ 3,047 $ 3,316 $ 2,588 $ 2,857
======= ======= ======= ======= ======= ======= ======= =======
20
26
YEAR ENDED
SEPTEMBER 30, 1997
------------------
(UNAUDITED)
PRO FORMA COMBINED:
Revenues.................................................. $ 312,747
Cost of services (including depreciation)................. 247,772
----------
Gross profit.............................................. 64,975
Selling, general and administrative expenses(a)........... 35,938
Goodwill amortization(b).................................. 3,069
----------
Income from operations.................................... 25,968
Interest and other income (expense), net(c)............... (86)
----------
Income before income taxes................................ 25,882
Provision for income taxes................................ 11,026
----------
Net income(d)............................................. $ 14,856
==========
Net income per share...................................... $ .68
==========
Shares used in computing pro forma net income per
share(e)................................................ 21,884,523
==========
HISTORICAL(F) PRO FORMA
----------------------------------------------------------- ---------------------------------
AS OF DECEMBER 31, AS OF AS OF SEPTEMBER 30, 1997(G)(H)
------------------------------------------- SEPTEMBER 30, ---------------------------------
1992 1993 1994 1995 1996 1997 COMBINED AS ADJUSTED(I)
------ ------ ------ ------ ------- ------------- ------------- -----------------
(UNAUDITED)
BALANCE SHEET DATA:
Working capital.... $1,845 $2,001 $1,968 $2,675 $ 4,671 $ 5,414 $(33,071)(j) $ 51,341
Total assets....... 5,570 6,582 8,809 9,357 13,226 24,470 216,422 237,273
Long-term debt, net
of current
maturities....... 719 505 927 634 1,295 968 20,763 18,885
Total stockholders'
equity........... 2,224 2,325 1,952 3,104 5,351 8,208 79,504 165,793
- ---------------
(a) The unaudited pro forma combined income statement data reflect an aggregate
of approximately $6.1 million in pro forma reductions in salary, bonus and
benefits of the owners of the Founding Companies to which they have agreed
prospectively, and the effect of revisions of certain lease agreements
between the Founding Companies and certain stockholders of the Founding
Companies. See "Certain Transactions."
(b) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40-year period and computed on the basis described in
the notes to the Unaudited Pro Forma Combined Financial Statements.
(c) Reflects the reduction for interest expense of $0.8 million attributable to
the repayment of $8.1 million of historical debt with proceeds from the
Offerings and other debt distributed prior to the Acquisitions, net of
additional interest expense of $1.4 million related to the debt discussed in
(h) below. Additionally, reflects 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 to be 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 of IES and
(iv) 5,399,187 of the 7,000,000 shares sold in the Offerings necessary to
pay the cash portion of the Acquisitions Consideration and offering
expenses. Also, includes 120,000 shares computed under the treasury stock
method related to 300,000 options which are currently outstanding, but
excludes any effects from options to purchase 2,328,600 shares which are
expected to be granted at the Offering price upon consummation of the
Offerings. See "Description of Capital Stock."
(f) Historical balance sheet data reflect information for Houston-Stafford.
(g) Reflects the Acquisitions and related transactions as if they had occurred
on September 30, 1997 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 historical financial statements, and notes thereto,
included elsewhere in this Prospectus.
21
27
(h) Reflects $29.8 million of previously undistributed earnings and nonoperating
assets and liabilities that will be transferred in connection with the
Acquisitions to the owners of the Founding Companies. This amount will be
funded through transfers of approximately (i) $4.2 million of nonoperating
assets, net of liabilities, (ii) $7.4 million of available cash of the
Founding Companies and (iii) $ 18.2 million of notes payable to certain
owners of the Founding Companies (such transfers, collectively, the "Owner
Amounts"). See "Certain Transactions."
(i) Reflects the closing of the Offerings and the Company's application of the
net proceeds therefrom to fund the cash portion of the Acquisitions
Consideration and to repay certain indebtedness of the Founding Companies.
See "Use of Proceeds" and "Certain Transactions."
(j) Includes the estimated $57.5 million in notes payable to owners of the
Founding Companies, representing the cash portion of the Acquisitions
Consideration to be paid from a portion of the net proceeds from the
Offerings. See "Pro Forma -- As Adjusted" amounts. The cash portion of the
Acquisitions Consideration will be adjusted based on the initial public
offering price of the Common Stock offered hereby.
22
28
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. Approximately 63% of the Company's pro forma combined year ended
September 30, 1997 revenues were from commercial and industrial contracting,
approximately 25% were from residential contracting, and approximately 12% were
derived from electrical maintenance work. In addition, approximately 88% of the
Company's pro forma combined year ended September 30, 1997 revenues of $312.7
million were derived from new construction and renovation, and approximately 12%
were attributable to maintenance work (including repair and replacement).
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
more 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 Founding Companies have agreed to reductions in their compensation and
related benefits totaling approximately $6.1 million in year ended September 30,
1997 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 will realize 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 Founding Companies; (iv)
consolidation of operations in certain locations and (v) greater volume
discounts from suppliers of materials, parts and supplies. Offsetting these
savings will be costs related to the Company's new corporate management, costs
of being a public company and integrating the Acquisitions.
The Company has sold an aggregate of 4,052,311 shares of Common Stock to
its management and has recorded (for financial statement presentation purposes)
a non-recurring, non-cash compensation charge of $38.1 million relating to such
sale. This non-recurring compensation charge has been excluded from the total
pro forma combined amounts in the Unaudited Pro Forma Combined Financial
Statements.
As a result of the Acquisitions, $122.7 million, representing the excess of
the consideration paid over the fair value of the net assets to be acquired,
will be recorded as goodwill on the Company's balance sheet. Goodwill will be
amortized as a non-cash charge to the income statement over a 40-year period.
The pro forma impact of this amortization expense, which is non-deductible for
tax purposes, is $3.1 million per year.
23
29
SUPPLEMENTAL UNAUDITED PRO FORMA COMBINED FINANCIAL INFORMATION OF THE FOUNDING
COMPANIES
The following supplemental unaudited pro forma combined financial
information for the periods presented do not purport to present those of the
combined Founding Companies in accordance with generally accepted accounting
principles, but represent merely a summation of the revenues, cost of services
(including depreciation), gross profit, selling, general and administrative
expenses and income from operations of the individual Founding Companies on a
historical basis and excludes the effects of the pro forma adjustments that are
included in the Unaudited Pro Forma Combined Statements appearing elsewhere in
this Prospectus. Selling, general and administrative expenses for periods prior
to the Acquisitions reflect the effects of salary and bonus distributions to the
owners of the Founding Companies. The data will not be comparable to, and may
not be indicative of, the Company's post-combination results of operations
because (i) the Founding Companies were not under common control or management
and had different tax structures (generally, S corporations or partnerships)
during the periods presented, (ii) the Company will use the purchase method to
establish a new basis of accounting to record the Acquisitions, (iii) the
Company will incur incremental costs for its corporate management and the costs
of being a public company and (iv) the combined data do not reflect the
potential benefits and cost savings the Company expects to realize when
operating as a combined entity.
The following table sets forth certain supplemental unaudited pro forma
combined financial information for the periods indicated:
FISCAL YEARS ENDED(A) YEAR ENDED
------------------------------------------------ SEPTEMBER 30,
1994 1995 1996 1997(B)
-------------- -------------- -------------- --------------
(IN THOUSANDS)
Revenues....................... $181,205 100% $211,626 100% $272,236 100% $312,747 100%
Cost of services............... 149,698 83 172,417 81 216,382 79 247,772 79
-------- --- -------- --- -------- --- -------- ---
Gross profit................. 31,507 17 39,209 19 55,854 21 64,975 21
Selling, general and
administrative expenses...... 23,752 13 28,506 13 34,528 13 35,938 13
-------- --- -------- --- -------- --- -------- ---
Income from operations....... $ 7,755 4% $ 10,703 6% $ 21,326 8% $ 25,968 8%
======== === ======== === ======== === ======== ===
- ---------------
(a) The fiscal years ended 1994, 1995 and 1996 are the years ended December 31,
1994, 1995 and 1996 for all Founding Companies, except for Pollock and
Hatfield, for which the fiscal years presented are the years ended October
31, 1994, 1995 and 1996; Rodgers, for which the fiscal years presented are
the years ended September 30, 1995, 1996 and 1997; and Summit, for which the
fiscal years presented are the years ended March 31, 1995, 1996 and 1997.
(b) Represents the year ended September 30, 1997 for all Founding Companies,
except that the amounts included for Ace, Hatfield, Popp and Reynolds are
for the year ended June 30, 1997.
Pro Forma Combined Results for the year ended September 30, 1997,
compared to the fiscal year ended 1996
Revenues increased approximately $40.5 million, or 15% from $272.2 million
for the fiscal year ended 1996 to $312.7 million for the year ended September
30, 1997. The increase in combined revenues occurred primarily at
Houston-Stafford, Mills, Daniel, Pollock and Haymaker. Houston-Stafford's
revenues increased $11.0 million, or 16% from 1996 to 1997, primarily due to an
overall increase in market demand and the consolidation of an electrical supply
company partially offset by the effects of unusually rainy weather in Texas.
Mills' revenues increased $9.0 million, or 14% from 1996 to 1997, primarily due
to a full year of revenues in 1997 from the acquisition of Fort Worth Regional
Electrical Systems, L.L.C. ("Regional Electric") in June 1996. Daniel's revenues
increased $5.8 million, or 46% from 1996 to 1997 primarily due to increased
contract revenues on several large high rise condominium projects in south
Florida. Pollock's revenues increased $4.5 million, or 28%, from 1996 to 1997,
primarily due to an increase in large commercial contracts, increased data
cabling work, and higher revenues for service work. Haymaker's revenues
increased
24
30
$4.2 million, or 56%, from 1996 to 1997, primarily due to a large hospital
contract and an overall increase in construction activity in Birmingham,
Alabama. Of the remaining ten Founding Companies, five reported an increase in
revenues and five recorded a decline in revenues between 1996 and 1997. The most
significant decline in revenue of $0.8 million occurred at Bexar-Calhoun,
primarily due to the completion in 1996 of an unusually large electrical
construction contract for a state university in Laredo, Texas. The most
significant increase in revenues among these other Founding Companies of $2.5
million or 18% occurred at Amber, primarily due to three large retail
construction contracts in 1997.
Gross profit increased $9.1 million, or 16% from $55.9 million for the fiscal
year ended 1996, to $65.0 million for the year ended September 30, 1997. The
increase in combined gross profit occurred primarily due to increases in gross
profit of $3.9 million or 30% at Houston-Stafford, $2.0 million or 70% at
Daniel, $1.3 million or 59% at Pollock and $1.3 million or 79% at Amber.
Houston-Stafford's gross margin increased from 18% in 1996 to 20% in 1997,
Daniel's gross margin increased from 23% in 1996 to 27% in 1997, Pollock's
gross margin increased from 14% in 1996 to 18% in 1997 and Amber's gross margin
increased from 12% in 1996 to 18% in 1997. The increases in Houston-Stafford's
gross profit and gross margin are primarily attributable to favorable pricing
associated with increased demand and higher discounts on certain long-term
material purchase commitments. Daniel's gross profit and gross margin increases
are primarily due to increased labor efficiencies and an increase in higher
margin high-rise residential contracts. Pollock's gross margin increases are
due to certain lower than expected and loss contracts in 1996 that did not
recur in 1997. Amber's gross profit increased as a result of an increase in
overall demand as well as demand for higher margin retail construction
contracts.
Selling, general and administrative expenses increased $7.5 million from $34.5
million in 1996 to $42.0 million in 1997. This increase occurred primarily due
to an increase in selling, general and administrative expenses of $3.7 million
at Houston-Stafford and $1.2 million at Mills. The increase in
Houston-Stafford's selling, general and administrative expenses was primarily
attributable to increased bonuses for certain key employees and to a lesser
degree higher insurance costs. Mills' increase in selling, general and
administrative expenses 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.
Pro Forma Combined Results for the fiscal year ended 1996, compared to the
fiscal year ended 1995
Revenues increased approximately $60.6 million, or 29% from $211.6 million
for the fiscal year ended 1995 to $272.2 million for the fiscal year ended 1996.
The increase in combined revenues occurred primarily at Houston-Stafford, Mills
and Bexar-Calhoun. Houston-Stafford's revenues increased $16.4 million, or 30%
from 1995 to 1996, primarily due to an overall increase in market demand and new
contractual arrangements for Houston-Stafford to be the sole or primary provider
of electrical installation services for certain residential contractors. Mills'
revenues increased $30.1 million, or 86% from 1995 to 1996, primarily due to the
acquisition of Regional Electric in June 1996 (which represents approximately
$5.2 million of 1996 revenues), an increase in market demand for large
industrial construction contracts for manufacturing and distribution facilities
in the greater Dallas area, and a 30% increase in maintenance and service
revenues. Bexar-Calhoun's revenues increased $5.3 million, or 19% from 1995 to
1996, as certain personnel were reassigned to the growing markets around Laredo
and New Braunfels, Texas, resulting in a $3.6 million increase in revenues in
these two markets between 1995 and 1996. Of the remaining 12 Founding Companies,
seven reported an increase in revenues, one reported relatively constant
revenues and four recorded a decline in revenues between 1995 and 1996. The most
significant decline in revenue of $2.0 million occurred at Ace, where an
unusually high demand for design-and-build projects in Valdosta, Georgia in 1995
did not recur in 1996. The most significant increase in revenues among these
other Founding Companies of $4.2 million or 43% occurred at Amber due to an
increase in large commercial projects on shopping malls and grocery stores in
central Florida.
Gross profit increased $16.6 million, or 42% from $39.2 million for the
fiscal year ended 1995, to $55.9 million for the fiscal year ended 1996. Gross
margin increased to 21% in 1996 from 19% in 1995. The
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31
increase in combined gross profit occurred primarily due to increases in gross
profit of $5.4 million or 74% at Houston-Stafford, $7.0 million or 89% at Mills,
and $1.3 million or 18% at Bexar-Calhoun. Houston-Stafford's gross margin
increased from 14% in 1995 to 18% in 1996, Mills' gross margin increased from
22% in 1995 to 23% in 1996, and Bexar-Calhoun's gross margin remained constant
at 24% in 1995 and 1996. The increases in Houston-Stafford's gross profit and
gross margin are primarily attributed to favorable pricing associated with
increased demand and higher discounts on certain long-term material purchase
commitments. Mills' gross profit and gross margin increases are primarily
attributed to the acquisition of Regional Electric, increased demand for complex
industrial contracts, and an increase in higher margin maintenance service
revenues. Bexar-Calhoun's gross profit increased as a result of its overall
increase in business volume.
Selling, general and administrative expenses increased 21% from $28.5
million in 1995 to $34.5 million in 1996. This increase occurred primarily due
to increases in selling, general and administrative expenses of $1.8 million at
Houston-Stafford and $2.9 million at Mills. The increase in Houston-Stafford's
selling, general and administrative expenses was primarily attributed to the
addition of infrastructure associated with its growth. Mills' increase in
selling, general and administrative expenses was attributed to increased
business volume, including that related to the acquisition of Regional Electric,
and increases in discretionary bonus and savings plan distributions.
Pro Forma Combined Results for the fiscal year ended 1995 compared to the
fiscal year ended 1994
Revenues increased $30.4 million, or 17% from $181.2 million for the fiscal
year ended 1994, to $211.6 million for the fiscal year ended 1995. The increase
in combined revenues occurred primarily at Houston-Stafford, Mills and
Bexar-Calhoun. Houston-Stafford's revenues increased $6.1 million, or 13% from
1994 to 1995, primarily due to an overall increase in demand and a new contract
under which Houston-Stafford is the sole or primary provider of electrical
installation services for a multifamily residential contractor. Mills' revenues
increased $9.8 million, or 38% from 1994 to 1995, primarily due to increased
demand for higher margin industrial contracting services and a 61% increase in
maintenance and service revenues. Bexar-Calhoun's revenues increased $4.5
million, or 20% from 1994 to 1995, due to an increase in retail construction
activity in San Antonio.
Of the remaining 12 Founding Companies, seven reported an increase in
revenues, two reported relatively constant revenues and three reported a decline
in revenues between 1994 and 1995. The most significant decline in revenues of
$1.3 million occurred at Hatfield, where an unusually large $2.0 million
contract was completed in 1994 and no comparable contract was performed in 1995.
The most significant increase in revenue among these other Founding Companies of
$2.6 million occurred at Ace due to an unusually high demand for
design-and-build commercial projects in 1995 as compared to 1994.
Gross profit increased $7.7 million, or 24% from $31.5 million for the
fiscal year ended 1994, to $39.2 million for the fiscal year ended 1995. Gross
margin increased to 19% in 1995 from 17% in 1994. The increase in combined gross
profit occurred primarily due to increases in gross profit of $1.6 million or
26% at Houston-Stafford, $3.3 million or 71% at Mills, and $1.5 million or 30%
at Bexar-Calhoun. Houston-Stafford's gross margin increased from 12% in 1994 to
14% in 1995, Mills' gross margin increased from 18% in 1994 to 22% in 1995, and
Bexar-Calhoun's gross margin increased from 22% in 1994 to 24% in 1995,
respectively. The increase in Houston-Stafford's gross profit and gross margin
are primarily attributed to favorable pricing related to increased demand.
Mills' gross profit and gross margin increases are primarily attributed to
increased market demand for complex industrial contracts, and an increase in
higher margin maintenance and service revenues. Bexar-Calhoun's gross profit and
gross margin increased as a result of higher margin retail construction
contracts in San Antonio, Texas.
Selling, general and administrative expenses increased 20% from $23.8
million in 1994 to $28.5 million in 1995. The increase in combined selling,
general and administrative expenses occurred primarily due to increases in
selling, general and administrative expenses of $0.7 million at
Houston-Stafford, $1.3 million at Mills and $0.5 million at Bexar-Calhoun. The
increase in Houston-Stafford's selling general and administrative expenses was
attributed to the addition of administrative infrastructure associated with its
growth. Mills' increase in selling, general and administrative expenses was
attributed to increased business volume and
26
32
increases in discretionary bonus and savings plan distributions. Bexar-Calhoun's
increase in selling, general and administrative expenses was attributed to the
addition of administrative infrastructure associated with Bexar-Calhoun's
growth.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
Upon consummation of the Acquisitions and after applying the estimated net
proceeds of the Offerings as discussed under "Use of Proceeds," the Company will
have $25.8 million of pro forma cash and cash equivalents, $51.3 million of pro
forma working capital and no outstanding indebtedness other than debt relating
to Owner Amounts and capital lease obligations totaling $19.3 million. The
Founding Companies' historical indebtedness of $8.1 million is anticipated to be
transferred to the founders or repaid from the proceeds of the Offerings.
On a combined basis, the Founding Companies generated $12.3 million of cash
from operating activities during the year ended September 30, 1997. Net cash
used in investing activities was $5.7 million on a combined basis and was
primarily used for capital expenditures. Net cash used in financing activities
was $7.8 million on a combined basis and was primarily used for debt repayment
and capital distributions.
The Company has entered into a preliminary agreement with a commercial bank
under which it expects to enter into a credit facility effective concurrently
with the closing of the Offerings. According to the proposed terms of the
agreement, the credit facility will be a three-year revolving credit facility of
up to $65 million to be used for working capital and capital expenditures, to
finance acquisitions and for general corporate purposes. The Company's existing
and future subsidiaries will guarantee the repayment of all amounts due under
the facility, and the facility will be secured by the capital and stock of the
guarantors and the accounts receivable of the Company and the guarantors. The
Company expects that the credit facility will require the consent of the lenders
for acquisitions exceeding a certain level of cash consideration, prohibit the
payment of cash dividends by the Company, restrict the ability of the Company to
incur other indebtedness and require the Company to comply with certain
financial covenants. Availability of the credit facility will be subject to
customary drawing conditions, completion of negotiations with the lenders and
execution of definitive loan documentation.
The Company anticipates that its cash flow from operations and proceeds
from the Offerings 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.
The Company intends to continue pursuing attractive acquisition
opportunities. 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 a portion of the net proceeds
of the Offerings, working capital, cash flow from operations and borrowings,
including any unborrowed portion of the proposed credit facility, as well as
issuances of additional equity.
Due to the relatively low levels of inflation experienced in fiscal 1994,
1995 and 1996, inflation did not have a significant effect on the results of the
combined Founding Companies in those fiscal years, or any of the Founding
Companies individually.
HOUSTON-STAFFORD RESULTS OF OPERATIONS
Houston-Stafford was founded in 1973 and is headquartered in Stafford,
Texas near Houston. It operates primarily in Texas, with other significant
operations in Georgia, Virginia, Tennessee and Maryland. In April 1997,
Houston-Stafford financed the acquisition of an electrical supply company from a
third party for $100,000 cash.
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33
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
--------------------------------------------- SEPTEMBER 30, -----------------------------
1994 1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
Revenues............. $48,001 100% $54,082 100% $70,493 100% $81,575 100% $53,062 100% $64,144 100%
Cost of services..... 42,163 88 46,712 86 57,662 82 64,831 80 44,485 84 51,654 81
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit....... 5,838 12 7,370 14 12,831 18 16,744 20 8,577 16 12,490 19
Selling, general and
administrative
expenses........... 5,319 11 6,027 11 7,810 11 11,474 14 4,404 8 8,068 13
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Income from
operations....... $ 519 1% $ 1,343 3% $ 5,021 7% $ 5,270 6% $ 4,173 8% $ 4,422 6%
======= === ======= === ======= === ======= === ======= === ======= ===
Houston-Stafford results for the nine months ended September 30, 1997 compared
to nine months ended
September 30, 1996
Revenues increased $11.0 million, or 21% from $53.1 million for the nine
months ended September 30, 1996 to $64.1 million for the nine months 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 $3.9 million during the first nine months of 1997 to
$12.5 million, and gross margin increased to 19% in 1997 from 16% in 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 83% from $4.4
million to $8.1 million. The increase was attributable to an increase in bonuses
for certain key employees and to a lesser degree higher insurance costs.
Houston-Stafford results for the year ended September 30, 1997 compared to the
year ended December 31, 1996.
Revenues increased $11.1 million or 16% from $70.5 million for the year
ended December 31, 1996 to $81.6 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 $3.9 million during the year ended September 30,
1997 to $16.7 million, and gross margin increased to 20% during the year ended
September 30, 1997 from 18% 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 47% from $7.8
million to $11.5 million. The increase was primarily attributable to an increase
in bonuses for certain key employees and to a lesser degree higher insurance
costs.
Houston-Stafford results for the year ended December 31, 1996 compared to the
year ended
December 31, 1995
Revenues increased $16.4 million, or 30% from $54.1 million for the year
ended December 31, 1995, to $70.5 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 $5.4 million, or 74% from $7.4 million for the year
ended December 31, 1995 to $12.8 million for the year ended December 31, 1996.
Gross margin increased from 14% to 18% over these
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34
periods. The increase in gross profit amounts and percentages is primarily
attributed 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 30% from $6.0
million to $7.8 million. The increase was attributable to the addition of
administrative infrastructure necessary to support the company'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.
Houston-Stafford results for the year ended December 31, 1995 compared to the
year ended
December 31, 1994
Revenues increased $6.1 million, or 13% from $48.0 million for the year
ended December 31, 1994, to $54.1 million for the year ended December 31, 1995,
due to increased demand and a new contract where the company is the sole or
primary provider of electrical contracting services for a significant
multi-family residential contractor.
Gross profit increased $1.6 million, or 26% from $5.8 million for the year
ended December 31, 1994 to $7.4 million for the year ended December 31, 1995.
Gross margin increased from 12% to 14% over these periods due to favorable
pricing partially offset by lower profits from government projects in 1995.
Selling, general and administrative expenses increased 14% in 1995 when
compared to 1994 as a result of the additional infrastructure necessary to
support the company's growth. Selling, general and administrative expenses as a
percentage of revenues remained constant during 1995 when compared to 1994.
HOUSTON-STAFFORD LIQUIDITY AND CAPITAL RESOURCES
Houston-Stafford generated $0.6 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 the purchase
of fixed assets. Net cash used in financing activities of $0.5 million resulted
from advances on Houston-Stafford's line of credit. Houston-Stafford had a $3.1
million line of credit as of September 30, 1997 that expires in July 1998. At
September 30, 1997, Houston-Stafford had $0.5 million outstanding under its line
of credit. Additionally, in April 1997, Houston-Stafford financed the
acquisition of an electrical supply company from a third party for $100,000
cash.
Houston-Stafford used $0.1 million of net cash from operating activities
for the year ended September 30, 1997. Net cash used in investing activities was
approximately $0.5 million, primarily for additional property and equipment. Net
cash used in financing activities of $0.6 million resulted from the net effect
of borrowings and payments of long-term debt.
At September 30, 1997, Houston-Stafford had working capital of $5.4 million
and total debt of $1.7 million.
Houston-Stafford generated $2.7 million in net cash from operating
activities for the year ended December 31, 1996. Net cash used in investing
activities was approximately $0.6 million for the purchase of fixed assets. Net
cash used in financing activities was $0.5 million for the year ended December
31, 1996 primarily as a result of the repayment of debt partially offset by
additional borrowings.
At December 31, 1996 Houston-Stafford had working capital of $4.7 million
and total debt of $1.7 million.
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.
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35
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
YEAR ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------- ------------- -----------------------------
1994 1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
Revenues..................... $25,544 100% $35,250 100% $65,439 100% $74,399 100% $43,684 100% $52,644 100%
Cost of services............. 20,937 82 27,372 78 50,535 77 60,572 81 33,998 78 44,035 84
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit............... 4,607 18 7,878 22 14,904 23 13,827 19 9,686 22 8,609 16
Selling, general and
administrative expenses.... 3,391 13 4,741 13 7,643 12 8,778 12 3,837 9 4,972 9
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Income from operations..... $ 1,216 5% $ 3,137 9% $ 7,261 11% $ 5,049 7% $ 5,849 13% $ 3,637 7%
======= === ======= === ======= === ======= === ======= === ======= ===
Mills results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $8.9 million, or 20% 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 Ft. 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 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 on the Ft. 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 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
36
30% increase in maintenance and service revenues resulting from the Company's
focus on increasing its maintenance and service revenues.
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 results for the year ended December 31, 1995 compared to the year ended
December 31, 1994
Revenues increased $9.8 million, or 38% from $25.5 million for the year
ended December 31, 1994 to $35.3 million for the year ended December 31, 1995,
primarily due to increased demand for higher margin new industrial contracting
services and a 61% increase in maintenance and service revenues.
Gross profit increased $3.3 million, or 71% from $4.6 million for the year
ended December 31, 1994 to $7.9 million for the year ended December 31, 1995.
Gross margin increased to 22% from 18% due to the increases in higher margin
industrial contracting and maintenance service revenues.
Selling, general and administrative expenses increased 40% from $3.4
million to $4.7 million. The increase was attributable to increased business
volume 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 the Company's 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.
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37
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
YEAR ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------- ------------- -----------------------------
1994 1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
Revenues.................... $23,168 100% $27,730 100% $33,023 100% $32,165 100% $24,994 100% $24,136 100%
Cost of services............ 17,967 78 20,964 76 25,017 76 24,976 78 18,909 76 18,868 78
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit.............. 5,201 22 6,766 24 8,006 24 7,189 22 6,085 24 5,268 22
Selling, general and
administrative expenses... 3,091 13 3,637 13 3,686 11 3,766 12 2,713 11 2,793 12
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Income from operations.... $ 2,110 9% $ 3,129 11% $ 4,320 13% $ 3,423 10% $ 3,372 13% $ 2,475 10%
======= === ======= === ======= === ======= === ======= === ======= ===
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 of operations for the year ended September 30, 1997
compared to the year ended December 31, 1996
Revenues decreased $0.8 million, or 2% 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 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.
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 attributed 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.
32
38
Bexar-Calhoun results for the year ended December 31, 1995 compared to the
year ended
December 31, 1994
Revenues increased $4.5 million, or 20% from $23.2 million in 1994 to $27.7
million in 1995, primarily due to a significant increase in the volume of
Bexar-Calhoun's retail construction business in the San Antonio, Texas market.
Gross profit increased $1.5 million, or 30% from $5.2 million in 1994 to
$6.7 million in 1995. Gross margin increased from 22% in 1994 to 24% in 1995.
Gross profit increased due to the revenue increase, while gross margin increased
due to higher margin retail construction.
Selling, general and administrative expenses increased 18% from $3.1
million in 1994 to $3.6 million in 1995. The increase was attributable to the
addition of infrastructure associated with Bexar-Calhoun's growth.
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,
plant, 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, plant, 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 December 31, 1996 Bexar-Calhoun had working capital of $3.7 million and
total debt of $1.0 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.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
YEAR ENDED ELEVEN MONTHS ENDED
YEARS ENDED OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -------------- -----------------------------
1995 1996 1997 1996 1997
------------- ------------- -------------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
Revenues..................... $13,002 100% $15,816 100% $20,291 100% $13,305 100% $17,780 100%
Cost of services............. 10,602 82 13,534 86 16,670 82 11,646 88 14,782 83
------- --- ------- --- ------- ---- ------- --- ------- ---
Gross profit............... 2,400 18 2,282 14 3,621 18 1,659 12 2,998 17
Selling, general and
administrative expenses.... 2,149 16 2,463 15 2,895 14 2,083 16 2,515 14
------- --- ------- --- ------- ---- ------- --- ------- ---
Income/(loss) from
operations............... $ 251 2% $ (181) (1)% $ 726 4% $ (424) (4)% $ 483 3%
======= === ======= === ======= ==== ======= === ======= ===
33
39
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 80% 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 attributed 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 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 $1.3 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 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.
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 the company'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.
34
40
Pollock used $0.3 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 7 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:
YEAR ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------- ------------- -----------------------------
1994 1995 1996 1997 1996 1997
------------- ------------- ------------- ------------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
Revenues............. $13,466 100% $16,012 100% $16,830 100% $18,779 100% $12,517 100% $14,466 100%
Cost of services..... 9,805 73 12,189 76 12,834 76 14,511 77 9,751 78 11,428 79
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Gross profit....... 3,661 27 3,823 24 3,996 24 4,268 23 2,766 22 3,038 21
Selling, general and
administrative
expenses........... 2,678 20 2,923 18 2,957 18 3,074 16 2,147 17 2,264 16
------- --- ------- --- ------- --- ------- --- ------- --- ------- ---
Income from
operations....... $ 983 7% $ 900 6% $ 1,039 6% $ 1,194 7% $ 619 5% $ 774 5%
======= === ======= === ======= === ======= === ======= === ======= ===
Muth results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
Revenues increased $1.9 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 $0.3 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 attributed 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 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
22% from 24% over these periods.
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
35
41
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 attributed to increased
margins on service work in 1996 and increased revenues.
Selling, general and administrative expenses remained constant over these
periods.
Muth results for the year ended December 31, 1995 compared to the year ended
December 31, 1994
Revenues increased $2.5 million, or 19% from $13.5 million for the year
ended December 31, 1994 to $16.0 million for the year ended December 31, 1995,
primarily due to increased overall demand.
Gross profit increased $0.1 million from $3.7 million for the year ended
December 31, 1994, to $3.8 million for the year ended December 31, 1995. Gross
margin decreased to 24% from 27% over these periods due to a lower and more
normal mix of higher margin design-and-build projects in 1995.
Selling, general and administrative expenses increased 9% from $2.7 million
to $2.9 million. The increase was due to an increase in administrative salaries
attributable to the additional infrastructure associated with Muth's growth.
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 $0.1 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 $2.2 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.
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. 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.
36
42
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
----------------------------- SEPTEMBER 30, ----------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------ -------------
(IN THOUSANDS) (UNAUDITED)
Revenues.......................... $12,049 100% $12,585 100% $18,409 100% $8,846 100% $14,670 100%
Cost of services.................. 11,725 97 9,713 77 13,518 73 6,675 75 10,480 71
------- --- ------- --- ------- --- ------ --- ------- ---
Gross profit.................... 324 3 2,872 23 4,891 27 2,171 25 4,190 29
Selling, general and
administrative expenses......... 1,502 13 1,884 15 2,316 13 1,360 15 1,792 12
------- --- ------- --- ------- --- ------ --- ------- ---
Income/(loss) from operations... $(1,178) (10)% $ 988 8% $ 2,575 14% $ 811 10% $ 2,398 17%
======= === ======= === ======= === ====== === ======= ===
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 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 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.
37
43
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.
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, of which $0.6 million was owed to a shareholder.
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:
YEAR ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
----------------------------- ------------- ------------------------------
1995 1996 1997 1996 1997
------------ ------------- ------------- ------------- -------------
(IN THOUSANDS) (UNAUDITED)
Revenues........................ $9,728 100% $13,878 100% $16,386 100% $10,572 100% $13,080 100%
Cost of services................ 8,635 89 12,215 88 13,415 82 8,710 82 9,910 76
------ --- ------- --- ------- --- ------- --- ------- ---
Gross profit.................. 1,093 11 1,663 12 2,971 18 1,862 18 3,170 24
Selling, general and
administrative expenses....... 957 10 1,160 8 1,379 8 978 9 1,197 9
------ --- ------- --- ------- --- ------- --- ------- ---
Income from operations........ $ 136 1% $ 503 4% $ 1,592 10% $ 884 8% $ 1,973 15%
====== === ======= === ======= === ======= === ======= ===
Amber results for the nine months ended September 30, 1997 compared to nine
months ended September 30, 1996
38
44
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 17% to 24% over these periods.
The improvement in gross margin was attributed 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 of operations 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 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
year ended September 30, 1997. Net cash used in investing activities was
approximately $0.3 million, primarily for additions to property, plant 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.
39
45
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
NINE MONTHS ENDED
YEAR ENDED YEAR ENDED SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, ---------------------------
1996 1997 1996 1997
------------ ------------- ------------ ------------
(IN THOUSANDS)
) (UNAUDITED
Revenues....................... $7,634 100% $11,772 100% $5,105 100% $9,243 100%
Cost of services............... 6,412 84 9,920 84 4,419 87 7,927 86
------ --- ------- --- ------ --- ------ ---
Gross profit................. 1,222 16 1,852 16 686 13 1,316 14
Selling, general and
administrative expenses...... 680 9 1,140 10 364 7 824 9
------ --- ------- --- ------ --- ------ ---
Income from operations....... $ 542 7% $ 712 6% $ 322 6% $ 488 5%
====== === ======= === ====== === ====== ===
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 $0.7 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 the company's incentive compensation plan.
Haymaker results of operations 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%.
HAYMAKER LIQUIDITY AND CAPITAL RESOURCES
Haymaker generated $0.4 million of net cash for 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 partners.
At September 30, 1997, Haymaker had working capital of $1.6 million and no
debt.
40
46
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 partners.
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
installation.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
YEAR ENDED YEAR ENDED
MARCH 31, SEPTEMBER 30, SIX MONTHS ENDED SEPTEMBER 30,
------------- ------------- --------------------------------
1997 1997 1996 1997
------------- ------------- -------------- --------------
(IN THOUSANDS) (UNAUDITED)
Revenues.................. $10,565 100% $10,995 100% $5,735 100% $6,165 100%
Cost of services.......... 9,157 87 9,454 86 4,946 86 5,243 85
------- --- ------- --- ------ --- ------ ---
Gross profit............ 1,408 13 1,541 14 789 14 922 15
Selling, general and
administrative
expenses................ 1,340 12 1,463 13 699 12 822 13
------- --- ------- --- ------ --- ------ ---
Income from
operations........... $ 68 1% $ 78 1% $ 90 2% $ 100 2%
======= === ======= === ====== === ====== ===
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 attributed 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.
Summit results of operations 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 15% 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.
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SUMMIT LIQUIDITY AND CAPITAL RESOURCES
Summit used $0.1 million of net cash for operating activities for the six
months 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 and September 30, 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.
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 fiscal 1996 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:
YEAR ENDED NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -------------- ----------------------------
1995 1996 1997 1996 1997
------------ ------------ -------------- ------------ ------------
(IN THOUSANDS) (UNAUDITED)
Revenues............................. $4,729 100% $4,551 100% $4,049 100% $3,741 100% $3,239 100%
Cost of services..................... 3,309 70 3,059 67 2,181 54 2,531 68 1,653 51
------ --- ------ --- ------ --- ------ --- ------ ---
Gross profit....................... 1,420 30 1,492 33 1,868 46 1,210 32 1,586 49
Selling, general and administrative
expenses........................... 512 11 503 11 503 12 397 10 397 12
------ --- ------ --- ------ --- ------ --- ------ ---
Income from operations............. $ 908 19% $ 989 22% $1,365 34% $ 813 22% $1,189 37%
====== === ====== === ====== === ====== === ====== ===
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 over budget
projects on which the company shares in the cost savings it provides 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.
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Thurman & O'Connell results of operations 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 margins 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 on which Thurman & O'Connell
shares in the cost savings it provides 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 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.
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 by
financing activities of $1.2 million 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/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.
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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 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
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.
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BUSINESS
IES was founded in June 1997 to create a leading national provider of
electrical contracting and maintenance services to the commercial, industrial
and residential markets. Concurrently with the closing of the Offerings, IES
will acquire 15 electrical contracting and maintenance service companies and a
related supply company with pro forma combined year ended September 30, 1997
revenues of $312.7 million, making it one of the largest providers of electrical
contracting and maintenance services in the United States. Of such pro forma
revenues, approximately 63% was derived from commercial and industrial
contracting, approximately 25% was derived from residential contracting and
approximately 12% was derived from electrical maintenance work. Combined
revenues of the Founding Companies, which have been in business an average of 18
years, increased at an average compound annual growth rate of approximately 20%
from fiscal 1994 through 1996.
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 provide recurring revenues
that are relatively independent of levels of construction activity. Typically,
the Founding Companies specialize in either commercial and industrial or
residential work, although a few of the Founding 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, local code requirements and purpose.
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 transmission 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 Founding 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. Based on this Census data, 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 a broad range of
customers, including 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
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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 1994 through 1996, the Founding Companies' revenues from
electrical contracting for commercial and industrial customers have grown at an
average compound annual rate of approximately 22% 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. The residential market consists primarily of electrical
installations in new single family and low-rise multifamily residence
construction. 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
Founding Companies' residential electrical contracting revenues have grown at an
average compound annual rate of approximately 19% from fiscal 1994 through 1996.
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 will have 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 will provide increased efficiency in materials purchasing,
computer
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52
system development, employee benefits, bonding, insurance and financing. The
Company believes that the diversity of its operations will diminish the effects
of regional and market downturns, offer opportunities to pursue growth in its
existing markets and create a base of expertise to expand into new markets and
serve new customers.
The Company plans to leverage 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 Founding 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 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 Founding
Companies are members of the IEC and other trade organizations, and the Company
intends to expand the practice of sharing best practices among the Founding
Companies and with 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 Founding Companies. The Company will identify and
share 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 Founding 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 Founding 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
Founding 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 Founding 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 entrepreneurial spirit present in each
of the Founding Companies. The Company also will be structured to allow it
to capitalize on the
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considerable local and regional market knowledge and customer relationships
possessed by each Founding 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 and the Offerings will provide
competitive advantages in this regard. The Company intends to attract and
develop 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 will
be centralized following the Offerings. In addition, by combining
overlapping operations of certain of the Founding Companies, the Company
expects to realize savings in overhead and other expenses. The Company
intends to use 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 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 Founding Companies. At some locations,
the larger combined workforce will provide 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 intends to focus on acquiring companies with management philosophies
based on both 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 service businesses that lack the
capital necessary to expand operations will become acquisition candidates. For
these acquisition candidates, the Company will provide (i) information on best
practices, (ii) expertise in expanding 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 Founding 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 will pursue 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 will seek 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 intends to
maintain existing business names and identities to retain goodwill for
marketing purposes.
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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.
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 service. 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. During the year ended September 30, 1997, the Company
had $35.8 million in revenues for periodic maintenance services provided under
existing service contracts and for emergency or other routine service calls.
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 1997
revenues. As a result of emphasis on quality and worker reliability, management
and a dedicated sales and work force at the Founding Companies have been
responsible for developing and maintaining successful relationships with key
customers. Customers of the Founding 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.
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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 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 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 intends to centralize its consolidated accounting and financial
reporting activities at its operational headquarters in Houston, Texas, while
basic accounting activities will be 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 approximately 850 owned and leased service
trucks, vans and support vehicles. It believes these vehicles generally are
adequate for the Company's current operations.
At September 30, 1997, the Company maintained offices at 48 locations. All
of the Company's facilities are leased. The Company's corporate headquarters are
located in Houston, Texas. The paragraphs below summarize the Company's primary
office and operating facilities.
The Company's primary warehouses, sales facilities and administrative
offices are as follows, subject to consolidation of certain facilities to
achieve operating efficiencies and subject to the execution of leases with
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certain owners of the Founding Companies in connection with the Acquisitions and
the consummation of the Offerings:
APPROXIMATE
LOCATION SQUARE FT. TYPE
-------- ----------- ----
Stafford, TX.............................. 3,500 Warehouse/Offices
Stafford, TX.............................. 15,000 Warehouse/Offices
Austin, TX................................ 2,970 Warehouse/Offices
Stafford, TX.............................. 1,661 Office
Stafford, TX.............................. 3,500 Warehouse/Offices
San Antonio, TX........................... 5,588 Warehouse/Offices
Grapevine, TX............................. 6,850 Warehouse/Offices
Aceworth, GA.............................. 5,256 Warehouse/Offices
Duluth, GA................................ 3,875 Warehouse/Offices
Katy, TX.................................. 5,000 Warehouse/Offices
Webster, TX............................... 7,054 Warehouse/Offices
Henderson, NV............................. 1,500 Warehouse/Offices
Rowlett, TX............................... 4,000 Warehouse/Offices
Spring, TX................................ 5,500 Warehouse/Offices
Monroe, NC................................ 4,500 Warehouse/Offices
San Antonio, TX........................... 5,000 Warehouse/Offices
Milford, CT............................... 900 Warehouse/Offices
Dallas, TX................................ 32,424 Warehouse/Offices
Austin, TX................................ 3,465 Warehouse/Offices
Saginaw, TX............................... 37,000 Warehouse/Offices
Fort Worth, TX............................ 18,000 Warehouse/Offices
Louisville, KY............................ 17,000 Warehouse/Offices
Everrett, WA.............................. 3,500 Warehouse/Offices
Everrett, WA.............................. 9,000 Lot
Scottsdale, AZ............................ 6,400 Warehouse/Offices
Valdosta, GA.............................. 11,084 Warehouse/Offices
Houston, TX............................... 8,722 Warehouse/Offices
Austin, TX................................ 1,200 Warehouse/Offices
Miami, FL................................. 19,000 Warehouse/Offices
Vero Beach, FL............................ 3,550 Warehouse/Offices
Birmingham, AL............................ 3,800 Offices
Phoenix, AZ............................... 6,900 Offices
Cincinnati, OH............................ 6,000 Warehouse/Offices
Ocoee, FL................................. 12,800 Warehouse/Offices
Mitchell, SD.............................. 8,000 Offices
Mitchell, SD.............................. 14,439 Warehouse/Offices
Sioux Falls, SD........................... 5,000 Warehouse/Offices
Rapid City, SD............................ 5,830 Warehouse/Offices
Deadwood, SD.............................. 2,650 Warehouse/Offices
Watertown, SD............................. 5,020 Warehouse/Offices
Huron, SD................................. 5,000 Warehouse/Offices
Showroom
Spearfish, SD............................. 1,825 Warehouse/Offices
Stafford, TX.............................. 10,500 Warehouse/Offices
Houston, TX............................... 23,040 Warehouse/Offices
Houston, TX............................... 19,000 Warehouse
San Antonio, TX........................... 13,492 Warehouse/Offices
San Antonio, TX........................... 6,535 Warehouse/Offices
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APPROXIMATE
LOCATION SQUARE FT. TYPE
-------- ----------- ----
San Antonio, TX........................... 16,692 Warehouse/Offices
Laredo, TX................................ 1,700 Warehouse/Offices
New Braunfels, TX......................... 3,164 Warehouse/Offices
In addition to the facilities listed above, the Company may operate on a
short-term basis in other locations as may be required from time to time to
perform its contracts. Upon the consummation of the Offerings, the Company will
lease its principal and administrative offices in Houston, Texas and is
currently in the process of obtaining office space for this purpose.
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 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.
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 30, 1997, the Company had approximately 3,550 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 and officers and those persons who will become directors, executive
officers and certain key employees following the consummation of the Offerings:
NAME AGE POSITION
---- --- --------
C. Byron Snyder......................... 49 Chairman of the Board of Directors
Jon Pollock............................. 51 President, Chief Executive Officer and Director*
Jerry Mills............................. 57 Senior Vice President and Chief Operating
Officer -- Commercial and Industrial and Director*
Ben L. Mueller.......................... 50 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*
John S. Stanfield....................... 42 Vice President -- Mergers and Acquisitions*
D. Merril Cummings...................... 36 Vice President -- Mergers and Acquisitions*
J. Paul Withrow......................... 32 Vice President and Chief Accounting Officer
Richard Muth............................ 50 President of Muth Electric, Inc., and Director*
Alan R. Sielbeck........................ 44 Director*
Robert Stalvey.......................... 47 Vice President of Ace Electric, Inc., and Director*
Richard L. Tucker....................... 62 Director*
Bob Weik................................ 62 President of BW Consolidated, Inc., and Director*
Thomas E. White, Jr..................... 53 Director*
- ---------------
* Election as a director or officer of the Company effective upon the
consummation of the Offerings.
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 will become President, Chief Executive Officer and a director
of the Company upon consummation of the Offerings. 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 will become Senior Vice President and Chief Operating
Officer -- Commercial and Industrial and a director of the Company upon
consummation of the Offerings. 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
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a past board member of the Independent Electrical Contractors, the Associated
Builders and Contractors, the Associated General Contractors and the Richardson
Electrical Board. Prior to 1972, Mr. Mills was an officer and part owner of
Koegel Cash Consulting Engineers.
Ben L. Mueller will become Senior Vice President, Chief Operating
Officer -- Residential and a director of the Company upon consummation of the
Offerings. 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 will become Senior Vice President, General Counsel and
Secretary of the Company upon consummation of the Offerings. Mr. Wombwell is
currently a partner at Andrews & Kurth L.L.P., where he has practiced law in the
area of corporate and securities matters for more than the last five years.
John S. Stanfield will become Vice President -- Mergers and Acquisitions
upon the consummation of the Offerings. Since March 1996, he has served as
Controller of Pollock Electric, Inc., one of the Founding Companies. From April
1993 through March 1996, Mr. Stanfield was an independent financial consultant,
specializing in acquisition, corporate reorganization, and accounting and
financial control services. From 1988 through 1993, Mr. Stanfield served as
Chief Financial Officer for companies in the distribution and manufacturing
industries. Mr. Stanfield was employed in various positions by Arthur Andersen
LLP from 1978 through 1988. Mr. Stanfield is a Certified Public Accountant.
D. Merril Cummings will become Vice President -- Mergers and Acquisitions
upon the closing of the Offerings. 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.
Richard Muth will become a director of the Company upon consummation of the
Offerings. 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. Seilbeck will become a director of the Company upon consummation of
the Offerings. 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,
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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 will become a director of the Company upon consummation of
the Offerings. 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 will become a director of the Company upon consummation
of the Offerings. 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 will become a director of the Company upon consummation of the
Offerings. 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.
Thomas E. White, Jr. will become a director of the Company upon
consummation of the Offerings. Mr. White has served as Chairman and Chief
Executive Officer of Enron Ventures Corp., a subsidiary of Enron Corp., since
December 1996. Mr. White served as Chairman and Chief Executive Officer of Enron
Operations Corp. from June 1993 until December 1996. Mr. White served as
Chairman and Chief Executive Officer of Enron Power Corp. from June 1991 until
June 1993. Mr. White joined Enron Corp. in 1990 as Vice President of Operations
for Enron Power Corp., after a twenty-three year career in the United States
Army, from which he retired in July 1990 with the rank of Brigadier General.
The Board of Directors will establish an Audit Committee and a Compensation
Committee. The Audit Committee will recommend the appointment of auditors and
oversee the accounting and audit functions of the Company. The Compensation
Committee will determine the salaries and bonuses of executive officers and
administer the Stock Option Plan. Messrs. Seilbeck, Tucker and White will 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.
Effective upon consummation of the Offerings, the Board of Directors will
be divided into three classes of directors, with directors serving staggered
three-year terms, expiring at the annual meeting of stockholders in 1998, 1999
and 2000, 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.
C. Byron Snyder, as the holder of all of the outstanding Restricted Common
Stock, will 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 holder of the Restricted Common Stock may remove the
director such holder is 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 at each annual meeting on which the
non-employee director continues to serve. See "-- 1997 Directors Stock Plan."
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EXECUTIVE COMPENSATION
The Company was incorporated in June 1997 and, prior to the Offerings, has
not conducted any operations other than activities related to the Acquisitions
and the Offerings. 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.
EMPLOYMENT AGREEMENTS
The Company will enter 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" by either party upon thirty days' written notice. 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 three years' base salary 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.
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
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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. 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 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 a total of 150,000 shares of Common Stock have been
granted to each of Mr. Wise and Mr. Wombell. In addition, at the consummation of
the Offerings, NQSOs to purchase approximately 2,328,600 shares will be granted
to other key employees of the Company and to employees of the Founding
Companies. Each of the foregoing options will have an exercise price equal to
the initial public offering price of the shares offered hereby, other than the
options granted to Messrs. Wise and Wombwell, which have been granted with
exercise price equal to 60% of the initial public offering price per share. 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, due to death or
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63
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.
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. Mr. Snyder is currently president and a director of the Company.
The trustee of the Snyder Children's Trust is an independent third party not
subject to control by Mr. Snyder. In September 1997, IES issued an additional
442,589 shares to Mr. Snyder and such trust. The value of the Common Stock
issued to Mr. Snyder was estimated at $9.10 per share and has been reflected as
a non-cash compensation charge in the IES financial statements. In October 1997,
Mr. Snyder exchanged 2,655,709 shares of Common Stock for an equal number of
shares of Restricted Common Stock. Mr. Snyder has agreed to advance whatever
funds are 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, all of
which are non-interest-bearing. All of Mr. Snyder's advances will be repaid from
the net proceeds of the Offerings.
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 Directors Plan, effective upon the consummation
of the Offerings, to the non-employee directors of the Company upon the closing
of the Offerings.
Simultaneously with the closing of the Offerings, the Company will acquire
by stock purchase all the issued and outstanding capital stock and other equity
interests of the Founding Companies, at which time each Founding Company will
become 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
consists of (i) an estimated $57.5 million in cash (subject to adjustment based
on the initial public offering price) and (ii) 12,313,025 shares of Common
Stock. In addition, the Company intends to repay approximately $6.4 million of
the historical indebtedness of the Founding Companies. In connection with the
Acquisitions, owners of certain of the Founding Companies will receive the Owner
Amounts, in the amounts set forth below. The Company will incur approximately
$18.2 million in indebtedness to fund the Owner Amounts.
The consummation of each Acquisition is subject to customary conditions.
These conditions include, among others, the accuracy of the representations and
warranties by the Founding Companies, their stockholders and the Company; the
performance by each of the parties of their respective covenants; and the
nonexistence of a material adverse change in the results of operations,
financial condition or business of each Founding Company. There can be no
assurance that the conditions to closing of the Acquisitions will be satisfied
or waived or that the acquisition agreements will not be terminated prior to
consummation.
The following table sets forth for each Founding Company (i) the
approximate portion of the Acquisitions Consideration to be paid to the
stockholders of each of the Founding Companies in cash and in shares of Common
Stock, which cash is subject to adjustments based on the initial public offering
price of the Common Stock offered hereby and (ii) the total debt which would
have been assumed by the Company as of
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September 30, 1997, which represents historical indebtedness, excluding capital
lease obligations, and indebtedness incurred to pay Owner Amounts:
SHARES OF
COMMON TOTAL
CASH STOCK DEBT
---------- ---------- ------
(DOLLARS IN THOUSANDS)
Houston-Stafford................................... $ 15,643 3,352,039 $1,624
Mills.............................................. 11,637 2,493,657 400
Bexar-Calhoun...................................... 8,696 1,863,397 938
Pollock............................................ 1,092 319,729 1,718
Muth............................................... 2,209 473,324 540
Daniel............................................. 3,975 851,823 --
Amber.............................................. 2,486 532,728 747
Haymaker........................................... 2,029 434,735 --
Summit............................................. 1,900 321,506 894
Thurman & O'Connell................................ 2,331 499,600 95
Rodgers............................................ 1,684 360,725 94
Hatfield........................................... 972 208,357 331
Ace................................................ 892 191,056 378
Reynolds........................................... 939 201,191 400
Popp............................................... 976 209,158 --
---------- ---------- ------
Total.................................... $ 57,461 12,313,025 $8,159
========== ========== ======
The foregoing table does not include Owner Amounts (based on September 30,
1997 balances) having a value of $5.9 million to be received by the owners of
Houston-Stafford, $9.4 million to be received by the owners of Mills, $1.2
million to be received by the owners of Bexar-Calhoun, $383,000 to be received
by the owner of Pollock, $1.8 million to be received by the owners of Muth, $4.3
million to be received by the owner of Daniel, $1.3 million to be received by
the owners of Amber, $1.2 million to be received by the owners of Haymaker,
$400,000 to be received by the owner of Summit, $1.6 million to be received by
the owners of Thurman & O'Connell, $981,000 to be received by the owners of
Rodgers, $46,000 to be received by the owners of Hatfield, $407,000 to be
received by the owners of Ace, $261,000 to be received by the owners of Reynolds
and $578,000 to be received by the owners of Popp.
Pursuant to the agreements relating to the Acquisitions, all stockholders
of each of the Founding Companies have agreed not to compete with the Company
for a period of two years after the termination of their affiliation with the
Company. In connection with the Acquisitions, the Company and the owners of the
Founding Companies have agreed to indemnify each other for breaches of
representations and warranties and certain other matters, subject to certain
limitations.
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Individuals who are or will become executive officers or directors of the
Company will receive the following portions of the Acquisitions Consideration
for their interests in the Founding Companies, subject to adjustments as
described above.
SHARES OF
COMPANY CASH COMMON STOCK
------- ----------- ------------
Houston-Stafford
Ben Mueller............................................... $ 5,005,712 1,072,652
Mills
Jerry Mills............................................... 10,022,624 2,147,705
Bexar-Calhoun
Bob Weik(a)............................................... 6,649,695 1,424,935
Pollock
Jon Pollock............................................... 1,092,069 319,729
Muth
Richard Muth(b)........................................... 2,088,961 447,635
Ace
Robert Stalvey............................................ 445,799 95,528
----------- ---------
Total............................................. $25,304,860 5,508,184
=========== =========
- ---------------
(a) Excludes cash of $347,834 and 74,536 shares of Common Stock to be 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 $119,883 and 25,689 shares of Common Stock to be received
by Mr. Muth's wife, Darlene Muth, as to which he disclaims beneficial
ownership.
The foregoing table does not include Owner Amounts that will be received by
the named individuals.
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND PRINCIPAL STOCKHOLDERS
During fiscal 1996, Houston-Stafford made payments totaling $187,000 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.
No such lease payments were made in 1997. Mr. Mueller will become Senior Vice
President, Chief Operating Officer -- Residential and a director the Company
following the consummation of the Offerings.
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.
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 will become Senior Vice President and Chief
Operating Officer -- Commercial and Industrial and a director of the Company
following the consummation of the Offerings.
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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.
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 and $156,000 for 1996.
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 will become a director of
the Company following the consummation of the Offerings.
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 will not be
in excess of fair rental value for such facilities.
Pollock leases certain real property from Mr. Pollock. Amounts paid
pursuant to this lease were $20,161 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 will become a director of the Company
following the consummation of the Offerings.
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.
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. It is anticipated that annual rentals on this facility
will be $103,200, without respect to property taxes and insurance. Mr. Stalvey
will become a director of the Company following the consummation of the
Offerings.
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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PRINCIPAL STOCKHOLDERS
The following table sets forth information with respect to beneficial
ownership of the Company's Common Stock, after giving effect to the issuance of
shares of Common Stock in connection with the Acquisitions and after giving
effect to the Offerings, 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., 2301 Preston, Houston, Texas 77003. All
persons listed have sole voting and investment power with respect to their
shares unless otherwise indicated.
BENEFICIAL OWNERSHIP
AFTER OFFERINGS
--------------------
SHARES PERCENT
--------- -------
C. Byron Snyder(a).......................................... 2,655,709 11.4%
Jon Pollock................................................. 785,643 3.4
Jerry Mills................................................. 2,380,662 10.2
Ben L. Mueller.............................................. 1,305,609 5.6
Jim P. Wise................................................. 100,000 *
John F. Wombwell............................................ 100,000 *
Richard Muth(b)............................................. 473,324 2.0
Alan R. Sielbeck(c)......................................... 0 *
Robert Stalvey.............................................. 95,528 *
Richard L. Tucker(c)........................................ 0 *
Bob Weik(d)................................................. 1,499,471 6.4
Thomas E. White, Jr.(c)..................................... 0 *
All executive officers and directors as a group (15
persons)(e)............................................... 9,675,720 41.4%
- ---------------
* Less than one percent.
(a) 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 25,689 shares of Common Stock owned by Mr. Muth's wife, as to which
Mr. Muth disclaims beneficial ownership.
(c) Mr. Seilbeck'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. White's
address is Enron Ventures Corp., 1400 Smith Street, Houston, TX 77002-7361.
(d) Includes 74,536 shares of Common Stock owned by two related trusts, as to
which Mr. Weik disclaims beneficial ownership.
(e) Includes 2,655,709 shares of Restricted Common Stock described in Note (a)
above.
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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, including 2,655,709 shares of
Restricted Common Stock, and 10,000,000 shares of preferred stock, par value
$0.01 per share. After giving effect to the Acquisitions, there will be
16,365,336 shares of Common Stock outstanding, including 2,655,709 shares of
Restricted Common Stock, and no shares of preferred stock outstanding. After the
closing of the Offerings, 23,365,336 shares of Common Stock will be issued and
outstanding, assuming no exercise of the Underwriters' over-allotment option.
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.
Each share of Restricted Common Stock will automatically convert to Common
Stock on a share-for-share basis (i) 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)), (ii) in the event any person acquires
beneficial ownership of 15% or more of the total number of outstanding shares of
Common Stock or (iii) in the event any person offers to acquire 15% or more of
the total number of outstanding shares of Common Stock.
The Company intends to make application to list the Common Stock on the
NYSE under the symbol "IEE." The Restricted Common Stock will not be 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
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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 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
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directors' and officers' liability insurance. The foregoing provisions may
extend to liabilities arising due to violations of the federal securities laws.
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.
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,
including 2,655,709 shares of Restricted Common Stock, and 10,000,000 shares of
preferred stock. After the Offerings, the Company will have outstanding
23,365,336 shares of Common Stock (assuming the Underwriters' over-allotment
options are not exercised). The 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 made). The notice
must contain certain
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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. All of the
7,000,000 shares sold in the Offerings, except for shares acquired by affiliates
of the Company, will be freely tradeable. Simultaneously with the closing of the
Offerings, the stockholders of the Founding Companies will receive, in the
aggregate, 12,313,025 shares of Common Stock as a portion of the consideration
for their businesses. Certain other stockholders of the Company will hold, in
the aggregate, an additional 1,396,602 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 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 Securities and Exchange 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
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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.
The Company has authorized the issuance of 3,500,000 shares of its Common
Stock in accordance with the terms of the Stock Option Plan. Options to purchase
300,000 shares have been granted under the Stock Option Plan and it is
anticipated that approximately 2,328,600 shares of Common Stock will be granted
upon the closing of the Offerings to certain other officers, directors and
former stockholders of the Founding Companies. The Company intends to file a
registration statement on Form S-8 under the Securities Act registering the
issuance of shares upon exercise of options granted under the Plan. As a result,
such shares will be eligible for resale in the public market.
The Company currently intends to file a registration statement covering
6,000,000 additional shares of Common Stock under the Securities Act for its use
in connection with future acquisitions. These shares generally will be freely
tradeable after their issuance by persons not affiliated with the Company unless
the Company contractually restricts their resale.
The Company and each of its directors and executive officers have agreed
not to (i) directly or indirectly, offer, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant for the sale of, or otherwise transfer or dispose
of any shares of Common Stock or any securities convertible into or exchangeable
or exercisable for Common Stock or file any registration statement under the
Securities Act with respect to any of the foregoing or (ii) enter into any swap
or any other agreement or any transaction that transfers, in whole or in part,
directly or indirectly, the economic consequence of ownership of the Common
Stock or any securities convertible into or exercisable or exchangeable for
Common Stock whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, for a period of 180 days from the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated on behalf of the Underwriters, except for (i) shares issued
in connection with acquisitions, provided that (except with respect to shares
issued in transactions in which the issuance or resale of such shares is not
registered under the Securities Act), the recipients of such shares agree to be
bound by similar restrictions and (ii) any shares of Common Stock issued or
options to purchase Common Stock granted pursuant to the Company's benefit plans
described herein. In addition, the current stockholders of the Company and the
owners of the Founding Companies have agreed with the Company not to sell,
contract to sell or otherwise dispose of any shares of Common Stock owned as of
the consummation of the Acquisitions, including shares received as consideration
in the Acquisitions, for a period of two years following receipt thereof,
subject to the rights of such holders to exercise their registration rights as
described below.
Prior to the Offerings, there has been 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
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aggregate, these groups hold 16,365,336 shares of 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 will not apply to the
registration statement the Company intends to file for use in future
acquisitions or with respect to employee benefit plans.
CERTAIN UNITED STATES FEDERAL TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a general summary of certain United States federal income
and estate tax consequences expected to result under current law from the
purchase, ownership and taxable disposition of Common Stock by a person or
entity other than (i) a citizen or resident of the United States, (ii) a
corporation, partnership or other entity created or organized in or under the
laws of the United States or of any state thereof, (iii) an estate, the income
of which is subject to United States federal income taxation regardless of its
source or (iv) a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
fiduciaries who have the authority to control all substantial decisions of the
trust (a "Non-U.S. Holder"). This summary does not address all of the United
States federal income and estate tax considerations that may be relevant to a
Non-U.S. Holder in light of its particular circumstances or to Non-U.S. Holders
that may be subject to special treatment under United States federal income tax
laws (such as insurance companies, tax-exempt organizations, financial
institutions, brokers, dealers in securities, and taxpayers that are neither
citizens nor residents of the United States, or that are foreign corporations,
foreign partnerships or foreign estates or trusts as to the United States).
Furthermore, this summary does not discuss any aspect of state, local or foreign
taxation. This summary is based on current provisions of the Internal Revenue
Code of 1986, as amended (the "Code"), Treasury regulations, judicial opinions,
published positions of the United States Internal Revenue Service (the "IRS")
and other applicable authorities, all of which are subject to change, possibly
with retroactive effect. Each prospective purchaser of Common Stock is advised
to consult its tax advisor with respect to the tax consequences of acquiring,
holding and disposing of Common Stock.
DIVIDENDS
Dividends paid to a Non-U.S. Holder of Common Stock generally will be
subject to withholding of United States federal income tax at a 30 percent rate
(or such lower rate as may be specified by an applicable income tax treaty)
unless the dividends are effectively connected with the conduct of a trade or
business of the Non-U.S. Holder within the United States, in which case the
dividends will be taxed at ordinary United States federal income tax rates and
will not be subject to the withholding tax described above. If the Non-U.S.
Holder is a corporation, such effectively connected income may also be subject
to an additional "branch profits tax."
SALE OR DISPOSITION OF COMMON STOCK
A Non-U.S. Holder generally will not be subject to United States federal
income tax in respect of any gain recognized on the sale or other taxable
disposition of Common Stock so long as (i) the gain is not effectively connected
with a trade or business of the Non-U.S. Holder in the United States; (ii) in
the case of a Non-U.S. Holder who is an individual and holds the Common Stock as
a capital asset, either (a) such holder is not present in the United States for
183 or more days in the taxable year of the disposition or (b) such holder does
not have a "tax home" in the United States for United States federal income tax
purposes or does not maintain an office or other fixed place of business in the
United States to which such gain is attributable; (iii) the Non-U.S. Holder is
not subject to tax pursuant to the provisions of United States federal income
tax law applicable to certain United States expatriates or (iv) the Common Stock
continues to be "regularly traded on an established securities market" for
United States federal income tax purposes and the Non-U.S. Holder has not held,
directly or indirectly, at any time during the five-year period ending on the
date of disposition (or, if shorter, the Non-U.S. Holder's holding period), more
than 5 percent of the outstanding Common Stock.
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BACKUP WITHHOLDING AND INFORMATION REPORTING
United States backup withholding tax generally will not apply to dividends
paid on Common Stock to a Non-U.S. Holder at an address outside the United
States. The Company must report annually to the IRS and to each Non-U.S. Holder
the amount of dividends paid to such holder and the amount, if any, of tax
withheld with respect to such dividends. This information may also be made
available to the tax authorities in the Non-U.S. Holder's country of residence.
Upon the sale or other taxable disposition of Common Stock by a Non-U.S.
Holder to or through a United States office of a broker, the broker must backup
withhold at a rate of 31 percent and report the sale to the IRS, unless the
holder certifies its non-U.S. status under penalties of perjury or otherwise
establishes exemption. Upon the sale or other taxable disposition of Common
Stock by a Non-U.S. Holder to or through the foreign office of a United States
broker, or a foreign broker with certain types of relationships to the United
States, the broker must report the sale to the IRS (but is not required to
backup withhold) unless the broker has documentary evidence in its files that
the seller is a Non-U.S. Holder and certain other conditions are met, or the
holder otherwise establishes an exemption.
Backup withholding is not an additional U.S. federal income tax. Amounts
withheld under the backup withholding rules are generally allowable as a refund
or credit against such Non-U.S. Holder's United States federal income tax
liability, if any, provided that the required information is furnished to the
IRS.
The United States Treasury department has recently issued regulations
generally effective for payments made after December 31, 1998 that will affect
the procedures to be followed by a Non-U.S. Holder in establishing such holder's
status as a Non-U.S. Holder for purposes of the withholding, backup withholding
and information reporting rules discussed herein. Among other things, a Non-U.S.
Holder may be required to furnish new certification of foreign status.
Prospective investors should consult their advisors concerning the effect of
such regulations on an investment in the Common Stock.
FEDERAL ESTATE TAXES
Common Stock owned or treated as owned by an individual who is not a
citizen or resident (as specially defined for United States federal estate tax
purposes) of the United States at the time of death will be included in such
individual's gross estate for United States federal estate tax purposes, unless
an applicable estate tax treaty provides otherwise.
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UNDERWRITING
Subject to the terms and conditions set forth in the U.S. purchase
agreement (the "U.S. Purchase Agreement") among the Company and each of the
underwriters named below (the "U.S. Underwriters"), the Company has agreed to
sell to each of the U.S. Underwriters, and each of the U.S. Underwriters, for
whom Merrill Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin &
Jenrette Securities Corporation, Equitable Securities Corporation and Sanders
Morris Mundy Inc. are acting as representatives (the "U.S. Representatives"),
severally has agreed to purchase from the Company, the aggregate number of
shares of Common Stock set forth opposite its name below.
NUMBER OF
U.S. UNDERWRITER SHARES
---------------- ---------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Equitable Securities Corporation............................
Sanders Morris Mundy Inc....................................
---------
Total.......................................... 5,600,000
=========
The Company has also entered into an international underwriting agreement
(the "International Purchase Agreement") with certain underwriters outside the
United States and Canada (the "International Managers" and, together with the
U.S. Underwriters, the "Underwriters"), for whom Merrill Lynch International,
Donaldson, Lufkin & Jenrette International, Equitable Securities Corporation and
Sanders Morris Mundy Inc. are acting as representatives. Subject to the terms
and conditions set forth in the International Purchase Agreement, and
concurrently with the sale of 5,600,000 shares of Common Stock to the U.S.
Underwriters pursuant to the U.S. Purchase Agreement, the Company has agreed to
sell to the International Managers, and the International Managers severally
have agreed to purchase from the Company, an aggregate of 1,400,000 shares of
Common Stock. The public offering price per share and the total underwriting
discount per share are identical under the U.S. Purchase Agreement and the
International Purchase Agreement.
In the U.S. Purchase Agreement and the International Purchase Agreement,
the several U.S. Underwriters and the several International Managers,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such Purchase Agreement if any of such shares being sold pursuant to each
such Purchase Agreement are purchased. Under certain circumstances, the
commitments of the non-defaulting U.S. Underwriters or the International
Managers (as the case may be) may be increased as set forth in the U.S. Purchase
Agreement and the International Purchase Agreement, respectively. The closing
with respect to the sale of shares of Common Stock to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another.
The U.S. Underwriters and the International Managers have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Under the terms of the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to each
other for purposes of resale at the public offering price, less an amount not
greater than the selling concession. Under the terms of the Intersyndicate
Agreement, the U.S. Underwriters and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to persons
who are non-United States and non-Canadian persons, and the International
Managers and any dealer to whom they sell shares of Common Stock will not offer
to sell or sell shares of Common Stock to persons who are United States or
Canadian
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persons or to persons they believe intend to resell to United States or Canadian
persons, except, in each case, for transactions pursuant to the Intersyndicate
Agreement.
The U.S. Representatives have advised the Company that the U.S.
Underwriters propose initially to offer the shares of Common Stock to the public
at the initial public offering price set forth on the cover page of this
Prospectus, and to certain dealers at such price less a concession not in excess
of $ per share. The U.S. Underwriters may allow, and such dealers may
reallow, a discount not in excess of $ per share to certain other dealers.
After the Offerings, the initial public offering price, concession and discount
may be changed.
The Company has granted the U.S. Underwriters an option, exercisable for 30
days after the date of this Prospectus, to purchase up to an aggregate of
840,000 additional shares of Common Stock at the initial public offering price
set forth on the cover page hereof, less the underwriting discount. The U.S.
Underwriters may exercise this option to cover overallotments, if any, made on
the sale of the shares of Common Stock offered hereby. If the U.S. Underwriters
exercise this option, each U.S. Underwriter will have a firm commitment, subject
to certain conditions, to purchase approximately the same percentage thereof
which the number of shares of Common Stock to be purchased by it shown in the
foregoing table bears to the 5,600,000 shares of Common Stock initially offered
hereby. The Company has also granted an option to the International Managers,
which expires 30 days after the date of this Prospectus, to purchase up to
210,000 additional shares of Common Stock to cover over-allotments, if any, on
terms similar to those granted to the U.S. Underwriters.
The Company and each of its directors and executive officers have agreed
not to (i) directly or indirectly, offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant for the sale of, or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for Common Stock or file any registration statement
under the Securities Act with respect to any of the foregoing or (ii) enter into
any swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequence of ownership of the
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, for a period of 180 days from the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated on behalf of the Underwriters, except for (i) shares issued
in connection with acquisitions, provided that (except with respect to shares
issued in transactions in which the issuance or resale of such shares is not
registered under the Securities Act), the recipients of such shares agree to be
bound by similar restrictions and (ii) any shares of Common Stock issued or
options to purchase Common Stock granted pursuant to the Company's benefit plans
described herein.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the U.S. Underwriters are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the U.S. Underwriters
may reduce that short position by purchasing Common Stock in the open market.
The U.S. Underwriters may also elect to reduce any short position by exercising
all or part of the over-allotment option described above.
The U.S. Underwriters may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the U.S. Underwriters purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
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77
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an affect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company intends to make application to list the Common Stock on the
NYSE under the symbol "IEE."
The U.S. Underwriters have reserved for sale, at the initial public
offering price, up to 700,000 shares of Common Stock for certain employees,
directors and business associates of, and certain other persons designated by,
the Company who have expressed an interest in purchasing such shares of Common
Stock. The number of shares available for sale to the general public in the
Offerings will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered to the general
public on the same basis as other shares offered hereby.
Prior to the Offerings, there has been no established trading market for
the shares of Common Stock. The initial public offering price for the Common
Stock offered hereby has been determined by negotiations between the Company and
the Underwriters. Among the factors considered in making such determination were
the history of and the prospects for the industry in which the Company competes,
an assessment of the Company's management, the past and present operations of
the Founding Companies and the Company, the historical results of operations of
the Founding Companies and the Company and the trend of its revenues and
earnings, the prospects for future earnings of the Company, the general
condition of prices of similar securities of generally comparable companies and
other relevant factors. There can be no assurance that an active trading market
will develop for the Common Stock or that the Common Stock will trade in the
public market subsequent to the Offerings at or above the initial public
offering price.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
LEGAL MATTERS
Certain legal matters in connection with the Common Stock being offered
hereby will be passed upon for the Company by Andrews & Kurth L.L.P., Houston,
Texas and for the Underwriters by Vinson & Elkins L.L.P., Houston, Texas.
Partners in the firm of Andrews & Kurth L.L.P. own shares of Common Stock not
exceeding 1% of the shares of Common Stock to be outstanding upon the
consummation of the Offerings.
EXPERTS
The audited financial statements of IES and the Founding Companies included
in this Prospectus and elsewhere in the Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
ADDITIONAL INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form S-1 (together with all
amendments, schedules and exhibits thereto the
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78
"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 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 examined by an independent public
accounting firm for each fiscal year.
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INDEX TO FINANCIAL STATEMENTS
PAGE
-----
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
Introduction to Unaudited Pro Forma Combined Financial
Statements............................................ F-3
Unaudited Pro Forma Combined Balance Sheet............. F-4
Unaudited Pro Forma Combined Statement of Operations... F-5
Notes to Unaudited Pro Forma Combined Financial
Statements............................................ F-6
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
Report of Independent Public Accountants............... F-10
Balance Sheets......................................... F-11
Statements of Operations............................... F-12
Statements of Cash Flows............................... F-13
Statements of Stockholders' Equity..................... F-14
Notes to Financial Statements.......................... F-15
INTEGRATED ELECTRICAL SERVICES, INC.
Report of Independent Public Accountants............... F-26
Balance Sheet.......................................... F-27
Statement of Operations................................ F-28
Statement of Cash Flows................................ F-29
Statement of Stockholders' Equity...................... F-30
Notes to Financial Statements.......................... F-31
FOUNDING COMPANIES
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
Report of Independent Public Accountants............... F-35
Consolidated Balance Sheets............................ F-36
Consolidated Statements of Operations.................. F-37
Consolidated Statements of Cash Flows.................. F-38
Consolidated Statements of Stockholders' Equity........ F-39
Notes to Consolidated Financial Statements............. F-40
BW CONSOLIDATED, INC. AND SUBSIDIARIES
Report of Independent Public Accountants............... F-47
Consolidated Balance Sheets............................ F-48
Consolidated Statements of Operations.................. F-49
Consolidated Statements of Cash Flows.................. F-50
Consolidated Statements of Stockholders' Equity........ F-51
Notes to Consolidated Financial Statements............. F-52
MUTH ELECTRIC, INC.
Report of Independent Public Accountants............... F-61
Balance Sheets......................................... F-62
Statements of Operations............................... F-63
Statements of Cash Flows............................... F-64
Statements of Stockholders' Equity..................... F-65
Notes to Financial Statements.......................... F-66
F-1
80
PAGE
-----
POLLOCK ELECTRIC, INC.
Report of Independent Public Accountants............... F-71
Balance Sheets......................................... F-72
Statements of Operations............................... F-73
Statements of Cash Flows............................... F-74
Statements of Stockholder's Equity..................... F-75
Notes to Financial Statements.......................... F-76
CHARLES P. BAGBY COMPANY, INC.
Report of Independent Public Accountants............... F-84
Balance Sheets......................................... F-85
Statements of Operations............................... F-86
Statements of Cash Flows............................... F-87
Statements of Partners' Capital........................ F-88
Notes to Financial Statements.......................... F-89
AMBER ELECTRIC, INC.
Report of Independent Public Accountants............... F-93
Balance Sheets......................................... F-94
Statements of Operations............................... F-95
Statements of Cash Flows............................... F-96
Statements of Stockholder's Equity..................... F-97
Notes to Financial Statements.......................... F-98
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, INC.
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-129
Balance Sheets......................................... F-130
Statements of Operations............................... F-131
Statements of Cash Flows............................... F-132
Statements of Stockholders' Equity..................... F-133
Notes to Financial Statements.......................... F-134
RODGERS ELECTRIC COMPANY, INC.
Report of Independent Public Accountants............... F-140
Balance Sheet.......................................... F-141
Statement of Operations................................ F-142
Statement of Cash Flows................................ F-143
Statement of Stockholders' Equity...................... F-144
Notes to Financial Statements.......................... F-145
F-2
81
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
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 the
outstanding capital stock and other equity interests of Ace, Amber,
Bexar-Calhoun, Daniel, Hatfield, Haymaker, Houston-Stafford, Mills, Muth,
Pollock, Reynolds, Rodgers, Summit, Popp and Thurman & O'Connell (together, the
Founding Companies), and related transactions, and (ii) IES's initial public
offerings (the Offerings). The acquisitions (the Acquisitions) will occur
simultaneously with the closing of the Offerings and will be accounted for using
the purchase method of accounting. Houston-Stafford has been identified as the
accounting acquirer for financial statement presentation purposes.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and related transactions, and the Offering, as if they had occurred
on September 30, 1997. 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 Founding Companies have contractually agreed to
prospective reductions in salary, bonuses, benefits and lease payments, these
reductions have been reflected in the unaudited pro forma combined statements of
operations. With respect to other potential cost savings, IES has not and cannot
quantify these savings until completion of the Acquisitions. It is anticipated
that these savings will be offset by costs related to IES's new corporate
management and by the costs associated with being a public company. However,
because these costs cannot be accurately quantified at this time, they have not
been included in the pro forma financial information of IES.
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 financial position or
results of operations would actually have been if such transactions in fact had
occurred on those dates and are not necessarily representative of IES's
financial position or results of operations for any future period. Since the
Founding 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 other financial statements and notes thereto included
elsewhere in this Prospectus. See also "Risk Factors" included elsewhere herein.
F-3
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INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1997
(AMOUNTS IN THOUSANDS)
BEXAR- HOUSTON-
AMBER CALHOUN DANIEL HAYMAKER STAFFORD MILLS MUTH POLLOCK SUMMIT
------ ------- ------ -------- -------- ------- ------ ------- ------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 988 $1,275 $ 917 $ 851 $2,492 $ 833 $ 81 $ 347 $ 157
Accounts receivable..................... 2,886 5,560 4,864 1,939 12,433 15,153 3,628 5,476 2,756
Less-Allowance.......................... 51 124 127 48 342 395 91 175 122
------ ------- ------ ------ ------- ------- ------ ------ ------
Accounts Receivable, net.............. 2,835 5,436 4,737 1,891 12,091 14,758 3,537 5,301 2,634
Costs and profits recognized in excess
of billings........................... 119 224 510 755 934 1,584 675 767 178
Other Receivables....................... 127 71 30 15 -- 659 246 13 74
Inventories............................. 25 541 23 -- 2,878 93 898 18 --
Prepaid expenses and other.............. 117 29 1,670 323 1,162 120 135 541 96
------ ------- ------ ------ ------- ------- ------ ------ ------
Total current assets.................. 4,211 7,576 7,887 3,835 19,557 18,047 5,572 6,987 3,139
PROPERTY AND EQUIPMENT, NET............. 516 5,206 541 246 2,125 2,397 1,133 379 180
OTHER ASSETS............................ -- 49 -- -- 780 443 -- -- 318
GOODWILL, NET........................... -- -- -- -- 2,008 173 -- -- --
------ ------- ------ ------ ------- ------- ------ ------ ------
Total assets.......................... $4,727 $12,831 $8,428 $4,081 $24,470 $21,060 $6,705 $7,366 $3,637
====== ======= ====== ====== ======= ======= ====== ====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.... $ 179 $ 96 $ 62 $ -- $ 721 $ 643 $ 540 $1,777 $ 808
Accounts payable and accrued expenses... 1,276 2,400 1,840 1,821 9,549 7,672 2,177 3,335 1,494
Payable to stockholder/affiliate........ -- -- -- -- -- -- -- -- --
Billings in excess of costs and profits
recognized............................ 196 840 1,370 366 2,417 1,966 543 889 182
Income taxes payable.................... 676 -- -- -- 1,234 -- -- 231 --
Other................................... 122 -- 81 -- 222 -- -- 146 20
------ ------- ------ ------ ------- ------- ------ ------ ------
Total current liabilities............. 2,449 3,336 3,353 2,187 14,143 10,281 3,260 6,378 2,504
------ ------- ------ ------ ------- ------- ------ ------ ------
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities............................ 568 842 102 -- 968 169 -- 71 88
Deferred income taxes................... 52 -- -- -- -- -- -- 21 11
Other long-term liabilities............. -- 1,302 483 -- 1,151 75 -- -- --
------ ------- ------ ------ ------- ------- ------ ------ ------
Total long-term liabilities........... 620 2,144 585 -- 2,119 244 -- 92 99
------ ------- ------ ------ ------- ------- ------ ------ ------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock............................ 1 20 8 1 295 1 74 1 1
Restricted common stock................. -- -- -- -- -- -- -- -- --
Receivable from stockholder............. -- -- -- -- -- -- -- -- --
Additional paid-in capital.............. -- 205 -- -- 112 175 -- 9 --
Retained earnings....................... 2,091 7,126 4,482 1,893 8,926 10,410 3,371 886 1,033
Treasury stock.......................... (434) -- -- -- (1,125) (51) -- -- --
------ ------- ------ ------ ------- ------- ------ ------ ------
Total stockholders' equity............ 1,658 7,351 4,490 1,894 8,208 10,535 3,445 896 1,034
------ ------- ------ ------ ------- ------- ------ ------ ------
Total liabilities and stockholders'
equity.............................. $4,727 $12,831 $8,428 $4,081 $24,470 $21,060 $6,705 $7,366 $3,637
====== ======= ====== ====== ======= ======= ====== ====== ======
OTHER PRO POST
THURMAN & FOUNDING PRO FORMA FORMA MERGER
O'CONNELL RODGERS COMPANIES IES ADJUSTMENTS COMBINED ADJUSTMENTS
--------- ------- --------- -------- ----------- -------- -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $1,160 $ 818 $ 829 $ -- $ (7,385) $ 3,363 $ 22,411
Accounts receivable..................... 679 623 3,548 -- (1,485) 58,072 --
Less-Allowance.......................... 17 15 61 -- -- 1,580 --
------ ------ ------ -------- -------- -------- --------
Accounts Receivable, net.............. 662 608 3,487 -- (1,485) 56,492 --
Costs and profits recognized in excess
of billings........................... 52 20 1,088 -- -- 6,906 --
Other Receivables....................... 9 5 48 -- -- 1,297 --
Inventories............................. 213 -- 344 -- -- 5,033 --
Prepaid expenses and other.............. 15 68 165 1,560 984 6,985 (1,560)
------ ------ ------ -------- -------- -------- --------
Total current assets.................. 2,111 1,519 5,961 1,560 (7,886) 80,076 20,851
PROPERTY AND EQUIPMENT, NET............. 301 393 1,057 6 (3,772) 10,708 --
OTHER ASSETS............................ -- 175 -- -- -- 1,765 --
GOODWILL, NET........................... -- -- -- -- 121,692 123,873 --
------ ------ ------ -------- -------- -------- --------
Total assets.......................... $2,412 $2,087 $7,018 $ 1,566 $110,034 $216,422 $ 20,851
====== ====== ====== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.... $ 7 $ 36 $ 918 $ -- $ 56,579 $62,366 $(62,001)
Accounts payable and accrued expenses... 262 488 2,218 -- -- 34,532 --
Payable to stockholder/affiliate........ -- -- -- 1,565 -- 1,565 (1,560)
Billings in excess of costs and profits
recognized............................ 361 109 430 -- -- 9,669 --
Income taxes payable.................... -- 213 -- -- -- 2,354 --
Other................................... -- -- 72 -- 1,998 2,661 --
------ ------ ------ -------- -------- -------- --------
Total current liabilities............. 630 846 3,638 1,565 58,577 113,147 (63,561)
------ ------ ------ -------- -------- -------- --------
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities............................ 88 58 398 -- 17,411 20,763 (1,878)
Deferred income taxes................... -- 75 5 -- 879 1,043 --
Other long-term liabilities............. -- -- 6 -- (1,051) 1,966 --
------ ------ ------ -------- -------- -------- --------
Total long-term liabilities........... 88 133 409 -- 17,239 23,772 (1,878)
------ ------ ------ -------- -------- -------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock............................ 300 15 42 41 (663) 137 70
Restricted common stock................. -- -- -- -- 26 26 --
Receivable from stockholder............. -- -- -- (40) 40 -- --
Additional paid-in capital.............. -- -- 198 38,095 32,999 71,793 86,220
Retained earnings....................... 1,394 1,093 2,761 (38,095) 176 7,547 --
Treasury stock.......................... -- -- (30) -- 1,640 -- --
------ ------ ------ -------- -------- -------- --------
Total stockholders' equity............ 1,694 1,108 2,971 1 34,218 79,503 86,290
------ ------ ------ -------- -------- -------- --------
Total liabilities and stockholders'
equity.............................. $2,412 $2,087 $7,018 $ 1,566 $110,034 $216,422 $ 20,851
====== ====== ====== ======== ======== ======== ========
AS
ADJUSTED
--------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 25,774
Accounts receivable..................... 58,072
Less-Allowance.......................... 1,580
--------
Accounts Receivable, net.............. 56,492
Costs and profits recognized in excess
of billings........................... 6,906
Other Receivables....................... 1,297
Inventories............................. 5,033
Prepaid expenses and other.............. 5,425
--------
Total current assets.................. 100,927
PROPERTY AND EQUIPMENT, NET............. 10,708
OTHER ASSETS............................ 1,765
GOODWILL, NET........................... 123,873
--------
Total assets.......................... $237,273
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.... $ 365
Accounts payable and accrued expenses... 34,532
Payable to stockholder/affiliate........ 5
Billings in excess of costs and profits
recognized............................ 9,669
Income taxes payable.................... 2,354
Other................................... 2,661
--------
Total current liabilities............. 49,586
--------
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities............................ 18,885
Deferred income taxes................... 1,043
Other long-term liabilities............. 1,966
--------
Total long-term liabilities........... 21,894
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock............................ 207
Restricted common stock................. 26
Receivable from stockholder............. --
Additional paid-in capital.............. 158,013
Retained earnings....................... 7,547
Treasury stock.......................... --
--------
Total stockholders' equity............ 165,793
--------
Total liabilities and stockholders'
equity.............................. $237,273
========
F-4
83
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
BEXAR- HOUSTON-
AMBER CALHOUN DANIEL HAYMAKER STAFFORD MILLS MUTH
------- ------- ------- -------- -------- ------- -------
REVENUES........................................... $16,386 $32,165 $18,409 $11,772 $ 81,575 $74,399 $18,779
COST OF SERVICES................................... 13,415 24,976 13,518 9,920 64,831 60,572 14,511
------- ------- ------- ------- -------- ------- -------
Gross profit...................................... 2,971 7,189 4,891 1,852 16,744 13,827 4,268
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....... 1,379 3,766 2,316 1,140 11,474 8,778 3,074
GOODWILL AMORTIZATION.............................. -- -- -- -- -- -- --
------- ------- ------- ------- -------- ------- -------
INCOME (LOSS) FROM OPERATIONS...................... 1,592 3,423 2,575 712 5,270 5,049 1,194
OTHER INCOME (EXPENSE):
Interest expense.................................. (45) (108) (60) (2) (187) (46) (27)
Other, net........................................ 69 (121) 100 -- 425 279 1
------- ------- ------- ------- -------- ------- -------
Other income (expense), net....................... 24 (229) 40 (2) 238 233 (26)
------- ------- ------- ------- -------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES.................. 1,616 3,194 2,615 710 5,508 5,282 1,168
PROVISION (BENEFIT) FOR INCOME TAXES............... 632 72 -- -- 2,192 274 --
------- ------- ------- ------- -------- ------- -------
NET INCOME (LOSS).................................. $ 984 $3,122 $ 2,615 $ 710 $ 3,316 $ 5,008 $ 1,168
======= ======= ======= ======= ======== ======= =======
NET INCOME PER SHARE...............................
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER
SHARE(1)..........................................
OTHER
THURMAN & FOUNDING PRO FORMA
POLLOCK SUMMIT O'CONNELL RODGERS COMPANIES IES ADJUSTMENTS
------- ------- --------- ------- --------- -------- -----------
REVENUES........................................... $20,291 $10,995 $4,049 $3,325 $20,602 $ -- $ --
COST OF SERVICES................................... 16,670 9,454 2,181 1,621 16,103 -- --
------- ------- ------ ------ ------- -------- -------
Gross profit...................................... 3,621 1,541 1,868 1,704 4,499 -- --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....... 2,895 1,463 503 1,238 3,980 38,095 (44,163)
GOODWILL AMORTIZATION.............................. -- -- -- -- -- -- 3,069
------- ------- ------ ------ ------- -------- -------
INCOME (LOSS) FROM OPERATIONS...................... 726 78 1,365 466 519 (38,095) 41,094
OTHER INCOME (EXPENSE):
Interest expense.................................. (172) (79) (6) (7) (87) -- (590)
Other, net........................................ 3 23 70 36 129 -- 316
------- ------- ------ ------ ------- -------- -------
Other income (expense), net....................... (169) (56) 64 29 42 -- (274)
------- ------- ------ ------ ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES.................. 557 22 1,429 495 561 (38,095) 40,820
PROVISION (BENEFIT) FOR INCOME TAXES............... 214 21 46 178 (51) 7,448
------- ------- ------ ------ ------- -------- -------
NET INCOME (LOSS).................................. $ 343 $ 1 $1,383 $ 317 $ 612 $(38,095) $33,372
======= ======= ====== ====== ======= ======== =======
NET INCOME PER SHARE...............................
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER
SHARE(1)..........................................
PRO FORMA
COMBINED
-----------
REVENUES........................................... $ 312,747
COST OF SERVICES................................... 247,772
-----------
Gross profit...................................... 64,975
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....... 35,938
GOODWILL AMORTIZATION.............................. 3,069
-----------
INCOME (LOSS) FROM OPERATIONS...................... 25,968
OTHER INCOME (EXPENSE):
Interest expense.................................. (1,416)
Other, net........................................ 1,330
-----------
Other income (expense), net....................... (86)
-----------
INCOME (LOSS) BEFORE INCOME TAXES.................. 25,882
PROVISION (BENEFIT) FOR INCOME TAXES............... 11,026
-----------
NET INCOME (LOSS).................................. $ 14,856
===========
NET INCOME PER SHARE............................... $ .68
===========
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER
SHARE(1).......................................... 21,884,523
===========
- ---------------
(1) Includes (a) 2,655,709 shares issued to the IES founder, (b) 1,396,602
shares issued to management of IES, (c) 12,313,025 shares issued to owners
of the Founding Companies and (d) 5,399,187 of the 7,000,000 shares sold in
the Offering necessary to pay the cash portion of the Acquisitions
consideration and expenses of the Offerings. The 1,600,183 shares excluded
reflect the net cash proceeds to IES. Additionally, includes 120,000 shares
computed under the treasury stock method related to 300,000 options which
are currently outstanding.
F-5
84
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
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. IES has conducted no operations
to date and will acquire the Founding Companies concurrently with and as a
condition of the closing of the Offerings.
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The periods
included in these financial statements for the individual Founding Companies are
as of and for the year ended September 30, 1997, except for Ace, Hatfield,
Reynolds, and Popp for which the period is as of and for the year ended June 30,
1997. The audited historical financial statements included elsewhere herein have
been included in accordance with Securities and Exchange Commission (SEC) Staff
Accounting Bulletin No. 80.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently with and as a condition to the closing of the Offerings, IES
will acquire all of the outstanding capital stock and other equity interests of
the Founding Companies. The acquisitions will be accounted for using the
purchase method of accounting with Houston-Stafford being treated as the
accounting acquirer.
The following table sets forth the consideration to be paid (a) in cash and
(b) in shares of Common Stock to the common stockholders of each of the Founding
Companies, other than the accounting acquirer (Houston-Stafford). For purposes
of computing the estimated purchase price for accounting purposes, the value of
the shares was determined using an estimated fair value of $10.50 per share (or
$94.1 million), which is less than the estimated initial public offering price
of $14.00 per share due to restrictions on the sale and transferability of the
shares issued. The total estimated purchase price of $135.9 million for the
acquisitions is based upon preliminary estimates and is subject to certain
purchase price adjustments at and following closing. The table does not reflect
net transfers of $29.8 million which represents previously undistributed
earnings and nonoperating assets and liabilities that will be transferred in
connection with the Acquisitions to the owners of the Founding Companies.
SHARES OF
CASH COMMON STOCK
------- -------------
(IN THOUSANDS)
Ace......................................................... $ 892 191
Amber....................................................... 2,486 533
Bexar-Calhoun............................................... 8,696 1,863
Daniel...................................................... 3,975 852
Hatfield.................................................... 972 208
Haymaker.................................................... 2,029 435
Mills....................................................... 11,637 2,494
Muth........................................................ 2,209 473
Pollock..................................................... 1,092 320
Reynolds.................................................... 939 201
Rodgers..................................................... 1,684 361
Summit...................................................... 1,900 321
Popp........................................................ 976 209
Thurman & O'Connell......................................... 2,331 500
------- -----
Total............................................. $41,818 8,961
======= =====
F-6
85
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
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 $29.8
million of previously undistributed earnings and nonoperating assets and
liabilities to the owners of the Founding Companies, which is expected
to be funded using $7.4 million of cash, $4.2 million of net
nonoperating assets, and new borrowings of $18.2 million.
(b) Records the liability for the cash portion of the consideration to be
paid to Houston-Stafford, the accounting acquirer.
(c) Records the merger of IES with Houston-Stafford, the accounting acquirer
and the payment of the receivable from stockholder.
(d) Records the purchase of the Founding Companies by IES consisting of
notes payable of $41.8 million and 8,960,987 shares of Common Stock
valued at $10.50 per share (or $94.1 million) for a total estimated
purchase price of $135.9 million resulting in excess purchase price of
$122.7 million over the net assets acquired of $13.2 million (see Note
2).
The following reconciles the historical net assets of the Founding
Companies to the net assets acquired:
TOTAL LESS: ACQUIRED
COMBINED HOUSTON-STAFFORD FOUNDING COMPANIES
-------- ---------------- ------------------
Historical net assets.................................. $45,285 $(8,209) $37,076
Transfer of Owner Amounts (as defined elsewhere
herein).............................................. (29,789) 5,879 (23,910)
------- ------- -------
Net assets after transfers............................. $15,496 $(2,330) $13,166
======= ======= =======
(e) Records the cash proceeds of $86.3 million from the issuance of shares
of IES Common Stock (based on an initial public offering price of $14.00
per share) net of estimated offering costs (including underwriters
commissions and discounts, accounting, legal and other offering costs)
of $11.7 million. Offering costs primarily consist of underwriting
discounts and commissions, accounting fees, legal fees and printing
expenses.
(f) Records payment of the cash portion of the consideration to the
stockholders of the Founding Companies of $57.5 million in connection
with the Mergers and the expected repayment of outstanding short- and
long-term debt totaling $6.4 million.
The following table summarizes unaudited pro forma combined balance sheet
adjustments (in thousands):
ADJUSTMENT
---------------------------------------- PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
-------- -------- ------- -------- -----------
ASSETS
Current assets --
Cash and cash equivalents............................ $ (7,385) $ -- $ -- $ -- $ (7,385)
Other receivables.................................... (1,484) -- -- -- (1,485)
Prepaid expenses and other........................... (619) -- -- 1,602 984
-------- -------- ------- -------- --------
Total current assets............................... (9,488) -- -- 1,602 (7,886)
Property and equipment, net and other assets........... (3,772) -- -- -- (3,772)
Goodwill, net.......................................... (1,051) -- -- 122,743 121,692
-------- -------- ------- -------- --------
Total assets................................... $(14,311) $ -- $ -- $124,345 $110,034
======== ======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Current maturities of long-term debt................. $ (882) $ 15,643 $ -- $ 41,818 $ 56,579
Payable to shareholder/affiliate..................... -- -- -- -- --
Unearned revenue and other current liabilities....... -- -- -- 1,998 1,998
-------- -------- ------- -------- --------
Total current liabilities.......................... (882) 15,643 -- 43,816 58,577
Long-term debt, net of current maturities.............. 17,411 -- -- -- 17,411
Deferred income taxes.................................. -- -- -- 879 879
Other long-term liabilities............................ (1,051) -- -- -- (1,051)
-------- -------- ------- -------- --------
Total liabilities.............................. 15,478 15,643 -- 44,695 75,816
Stockholders' equity --
Common stock......................................... -- -- (262) (401) (663)
Restricted common stock.............................. -- -- -- 26 26
Receivable from stockholder.......................... -- -- 40 -- 40
Additional paid-in capital........................... -- (15,643) (38,998) 87,640 32,999
Retained earnings.................................... (29,789) -- 38,095 (8,130) 176
Treasury stock....................................... -- -- 1,125 515 1,640
-------- -------- ------- -------- --------
Total stockholders' equity..................... (29,789) (15,643) -- 79,650 34,218
-------- -------- ------- -------- --------
Total liabilities and stockholders' equity..... $(14,311) $ -- $ -- $124,345 $110,034
======== ======== ======= ======== ========
F-7
86
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ADJUSTMENT
------------------- POSTMERGER
(E) (F) ADJUSTMENT
------- -------- ----------
ASSETS
Current assets --
Cash and cash equivalents................................. $86,290 $(63,879) $ 22,411
Prepaid expenses and other................................ -- (1,560) (1,560)
------- -------- --------
Total current assets................................ 86,290 (65,439) 20,851
------- -------- --------
Total assets........................................ $86,290 $(65,439) $ 20,851
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Current maturities of long-term debt...................... $ -- $(62,001) $(62,001)
Payable to stockholder/affiliate.......................... -- (1,560) (1,560)
------- -------- --------
Total current liabilities........................... -- (63,561) (63,561)
Long-term debt, net of current maturities................... -- (1,878) (1,878)
------- -------- --------
Total liabilities................................... -- (65,439) (65,439)
------- -------- --------
Stockholders' equity --
Common stock.............................................. 70 -- 70
Restricted common stock................................... -- -- --
Additional paid-in capital................................ 86,220 -- 86,220
Retained earnings......................................... -- -- --
Treasury stock............................................ -- -- --
------- -------- --------
Total stockholders' equity.......................... 86,290 -- 86,290
------- -------- --------
Total liabilities and stockholders' equity.......... $86,290 $(65,439) $ 20,851
======= ======== ========
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
YEAR ENDED SEPTEMBER 30, 1997
(a) Reflects the $6.1 million reduction in salaries, bonuses and benefits
to the owners of the Founding Companies. These reductions in salaries,
bonuses and benefits have been agreed prospectively in accordance with
the terms of the employment agreements. 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 to be 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 will be acquired as part of the
transaction.
(c) Reflects the reversal of the non-recurring compensation charge of $38.1
million recorded by IES for shares issued to management for nominal
consideration. Also, reflects interest expense of $1.4 million on
borrowings of $18.2 million necessary to fund the transfers discussed
in 3(a) above, net of interest savings of $.8 million on the $8.1
million of debt to be repaid using proceeds from the Offering or to be
transferred to the Founding Companies as discussed in 3(a) above.
(d) Reflects the incremental provision for federal and state income taxes
at a 38% overall tax rate before goodwill and other permanent items,
relating to the other statements of operations adjustments and for
income taxes on S Corporation income not provided for in the historical
financial statements.
F-8
87
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
ADJUSTMENT
-------------------------------------- PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
------- ------- -------- ------- -----------
Selling, general and administrative
expenses......................... $(6,068) $ -- $(38,095) $ -- $(44,163)
Goodwill amortization.............. -- 3,069 -- -- 3,069
------- ------- -------- ------- --------
Income (loss) from operations.... 6,068 (3,069) 38,095 -- 41,094
Other income (expense) --
Interest expense................. -- -- (590) -- (590)
Other, net....................... -- 316 -- -- 316
------- ------- -------- ------- --------
Income (loss) before income
taxes......................... 6,068 (2,753) 37,505 -- 40,820
Provision for income taxes......... -- -- -- 7,448 7,448
------- ------- -------- ------- --------
Net income (loss).................. $ 6,068 $(2,753) $ 37,505 $(7,448) $ 33,372
======= ======= ======== ======= ========
F-9
88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Houston-Stafford Electric, Inc.:
We have audited the accompanying consolidated balance sheets of
Houston-Stafford Electric, Inc., a Texas corporation, and consolidated entity as
of December 31, 1995 and 1996 and September 30, 1997, and the related
consolidated 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. 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 Houston-Stafford Electric,
Inc. and consolidated entity 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, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-10
89
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
(SEE NOTE 1)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
CURRENT ASSETS:
Cash and cash equivalents................................. $1,048 $ 2,682 $ 2,492
Accounts receivable --
Trade, net of allowance of $220, $264 and $342,
respectively......................................... 4,605 5,445 9,580
Retainage.............................................. 1,480 1,847 2,511
Inventories, net.......................................... 337 346 2,878
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 259 247 934
Prepaid expenses and other current assets................. 560 663 1,162
------ ------- -------
Total current assets.............................. 8,289 11,230 19,557
RECEIVABLES FROM RELATED PARTIES............................ 335 338 309
OTHER RECEIVABLES........................................... 210 166 264
GOODWILL AND OTHER INTANGIBLE ASSETS........................ -- 23 2,008
OTHER NON-CURRENT ASSETS.................................... 38 41 207
PROPERTY AND EQUIPMENT, net................................. 485 1,428 2,125
------ ------- -------
Total assets...................................... $9,357 $13,226 $24,470
====== ======= =======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 353 $ 428 $ 721
Accounts payable and accrued expenses..................... 3,921 3,682 9,549
Income taxes payable...................................... -- -- 1,234
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 1,143 1,733 2,417
Other current liabilities................................. 197 716 222
------ ------- -------
Total current liabilities......................... 5,614 6,559 14,143
LONG-TERM DEBT, net of current maturities................... 634 1,295 968
OTHER NON-CURRENT LIABILITIES............................... 5 21 1,151
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $5 par value, 500,000 shares authorized,
59,000 shares issued and 20,000 shares outstanding..... 295 295 295
Additional paid-in capital................................ 112 112 112
Retained earnings......................................... 3,022 6,069 8,926
Treasury stock, 29,000 and 39,000 shares, at cost,
respectively........................................... (325) (1,125) (1,125)
------ ------- -------
Total stockholder's equity........................ 3,104 5,351 8,208
------ ------- -------
Total liabilities and stockholder's equity........ $9,357 $13,226 $24,470
====== ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-11
90
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
(SEE NOTE 1)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
--------------------------- SEPTEMBER 30, ------------------
1994 1995 1996 1997 1996 1997
------- ------- ------- ------------- -------- -------
(UNAUDITED)
REVENUES.................................... $48,001 $54,082 $70,493 $81,575 $ 53,062 $64,144
COST OF SERVICES (including depreciation)... 42,163 46,712 57,662 64,831 44,485 51,654
------- ------- ------- ------- -------- -------
Gross profit...................... 5,838 7,370 12,831 16,744 8,577 12,490
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................. 5,319 6,027 7,810 11,474 4,404 8,068
------- ------- ------- ------- -------- -------
Income from operations............ 519 1,343 5,021 5,270 4,173 4,422
------- ------- ------- ------- -------- -------
OTHER INCOME (EXPENSE):
Interest expense.......................... (137) (254) (134) (187) (90) (143)
Other..................................... 66 58 94 425 49 380
------- ------- ------- ------- -------- -------
Other income (expense), net....... (71) (196) (40) 238 (41) 237
------- ------- ------- ------- -------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES.... 448 1,147 4,981 5,508 4,132 4,659
PROVISION FOR INCOME TAXES.................. 186 416 1,934 2,192 1,544 1,802
------- ------- ------- ------- -------- -------
NET INCOME.................................. $ 262 $ 731 $ 3,047 $ 3,316 $ 2,588 $ 2,857
======= ======= ======= ======= ======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-12
91
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
(SEE NOTE 1)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
--------------------------- SEPTEMBER 30, -----------------
1994 1995 1996 1997 1996 1997
------- ------- ------- ------------- ------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 262 $ 731 $ 3,047 $ 3,316 $ 2,588 $ 2,857
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization...................... 55 76 133 187 54 108
Loss (gain) on sale of property and equipment...... (29) (5) 2 (138) -- (140)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable........................... (1,725) (625) (1,237) (3,631) (1,687) (4,081)
Inventories................................... (331) 315 (9) (1,409) -- (1,400)
Costs and estimated earnings in excess of
billings on uncompleted contracts........... (298) 850 12 (988) 313 (687)
Prepaid expenses and other current assets..... (31) 156 (85) (287) 49 (153)
Increase (decrease) in --
Accounts payable and accrued expenses......... 367 617 (239) 2,563 (202) 2,600
Billings in excess of costs and estimated
earnings on uncompleted contracts........... 281 637 590 (10) 1,283 683
Other current liabilities..................... 68 157 505 47 1,014 556
Other, net......................................... 28 (29) (4) 216 30 250
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities......................................... (1,353) 2,880 2,715 (134) 3,442 593
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment......... 48 49 12 47 -- 35
Additions of property and equipment.................. (64) (145) (642) (478) (494) (330)
Advances to affiliates............................... -- -- -- (109) -- (109)
Collections of notes receivable...................... -- -- -- 86 -- 86
------- ------- ------- ------- ------- -------
Net cash used in investing activities................ (16) (96) (630) (454) (494) (318)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt......................... 3,146 405 2,875 10,820 2,070 10,015
Payments of long-term debt........................... (1,543) (2,397) (3,326) (11,431) (2,375) (10,480)
Distributions to stockholders........................ -- (15) -- -- -- --
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities......................................... 1,603 (2,007) (451) (611) (305) (465)
------- ------- ------- ------- ------- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS.............. 234 777 1,634 (1,199) 2,643 (190)
CASH AND CASH EQUIVALENTS, beginning of period......... 37 271 1,048 3,691 1,048 2,682
------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period............... $ 271 $ 1,048 $ 2,682 $ 2,492 $ 3,691 $ 2,492
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest........................................... $ 137 $ 254 $ 134 $ 166 $ 90 $ 143
Income taxes....................................... 104 225 1,482 2,050 305 900
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
92
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
(SEE NOTE 1)
CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED TREASURY STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ---------- -------- -------- -------------
BALANCE, December 31, 1993......... 59,000 $295 $112 $2,044 $ (325) $2,126
Distributions to stockholders.... -- -- -- (15) -- (15)
Net income....................... -- -- -- 262 -- 262
------ ---- ---- ------ ------- ------
BALANCE, December 31, 1994......... 59,000 295 112 2,291 (325) 2,373
Distributions to stockholders.... -- -- -- -- -- --
Net income....................... -- -- -- 731 -- 731
------ ---- ---- ------ ------- ------
BALANCE, December 31, 1995......... 59,000 295 112 3,022 (325) 3,104
Purchase of treasury stock....... -- -- -- -- (800) (800)
Net income....................... -- -- -- 3,047 -- 3,047
------ ---- ---- ------ ------- ------
BALANCE, December 31, 1996......... 59,000 295 112 6,069 (1,125) 5,351
Net income....................... -- -- -- 2,857 -- 2,857
------ ---- ---- ------ ------- ------
BALANCE, September 30, 1997........ 59,000 $295 $112 $8,926 $(1,125) $8,208
====== ==== ==== ====== ======= ======
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
93
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION AND BASIS OF PRESENTATION:
Houston-Stafford Electric, Inc. (the Company), a Texas corporation, focuses
on providing electrical system installation and repair services primarily for
residential and mid-sized to large commercial facilities. Work on new structures
is performed primarily under fixed-price contracts. The Company performs the
majority of its contract work under fixed-price contracts with contract terms
ranging from six to 18 months. The Company performs the majority of its work in
Texas and has operations in other states.
In April 1997, the Company acquired an electrical supply company from a third
party for $100,000. The purchase of such electrical supply company has been
reflected as a purchase business combination. Consequently, the accompanying
financial statements reflect the consolidated results of operations and
financial position of the Company and the acquired electrical supply company
for periods subsequent to April 1997. All significant intercompany transactions
and balances have been eliminated for those periods.
In October 1997, the Company and its stockholder entered into a definitive
agreement with Integrated Electrical Services, Inc. (IES), pursuant to which all
outstanding shares of the Company's common stock will be exchanged for cash and
shares of IES common stock, concurrent with the consummation 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 IES. 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.
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.
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-15
94
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 30, 1997 and the
nine months ended September 30, 1996 and 1997:
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ----- -----
(UNAUDITED)
Treasury stock purchased.................... -- -- $800 $800 -- --
Debt assumed in treasury stock purchase
transaction............................... -- -- 800 800 -- --
Purchase price of real property............. -- -- 496 805 -- 309
Debt assumed in connection with purchase of
property.................................. -- -- 368 368 395 --
Receivables reduced in connection with
purchase of property...................... -- -- 79 79 -- --
Debt assumed in connection with
prepayments............................... -- -- -- 18 -- 18
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 $55,000, $76,000 and $133,000 for the years ended December 31,
1994, 1995 and 1996 and $187,000 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.
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.
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
F-16
95
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1995, 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.
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 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 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 financial position or results of
operations of the Company.
F-17
96
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED DECEMBER 31, SEPTEMBER 30,
USEFUL LIVES ----------------- -------------
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
Land..................................... N/A $ 236 $ 461 $ 569
Buildings................................ 5-32 144 439 634
Transportation equipment................. 5 1,432 615 967
Machinery and equipment.................. 3-10 329 370 479
Computer and telephone equipment......... 5-7 180 129 174
Building and Leasehold improvements...... 5-32 185 251 273
Furniture and fixtures................... 5-7 198 207 403
------- ------- -------
2,704 2,472 3,499
Less -- Accumulated depreciation and
amortization........................... (2,219) (1,044) (1,374)
------- ------- -------
Property and equipment, net.... $ 485 $ 1,428 $ 2,125
======= ======= =======
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
------------- -------------
1995 1996 1997
----- ---- -------------
Balance at beginning of period......................... $ 395 $220 $264
Additions to costs and expenses........................ 49 58 85
Deductions for uncollectible receivables written off
and recoveries....................................... (224) (14) (7)
----- ---- ----
Balance at end of period............................... $ 220 $264 $342
===== ==== ====
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1995 1996 1997
------ ------ -------------
Accounts payable, trade.............................. $2,210 $1,748 $6,093
Accrued compensation and other expenses.............. 1,711 1,934 3,456
------ ------ ------
$3,921 $3,682 $9,549
====== ====== ======
F-18
97
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
-------------------- -------------
1995 1996 1997
-------- -------- -------------
Costs incurred on contracts in progress.......... $ 15,370 $ 22,926 $ 22,201
Estimated earnings............................... 2,193 4,269 3,286
-------- -------- --------
17,563 27,195 25,487
Less -- Billings to date......................... (18,447) (28,681) (26,970)
-------- -------- --------
$ (884) $ (1,486) $ (1,483)
======== ======== ========
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. $ 259 $ 247 $ 934
Less -- Billings in excess of costs and
estimated earnings on uncompleted
contracts................................... (1,143) (1,733) (2,417)
-------- -------- --------
$ (884) $ (1,486) $ (1,483)
======== ======== ========
F-19
98
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
--------------- -------------
1995 1996 1997
----- ------ -------------
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 treasury stock.......................... $ -- $ 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......... 729 458 --
Line of credit with a bank in the amount of
$3,100,000, bearing interest at prime plus 1/2
percent, maturing in July 1998 and secured by the
Company's trade receivables, inventory and
equipment. (Prime was 8.5 percent as of September
30, 1997).......................................... -- -- 507
Mortgage payable to an officer, dated April 1996,
payable in monthly installments of $4 including
interest at 10%, maturing April 2001 and secured by
certain real property.............................. -- 186 159
Mortgage payable to an individual, dated September
1996, payable in monthly installments of $3
including interest at 9%, maturing October 2001 and
secured by certain real property................... -- 130 115
Mortgage payable to a financial institution, dated
December 1995, payable in monthly installments of
$1 including interest at 7.426%, maturing October
2112 and secured by certain real property.......... 113 110 108
Mortgage payable to a bank, renewed January 1996,
payable in monthly installments of $2 plus interest
at 9.25%, maturing January 1999 and secured by
certain real property.............................. 70 48 30
Mortgage payable to a bank, assumed December 1996,
payable in monthly installments of $.5 including
interest at 9.875%, maturing October 2006 and
secured by certain real property................... -- 25 --
Capital lease obligations............................ -- -- 65
Other................................................ 75 -- 6
----- ------ ------
987 1,723 1,689
Less -- Current maturities........................... (353) (428) (721)
----- ------ ------
Total long-term debt....................... $ 634 $1,295 $ 968
===== ====== ======
F-20
99
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Principal payments due on long-term debt at September 30, 1997 are as
follows (in thousands):
1997........................................................ $ 83
1998........................................................ 718
1999........................................................ 190
2000........................................................ 198
2001........................................................ 174
2002........................................................ 141
Thereafter.................................................. 185
------
Total............................................. $1,689
======
6. LEASES:
The Company leases various facilities, at which it conducts some of its
operations, under operating leases from third parties. Lease expiration dates
and approximate lease payments for the years ending December 31, 1995 and 1996,
and for the year ended September 30, 1997 are as follows (in thousands):
SEPTEMBER 30,
LOCATION EXPIRATION 1995 1996 1997
-------- ---------- ---- ---- -------------
Austin.............................. October 31, 1997 $ 7 $ 2 $ 12
S.A. Com............................ August 15, 1999 -- 3 25
Fort Worth.......................... September 21, 2000 14 14 24
Acworth............................. November 30, 2002 7 7 10
Duluth.............................. February 28, 1998 18 18 19
Nevada.............................. January 31, 1998 -- 13 15
Polaris............................. December 31, 1997 -- 6 6
--- --- ----
$46 $63 $111
=== === ====
Future minimum lease payments under these noncancelable operating leases
are as follows (in thousands):
Year ending December 31 --
1997................................................. $ 51
1998................................................. 95
1999................................................. 76
2000................................................. 51
2001................................................. 24
2002................................................. 23
----
$320
====
For a discussion of leases with certain related parties, see Note 8.
F-21
100
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES (IN THOUSANDS):
Federal and state income taxes are as follows:
YEAR ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1994 1995 1996 1997
----- ----- ------- -------------
Federal --
Current..................................... $158 $372 $1,455 $2,155
Deferred.................................... 28 (9) 235 (240)
State --
Current..................................... -- 54 210 311
Deferred.................................... -- (1) 34 (34)
---- ---- ------ ------
$186 $416 $1,934 $2,192
==== ==== ====== ======
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:
YEAR ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -------------
1994 1995 1996 1997
----- ----- ------- -------------
Provision at the statutory rate............... $157 $401 $1,743 $1,928
Increase resulting from --
Non-deductible expenses..................... 29 (19) 32 84
State income tax, net of benefit for federal
deduction................................ -- 34 159 180
---- ---- ------ ---------
$186 $416 $1,934 $2,192
==== ==== ====== =========
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:
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
Deferred income tax assets --
Bad debts........................................... $ 148 $ 137 $162
Reserves and accrued expenses....................... 386 365 564
Other............................................... 1 -- --
----- ----- ---------
Total deferred income tax asset............. 535 502 726
Deferred income tax liabilities --
Property and equipment.............................. $ -- $ (21) $(81)
Deferred contract revenue........................... (138) (353) (220)
Accrued expenses.................................... -- -- (40)
----- ----- ---------
Total deferred income tax liability......... $(138) $(374) $(341)
----- ----- ---------
Net deferred income tax asset............... $ 397 $ 128 $385
===== ===== =========
F-22
101
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
Deferred tax assets --
Current............................................. $ 535 $ 502 $ 726
Long-term........................................... -- -- --
----- ----- -----
Total....................................... 535 502 726
----- ----- -----
Deferred tax liabilities --
Current............................................. (138) (353) (260)
Long-term........................................... -- (21) (81)
----- ----- -----
Total....................................... $(138) $(374) $(341)
===== ===== =====
8. RELATED-PARTY TRANSACTIONS:
The Company is owned by Roy D. Brown and conducts business with the
following affiliated entities:
Houston-Stafford Plumbing, Inc. T and R Development
HSC Building Co., Inc. Ten Ninety Two, Ltd.
Brown-Mueller Joint Venture Lite Management
Hospital Solutions, Inc.
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
------- -------- -------------
RECEIVABLES:
Lite Management................................. $ -- $ 23,000 $23,000
Hospital Solutions, Inc......................... -- 25,000 73,396
T and R Development............................. 98,717 106,638 106,637
Houston-Stafford Plumbing....................... 74,495
Brown-Mueller Joint Venture..................... -- 2,457 29,753
Houston-Stafford Bldg. Co....................... 36,379
Principal, Houston-Stafford Electric, Inc....... 52,502 84,840 84,841
Ben Mueller, officer............................ -- 25,943 25,943
PAYABLES:
Houston-Stafford Plumbing, Inc.................. 5,645 13,163 13,785
TRANSACTIONS
The Company leases certain real properties from certain related parties for
use as electrical shops. These leases are open without binding contracts. The
annual rentals for 1994, 1995, 1996 and for the year ended September 30, 1997,
approximated $204,000, $154,000, $217,000 and $139,000 respectively, including
payments to Brown-Mueller Joint Venture (co-owned by Ray Brown and Ben Mueller)
of $174,000, $124,000, $187,000 and $109,000 respectively.
The Company has a mortgage payable to an officer of $159,000 which is
payable in monthly installments of $4,000. This mortgage matures in April 2001
and is secured by certain real property. The Company has a mortgage payable to a
related party of $115,000 which is payable in monthly installments of $3,000
(including interest at 9%). This mortgage matures in October 2001 and is secured
by certain real property. See Note 5 for additional disclosure regarding these
mortgages.
F-23
102
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company received two pieces of real property in exchange for the
elimination of a balance due from HSC Building Company, of $79,449 and the
assumption of a note due HSC Building Co., Inc., of $25,376.
At September 30, 1997, the company did not have a balance due to or from
HSC Building Co., Inc.
In May 1996, the Company acquired a building and land at a cost of
$220,115. The financing for the acquisition was provided by an officer of the
Company, Ben Mueller. An installment promissory note of $208,123 was signed by
the Company. The note is payable over five years at 10 percent interest.
In August 1996, the Company negotiated the purchase of the stock of Ben
Mueller, a principal who had a one-third interest. The selling price of the
shares totaled $800,000. The Company has signed an installment promissory note
which will provide for the payout of $800,000 over seven years at 8 percent
interest and is secured by the purchased stock.
Certain costs incurred by the Company are allocated to other affiliated
companies on the basis of gross payroll dollars.
As a result of the acquisition of the electrical supply company, the
Company assumed two non-compete agreements with certain related parties. The
total amount due under these agreements at September 30, 1997 is $1,051,000, the
majority of which is payable monthly and due August 2006.
9. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution benefit plan. The Company may make
discretionary contributions. Through September 30, 1997, the Company has made no
contributions to the plan.
10. 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.
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 also
carries employment practices liability coverage. The Company has not incurred
significant uninsured losses on any of these items.
Additionally, the Company provides workers' compensation coverage. The
policy has no deductible and provides coverage in the amount of $500,000 per
accident.
During 1997, a general contractor with which the Company does business
acquired a line of credit from a bank on which the Company agreed to act as 2nd
guarantor. This guaranty expires in December of 1997 and is in the amount of
$750,000.
F-24
103
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales of approximately 15 percent, 11 percent and 10
percent of total sales to one major customer during the years ended December 31,
1995, 1996 and September 30, 1997, respectively.
In addition, the Company grants credit, generally without collateral, to
its customers, which are general contractors and home builders, located
primarily in Texas. Consequently, the Company is subject to potential credit
risk related to changes in business and economic factors within the Texas
construction and home-building market. However, 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-25
104
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. 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, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-26
105
INTEGRATED ELECTRICAL SERVICES, INC.
BALANCE SHEET -- SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
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
AMOUNTS DUE TO STOCKHOLDER.................................. $ 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................................ 38,095
Retained deficit.......................................... (38,095)
-------
Total stockholders' equity........................ 1
-------
Total liabilities and stockholders' equity........ $ 1,566
=======
- ---------------
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-27
106
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION
(JUNE 26, 1997) THROUGH SEPTEMBER 30, 1997
(IN THOUSANDS)
REVENUES.................................................... $ --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 38,095
--------
LOSS BEFORE INCOME TAXES.................................... (38,095)
PROVISION FOR INCOME TAXES.................................. --
--------
NET LOSS.................................................... $(38,095)
========
The accompanying notes are an integral part of these financial statements.
F-28
107
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION
(JUNE 26, 1997) THROUGH SEPTEMBER 30, 1997
(IN THOUSANDS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................. $(38,095)
Non-cash compensation charge.............................. 38,095
Adjustments to reconcile net loss to net cash used in
operating activities --
Changes in assets and liabilities --
Increase in deferred offering costs.................. (1,560)
Increase in accrued liabilities and amounts due to
stockholder......................................... 1,565
--------
Net cash used in operating activities............. 5
--------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital Expenditures................................... (6)
--------
Net cash used in investing activities............. (6)
--------
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.................... $ --
========
The accompanying notes are an integral part of these financial statements.
F-29
108
INTEGRATED ELECTRICAL SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION
(JUNE 26, 1997) THROUGH SEPTEMBER 30, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK RECEIVABLE ADDITIONAL TOTAL
------------------ FROM PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT STOCKHOLDERS CAPITAL DEFICIT EQUITY
--------- ------ ------------ ---------- -------- -------------
INITIAL CAPITALIZATION, June
26, 1997.................... 2,329,569 $23 $ -- $ -- $ -- $23
ISSUANCE OF ADDITIONAL SHARES
TO MANAGEMENT............... 1,722,742 18 -- -- -- 18
NET INCOME (LOSS)............. -- -- -- 38,095 (38,095) --
RECEIVABLE FROM
STOCKHOLDERS................ -- -- (40) -- -- (40)
--------- --- ---- ------- -------- ---
BALANCE, September 30, 1997... 4,052,311 $41 $(40) $38,095 $(38,095) $ 1
========= === ==== ======= ======== ===
- ---------------
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-30
109
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.
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 current primary stockholder, on behalf of the
Company. The Company's primary stockholder has also committed to fund future
organization expenses and offering costs. As of September 30, 1997, costs of
approximately $1,560,000 have been incurred in connection with the Offerings,
and such costs will be treated as a reduction of the proceeds from the
Offerings. IES has treated these costs as deferred offering costs in the
accompanying balance sheet. IES is dependent upon the Offerings to execute the
pending Acquisitions and to repay its current primary stockholder for funding
deferred offering costs. There is no assurance that the pending Acquisitions
will be completed. 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".
2. STOCKHOLDERS' EQUITY:
Common Stock and Preferred Stock
In connection with the organization and initial capitalization of IES, the
Company issued 2,329,569 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 1,722,742 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 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 $38.1
million, which is calculated based on a fair value which is discounted from the
estimated initial public offering price.
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 .
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
F-31
110
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
common stock will convert into Common Stock (i) upon disposition by the holder
of such shares, or (ii) in the event that any person acquires, or offers to
acquire, 15% or more of the total outstanding shares of Common Stock.
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 intends
to file a registration statement on Form S-8 under the Securities Act
registering the issuance of shares upon exercise of options granted under this
Plan. The Company expects to grant 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 nonemployees. 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 Offering.
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 expense attributable to
stock options based on the method prescribed in APB Opinion
F-32
111
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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, warrants, etc. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. The
Company will adopt 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 share, conversion and
exercise prices, etc. The Company will adopt 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 is
not anticipated to have a material impact on the Company, or its financial
disclosures, as the Company currently does not plan to enter into any material
transactions which result in charges (or credits) directly to equity (such
additional minimum pension liability changes, currency translation adjustments,
unrealized gains and losses on available for sale securities, etc.).
5. FOUNDING COMPANY ACQUISITIONS:
IES has signed definitive agreements to acquire the following entities (the
Founding Companies) to be effective contemporaneously with the Offerings. The
entities to be 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 Company, Inc. and General Partner, Inc.
Houston-Stafford Electric, Inc. and Stark Investments, Inc.
Mills Electrical Contractors, Inc. and Subsidiaries
Muth Electric, Inc.
Pollock Electric, Inc.
Reynolds Electric Corp.
Rodgers Electric Co., Inc.
Summit Electric of Texas, Inc.
Thomas Popp & Co., Inc.
Thurman & O'Connell Corp.
The aggregate consideration that will be paid by IES to acquire the
Founding Companies is approximately $57.5 million in cash and 12.3 million
shares of Common Stock.
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
F-33
112
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. EVENTS SUBSEQUENT TO THE DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED)
The Company expects to enter into a credit facility effective concurrently
with the closing of the Offerings. A commercial bank has agreed to structure the
credit facility subject to the terms and conditions of a commitment letter.
According to these terms, the credit facility will be a three-year revolving
credit facility of up to $65 million to be used for working capital, capital
expenditures, to finance acquisitions and for other general corporate purposes.
The Company's existing and future subsidiaries will guarantee the repayment of
all amounts due under the facility and the facility will be secured by the
capital stock of those subsidiaries and the accounts receivable of the Company
and those subsidiaries. The Company expects that the credit facility will
require the consent of the lenders for acquisitions exceeding a certain level of
cash consideration, prohibit the payment of cash dividends by the Company,
restrict the ability of the Company to incur other indebtedness and require the
Company to comply with certain financial covenants.
F-34
113
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mills Electrical Contractors, Inc. and Subsidiary:
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. 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, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-35
114
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
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 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:
Notes payable 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
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
115
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
--------------------------- SEPTEMBER 30, -----------------
1994 1995 1996 1997 1996 1997
------- ------- ------- ------------- ------- -------
(UNAUDITED)
REVENUES........................... $25,544 $35,250 $65,439 $74,399 $43,684 $52,644
COST OF SERVICES (including
depreciation and amortization)... 20,937 27,372 50,535 60,572 33,998 44,035
------- ------- ------- ------- ------- -------
Gross profit............. 4,607 7,878 14,904 13,827 9,686 8,609
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES......................... 3,391 4,741 7,643 8,778 3,837 4,972
------- ------- ------- ------- ------- -------
Income from operations... 1,216 3,137 7,261 5,049 5,849 3,637
------- ------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense................. (22) (56) (61) (46) (34) (19)
Other............................ 92 195 215 277 153 215
------- ------- ------- ------- ------- -------
Other income (expense),
net.................... 70 139 154 231 119 196
------- ------- ------- ------- ------- -------
INCOME BEFORE MINORITY INTEREST AND
PROVISION FOR STATE INCOME
TAXES............................ 1,286 3,276 7,415 5,280 5,968 3,833
Minority interest in net (income)
loss of subsidiary............... -- -- (3) 2 (5) --
------- ------- ------- ------- ------- -------
INCOME BEFORE PROVISION FOR STATE
INCOME TAXES..................... 1,286 3,276 7,412 5,282 5,963 3,833
Provision for state income taxes... 52 131 309 274 182 147
------- ------- ------- ------- ------- -------
NET INCOME......................... $ 1,234 $ 3,145 $ 7,103 $ 5,008 $ 5,781 $ 3,686
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-37
116
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED NINE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED JUNE 30,
--------------------------- ------------- -----------------
1994 1995 1996 1997 1996 1997
------- ------- ------- ------------- ------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 1,234 $ 3,145 $ 7,103 $ 5,008 $ 5,781 $ 3,686
Adjustments to reconcile net income to net cash
provided by (used in) operating
activities --
Depreciation and amortization................ 179 253 385 637 197 449
Loss (gain) on sale of property and
equipment................................. (2) -- (20) 6 (21) 5
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable..................... (2,107) (1,894) (6,997) 1,637 (9,998) (1,364)
Inventories, net........................ 10 1 20 (27) 2 (45)
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................. (402) 386 (198) (1,146) (307) (1,255)
Prepaid expenses and other current
assets................................ (46) 105 (89) 58 (149) (2)
Increase (decrease) in --
Accounts payable and accrued expenses... 1,780 1,178 5,057 121 3,090 (1,846)
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. (353) 1,159 2,777 (3,705) 3,926 (2,556)
Unearned revenue and other current
liabilities........................... -- 98 (98) -- (98) --
Other, net................................... (64) (29) (52) 100 (130) 22
------- ------- ------- ------- ------- -------
Net cash provided by (used in) operating
activities................................ 229 4,402 7,888 2,689 2,293 (2,906)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Increase in notes receivable................... (12) (291) (75) -- (75) --
Collection of notes receivable................. 140 141 377 -- 377 --
Proceeds from sale of property and equipment... 8 15 44 8 44 8
Additions of property and equipment............ (279) (255) (912) (1,551) (538) (1,177)
------- ------- ------- ------- ------- -------
Net cash used in investing activities... (143) (390) (566) (1,543) (192) (1,169)
------- ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt................... -- -- -- 1,000 -- 1,000
Payments of long-term debt..................... (19) (136) (204) (902) (117) (815)
Distributions to stockholders.................. (147) (2,216) (3,687) (3,777) (426) (516)
Sale of treasury stock......................... 181 -- -- -- -- --
------- ------- ------- ------- ------- -------
Net cash provided by (used in) financing
activities............................ 15 (2,352) (3,891) (3,679) (543) (331)
------- ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 101 1,660 3,431 (2,533) 1,558 (4,406)
CASH AND CASH EQUIVALENTS, beginning of period... 47 148 1,808 3,366 1,808 5,239
------- ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of period......... $ 148 $ 1,808 $ 5,239 $ 833 $ 3,366 $ 833
======= ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest..................................... $ 22 $ 56 $ 61 46 $ 34 $ 19
Income Taxes................................. $ -- $ 55 $ 93 $ 105 $ 84 $ 105
The accompanying notes are an integral part of these financial statements.
F-38
117
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------ ------ ---------- -------- -------- -------------
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
=== === ==== ======= ==== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-39
118
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, Inc. 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.
In October 1997, 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 will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offering) of additional common stock by IES. 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.
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.
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 (in thousands)
The Company had the following noncash investing and financing activities
for the years ended December 31, 1994, 1995, 1996 and September 1997:
NINE MONTHS
ENDED
SEPTEMBER 30,
-------------
1994 1995 1996 1997 1996 1997
---- ---- ---- ---- ----- -----
Property acquired in capital lease
transactions.............................. $290 $195 $254 $ 17 $237 $ --
Goodwill recognized in purchase
transactions.............................. $ -- $ -- $185 -- 185 --
F-40
119
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and $385,000 and 637,000 for the
years ended December 31, 1994, 1995 and 1996 and September 30, 1997,
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 purchased 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.
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.
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.
F-41
120
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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 Offering.
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 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.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------ SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ------- ------- -------------------------------
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
======= ======= =======
F-42
121
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
YEAR ENDED
------------------------------------
DECEMBER 31,
-------------------- SEPTEMBER 30,
1994 1995 1996 1997
---- ---- ---- -------------
Balance at beginning of period................... $ 77 $128 $168 432
Additions to/(reduction to) costs and expenses... 51 40 158 (37)
---- ---- ---- ----
Balance at end of period......................... $128 $168 $326 $395
==== ==== ==== ====
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:
DECEMBER 31,
--------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
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
====== ====== ======
Electrical system installation contracts in progress are as follows:
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- -------- -------------
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)
======= ======== ========
5. LINE-OF-CREDIT DEBT:
The Company has a $2,000,000 line-of-credit agreement with a bank to be
drawn upon as needed, with variable interest at the bank's prime rate, as
defined, secured by accounts receivable, furniture, fixtures and equipment, an
assignment of a $500,000 life insurance policy on the president and the
president's personal guaranty. In June 1997, the line-of-credit agreement was
extended to June of 1999. At September 30, 1997, there was an outstanding draw
against this line of credit in the amount of $400,000, which is due and payable
within one year.
F-43
122
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 long-term debt as of September 30, 1997, are as follows
(in thousands):
Year ending September 30 --
1998................................................... $264
1999................................................... 143
2000................................................... 5
----
$412
====
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):
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
====
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
$26,000, $156,000 and $156,000 for the years ended December 31, 1995, 1996 and
September 30, 1997, 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
F-44
123
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 and $49,000 for the years ended December 31, 1995, 1996 and September
30,1997, respectively.
Future minimum lease payments under these noncancelable operating leases
are as follows (in thousands):
Year Ended September 30 --
1998................................................... $138
1999................................................... 67
2000................................................... 38
Thereafter............................................. 71
----
$314
====
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):
DECEMBER 31, SEPTEMBER 30,
--------------- -------------
1995 1996 1997
------ ------ -------------
Accounts receivable from CIMA.......................... $ 2 $ 208 $ 632
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
Additionally, the Company has guaranteed an officer note at a bank with an
outstanding balance of approximately $298,000 at December 31, 1996. 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 were $186,000, $450,000, $789,000 and $789,000, respectively.
F-45
124
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable, a line of credit, notes payable and
long-term debt. The Company believes that the carrying values of these
instruments on the accompanying consolidated balance sheets approximates their
fair values.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's consolidated
financial position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including workers'
compensation, business auto liability, commercial general liability, property
and an umbrella policy. The Company has not incurred significant uninsured
losses on any of these items.
11. MAJOR CUSTOMERS AND RISK CONCENTRATION:
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.
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-46
125
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.
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, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-47
126
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
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 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 and 500,000
shares authorized, respectively; 31,598, 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
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-48
127
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
--------------------------- SEPTEMBER 30, -----------------
1994 1995 1996 1997 1996 1997
------- ------- ------- ------------- ------- -------
(UNAUDITED)
REVENUES..................................... $23,168 $27,730 $33,023 $32,165 $24,994 $24,136
COST OF SERVICES (including depreciation).... 17,967 20,964 25,017 24,976 18,909 18,868
------- ------- ------- ------- ------- -------
Gross profit........................ 5,201 6,766 8,006 7,189 6,085 5,268
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 3,091 3,637 3,686 3,766 2,713 2,793
------- ------- ------- ------- ------- -------
Income from operations.............. 2,110 3,129 4,320 3,423 3,372 2,475
------- ------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense........................... (135) (120) (97) (108) (73) (84)
Other...................................... 97 263 174 195 137 158
------- ------- ------- ------- ------- -------
Other income (expense), net......... (38) 143 77 87 64 74
------- ------- ------- ------- ------- -------
NET INCOME BEFORE INCOME TAX AND MINORITY
INTEREST................................... 2,072 3,272 4,397 3,510 3,436 2,549
INCOME TAX EXPENSE (BENEFIT)................. 772 1,238 (28) 72 (67) 33
------- ------- ------- ------- ------- -------
NET INCOME BEFORE MINORITY INTEREST.......... 1,300 2,034 4,425 3,438 3,503 2,516
MINORITY INTEREST EXPENSE.................... -- -- 250 316 203 269
------- ------- ------- ------- ------- -------
NET INCOME................................... $ 1,300 $ 2,034 $ 4,175 $ 3,122 $ 3,300 $ 2,247
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-49
128
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, YEAR ENDED SEPTEMBER 30,
-------------------------- SEPTEMBER 30, -----------------
1994 1995 1996 1997 1996 1997
------ ------- ------- ------------- ------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $1,300 $ 2,034 $ 4,175 $ 3,122 $ 3,300 2,247
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization................ 292 329 426 534 296 404
Loss (gain) on sale of property and
equipment.................................. 9 (54) (17) (3) (19) (5)
Deferred tax benefit......................... -- -- (180) -- (180) --
Minority interest expense.................... -- -- 250 316 203 269
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable........................ (459) (244) (1,828) (663) (1,115) 50
Inventories................................ (7) 131 (96) 29 (109) 16
Costs and estimated earnings in excess of
billings on uncompleted contracts....... 80 (13) 4 156 (194) (42)
Prepaid expenses and other current
assets.................................. (3) 4 (5) (19) (5) (19)
Increase (decrease) in --
Accounts payable and accrued expenses...... (153) 141 (187) (140) 222 269
Billings in excess of costs and estimated
earnings on uncompleted contracts....... (51) 282 143 34 200 91
Other current liabilities.................. 34 41 36 (112) (18) (166)
------ ------- ------- ------- ------- -------
Net cash provided by operating
activities............................ 1,042 2,651 2,721 3,254 2,581 3,114
------ ------- ------- ------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment... 4 141 66 23 63 20
Stockholder receivable......................... -- (512) 512 -- 512 --
Other assets................................... 1 (3) (6) (31) 3 (22)
Additions of property and equipment............ (485) (1,001) (1,160) (1,068) (984) (892)
------ ------- ------- ------- ------- -------
Net cash used in investing activities... (480) (1,375) (588) (1,076) (406) (894)
------ ------- ------- ------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of short-term debt.................. 643 515 1,832 2,000 632 800
Borrowings of long-term debt................... -- -- 10 25 24 39
Repayments of short-term debt.................. (643) (515) (1,832) (2,000) (632) (800)
Repayments of long-term debt................... (377) (310) (219) (217) (200) (198)
Stockholder distributions...................... -- (32) (2,556) (2,451) (2,222) (2,117)
Minority interest contributions................ -- -- 85 935 85 935
Minority interest distributions................ -- -- (126) (165) (72) (111)
Purchase of treasury stock..................... -- (961) -- -- -- --
------ ------- ------- ------- ------- -------
Net cash used in financing activities... (377) (1,303) (2,806) (1,873) (2,385) (1,452)
------ ------- ------- ------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 185 (27) (673) 305 (210) 768
CASH AND CASH EQUIVALENTS, beginning of period... 1,022 1,207 1,180 970 1,180 507
------ ------- ------- ------- ------- -------
CASH AND CASH EQUIVALENTS, end of
period......................................... $1,207 $ 1,180 $ 507 $ 1,275 $ 970 $ 1,275
====== ======= ======= ======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest..................................... $ 137 $ 119 $ 97 $ 108 $ 73 $ 84
Income taxes................................. 744 1,197 132 202 43 198
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
129
BW CONSOLIDATED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED TREASURY STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS STOCK EQUITY
------- ------ ---------- -------- -------- -------------
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
======= ==== ===== ======= ===== =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-51
130
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 the
accompanying consolidated financial statements.
In October 1997, 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 will be exchanged for cash and
shares of IES common stock, concurrent with the consummation 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 IES. 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 employer of CEC.
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.
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.
F-52
131
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities
for the years ended December 31, 1994, 1995 and 1996, for the year ended
September 30, 1997, and the nine months ended September 30, 1996 and 1997.
YEAR ENDED NINE MONTHS
SEPTEMBER 30, SEPTEMBER 30,
------------- --------------
1994 1995 1996 1997 1996 1997
---- ---- ---- ------------- ----- ------
(UNAUDITED)
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
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.
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.
F-53
132
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 Offering (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 financial position or results of operations of the
Company.
F-54
133
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES ----------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
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
======= ======= =======
4. DETAIL OF CERTAIN CONSOLIDATED BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31,
------------ SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
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
==== ==== ====
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
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
====== ====== ======
F-55
134
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1995 1996 1997
------- ------- -------------
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 (7)
------- ------- -------
$ (420) $ (567) $ (622)
======= ======= =======
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)
======= ======= =======
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
------ ---- -------------
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
====== ==== ====
F-56
135
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The maturities of long-term debt at September 30, 1997, are as follows (in
thousands):
1998........................................................ $ 96
1999........................................................ 112
2000........................................................ 116
2001........................................................ 126
2002........................................................ 138
Thereafter.................................................. 350
----
$938
====
The Company currently has two lines of credit established. 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 is 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 is 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.
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 and $10,000 in 1994,
1995, 1996 and 1997 respectively.
7. INCOME TAXES (IN THOUSANDS):
Federal and state income taxes are as follows:
YEAR ENDED
DECEMBER 31,
1994 1995
---- ------
Federal --
Current.................................................. $663 $1,118
Deferred................................................. 26 (45)
State --
Current.................................................. 83 157
Deferred................................................. -- 8
---- ------
$772 $1,238
==== ======
F-57
136
BW CONSOLIDATED, 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 34% to income before
provision for income taxes as follows:
YEAR ENDED
DECEMBER 31,
1994 1995
---- ------
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
==== ======
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:
DECEMBER 31,
1995
------------
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)
======
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31,
1995
------------
Deferred tax assets --
Current................................................... $ 126
Long-term................................................. --
-----
Total............................................. $ 126
=====
Deferred tax liabilities --
Current................................................... --
Long-term................................................. (306)
-----
Total............................................. $(306)
=====
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).
F-58
137
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS:
Notes receivable from a stockholder consists of the following (in
thousands):
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1995 1996 1997
---- ---- -------------
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 $ -- $ --
==== ==== ======
The Company recognized interest income from a stockholder of $--, $30,000,
$13,000 and $5,000 in 1994, 1995, 1996 and for the year ended September 30,
1997, 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 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.
F-59
138
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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-60
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. 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, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-61
140
MUTH ELECTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
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
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-62
141
MUTH ELECTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS
DECEMBER 31, YEAR ENDED ENDED SEPTEMBER 30,
--------------------------- SEPTEMBER 30, -------------------
1994 1995 1996 1997 1996 1997
------- ------- ------- ------------- -------- --------
(UNAUDITED)
REVENUES........................ $13,466 $16,012 $16,830 $18,779 $12,517 $14,466
COST OF SERVICES (including
depreciation)................. 9,805 12,189 12,834 14,511 9,751 11,428
------- ------- ------- ------- ------- -------
Gross profit.......... 3,661 3,823 3,996 4,268 2,766 3,038
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES....... 2,678 2,923 2,957 3,074 2,147 2,264
------- ------- ------- ------- ------- -------
Income from
operations.......... 983 900 1,039 1,194 619 774
------- ------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest income (expense)..... 6 11 (24) (27) (17) (20)
Other......................... (79) (95) 27 1 22 (4)
------- ------- ------- ------- ------- -------
Other income
(expense), net...... (73) (84) 3 (26) 5 (24)
------- ------- ------- ------- ------- -------
NET INCOME...................... $ 910 $ 816 $ 1,042 $ 1,168 $ 624 $ 750
======= ======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-63
142
MUTH ELECTRIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR NINE MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
---------------------- ------------- -------------
1994 1995 1996 1997 1996 1997
----- ----- ------ ------------- ----- -----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 910 $ 816 $1,042 $ 1,168 $ 624 $ 750
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization................. 142 185 224 212 194 182
Loss (gain) on sale of property and
equipment................................... (6) 16 (28) (26) (16) (14)
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable...................... (260) 70 (674) (1,209) (406) (941)
Inventories.............................. 31 (38) (70) (82) (66) (78)
Costs and estimated earnings in excess of
billings on uncompleted contracts...... 579 (291) 70 (125) (44) (239)
Prepaid expenses and other current
assets................................. (41) 5 10 (81) 96 5
Increase (decrease) in --
Accounts payable and accrued expenses.... (478) 525 59 451 105 497
Billings in excess of costs and estimated
earnings on uncompleted contracts...... (252) (95) (119) 197 47 363
----- ----- ------ ------- ----- -----
Net cash provided by operating
activities............................. 625 1,193 514 505 534 525
----- ----- ------ ------- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.... 11 5 53 42 34 23
Additions of property and equipment............. (201) (560) (443) (226) (401) (184)
----- ----- ------ ------- ----- -----
Net cash used in investing activities.... (190) (555) (390) (184) (367) (161)
----- ----- ------ ------- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings or notes payable................. -- -- 530 300 240 10
Payments of long-term loan receivable........... 390 -- -- -- -- --
Distributions to stockholders................... (715) (722) (625) (625) (375) (375)
----- ----- ------ ------- ----- -----
Net cash used in financing activities.... (325) (722) (95) (325) (135) (365)
----- ----- ------ ------- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 110 (84) 29 (4) 32 (1)
CASH AND CASH EQUIVALENTS, beginning of period.... 27 137 53 85 53 82
----- ----- ------ ------- ----- -----
CASH AND CASH EQUIVALENTS, end of period.......... $ 137 $ 53 $ 82 $ 81 $ 85 $ 81
===== ===== ====== ======= ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest...................................... $ 9 $ 4 $ 33 $ 36 $ 25 $ 28
The accompanying notes are an integral part of these financial statements.
F-64
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MUTH ELECTRIC, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
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.................... -- -- (375) (375)
Net income....................................... -- -- 750 750
--- --- ------ ------
BALANCE, September 30, 1997........................ 737 $74 $3,371 $3,445
=== === ====== ======
The accompanying notes are an integral part of these financial statements.
F-65
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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.
In October 1997, 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 will be exchanged for cash and
shares of IES common stock, concurrent with the consummation of the initial
public offerings in the United States and Canada and outside the United States
and Canada (the Offering) of additional common stock by IES. 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.
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.
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 and $212,000 for the years ended December 31, 1994, 1995, 1996 and
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.
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-
F-66
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MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
completion method 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 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
Offering.
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 or other assets may be impaired, an evaluation of
F-67
146
MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
ESTIMATED DECEMBER 31, SEPTEMBER 30,
USEFUL LIVES ----------------- -------------
IN YEARS 1995 1996 1997
------------ ------- ------- -------------
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
======= ======= ======
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
---- ---- -------------
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
=== === ===
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31, SEPTEMBER 30,
---------------- -------------
1995 1996 1997
------ ------ -------------
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
====== ====== ======
F-68
147
MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
------------------- -------------
1995 1996 1997
-------- ------- -------------
Costs incurred on contracts in progress.............. $ 9,215 $ 7,159 $ 149
Estimated earnings, net of losses.................... 1,914 1,277 9,265
-------- ------- -------
11,129 8,436 9,116
Less -- Billings to date............................. (10,889) (8,180) (8,984)
-------- ------- -------
$ 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
======== ======= =======
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 and $85,000 for the years ending December 31,
1995, 1996 and September 31, 1997 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 and $115,000 for the years ended December 31,
1995 and 1996 and September 30, 1997, 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.
F-69
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MUTH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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-70
149
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. 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 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-71
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POLLOCK ELECTRIC INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
OCTOBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
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
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-72
151
POLLOCK ELECTRIC INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED ELEVEN MONTHS ENDED
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
----------------------- ------------- --------------------
1995 1996 1997 1996 1997
------- ------------- ------------- -------- --------
(UNAUDITED)
REVENUES............................... $13,002 $15,816 $20,291 $13,305 $17,780
COST OF SERVICES (including
depreciation)........................ 10,602 13,534 16,670 11,646 14,782
------- ------- ------- ------- -------
Gross profit................. 2,400 2,282 3,621 1,659 2,998
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES............................. 2,149 2,463 2,895 2,083 2,515
------- ------- ------- ------- -------
Income (loss) from
operations................. 251 (181) 726 (424) 483
------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense..................... (77) (104) (172) (87) (155)
Other................................ -- 156 3 154 1
------- ------- ------- ------- -------
Other income (expense),
net........................ (77) 52 (169) 67 (154)
------- ------- ------- ------- -------
INCOME (LOSS) BEFORE INCOME TAXES...... 174 (129) 557 (357) 329
PROVISION (BENEFIT) FOR INCOME TAXES... 82 (30) 214 (104) 140
------- ------- ------- ------- -------
NET INCOME (LOSS)...................... $ 92 $ (99) $ 343 $ (253) $ 189
======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-73
152
POLLOCK ELECTRIC INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
ELEVEN MONTHS
YEAR ENDED YEAR ENDED ENDED
OCTOBER 31, SEPTEMBER 30, SEPTEMBER 30,
--------------- ------------- ---------------
1995 1996 1997 1996 1997
----- ------- ------------- ------- -----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ 92 $ (99) $ 343 $ (253) $ 189
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization........... 64 107 131 83 107
Deferred income taxes................... (141) (103) (35) (146) (78)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable................ 577 (2,257) (1,479) (1,492) (714)
Inventories........................ -- -- (18) -- (18)
Costs and estimated earnings in
excess of billings on uncompleted
contracts........................ (164) 197 (234) (134) (565)
Prepaid expenses and other current
assets........................... (30) (41) (78) (71) (83)
Increase (decrease) in --
Accounts payable and accrued
expenses......................... (546) 1,635 1,143 815 323
Income taxes payable............... 170 (172) 120 (243) 49
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................ 9 83 19 636 572
Unearned revenue and other current
liabilities...................... (31) (1) 103 29 133
----- ------- ------- ------- -----
Net cash provided by (used in)
operating activities............. -- (651) 15 (776) (85)
----- ------- ------- ------- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment........ (77) (154) (175) (112) (133)
----- ------- ------- ------- -----
Net cash used in investing
activities....................... (77) (154) (175) (112) (133)
----- ------- ------- ------- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under line of credit........ 241 725 484 609 343
----- ------- ------- ------- -----
Net cash provided by financing
activities....................... 241 725 484 609 343
----- ------- ------- ------- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 164 (80) 324 (279) 125
CASH AND CASH EQUIVALENTS, beginning of
period..................................... 138 302 23 302 222
----- ------- ------- ------- -----
CASH AND CASH EQUIVALENTS, end of period..... $ 302 $ 222 $ 347 $ 23 $ 347
===== ======= ======= ======= =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................................ $ 77 $ 104 $ 171 $ 88 $ 155
Income taxes............................ 21 245 38 245 38
The accompanying notes are an integral part of these financial statements.
F-74
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POLLOCK ELECTRIC INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL TOTAL
--------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
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 income................................. -- -- -- (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
===== === === ====== ======
The accompanying notes are an integral part of these financial statements.
F-75
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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.
In October 1997, 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 will be exchanged for cash and
shares of IES common stock, concurrent with the consummation 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 IES. 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.
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.
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
$64,144, $107,242 and $131,190 for the years ended October 31, 1995 and 1996 and
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.
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.
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
F-76
155
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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
F-77
156
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
ESTIMATED OCTOBER 31, SEPTEMBER 30,
USEFUL LIVES -------------- -------------
IN YEARS 1995 1996 1997
------------ ----- ----- ----
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
===== ===== =====
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
OCTOBER 31, SEPTEMBER 30,
------------ -------------
1995 1996 1997
---- ---- ----
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
==== ==== ====
Accounts payable and accrued expenses consist of the following (in
thousands):
OCTOBER 31, SEPTEMBER 30,
---------------- -------------
1995 1996 1997
------ ------ ----
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
====== ====== ======
F-78
157
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
OCTOBER 31, SEPTEMBER 30,
------------------ -------------
1995 1996 1997
------- ------- -------------
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)
======= ======= ========
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 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 and $36,000 for the years
ended October 31, 1995 and 1996 and September 30, 1997, respectively.
Future minimum lease payments under this noncancelable operating lease are
as follows (in thousands):
OCTOBER 31, SEPTEMBER 30,
1996 1997
----------- -------------
1997............................................. $36 $--
1998............................................. 36 36
1999............................................. 3 6
--- ---
$75 $42
=== ===
F-79
158
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
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
====
7. INCOME TAXES (IN THOUSANDS):
Federal and state income taxes are as follows:
YEAR ENDED YEAR ENDED
OCTOBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
Federal --
Current..................................... $ 259 $ 72 $ 318
Deferred.................................... (187) (99) (122)
State --
Current..................................... 35 10 39
Deferred.................................... (25) (13) (21)
----- ----- -----
$ 82 $ (30) $ 214
===== ===== =====
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:
OCTOBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
Income tax expense (recovery) at the statutory
rate........................................ $ 61 $ (45) $ 194
Increase (decrease) resulting from --
State income taxes, net of related tax
effect................................... 6 (2) 12
Nondeductible expenses...................... 15 17 8
----- ----- -----
$ 82 $ (30) $ 214
===== ===== =====
F-80
159
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
OCTOBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
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)
----- ----- -----
Total deferred income tax assets............ $ 27 $ 139 $ 79
===== ===== =====
The net deferred tax assets and liabilities are comprised of the following:
OCTOBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
----- ----- -------------
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
===== ===== =====
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, and $36,000 for the years ended October 31, 1995 and 1996 and
September 30, 1997, 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
F-81
160
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-82
161
POLLOCK ELECTRIC INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-83
162
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charles P. Bagby Company, Inc.:
We have audited the accompanying balance sheets of Charles P. Bagby
Company, 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. 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 Company,
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, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-84
163
CHARLES P. BAGBY COMPANY, INC.
BALANCE SHEETS
(IN THOUSANDS)
ASSETS
DECEMBER 31, SEPTEMBER 30
1996 1997
------------ -------------
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
====== ======
The accompanying notes are an integral part of these financial statements.
F-85
164
CHARLES P. BAGBY COMPANY, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
------------ ------------- ---------------------------
1996 1997 1996 1997
------------ ------------- ----------- -------------
(UNAUDITED)
REVENUES................................... $7,634 $11,772 $5,105 $ 9,243
COST OF SERVICES (including depreciation).. 6,412 9,920 4,419 7,927
------ ------- ------ -------
Gross profit..................... 1,222 1,852 686 1,316
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 680 1,140 364 824
------ ------- ------ -------
Income from operations........... 542 712 322 492
------ ------- ------ -------
OTHER INCOME (EXPENSE):
Other.................................... 39 (2) 37 (4)
------ ------- ------ -------
Other income (expense), net...... 39 (2) 37 (4)
------ ------- ------ -------
NET INCOME................................. $ 581 $ 710 $ 359 $ 488
====== ======= ====== =======
The accompanying notes are an integral part of these financial statements.
F-86
165
CHARLES P. BAGBY COMPANY, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
YEAR ENDED YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, -------------------
1996 1997 1996 1997
------------ ------------- ----------- -----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 581 $ 710 $ 359 $ 488
Adjustments to reconcile net income to net
cash provided by (used in) operating
activities --
Depreciation and amortization.............. 21 23 15 17
Changes in operating assets and
liabilities -- (Increase) decrease in --
Accounts receivable................... (764) (879) (159) (274)
Costs and estimated earnings in excess
of billings on uncompleted
contracts........................... (15) (697) 94 (588)
Prepaid expenses and other current
assets.............................. (136) 83 (183) 36
Increase (decrease) in --
Accounts payable and accrued
expenses............................ 130 1,131 (582) 419
Billings in excess of costs and
estimated earnings on uncompleted
contracts........................... 51 315 37 301
Other, net............................ 30 12 20 2
----- ------- ------ -----
Net cash provided by (used in)
operating activities................ (102) 698 (399) 401
----- ------- ------ -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions of property and equipment........... (20) (48) (16) (54)
----- ------- ------ -----
Net cash used in investing
activities.......................... (20) (48) (16) (54)
----- ------- ------ -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings......................... -- 230 -- 230
Payments on short-term borrowings............. -- (230) (230)
Distributions to shareholders................. (360) (480) (10) (120)
----- ------- ------ -----
Net cash used in financing
activities.......................... (360) (480) (10) (120)
----- ------- ------ -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................... (482) 170 (425) 227
----- ------- ------ -----
CASH AND CASH EQUIVALENTS, beginning of
period........................................ 1,106 681 1,106 624
----- ------- ------ -----
CASH AND CASH EQUIVALENTS, end of
period........................................ $ 624 $ 851 $ 681 $ 851
===== ======= ====== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest................................... $ 1 $ 10 $ 1 $ 10
The accompanying notes are an integral part of these financial statements.
F-87
166
CHARLES P. BAGBY COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK TOTAL
----------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------- -------- -------------
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 gains (losses)..................... -- -- (9) (9)
Net income........................................ -- -- 488 488
----- ------- ------ ------
BALANCE, September 30, 1997......................... 1,000 $ 1 $1,893 $1,894
===== ======= ====== ======
The accompanying notes are an integral part of these financial statements.
F-88
167
CHARLES P. BAGBY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Charles P. Bagby Company, 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.
In October 1997, 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 will be exchanged for cash and
shares of IES common stock, concurrent with the consummation 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 IES. 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.
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.
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.
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
$21,000 for the year ended December 31, 1996, and $23,000 for the year ended
September 30, 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
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.
Contract costs include all direct material and labor costs and those indirect
costs related to contract
F-89
168
CHARLES P. BAGBY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
F-90
169
CHARLES P. BAGBY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED
USEFUL LIVES DECEMBER 31, SEPTEMBER 30,
IN YEARS 1996 1997
------------ ------------ -------------
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
===== =====
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Balance at beginning of period............................. $22 $26
Additions to costs and expenses............................ 20 22
--- ---
Balance at end of period................................... $42 $48
=== ===
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
Accounts payable, trade.................................... $ 685 $1,120
Accrued compensation and benefits.......................... 175 624
Other accrued expenses..................................... 542 77
------ ------
$1,402 $1,821
====== ======
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
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
======= =======
F-91
170
CHARLES P. BAGBY COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
The Company has a $650,000 line of credit with a bank. The line of credit
expires June 30, 1998, and bears interest at 1 percent over the prime lending
rate. The line of credit is 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.
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 for
the year ended December 31, 1996, and $106,000 for the year ended September 30,
1997.
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.
F-92
171
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. 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 in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-93
172
AMBER ELECTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
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 --
Deferred tax liability.................................... 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
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-94
173
AMBER ELECTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
----------------- SEPTEMBER 30, -----------------
1995 1996 1997 1996 1997
------- ------- ------------- ------- -------
(UNAUDITED)
REVENUES................................... $ 9,728 $13,878 $16,386 $10,572 $13,080
COST OF SERVICES (including
depreciation)............................ 8,635 12,215 13,415 8,710 9,910
------- ------- ------- ------- -------
Gross profit..................... 1,093 1,663 2,971 1,862 3,170
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................. 957 1,160 1,379 978 1,197
------- ------- ------- ------- -------
Income from operations........... 136 503 1,592 884 1,973
------- ------- ------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense......................... (65) (51) (45) (51) (45)
Other.................................... 24 36 69 10 43
------- ------- ------- ------- -------
Other income (expense), net...... (41) (15) 24 (41) (2)
------- ------- ------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES... 95 488 1,616 843 1,971
PROVISION FOR INCOME TAXES................. 36 198 632 333 767
------- ------- ------- ------- -------
NET INCOME................................. $ 59 $ 290 $ 984 $ 510 $ 1,204
======= ======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-95
174
AMBER ELECTRIC, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
------------- SEPTEMBER 30, ---------------
1995 1996 1997 1996 1997
----- ----- ------------- ----- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 59 $ 290 $ 984 $ 510 $ 1,204
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization................ 62 87 172 61 146
Bad debt expense............................. 17 35 37 9 11
(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 89 (31) 34
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable..................... (299) (308) (1,142) (112) (946)
Inventories............................. 15 11 11 3 3
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................. (6) (126) 35 (129) 32
Employee advances....................... 14 (27) 13 (15) 25
Prepaid expenses and other current
assets................................ (7) 22 (13) (19) (54)
Note receivable, related party.......... -- (21) (65) (21) (65)
Increase (decrease) in --
Accounts payable and accrued expenses... 20 461 392 188 119
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. 304 53 12 (171) (212)
Income taxes payable.................... 49 163 218 377 432
Other, net................................... 4 1 (6) (7)
----- ----- ----- ----- -------
Net cash provided by operating
activities.............................. 177 670 737 654 721
----- ----- ----- ----- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.... 5 2 8 2 8
Additions of property and equipment............. (155) (190) (323) (157) (290)
----- ----- ----- ----- -------
Net cash used in investing activities... (150) (188) (315) (155) (282)
----- ----- ----- ----- -------
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.................... 104 131 236 95 200
Payments of long-term debt...................... (74) (130) (163) (83) (116)
----- ----- ----- ----- -------
Net cash provided by (used in) financing
activities............................ 6 -- 73 (89) (16)
----- ----- ----- ----- -------
NET INCREASE IN CASH AND CASH EQUIVALENTS......... 33 482 495 410 423
CASH AND CASH EQUIVALENTS, beginning of period.... 50 83 493 83 565
----- ----- ----- ----- -------
CASH AND CASH EQUIVALENTS, end of period.......... $ 83 $ 565 $ 988 $ 493 $ 988
===== ===== ===== ===== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest..................................... $ 65 $ 51 $ 45 $ 51 $ 45
Income taxes................................. 27 10 303 8 301
The accompanying notes are an integral part of these financial statements.
F-96
175
AMBER ELECTRIC, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK TOTAL
--------------- RETAINED TREASURY STOCKHOLDER'S
SHARES AMOUNT EARNINGS STOCK EQUITY
------ ------ -------- -------- -------------
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
===== == ====== ===== ======
The accompanying notes are an integral part of these financial statements
F-97
176
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.
In October 1997, 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 will be exchanged for cash and
shares of IES common stock, concurrent with the consummation 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 IES. 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.
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.
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 and $172,000 for the
years ended December 31, 1995, 1996, and 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.
F-98
177
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 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
F-99
178
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
ESTIMATED DECEMBER 31, SEPTEMBER 30,
USEFUL LIVES -------------- -------------
IN YEARS 1995 1996 1997
------------ ----- ----- -------------
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
==== ===== =====
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1995 1996 1997
------- ------- -------------
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
======= ======= ======
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1995 1996 1997
------- ------- -------------
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
======= ======= ======
F-100
179
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
----------------- -------------
1995 1996 1997
------- ------- -------------
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)
======= ======= =======
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):
Year ending December 31 --
1998................................................... $179
1999................................................... 155
2000................................................... 115
2001................................................... 76
2002................................................... 70
Thereafter............................................. 152
----
$747
====
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.
F-101
180
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 and $83,000 for the years ended
December 31, 1995, 1996 and September 30, 1997, respectively.
There are no future minimum lease payments under this operating lease.
7. INCOME TAXES (IN THOUSANDS):
Federal income taxes are as follows:
YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1995 1996 1997
---- ---- -------------
Federal --
Current............................................... $ 1 $224 $510
Deferred.............................................. 30 (54) 32
State --
Current............................................... $ -- $ 27 $ 95
Deferred.............................................. 5 1 (5)
---- ---- ----
$ 36 $198 $632
==== ==== ====
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:
YEAR ENDED YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
------------ -------------
1995 1996 1997
---- ---- -------------
Provision at the statutory rate.......................... $33 $171 $565
Increase resulting from --
State income taxes, net of related federal benefit..... 3 19 59
Permanent differences, primarily meals and
entertainment....................................... -- 8 8
--- ---- ----
$36 $198 $632
=== ==== ====
F-102
181
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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:
YEAR ENDED
DECEMBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
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)
===== ===== =====
The net deferred tax assets and liabilities are comprised of the following:
DECEMBER 31, SEPTEMBER 30,
------------- -------------
1995 1996 1997
----- ---- -------------
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)
===== ==== =====
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 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
F-103
182
AMBER ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
contributions by the Company under the plan were approximately $31,000, $44,000
and $56,000 for the years ending December 31, 1995, 1996 and September 30, 1997,
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, and sales of approximately 22 percent of total sales to one major
customer during the year ended September 30, 1997.
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
183
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. 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, in conformity with generally accepted
accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-105
184
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST, INC.
COMBINED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
ASSETS
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
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-106
185
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST, INC.
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS
DECEMBER 31, YEAR ENDED ENDED SEPTEMBER 30,
----------------- SEPTEMBER 30, ---------------------
1995 1996 1997 1996 1997
------- ------- ------------- ----------- -------
(UNAUDITED)
REVENUES................................ $12,049 $12,585 $18,409 $8,846 $14,670
COST OF SERVICES (including
depreciation)......................... 11,725 9,713 13,518 6,675 10,480
------- ------- ------- ------ -------
Gross profit.................. 324 2,872 4,891 2,171 4,190
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.............................. 1,502 1,884 2,316 1,360 1,792
------- ------- ------- ------ -------
Income (loss) from
operations.................. (1,178) 988 2,575 811 2,398
------- ------- ------- ------ -------
OTHER INCOME (EXPENSE):
Interest expense...................... (46) (73) (60) (58) (45)
Other................................. 71 86 100 48 62
------- ------- ------- ------ -------
Other income (expense), net... 25 13 40 (10) 17
------- ------- ------- ------ -------
NET INCOME (LOSS)....................... $(1,153) $ 1,001 $ 2,615 $ 801 $ 2,415
======= ======= ======= ====== =======
The accompanying notes are an integral part of these financial statements.
F-107
186
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST, INC.
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED NINE MONTHS
DECEMBER 31, YEAR ENDED ENDED SEPTEMBER 30,
---------------- SEPTEMBER 30, --------------------
1995 1996 1997 1996 1997
------- ------ ------------- ----------- ------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)......................... $(1,153) $1,001 $ 2,615 $ 801 $2,415
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities --
Depreciation and amortization.......... 113 125 141 100 116
Provision for bad debts................ 29 205 229 23 47
Loss on abandonment of leasehold
improvements......................... -- -- 34 -- 34
Changes in operating assets and
liabilities --
(Increase) decrease in --
Accounts receivable............... 423 (185) (1,606) (577) (1,998)
Inventories....................... 14 19 37 43 61
Costs and estimated earnings in
excess of billings on
uncompleted contracts........... 733 (600) 45 (436) 209
Prepaid expenses and other current
assets.......................... 25 (11) (158) 17 (130)
Increase (decrease) in --
Accounts payable and accrued
expenses........................ (567) (379) 667 (151) 895
Deposits on contracts in
progress........................ -- 500 (500) 500 (500)
Billings in excess of costs and
estimated earnings on
uncompleted contracts........... (92) 631 548 701 618
Other current liabilities......... (42) (87) (68) (8) 11
------- ------ ------- ----- ------
Net cash provided by (used in)
operating activities............ (517) 1,219 1,984 1,013 1,778
------- ------ ------- ----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of investments................... (31) (306) (889) (3) (586)
Additions of property and equipment....... (97) (175) (444) (84) (353)
------- ------ ------- ----- ------
Net cash used in investing
activities...................... (128) (481) (1,333) (87) (939)
------- ------ ------- ----- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt.............. 350 17 171 -- 154
Payments of long-term debt................ (44) (406) (175) (323) (92)
Distributions to stockholders............. -- -- (395) -- (395)
------- ------ ------- ----- ------
Net cash provided by (used in)
financing activities............ 306 (389) (399) (323) (333)
------- ------ ------- ----- ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS............................... (339) 349 252 603 506
CASH AND CASH EQUIVALENTS, beginning of
period.................................... 401 62 665 62 411
------- ------ ------- ----- ------
CASH AND CASH EQUIVALENTS, end of period.... $ 62 $ 411 $ 917 $ 665 $ 917
======= ====== ======= ===== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for --
Interest.................................. $ 20 $ 113 $ 102 $ 18 $ 7
The accompanying notes are an integral part of these financial statements.
F-108
187
DANIEL ELECTRICAL CONTRACTORS INC. AND
DANIEL ELECTRICAL OF TREASURE COAST, INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
UNREALIZED
COMMON STOCK GAIN (LOSS) TOTAL
--------------- RETAINED ON STOCKHOLDER'S
SHARES AMOUNT EARNINGS SECURITIES EQUITY
------ ------ -------- ------------- -------------
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
===== == ======= ==== =======
The accompanying notes are an integral part of these financial statements.
F-109
188
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.
In October 1997, 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 will be exchanged for cash and
shares of IES common stock, concurrent with the consummation 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 IES. 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.
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.
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.
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.
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
F-110
189
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
lesser of the life of the lease or the estimated useful life of the asset.
Depreciation and amortization expense was $113,000, $125,000 and $142,000 for
the years ended December 31, 1995, 1996 and 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.
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. 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 provision for current or deferred income taxes. The Company intends to
terminate its S Corporation status concurrently with the effective date of the
Offering.
F-111
190
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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):
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ----- ----- -------------
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
===== ===== ======
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
---- ----- -------------
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
=== ===== =====
F-112
191
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
-------------- SEPTEMBER 30,
1995 1996 1997
------ ---- -------------
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
====== ==== ======
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31,
----------------- SEPTEMBER 30,
1995 1996 1997
------ ------- -------------
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)
====== ======= ========
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):
1998........................................................ $ 62
1999........................................................ 44
2000........................................................ 36
2001........................................................ 15
2002........................................................ 7
----
$164
====
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
F-113
192
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 and $4,000 for the years ended December 31, 1995, 1996 and September 30,
1997, respectively.
Related-Party Compensation
The Company paid $58,000, $72,000 and $72,000 for the years ended December
31, 1995, 1996 and September 30, 1997, 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
and $14,000 for the years ended December 31, 1995, 1996 and September 30, 1997,
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.
F-114
193
DANIEL ELECTRICAL CONTRACTORS, INC. AND
DANIEL ELECTRICAL OF TREASURE COAST, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
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.
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, and sales of approximately 30 percent
and 38 percent of total sales to two major customers during the year ended
September 30, 1997.
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
194
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Summit Electric of Texas, Inc.:
We have audited the accompanying balance sheets of Summit Electric of
Texas, Inc., 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. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our 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,
Inc. as of March 31, 1997 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-116
195
SUMMIT ELECTRIC OF TEXAS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
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 20
------ ------
Total current liabilities......................... 2,232 2,504
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 1,033
------ ------
Total stockholder's equity........................ 992 1,034
------ ------
Total liabilities and stockholder's equity........ $3,336 $3,637
====== ======
The accompanying notes are an integral part of these financial statements.
F-117
196
SUMMIT ELECTRIC OF TEXAS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
SIX MONTHS
YEAR ENDED YEAR ENDED ENDED SEPTEMBER 30,
MARCH 31, SEPTEMBER 30, --------------------
1997 1997 1996 1997
---------- ------------- -------- --------
(UNAUDITED)
REVENUES........................................... $10,565 $10,995 $5,735 $6,165
COST OF SERVICES (including depreciation).......... 9,157 9,454 4,946 5,243
------- ------- ------ ------
Gross profit............................. 1,408 1,541 789 922
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES....... 1,340 1,463 699 822
------- ------- ------ ------
Income from operations................... 68 78 90 100
------- ------- ------ ------
OTHER INCOME (EXPENSE):
Interest expense................................. (56) (79) (19) (42)
Other............................................ 25 23 13 11
------- ------- ------ ------
Other expense, net....................... (31) (56) (6) (31)
------- ------- ------ ------
INCOME BEFORE PROVISION FOR INCOME TAXES........... 37 22 84 69
PROVISION FOR INCOME TAXES......................... 23 21 28 26
------- ------- ------ ------
NET INCOME......................................... $ 14 $ 1 $ 56 $ 43
======= ======= ====== ======
The accompanying notes are an integral part of these financial statements.
F-118
197
SUMMIT ELECTRIC OF TEXAS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS
ENDED
YEAR ENDED YEAR ENDED SEPTEMBER 30,
MARCH 31, SEPTEMBER 30, -------------
1997 1997 1996 1997
---------- ------------- ----- -----
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 14 $ 1 $ 56 $ 43
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization.................... 72 75 38 41
Provision for doubtful accounts.................. -- 10 -- 10
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable......................... 316 (420) 452 (284)
Receivable from stockholder................. 56 (58) 48 (66)
Other receivables........................... 32 42 25 35
Costs and estimated earnings in excess of
billings on uncompleted contracts......... (105) (45) 1 61
Prepaid expenses and other current assets... (23) (8) (16) (1)
Increase (decrease) in --
Accounts payable and accrued expenses....... (498) 541 (519) 520
Billings in excess of costs and estimated
earnings on uncompleted contracts......... 48 (153) (52) (253)
Other, net....................................... 3 15 2 14
----- ----- ----- -----
Net cash provided by (used in) operating
activities................................ (85) -- 35 120
----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on notes receivable from related parties... 3 4 1 2
Additions to property and equipment................. (191) (156) (35) --
----- ----- ----- -----
Net cash provided by (used in) investing
activities................................ (188) (152) (34) 2
----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt and notes payable...... 238 226 3 (9)
Payments of long-term debt.......................... (19) (24) (8) (13)
----- ----- ----- -----
Net cash provided by (used in) financing
activities................................ 219 202 (5) (22)
----- ----- ----- -----
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS......................................... (54) 50 (4) 100
CASH AND CASH EQUIVALENTS, beginning of period........ 111 107 111 57
----- ----- ----- -----
CASH AND CASH EQUIVALENTS, end of period.............. $ 57 $ 157 $ 107 $ 157
===== ===== ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest......................................... $ 56 $ 79 $ 19 $ 42
Income taxes..................................... 16 19 19 3
The accompanying notes are an integral part of these financial statements.
F-119
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SUMMIT ELECTRIC OF TEXAS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
BALANCE, March 31, 1996 (unaudited)................ 1,000 $1 $ 977 $ 978
Net income....................................... -- -- 14 14
----- -- ------ ------
BALANCE, March 31, 1997............................ 1,000 1 991 992
Net income (unaudited)........................... -- -- 42 42
----- -- ------ ------
BALANCE, September 30, 1997........................ 1,000 $1 $1,033 $1,034
===== == ====== ======
The accompanying notes are an integral part of these financial statements.
F-120
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SUMMIT ELECTRIC OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Summit Electric of Texas, Inc. (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.
In October 1997, 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 will be exchanged for cash and
shares of IES common stock, concurrent with the consummation 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 IES. 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.
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.
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 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 and $75,358 for the years ended March 31, 1997 and 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.
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-
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SUMMIT ELECTRIC OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
completion method 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 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 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
F-122
201
SUMMIT ELECTRIC OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
ESTIMATED
USEFUL LIVES MARCH 31, SEPTEMBER 30,
IN YEARS 1997 1997
------------ --------- -------------
Transportation equipment......................... 5 $ 450 $ 447
Machinery and equipment.......................... 7 11 12
Computer and telephone equipment................. 5 84 84
Leasehold improvements........................... 31.5 52 52
Furniture and fixtures........................... 7 43 43
----- -----
640 638
Less -- Accumulated depreciation and
amortization................................... (417) (458)
----- -----
Property and equipment, net............ $ 223 $ 180
===== =====
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
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
==== ====
Accounts payable and accrued expenses consist of the following (in
thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
Accounts payable, trade..................................... $696 $ 1,175
Other accrued expenses...................................... 278 319
---- -------
$974 $ 1,494
==== =======
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SUMMIT ELECTRIC OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
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)
======= =======
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
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
==== ====
The maturities of long-term debt are as follows (in thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
YEAR ENDED --------- -------------
1998................................................... $ 27 $ 27
1999................................................... 29 28
2000................................................... 26 27
2001................................................... 28 28
2002................................................... 18 5
---- ----
$128 $115
==== ====
The Company has a $1,000,000 line of credit with a bank. The line of credit
expires 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.
F-124
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SUMMIT ELECTRIC OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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.
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. The Company also leases two
facilities from third parties. The rent paid under these leases were
approximately $7,144 and $15,051 for the years ended March 31, 1997 and
September 30, 1997, respectively.
Future minimum lease payments under these noncancelable operating leases
are as follows (in thousands):
YEAR ENDED
-------------------------
MARCH 31 SEPTEMBER 30
--------- -------------
1998................................................... $ 99 $ 99
1999................................................... 66 26
2000................................................... 1 --
Thereafter............................................. -- --
---- ----
$166 $125
==== ====
7. INCOME TAXES:
Federal income taxes are as follows (in thousands):
YEAR ENDED
-------------------------
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
Current --
Federal................................................... $17 $19
State..................................................... 6 2
--- ---
$23 $21
=== ===
F-125
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SUMMIT ELECTRIC OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income tax expense 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):
YEAR ENDED
--------------------------
MARCH 31, SEPTEMBER 30,
1997 1997
---------- -------------
Provision at the statutory rate............................. $10 $ 6
Increase resulting from --
Permanent differences, primarily meals and
entertainment.......................................... 9 14
State income tax, net of benefit for federal deduction.... 4 1
--- ---
$23 $21
=== ===
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):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
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
==== ====
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
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
==== ====
F-126
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SUMMIT ELECTRIC OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. RELATED-PARTY TRANSACTIONS:
Notes receivable from related parties consist of the following (in
thousands):
MARCH 31, SEPTEMBER 30,
1997 1997
--------- -------------
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
==== ====
The Company provides auto repair and restoration services to the
Stockholder. The Stockholder reimbursed the Company $81,161 and $122,979 for
such services for March 31, 1997 and September 30, 1997, 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, totaled $24,747 and $24,660, 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.
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.
F-127
206
SUMMIT ELECTRIC OF TEXAS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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-128
207
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. 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 in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-129
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THURMAN & O'CONNELL CORPORATION
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
---------------- SEPTEMBER 30,
1995 1996 1997
------ ------ -------------
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 STOCKHOLDER'S 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
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
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-130
209
THURMAN & O'CONNELL CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED NINE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED SEPTEMBER 30,
--------------- ------------- --------------------
1995 1996 1997 1996 1997
------ ------ ------------- -------- --------
(UNAUDITED)
REVENUES..................................... $4,729 $4,551 $ 4,049 $3,741 $3,239
COST OF SERVICES............................. 3,309 3,059 2,181 2,531 1,653
------ ------ ------------- ------ ------
Gross profit....................... 1,420 1,492 1,868 1,210 1,586
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 512 503 503 397 397
------ ------ ------------- ------ ------
Income from operations............. 908 989 1,365 813 1,189
------ ------ ------------- ------ ------
OTHER INCOME (EXPENSE):
Interest expense........................... (13) (8) (6) (6) (4)
Other...................................... 36 65 70 46 51
------ ------ ------------- ------ ------
Other income (expense), net........ 23 57 64 40 47
------ ------ ------------- ------ ------
INCOME BEFORE INCOME TAX EXPENSE............. 931 1,046 1,429 853 1,236
INCOME TAX EXPENSE........................... 19 36 46 24 34
------ ------ ------------- ------ ------
NET INCOME................................... $ 912 $1,010 $ 1,383 $ 829 $1,202
====== ====== ============= ====== ======
The accompanying notes are an integral part of these financial statements.
F-131
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THURMAN & O'CONNELL CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, YEAR ENDED SEPTEMBER 30,
---------------- SEPTEMBER 30, ---------------
1995 1996 1997 1996 1997
------ ------- ------------- ------ ------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................... $ 912 $ 1,010 $ 1,383 $ 829 $1,202
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization............... 53 49 51 37 39
Provision to (reduction in) allowance for
doubtful accounts......................... 13 10 36 (19) 7
Loss (gain) on sale of property and
equipment................................. (1) -- (1) -- (1)
Changes in operating assets and
liabilities --
(Increase) decrease in --
Receivables............................... (506) 1,018 (6) 756 (268)
Inventories............................... (405) 799 181 678 60
Costs and estimated earnings in excess of
billings on uncompleted contracts...... 68 (22) (28) (24) (30)
Prepaid expenses and other current
assets................................. 25 (9) (9) (2) (2)
Increase (decrease) in --
Accounts payable and accrued expenses..... (1) (421) (165) (236) 20
Billings in excess of costs and estimated
earnings on uncompleted contracts...... 916 (1,173) (506) (785) (118)
------ ------- ------- ------ ------
Net cash provided by operating
activities........................... 1,074 1,261 936 1,234 909
------ ------- ------- ------ ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment... 1 -- 23 -- 23
Additions of property and equipment............ (42) (13) (62) (7) (56)
------ ------- ------- ------ ------
Net cash used in investing
activities........................... (41) (13) (39) (7) (33)
------ ------- ------- ------ ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt................... -- 103 103 -- --
Payments of long-term debt..................... (63) (113) (110) (7) (4)
Distributions to stockholders.................. (620) (610) (1,200) (610) (1,200)
------ ------- ------- ------ ------
Net cash used in financing
activities........................... (683) (620) (1,207) (617) (1,204)
------ ------- ------- ------ ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... 350 628 (310) 610 (328)
CASH AND CASH EQUIVALENTS, beginning of period... 510 860 1,470 860 1,488
------ ------- ------- ------ ------
CASH AND CASH EQUIVALENTS, end of period......... $ 860 $ 1,488 $ 1,160 1,470 $1,160
====== ======= ======= ====== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest.................................. $ 10 $ 8 $ 7 $ 6 $ 4
Taxes..................................... $ 6 $ 26 $ 50 $ 23 $ 47
The accompanying notes are an integral part of these financial statements.
F-132
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THURMAN & O'CONNELL CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
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
=== ==== ====== ======
The accompanying notes are an integral part of these financial statements.
F-133
212
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.
In October 1997, 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 will be exchanged for cash and
shares of IES common stock, concurrent with the consummation 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 IES. 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.
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.
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 $52,000 for the
years ended December 31, 1995 and 1996 and 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.
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-
F-134
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THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
completion method 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 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 Offering (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 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-135
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THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment, at cost, consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------- SEPTEMBER 30,
IN YEARS 1995 1996 1997
------------ ----- ----- -------------
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
===== ===== ======
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts receivable
consists of the following (in thousands):
DECEMBER 31,
------------ SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
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
=== ==== ====
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
------------ SEPTEMBER 30,
1995 1996 1997
---- ---- -------------
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
==== ==== ====
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THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Electrical system installation contracts in progress are as follows (in
thousands):
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1995 1996 1997
------- ------- -------------
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)
======= ======= ======
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):
YEAR ENDING DECEMBER 31 --
- --------------------------
1997................................................... $ 2
1998................................................... 7
1999................................................... 8
2000................................................... 8
2001................................................... 9
Thereafter............................................. 61
---
$95
===
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.
F-137
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THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
6. RELATED-PARTY TRANSACTIONS:
The Company earned revenue for electrical contracting services from
companies owned by a stockholder of approximately $47,000, $40,000 and $25,000
for the years ended December 31, 1995 and 1996, and September 30, 1997,
respectively, with approximately $1,000, $2,000 and $4,000 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 and $8,000 for the years ended December 31, 1995 and 1996 and September
30, 1997, respectively.
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, 1996 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
F-138
217
THURMAN & O'CONNELL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
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 and sales of
approximately 26, 12 and 12 percent of total sales to three major customers
during the year ended September 30, 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 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-139
218
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 stockholder's 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 Rodgers Electric Company,
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.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-140
219
RODGERS ELECTRIC COMPANY, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
ASSETS
SEPTEMBER 30,
1997
-------------
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 STOCKHOLDER'S 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
Income taxes payable...................................... 213
------
Total current liabilities......................... 846
LONG-TERM DEBT, net of current maturities................... 58
DEFERRED TAX LIABILITY...................................... 75
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $100 par value, 500 shares authorized, 150
shares issued and outstanding.......................... 15
Retained earnings......................................... 1,093
------
Total stockholder's equity........................ 1,108
------
Total liabilities and stockholder's equity........ $2,087
======
The accompanying notes are an integral part of these financial statements.
F-141
220
RODGERS ELECTRIC COMPANY, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED
SEPTEMBER 30,
1997
-------------
REVENUES.................................................... $3,325
COST OF SERVICES (including depreciation)................... 1,621
------
Gross profit...................................... 1,704
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 1,238
------
Income from operations............................ 466
------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (7)
Other..................................................... 36
------
Other expense, net................................ 29
------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 495
PROVISION FOR INCOME TAXES.................................. 178
------
NET INCOME.................................................. $ 317
======
The accompanying notes are an integral part of these financial statements.
F-142
221
RODGERS ELECTRIC COMPANY, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED
SEPTEMBER 30,
1997
-------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 317
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 47
Provision for doubtful accounts........................ 11
Changes in operating assets and liabilities --
(Increase) decrease in --
Accounts receivable............................... (275)
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... (20)
Deferred taxes, net............................... (34)
Other............................................. 14
Increase (decrease) in --
Accounts payable and accrued expenses............. 355
Income taxes payable.............................. 211
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 109
-----
Net cash provided by operating activities......... 735
-----
CASH FLOWS FROM INVESTING ACTIVITIES:
Payments on notes receivable from related parties......... 2
Additions to property and equipment....................... (170)
-----
Net cash used in investing activities............. (168)
-----
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings of long-term debt and notes payable............ 70
Payments of long-term debt................................ (23)
-----
Net cash provided by financing activities......... 47
-----
NET INCREASE IN CASH AND CASH EQUIVALENTS................... 614
CASH AND CASH EQUIVALENTS, beginning of period.............. 204
-----
CASH AND CASH EQUIVALENTS, end of period.................... $ 818
=====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest............................................... $ 7
Income taxes........................................... --
The accompanying notes are an integral part of these financial statements.
F-143
222
RODGERS ELECTRIC COMPANY, INC.
STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
BALANCE, September 30, 1996.......................... 150 $15 $ 776 $ 791
Net income......................................... -- -- 317 317
--- --- ------ ------
BALANCE, September 30, 1997.......................... 150 $15 $1,093 $1,108
=== === ====== ======
The accompanying notes are an integral part of these financial statements.
F-144
223
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.
In October 1997, 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 will be exchanged for cash and
shares of IES common stock, concurrent with the consummation 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 IES. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
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 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
approximately $25,000 and $47,000 for the years ended March 31, 1997 and
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.
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.
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.
F-145
224
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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. A reserve for warranty costs is recorded
based upon the historical level of warranty claims and management's estimate for
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-146
225
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED
USEFUL LIVES SEPTEMBER 30,
IN YEARS 1997
------------ -------------
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
=====
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following (in
thousands):
SEPTEMBER 30,
1997
-------------
Accounts payable, trade..................................... $106
Payroll, profit sharing and related items................... 363
Other accrued expenses...................................... 19
----
$488
====
Contracts in progress (in thousands):
SEPTEMBER 30,
1997
-------------
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..................................... $109
Less-Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (20)
----
Net liability..................................... $(89)
====
F-147
226
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. LONG-TERM DEBT:
Long-term debt consists of the following (in thousands):
SEPTEMBER 30,
1997
-------------
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
====
The maturities of long-term debt are as follows (in thousands):
SEPTEMBER 30,
YEAR ENDED SEPTEMBER 30 -- 1997
-------------------------- -------------
1998................................................... $ 36
1999................................................... 27
2000................................................... 18
2001................................................... 10
2002................................................... 3
----
$ 94
====
6. RELATED PARTY TRANSACTIONS:
The Company is located in a building owned by the sole stockholder which is
leased to the Company with monthly rental payments of $2,200 per month.
7. INCOME TAXES:
Federal income taxes are $178 for the fiscal year ended September 30, 1997.
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):
YEAR ENDED
MARCH 31,
1997
----------
Provision at the statutory rate............................. $173
Increase resulting from --
Permanent differences, mainly meals and entertainment..... 5
----
$178
====
F-148
227
RODGERS ELECTRIC COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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):
SEPTEMBER 30,
1997
-------------
Allowance for doubtful accounts and other................... $ 39
Bases difference on property and equipment.................. (75)
----
Deferred tax liabilities.......................... $(36)
====
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 were $192,000.
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 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.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability, workers' compensation 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.
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. However, management believes that its contract acceptance,
billing and collection policies are adequate to minimize the potential credit
risk.
F-149
228
======================================================
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 OR THE UNDERWRITERS. 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
PAGE
----
Prospectus Summary....................
Risk Factors..........................
The Company...........................
Use of Proceeds.......................
Dividend Policy.......................
Capitalization........................
Dilution..............................
Selected Financial Data...............
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management............................
Certain Transactions..................
Principal Stockholders................
Description of Capital Stock..........
Shares Eligible for Future Sale.......
Underwriting..........................
Legal Matters.........................
Experts...............................
Additional Information................
Index to Financial Statements.........
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
7,000,000 SHARES
INTEGRATED ELECTRICAL
SERVICES, INC.
[INTEGRATED LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
EQUITABLE SECURITIES CORPORATION
SANDERS MORRIS MUNDY
, 1997
======================================================
229
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION(A)
SEC Registration Fee........................................ $ 36,591
NASD Filing Fee............................................. 12,575
Listing Fee................................................. *
Accounting Fees and Expenses................................ 3,200,000
Legal Fees and Expenses..................................... 950,000
Printing Expenses........................................... 250,000
Transfer Agent's Fees....................................... *
Miscellaneous............................................... *
----------
Total..................................................... $ *
==========
- ---------------
(a) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
* To be completed by amendment.
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
II-1
230
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.
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 intends to enter into indemnification agreements with each of
its executive officers and directors.
Under Section 6 of the U.S. and International Purchase Agreements filed as
Exhibits 1.1 and 1.2 to this Registration Statement, the Underwriters have
agreed to indemnify, under certain conditions, the Company, its officers and
directors, and persons who control the Company within the meaning of the
Securities Act of 1933, as amended, against certain liabilities.
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 recent 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.
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
231
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits
EXHIBIT
-------
*1.1 -- Form of U.S. Purchase Agreement.
*1.2 -- Form of International Purchase Agreement.
**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.
**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.
**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 Employment Partners of
such partnerships.
**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.
**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.
**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.
**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., Charles P.
Bagby Company, Inc.
**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.
**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.
**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.
**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.
**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.
**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.
**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.
II-3
232
EXHIBIT
-------
**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.
**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.
*3.1 -- Amended and Restated Certificate of Incorporation.
*3.2 -- Bylaws.
*4.1 -- Specimen Common Stock Certificate.
*5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of
the securities being registered.
*10.1 -- Form of Employment Agreement.
*10.2 -- Form of Officer and Director Indemnification Agreement.
*10.3 -- Integrated Electrical Services, Inc. 1997 Stock Plan.
*10.4 -- Integrated Electrical Services, Inc. 1997 Directors Stock
Plan.
*23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit
5.1).
*23.2 -- Consent of Arthur Andersen LLP.
**24.1 -- Powers of Attorney (included in signature page set forth
on page II-5).
*27 -- Financial Data Schedule.
*99.1 -- Consents of Alan Sielbeck, Richard L. Tucker and Thomas
E. White to serve as directors.
- ---------------
* 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) 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
II-4
233
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.
(3) To provide to the Underwriters at the closing specified in the
underwriting agreement certificates in such denominations and registered in
such names as required by the Underwriters to permit prompt delivery to
each purchaser.
II-5
234
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 NOVEMBER 28, 1997.
Integrated Electrical Services, Inc.
By: /s/ JIM P. WISE
----------------------------------
Jim P. Wise
Senior Vice President
and Chief Financial Officer
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 NOVEMBER 28, 1997.
SIGNATURE TITLE
C. BYRON SNYDER* President and Chairman of the
- ----------------------------------------------------- Board of Directors
C. Byron Snyder (Principal Executive
Officer)
/s/ JIM P. WISE Senior Vice President and
- ----------------------------------------------------- Chief Financial Officer
Jim P. Wise (Principal Financial
Officer)
J. PAUL WITHROW* Vice President and Chief
- ----------------------------------------------------- Accounting Officer
J. Paul Withrow (Principal Accounting
Officer)
By: /s/ JIM P. WISE
- -----------------------------------------------------
(Jim P. Wise, pursuant to a power
of attorney filed with this Registration Statement
No. 333-38715, filed with the Securities and Exchange
Commission on October 24, 1997)
II-6
235
INDEX TO EXHIBITS
EXHIBIT
-------
*1.1 -- Form of U.S. Purchase Agreement.
*1.2 -- Form of International Purchase Agreement.
**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.
**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.
**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 Employment Partners of
such partnerships.
**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.
**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.
**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.
**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., Charles P.
Bagby Company, Inc.
**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.
**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.
**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.
**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.
**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.
**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.
236
EXHIBIT
-------
**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.
**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.
**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.
*3.1 -- Amended and Restated Certificate of Incorporation.
*3.2 -- Bylaws.
*4.1 -- Specimen Common Stock Certificate.
*5.1 -- Opinion of Andrews & Kurth L.L.P. as to the legality of
the securities being registered.
*10.1 -- Form of Employment Agreement.
*10.2 -- Form of Officer and Director Indemnification Agreement.
*10.3 -- Integrated Electrical Services, Inc. 1997 Stock Plan.
*10.4 -- Integrated Electrical Services, Inc. 1997 Directors Stock
Plan.
*23.1 -- Consent of Andrews & Kurth L.L.P. (included in Exhibit
5.1).
*23.2 -- Consent of Arthur Andersen LLP.
**24.1 -- Powers of Attorney (included in signature page set forth
on page II-5).
*27 -- Financial Data Schedule.
*99.1 -- Consents of Alan Sielbeck, Richard L. Tucker and Thomas
E. White to serve as directors.
- ---------------
* Filed herewith.
** Previously filed.
2
237
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 INTERNATIONAL PROSPECTUS]
SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED NOVEMBER 28, 1997
PROSPECTUS
7,000,000 SHARES
INTEGRATED ELECTRICAL SERVICES, INC.
[INTEGRATED LOGO]
COMMON STOCK
------------------------
All of the shares of Common Stock, $.01 par value per share (the "Common
Stock"), offered hereby are being offered by Integrated Electrical Services,
Inc. (the "Company").
Of the shares of Common Stock being offered hereby, 1,400,000 shares (the
"International Shares") are being offered initially outside the United States
and Canada (the "International Offering") by the International Managers and
5,600,000 shares (the "U.S. Shares") are being offered initially in the United
States and Canada (the "U.S. Offering" and, together with the International
Offering, the "Offerings") by the U.S. Underwriters. The price to public and
underwriting discount per share are identical for both Offerings and the
closings for both Offerings are conditioned upon each other. See "Underwriting."
Prior to the Offerings, there has been no public market for the Common
Stock. It is currently estimated that the initial public offering price will be
between $ and $ per share. See "Underwriting" for information relating to the
factors to be considered in determining the initial public offering price.
Shares of Common Stock are being reserved for sale to certain employees,
directors and business associates of, and certain other persons designated by,
the Company, at the initial public offering price. Such employees, directors,
and other persons are expected to purchase, in the aggregate, not more than 10%
of the Common Stock offered in the Offerings. See "Underwriting."
The Company intends to make application to list the Common Stock on The New
York Stock Exchange ("NYSE") under the symbol "IEE."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE PURCHASERS OF THE SECURITIES OFFERED
HEREBY.
------------------------
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.
========================================================================================================================
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------------
Per Share......................................... $ $ $
- ------------------------------------------------------------------------------------------------------------------------
Total(3).......................................... $ $ $
========================================================================================================================
(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended (the "Securities Act"). See "Underwriting."
(2) Before deducting expenses payable by the Company estimated at $ .
(3) The Company has granted the International Managers and U.S. Underwriters
options, exercisable within 30 days after the date hereof, to purchase up to
210,000 and 840,000 additional shares of Common Stock, respectively, solely
to cover over-allotments, if any. If such options are exercised in full, the
total Price to Public, Underwriting Discount and Proceeds to Company will be
$ , $ and $ , respectively. See "Underwriting."
------------------------
The shares of Common Stock offered hereby are offered by the several
Underwriters, subject to prior sale, when, as and if issued to and accepted by
the Underwriters against payment therefor, subject to certain conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the share
certificates representing the Common Stock will be made in New York, New York on
or about , 1997.
------------------------
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
EQUITABLE SECURITIES CORPORATION
SANDERS MORRIS MUNDY
------------------------
The date of this Prospectus is , 1997.
238
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
[MAP OF LOCATIONS AND OTHER GRAPHICS]
Certain persons participating in the Offerings may engage in transactions
that stabilize, maintain or otherwise affect the price of the Common Stock. Such
transactions may include stabilizing, the purchase of Common Stock to cover
syndicate short positions and the imposition of penalty bids. For a description
of these activities, see "Underwriting."
For United Kingdom purchasers: The shares of Common Stock may not be
offered or sold in the United Kingdom other than to persons whose ordinary
activities involve them in acquiring, holding, managing or disposing of
investments, whether as principal or agent (except in circumstances that do not
constitute an offer to the public within the meaning of the Public Offers of
Securities Regulations 1995 or the Financial Services Act 1986), and this
Prospectus may only be issued or passed on to any person in the United Kingdom
if that person is of a kind described in Article 11(3) of the Financial Services
Act 1986 (Investment Advertisements) (Exemptions) Order 1996 or is a person to
whom the Prospectus may otherwise lawfully be passed on.
239
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
UNDERWRITING
Subject to the terms and conditions set forth in the international purchase
agreement (the "International Purchase Agreement") among the Company and each of
the underwriters named below (the "International Managers"), the Company has
agreed to sell to each of the International Managers, and each of the
International Managers, for whom Merrill Lynch International, Donaldson, Lufkin
& Jenrette International, Equitable Securities Corporation and Sanders Morris
Mundy Inc. are acting as representatives (the "Lead Managers"), severally has
agreed to purchase from the Company, the aggregate number of shares of Common
Stock set forth opposite its name below.
NUMBER OF
INTERNATIONAL MANAGERS SHARES
---------------------- ---------
Merrill Lynch International.................................
Donaldson, Lufkin & Jenrette International..................
Equitable Securities Corporation............................
Sanders Morris Mundy Inc....................................
---------
Total.......................................... 1,400,000
=========
The Company has also entered into a U.S. purchase agreement (the "U.S.
Purchase Agreement") with certain other underwriters in the United States and
Canada (the "U.S. Underwriters" and, together with the International Managers,
the "Underwriters"), for whom Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Donaldson, Lufkin & Jenrette Securities Corporation, Equitable
Securities Corporation and Sanders Morris Mundy Inc. are acting as
representatives. Subject to the terms and conditions set forth in the U.S.
Purchase Agreement, and concurrently with the sale of 1,400,000 shares of Common
Stock to the International Managers pursuant to the International Purchase
Agreement, the Company has agreed to sell to the U.S. Underwriters, and the U.S.
Underwriters severally have agreed to purchase from the Company, an aggregate of
5,600,000 shares of Common Stock. The public offering price per share of Common
Stock and the total underwriting discount per share are identical under the
International Purchase Agreement and the U.S. Purchase Agreement.
In the International Purchase Agreement and the U.S. Purchase Agreement,
the several International Managers and the several U.S. Underwriters,
respectively, have agreed, subject to the terms and conditions set forth
therein, to purchase all of the shares of Common Stock being sold pursuant to
each such Purchase Agreement if any of such shares being sold pursuant to each
such Purchase Agreement are purchased. Under certain circumstances, the
commitments of non-defaulting International Managers or U.S. Underwriters (as
the case may be) may be increased as set forth in the International Purchase
Agreement and the U.S. Purchase Agreement, respectively. The closing with
respect to the sale of shares of Common Stock to be purchased by the
International Managers and the U.S. Underwriters are conditioned upon one
another.
The International Managers and the U.S. Underwriters have entered into an
intersyndicate agreement (the "Intersyndicate Agreement") that provides for the
coordination of their activities. Under the terms of the Intersyndicate
Agreement, the Underwriters are permitted to sell shares of Common Stock to each
other for the purposes of resale at the public offering price, less an amount
not greater than the selling concession. Under the terms of the Intersyndicate
Agreement, the International Managers and any dealer to whom they sell shares of
Common Stock will not offer to sell or sell shares of Common Stock to persons
who are United States or Canadian persons or to persons they believe intend to
resell to persons who are United States or
240
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Canadian persons, and the U.S. Underwriters and any dealer to whom they sell
shares of Common Stock will not offer to sell or sell shares of Common Stock to
persons who are non-United States and non-Canadian persons or to persons they
believe intend to resell to persons who are non-United States persons or non-
Canadian persons, except, in each case, for transactions pursuant to the
Intersyndicate Agreement.
The Lead Managers have advised the Company that the International Managers
propose initially to offer the shares of Common Stock to the public at the
initial public offering price set forth on the cover page of this Prospectus,
and to certain dealers at such price less a concession not in excess of $
per share. The International Managers may allow, and such dealers may reallow, a
discount not in excess of $ per share to certain other dealers. After the
Offerings, the initial public offering price, concession and discount may be
changed.
The Company has granted the International Managers an option, exercisable
by the Lead Managers for 30 days after the date of this Prospectus, to purchase
up to an aggregate of 240,000 additional shares of Common Stock at the initial
public offering price set forth on the cover page hereof, less the underwriting
discount. The International Managers may exercise this option to cover
overallotments, if any, made on the sale of the shares of Common Stock offered
hereby. If the International Managers exercise this option, each International
Manager will have a firm commitment, subject to certain conditions, to purchase
approximately the same percentage thereof which the number of shares of Common
Stock to be purchased by it shown in the foregoing table bears to the 1,400,000
shares of Common Stock initially offered hereby. The Company has also granted an
option to the U.S. Underwriters, which expires 30 days after the date of this
Prospectus, to purchase up to 810,000 additional shares of Common Stock to cover
over-allotments, if any, on terms similar to those granted to the International
Managers.
The Company and each of its directors and executive officers have agreed
not to (i) directly or indirectly, offer, pledge, sell, contract to sell, sell
any option or contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant for the sale of, or otherwise transfer or
dispose of any shares of Common Stock or any securities convertible into or
exchangeable or exercisable for Common Stock or file any registration statement
under the Securities Act with respect to any of the foregoing or (ii) enter into
any swap or any other agreement or any transaction that transfers, in whole or
in part, directly or indirectly, the economic consequence of ownership of the
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock whether any such swap or transaction described in clause (i) or
(ii) above is to be settled by delivery of Common Stock or such other
securities, in cash or otherwise, for a period of 180 days from the date of this
Prospectus without the prior written consent of Merrill Lynch, Pierce, Fenner &
Smith Incorporated on behalf of the Underwriters, except for (i) shares issued
in connection with acquisitions, provided that (except with respect to shares
issued in transactions in which the issuance or resale of such shares is not
registered under the Securities Act), the recipients of such shares agree to be
bound by similar restrictions and (ii) any shares of Common Stock issued or
options to purchase Common Stock granted pursuant to the Company's benefit plans
described herein.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
Until the distribution of the Common Stock is completed, rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase the Common Stock. As an exception to these
rules, the U.S. Underwriters are permitted to engage in certain transactions
that stabilize the price of the Common Stock. Such transactions consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of the
Common Stock.
If the Underwriters create a short position in the Common Stock in
connection with the Offering, (i.e., if they sell more shares of Common Stock
than are set forth on the cover page of this Prospectus), the U.S. Underwriters
may reduce that short position by purchasing Common Stock in the open market.
The U.S.
241
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
Underwriters may also elect to reduce any short position by exercising all or
part of the over-allotment option described above.
The U.S. Underwriters may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the U.S. Underwriters purchase
shares of Common Stock in the open market to reduce the Underwriters' short
position or to stabilize the price of the Common Stock, they may reclaim the
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offerings.
In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an affect on the price of a security to the extent that it were
to discourage resales of the security.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Common Stock. In addition, neither
the Company nor any of the Underwriters makes any representation that the U.S.
Underwriters will engage in such transactions or that such transactions, once
commenced, will not be discontinued without notice.
The Company intends to make application to list the Common Stock on the
NYSE under the symbol "IEE."
The U.S. Underwriters have reserved for sale, at the initial public
offering price, up to 700,000 shares of Common Stock for certain employees,
directors and business associates of, and certain other persons designated by,
the Company who have expressed an interest in purchasing such shares of Common
Stock. The number of shares available for sale to the general public in the
Offerings will be reduced to the extent such persons purchase such reserved
shares. Any reserved shares not so purchased will be offered to the general
public on the same basis as other shares offered hereby.
Prior to the Offerings, there has been no established trading market for
the shares of Common Stock. The initial public offering price for the Common
Stock offered hereby has been determined by negotiations between the Company and
the Underwriters. Among the factors considered in making such determination were
the history of and the prospects for the industry in which the Company competes,
an assessment of the Company's management, the past and present operations of
the Founding Companies and the Company, the historical results of operations of
the Founding Companies and the Company and the trend of its revenues and
earnings, the prospects for future earnings of the Company, the general
condition of prices of similar securities of generally comparable companies and
other relevant factors. There can be no assurance that an active trading market
will develop for the Common Stock or that the Common Stock will trade in the
public market subsequent to the Offerings at or above the initial public
offering price.
The Underwriters have informed the Company that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority.
Each International Manager represents and agrees that (a) it has not
offered or sold and prior to the expiration of six months from the closing date
of the Offerings, will not offer or sell any shares of Common Stock to persons
in the United Kingdom, except to persons whose ordinary activities involve them
in acquiring, holding, managing or disposing of investments (as principal or
agent) for the purposes of their businesses or otherwise in circumstances which
have not resulted and will not result in an offer to the public in the United
Kingdom within the meaning of the Public Offers of Securities Regulations 1995,
(b) it has complied with and will comply with all applicable provisions of the
Financial Services Act 1986 with respect to anything done by it in relation to
the Common Stock in, from or otherwise involving the United Kingdom, and (c) it
has only issued or passed on and will only issue or pass on to any person in the
United Kingdom any document received by it in connection with the issue or sale
of the Common Stock if that person is of a kind
242
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996 or is a person to whom such document may
otherwise lawfully be issued or passed on.
No action has been or will be taken in any jurisdiction (except in the
United States) that would permit a public offering of the shares of Common Stock
or the possession, circulation or distribution of this Prospectus or any other
material relating to the Company or the shares of Common Stock in any
jurisdiction where action for that purpose is required. Accordingly, the shares
of Common Stock may not be offered or sold, directly or indirectly, and neither
this Prospectus nor any other offering material or advertisements in connection
with the shares of Common Stock may be distributed or published, in or from any
country or jurisdiction except in compliance with any applicable rules and
regulations of such country or jurisdiction.
Purchasers of the shares of Common Stock offered hereby may be required to
pay stamp taxes and other charges in accordance with the laws and practices of
the country of purchase, in addition to the offering price set forth on the
cover page of this Prospectus.
243
[ALTERNATE PAGE FOR INTERNATIONAL 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 OR THE UNDERWRITERS. 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
PAGE
----
Prospectus Summary....................
Risk Factors..........................
The Company...........................
Use of Proceeds.......................
Dividend Policy.......................
Capitalization........................
Dilution..............................
Selected Financial Data...............
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business..............................
Management............................
Certain Transactions..................
Principal Stockholders................
Description of Capital Stock..........
Shares Eligible for Future Sale.......
Certain United States Tax Consequences
to Non-United States Holders........
Underwriting..........................
Legal Matters.........................
Experts...............................
Additional Information................
Index to Financial Statements.........
------------------------
UNTIL , 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
======================================================
======================================================
7,000,000 SHARES
INTEGRATED ELECTRICAL
SERVICES, INC.
[INTEGRATED LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
EQUITABLE SECURITIES CORPORATION
SANDERS MORRIS MUNDY
, 1997
======================================================
1
EXHIBIT 1.1
DRAFT 11/13/97
================================================================================
INTEGRATED ELECTRICAL SERVICES, INC.
(A DELAWARE CORPORATION)
5,600,000 SHARES OF COMMON STOCK
U. S. PURCHASE AGREEMENT
Dated: *, 1997
================================================================================
2
TABLE OF CONTENTS
PAGE
----
SECTION 1. Representations and Warranties. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(a) Representations and Warranties by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(i) Compliance with Registration Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(ii) Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(iii) Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(iv) No Material Adverse Change in Business . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(v) Good Standing of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(vi) Good Standing of Founding Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(vii) Capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(viii) Authorization of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(ix) Authorization and Description of Securities . . . . . . . . . . . . . . . . . . . . . . . . . 6
(x) Absence of Defaults and Conflicts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(xi) Absence of Labor Dispute . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(xii) Absence of Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(xiii) Accuracy of Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(xiv) Possession of Intellectual Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(xv) Absence of Further Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(xvi) Possession of Licenses and Permits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(xvii) Title to Property . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(xviii) Compliance with Cuba Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(xix) Investment Company Act . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(xx) Environmental Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(xxi) Registration Rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(xxii) Tax Returns . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(xxiv) ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(xxv) Related Party Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(xxvi) Reserved Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(xxvii) Consummation of Combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(b) Officer's Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing. . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(a) Initial Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(b) Option Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(c) Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(d) Denominations; Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
SECTION 3. Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(a) Compliance with Securities Regulations and Commission Requests . . . . . . . . . . . . . . . . . . . 12
(b) Filing of Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(c) Delivery of Registration Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(d) Delivery of Prospectuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(e) Continued Compliance with Securities Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(f) Blue Sky Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(g) Rule 158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(h) Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
i
3
(i) Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(j) Restriction on Sale of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
(k) Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(l) Compliance with NASD Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(m) Compliance with Rule 463. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 4. Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(a) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(b) Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 5. Conditions of U.S. Underwriters' Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(a) Effectiveness of Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(b) Opinions of Counsel for Company and the Founding Companies . . . . . . . . . . . . . . . . . . . . . 15
(c) Opinion of Counsel for U.S. Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(d) Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
(e) Accountant's Comfort Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(f) Bring-down Comfort Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(g) Approval of Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(h) No Objection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(i) Lock-up Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(k) Purchase of Initial International Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(l) Conditions to Purchase of U.S. Option Securities . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(i) Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
(ii) Opinion of Counsel for Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(iii) Opinion of Counsel for U.S. Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . 17
(iv) Bring-down Comfort Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(m) Additional Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(n) Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
SECTION 6. Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(a) Indemnification of U.S. Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
(b) Indemnification of Company, Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 18
(c) Actions against Parties; Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
(d) Settlement without Consent if Failure to Reimburse . . . . . . . . . . . . . . . . . . . . . . . . . 19
(e) Indemnification for Reserved Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 7. Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
SECTION 8. Representations, Warranties and Agreements to Survive Delivery . . . . . . . . . . . . . . . . . . . 20
SECTION 9. Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(a) Termination; General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
(b) Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 10. Default by One or More of the U.S. Underwriters . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21
SECTION 11. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
ii
4
SECTION 12. Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 13. Governing Law and Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SECTION 14. Effect of Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
SCHEDULE A . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sch A-1
SCHEDULE B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sch B-1
SCHEDULE C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sch C-1
SCHEDULE D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sch D-1
Exhibit A-1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A1-1
Exhibit A-2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A2-1
Exhibit B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . B-1
iii
5
INTEGRATED ELECTRICAL SERVICES, INC.
(a Delaware corporation)
5,600,000 Shares of Common Stock
(Par Value $.01 Per Share)
U.S. PURCHASE AGREEMENT
*, 1997
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
Donaldson, Lufkin & Jenrette
Securities Corporation
Equitable Securities Corporation
Sanders Morris Mundy Inc.
as U.S. Representative(s) of the several U.S. Underwriters
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Ladies and Gentlemen:
Integrated Electrical Services, Inc., a Delaware Corporation (the
"Company"), Confirms its Agreement with Merrill Lynch & Co., Merrill Lynch,
Pierce, Fenner & Smith Incorporated ("Merrill Lynch") and each of the other
U.S. Underwriters named in Schedule A hereto (collectively, the "U.S.
Underwriters", which term shall also include any underwriter substituted as
hereinafter provided in Section 10 hereof), for whom Merrill Lynch, Donaldson,
Lufkin & Jenrette Securities Corporation, Equitable Securities Corporation and
Sanders Morris Mundy Inc. are acting as representatives (in such capacity, the
"Representatives"), with respect to the issue and sale by the Company and the
purchase by the U.S. Underwriters, acting severally and not jointly, of the
respective numbers of shares of Common Stock, par value $.01 per share, of the
Company ("Common Stock") set forth in said Schedule A, and with respect to the
grant by the Company to the U.S. Underwriters, acting severally and not
jointly, of the option described in Section 2(b) hereof to purchase all or any
part of 840,000 additional shares of Common Stock to cover over-allotments, if
any. The aforesaid 5,600,000 shares of Common Stock (the "Initial U.S.
Securities") to be purchased by the U.S. Underwriters and all or any part of
the 840,000 shares of Common Stock subject to the option described in Section
2(b) hereof (the "U.S. Option Securities") are hereinafter called,
collectively, the "U.S. Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "International Purchase Agreement")
providing for the offering by the Company of an aggregate of 1,400,000 shares
of Common Stock (the "Initial International Securities") through arrangements
with certain underwriters outside the United States and Canada (the
"International Managers") for which Merrill Lynch International, Donaldson,
Lufkin & Jenrette International, Equitable Securities Corporation and Sanders
Morris Mundy Inc. are acting as lead managers (the "Lead Managers") and the
grant by the Company to the International Managers, acting severally and not
jointly, of an option to purchase all or any part of the International
6
Managers' pro rata portion of up to 210,000 additional shares of Common Stock
solely to cover overallotments, if any (the "International Option Securities"
and, together with the U.S. Option Securities, the "Option Securities"). The
Initial International Securities and the International Option Securities are
hereinafter called the "International Securities". It is understood that the
Company is not obligated to sell and the U.S. Underwriters are not obligated to
purchase, any Initial U.S. Securities unless all of the Initial International
Securities are contemporaneously purchased by the International Managers.
The U.S. Underwriters and the International Managers are hereinafter
collectively called the "Underwriters", the Initial U.S. Securities and the
Initial International Securities are hereinafter collectively called the
"Initial Securities", and the U.S. Securities, and the International Securities
are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated (in such capacity, the "Global Coordinator").
The Company understands that the U.S. Underwriters propose to make a
public offering of the U.S. Securities as soon as the Representatives deem
advisable after this Agreement has been executed and delivered.
The Company and the U.S. Underwriters agree that up to 700,000 shares
of the Initial U.S. Securities to be purchased by the U.S. Underwriters (the
"Reserved Securities") shall be reserved for sale by the Underwriters to
certain eligible employees and persons having business relationships with the
Company, as part of the distribution of the Securities by the Underwriters,
subject to the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that such Reserved
Securities are not orally confirmed for purchase by such eligible employees and
persons having business relationships with the Company by the end of the first
business day after the date of this Agreement, such Reserved Securities may be
offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-38715) covering the
registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will
either (i) prepare and file a prospectus in accordance with the provisions of
Rule 430A ("Rule 430A") of the rules and regulations of the Commission under
the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule
424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely
upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term
sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule
424(b). Two forms of prospectus are to be used in connection with the offering
and sale of the Securities: one relating to the U.S. Securities (the "Form of
U.S. Prospectus") and one relating to the International Securities (the "Form
of International Prospectus"). The Form of International Prospectus is
identical to the Form of U.S. Prospectus, except for the front cover and back
cover pages and the information under the caption "Underwriting" [and the
inclusion in the Form of International Prospectus of a section under the
caption "Certain United States Tax Considerations for Non-United States
Holders."] The information included in any such prospectus or in any such Term
Sheet, as the case may be, that was omitted from such registration statement at
the time it became effective but that is deemed to be part of such registration
statement at the time it became effective (a) pursuant to paragraph (b) of Rule
430A is referred to
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7
as "Rule 430A Information" or (b) pursuant to paragraph (d) of Rule 434 is
referred to as "Rule 434 Information." Each Form of U.S. Prospectus and Form
of International Prospectus used before such registration statement became
effective, and any prospectus that omitted, as applicable, the Rule 430A
Information or the Rule 434 Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto and schedules thereto at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
Form of U.S. Prospectus and the final Form of International Prospectus in the
forms first furnished to the Underwriters for use in connection with the
offering of the Securities are herein called the "U.S. Prospectus" and the
"International Prospectus," respectively, and collectively, the "Prospectuses."
For purposes of this Agreement, all references to the Registration Statement,
any preliminary prospectus, the U.S. Prospectus, the International Prospectus
or any Term Sheet or any amendment or supplement to any of the foregoing shall
be deemed to include the copy filed with the Commission pursuant to its
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
At the Closing Time (defined below), the Company will acquire all of
the outstanding capital stock or other equity interests of each of the
companies listed on Schedule D (each, a "Founding Company" and, collectively,
the "Founding Companies"), in each case pursuant to a stock purchase agreement
(each an "Acquisition Agreement" and, collectively, the "Acquisition
Agreements"), each as described in the Prospectuses under the caption "Certain
Transactions - Organization of the Company" (collectively, the "Combination").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each U.S. Underwriter as of the date hereof, as of
the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b), hereof and agrees with each U.S.
Underwriter, as follows:
(i) Compliance with Registration Requirements. Each of
the Registration Statement and any Rule 462(b) Registration Statement
has become effective under the 1933 Act and no stop order suspending
the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or,
to the knowledge of the Company, are contemplated by the Commission,
and any request on the part of the Commission for additional
information has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments
thereto became effective and at the Closing Time (and, if any U.S.
Option Securities are purchased, at the Date of Delivery), the
Registration Statement, the Rule 462(b) Registration Statement and any
amendments and supplements thereto complied and will comply in all
material respects with the requirements of the 1933 Act and the 1933
Act Regulations and did not and will not contain an 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 not
misleading. Neither of the Prospectuses nor any amendments or
supplements thereto, at the time the Prospectuses or any amendments or
supplements thereto were issued and at the Closing Time (and, if any
U.S. Option Securities are purchased, at the Date of Delivery),
included or will include an untrue statement of a
3
8
material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434 and
the Prospectuses shall not be "materially different", as such term is
used in Rule 434, from the prospectuses included in the Registration
Statement at the time it became effective. The representations and
warranties in this subsection shall not apply to statements in or
omissions from the Registration Statement or the U.S. Prospectus made
in reliance upon and in conformity with information furnished to the
Company in writing by any U.S. Underwriter through the Representatives
expressly for use in the Registration Statement or the U.S.
Prospectus.
Each preliminary prospectus and the prospectuses filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectuses
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Independent Accountants. The accountants who
certified the financial statements and supporting schedules included
in the Registration Statement are independent public accountants as
required by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements
included in the Registration Statement and the Prospectuses, together
with the related schedules and notes, present fairly the financial
position of the Company, the Founding Companies, and their respective
consolidated subsidiaries at the dates indicated and the statement of
operations, stockholders' equity and cash flows of the Company, the
Founding Companies and their consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein.
The selected financial data and the summary financial information
included in the Prospectuses present fairly the information shown
therein and have been compiled on a basis consistent with that of the
audited financial statements included in the Registration Statement.
The pro forma financial statements and the related notes thereto
included in the Registration Statement and the Prospectuses present
fairly the information shown therein, have been prepared in accordance
with the Commission's rules and guidelines with respect to pro forma
financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate to
give effect to the transactions and circumstances referred to therein.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses, except as otherwise stated therein,
(A) there has been no material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or
business prospects of the Company, the Founding Companies and their
respective subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the
Company, the Founding Companies or their respective subsidiaries,
other than those in the ordinary course of business, which are
material with respect to the Company, the Founding Companies and their
respective subsidiaries considered as one enterprise, and (C) there
has been no dividend or
4
9
distribution of any kind declared, paid or made by the Company on any
class of its capital stock or, except as set forth in the
Prospectuses, by any Founding Company on any class of its capital
stock.
(v) Good Standing of the Company. The Company has been
duly organized and is validly existing as a corporation in good
standing under the laws of the State of Delaware and has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectuses and to enter
into and perform its obligations under this Agreement. The Company is
duly qualified as a foreign corporation to transact business and is in
good standing in each other jurisdiction in which such qualification
is required, whether by reason of the ownership or leasing of property
or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(vi) Good Standing of Founding Companies. The Company has
no subsidiaries as of the date hereof. As of the Closing Time, the
only subsidiaries of the Company will be the Founding Companies and
their respective subsidiaries. Each Founding Company or subsidiary
thereof that is a corporation has been duly organized and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority
to own, lease and operate its properties and to conduct its business
as described in the Prospectuses and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect. Except as
otherwise disclosed in the Registration Statement, all of the issued
and outstanding capital stock of each Founding Company or subsidiary
has been duly authorized and validly issued, is fully paid and
non-assessable, and upon consummation of the Combination, will be
owned by the Company, directly or through subsidiaries, free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim
or equity. None of the outstanding shares of capital stock of any
founding company subsidiary was issued in violation of the preemptive
or similar rights of any security holder of such subsidiary. Each
Founding Company or subsidiary thereof that is a partnership or
limited liability company has been duly formed and is validly existing
in good standing under the laws of the jurisdiction of organization,
has power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectuses and is duly
qualified to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect. Exhibit 21 to
the Registration Statement sets forth a complete list of the Founding
Companies and their subsidiaries, except to the extent permitted by
the rules and regulations of the Commission.
(vii) Capitalization. As of the Closing Time, the Company
had authorized capital stock consisting of 100,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock").
Prior to the closing of the transactions contemplated by each of the
Acquisition Agreements and the issuance of shares of Common Stock as
contemplated thereby and by the U.S. Purchase Agreement and the
International Purchase Agreement, the Company had issued and
outstanding 4,052,311 shares of Common Stock and no shares of
Preferred Stock; upon consummation of the Combination and the
issuance of 12,313,026 shares of Common Stock as contemplated by the
Acquisition Agreements, (which, together with the 4,052,311 shares of
Common Stock issued prior to the Combination, are all the shares of
Common Stock issued or to be issued prior to the issuance and sale of
the Securities), but without giving effect to the issuance of the
Securities pursuant to the terms of the U.S. Purchase
5
10
Agreement and the International Purchase Agreement, the Company will
have issued and outstanding 16,365,337 shares of Common Stock and no
shares of Preferred Stock. All of such shares of Common Stock have
been duly authorized and, when issued and delivered to the purchasers
thereof against payment therefor as provided in the Acquisition
Agreements, will be validly issued, fully paid and nonassessable.
None of the outstanding shares of capital stock of the Company was
issued in violation of the preemptive or other similar rights of any
security holder of the Company. Except as described in the
Prospectuses, there are no outstanding options, warrants or other
rights calling for the issuance of, and there are no commitments to
issue any shares of, capital stock of the Company or any security
convertible into or exchangeable or exercisable for capital stock of
the Company.
(viii) Authorization of Agreement. This Agreement and the
International Purchase Agreement have been duly authorized, executed
and delivered by the Company.
(ix) Authorization and Description of Securities. The
Securities to be purchased by the U.S. Underwriters and the
International Managers from the Company have been duly authorized for
issuance and sale to the U.S. Underwriters pursuant to this Agreement
and the International Managers pursuant to the International Purchase
Agreement, respectively, and, when issued and delivered by the Company
pursuant to this Agreement and the International Purchase Agreement,
respectively, against payment of the consideration set forth herein
and the International Purchase Agreement, respectively, will be
validly issued, fully paid and non-assessable. The Common Stock
conforms to all statements relating thereto contained in the
Prospectuses and such description conforms to the rights set forth in
the instruments defining the same. No holder of the Securities will
be subject to personal liability by reason of being such a holder.
The issuance of the Securities is not subject to the preemptive or
other similar rights of any security holder of the Company.
(x) Absence of Defaults and Conflicts. Neither the
Company nor any of the Founding Companies or their respective
subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or other
agreement or instrument to which the Company, any Founding Company or
any of their respective subsidiaries is a party or by which it or any
of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a
Material Adverse Effect. The execution, delivery and performance of
this Agreement, the International Purchase Agreement, and the
Acquisition Agreements and the consummation of the transactions
contemplated in this Agreement, the International Purchase Agreement
and in the Registration Statement (including the issuance and sale of
the Securities and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use of
Proceeds") and compliance by the Company with its obligations under
this Agreement, the International Purchase Agreement and the
Acquisition Agreements have been duly authorized by all necessary
corporate action and do not and will not, whether with or without the
giving of notice or passage of time or both, conflict with or
constitute a breach of, or default or Repayment Event (as defined
below) under, or result in the creation or imposition of any lien,
charge or encumbrance upon any property or assets of the Company, any
Founding Company or any subsidiary pursuant to, the Agreements and
Instruments (except for such conflicts, breaches or defaults or liens,
charges or encumbrances that would not result in a Material Adverse
Effect), nor will such action result in any violation of the
provisions of the charter or by-laws of the Company, any Founding
Company or any subsidiary thereof or any applicable law, statute,
rule, regulation, judgment, order,
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11
writ or decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company, any
Founding Company or any subsidiary thereof or any of their assets,
properties or operations. As used herein, a "Repayment Event" means
any event or condition which gives the holder of any note, debenture
or other evidence of indebtedness (or any person acting on such
holder's behalf) the right to require the repurchase, redemption or
repayment of all or a portion of such indebtedness by the Company, any
Founding Company or any subsidiary thereof.
(xi) Absence of Labor Dispute. No labor dispute with the
employees of the Company, any Founding Company or any subsidiary
thereof exists or, to the knowledge of the Company, is imminent, and
neither the Company nor any Founding Company is aware of any existing
or imminent labor disturbance by the employees of any of its or any
subsidiary's principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to
result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company, any Founding Company or any subsidiary thereof, which is
required to be disclosed in the Registration Statement (other than as
disclosed therein), or which might reasonably be expected to result in
a Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in this Agreement,
the International Purchase Agreement or the Acquisition Agreements or
the performance by the Company of its obligations hereunder or
thereunder; the aggregate of all pending legal or governmental
proceedings to which the Company, any Founding Company or any
subsidiary thereof is a party or of which any of their respective
property or assets is the subject which are not described in the
Registration Statement, including ordinary routine litigation
incidental to the business, could not reasonably be expected to result
in a Material Adverse Effect.
(xiii) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectuses or to be filed as exhibits thereto which
have not been so described and filed as required.
(xiv) Possession of Intellectual Property. The Company,
the Founding Companies and their subsidiaries own or possess, or can
acquire on reasonable terms, adequate patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade
names or other intellectual property (collectively, "Intellectual
Property") necessary to carry on the business now operated by them,
and neither the Company, any Founding Company nor any of its
subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with
respect to any Intellectual Property or of any facts or circumstances
which would render any Intellectual Property invalid or inadequate to
protect the interest of the Company, such Founding Company or any of
its subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity
or inadequacy, singly or in the aggregate, would result in a Material
Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in
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12
connection with the offering, issuance or sale of the Securities under
this Agreement and the International Purchase Agreement or the
consummation of the transactions contemplated by this Agreement, the
International Purchase Agreement or the Acquisition Agreements, except
such as have been already obtained or as may be required under the
1933 Act or the 1933 Act Regulations and foreign or state securities
or blue sky laws.
(xvi) Possession of Licenses and Permits. The Company,
each Founding Company and their subsidiaries possess such permits,
licenses, approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state,
local or foreign regulatory agencies or bodies necessary to conduct
the business now operated by them. The Company, each Founding Company
and their subsidiaries are in compliance with the terms and conditions
of all such Governmental Licenses, except where the failure so to
comply would not, singly or in the aggregate, have a Material Adverse
Effect. All of the Governmental Licenses are valid and in full force
and effect, except when the invalidity of such Governmental Licenses
or the failure of such Governmental Licenses to be in full force and
effect would not have a Material Adverse Effect. Neither the Company
nor any Founding Company or their subsidiaries has received any notice
of proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in
a Material Adverse Effect.
(xvii) Title to Property. The Company, each Founding
Company and their subsidiaries have good and marketable title to all
real property owned by them and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectuses or (b) do
not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be
made of such property by the Company, the Founding Companies or any of
their subsidiaries. All of the leases and subleases material to the
business of the Company, the Founding Companies or any of their
subsidiaries, considered as one enterprise, and under which the
Company, the Founding Company or any of their subsidiaries holds
properties described in the Prospectuses, are in full force and
effect, and neither the Company nor any Founding Company or any of
their subsidiaries has any notice of any material claim of any sort
that has been asserted by anyone adverse to the rights of the Company,
such Founding Company or any subsidiary under any of the leases or
subleases mentioned above, or affecting or questioning the rights of
the Company, such Founding Company or such subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(xviii) Compliance with Cuba Act. The Company has complied
with, and is and will be in compliance with, the provisions of that
certain Florida act relating to disclosure of doing business with
Cuba, codified as Section 517.075 of the Florida statutes, and the
rules and regulations thereunder (collectively, the "Cuba Act") or is
exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon
the issuance and sale of the Securities as herein contemplated, the
application of the net proceeds therefrom as described in the
Prospectuses or consummation of the Combination will not be, an
"investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended (the "1940 Act").
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(xx) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the
Company, any Founding Company or any subsidiary thereof is in
violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any
judicial or administrative interpretation thereof, including any
judicial or administrative order, consent, decree or judgment,
relating to pollution or protection of human health, the environment
(including, without limitation, ambient air, surface water,
groundwater, land surface or subsurface strata) or wildlife,
including, without limitation, laws and regulations relating to the
release or threatened release of chemicals, pollutants, contaminants,
wastes, toxic substances, hazardous substances, petroleum or petroleum
products (collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company, the Founding Companies and their subsidiaries
have all permits, authorizations and approvals required under any
applicable Environmental Laws and are each in compliance with their
requirements, (C) there are no pending or threatened administrative,
regulatory or judicial actions, suits, demands, demand letters,
claims, liens, notices of noncompliance or violation, investigation or
proceedings relating to any Environmental Law against the Company, any
Founding Company or any of their subsidiaries and (D) there are no
events or circumstances that might reasonably be expected to form the
basis of an order for clean-up or remediation, or an action, suit or
proceeding by any private party or governmental body or agency,
against or affecting the Company, any Founding Company or any of their
subsidiaries relating to Hazardous Materials or any Environmental
Laws.
(xxi) Registration Rights. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xxii) Tax Returns. The Company, each Founding Company and
each subsidiary have filed all Federal, state, local and foreign
income tax returns which have been required to be filed and have paid
all taxes indicated by said returns and all assessments received by it
or any of them to the extent that such taxes have become due and are
not being contested in good faith, except for the filing of those
returns, and the paying of those taxes, the failure to file or pay,
respectively, individually or in the aggregate, would not have a
Material Adverse Effect. All tax liabilities have been adequately
provided for in the financial statements of the Company or the
applicable Founding Company.
(xxiii) Insurance. The Company and the Founding Companies
and their subsidiaries carry, or are covered by, insurance in such
amounts and covering such risks as is reasonably adequate for the
conduct of their respective businesses and the value of their
respective properties and as is customary for companies in the
Company's industry.
(xxiv) ERISA. The Company and the Founding Companies and
their subsidiaries are in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA").
(xxv) Related Party Transactions. No relationship, direct
or indirect, exists between or among the Company or any Founding
Company or subsidiary, on the one hand, and the directors, officers,
shareholders, customers or suppliers of the Company, such Founding
Company or its
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subsidiaries on the other hand, which is required to be described in
the Prospectuses which is not so described.
(xxvi) Reserved Shares. Each of the persons identified by
the Company to the Underwriters to receive Reserved Shares is a
citizen of the United States and currently is a resident of one of the
United States.
(xxvii) Consummation of Combination. As of the date of this
Agreement, all conditions to consummation of the transactions
contemplated by each Acquisition Agreement have been satisfied, with
the exception of the Closing of the sale of the Securities pursuant to
this Agreement and the International Purchase Agreement. There have
been no amendments or supplements to any of the Acquisition Agreements
since the original execution thereof on October 21, 1997. The Company
has notified the Underwriters of any waiver of any conditions to
consummation of such Acquisition Agreements. The Closing (as defined
in the Acquisition Agreements) with respect to each Acquisition
Agreement has occurred. At or prior to the Closing Time, the
transactions contemplated by each Acquisition Agreement will be
consummated, with the result that each Founding Company will become a
wholly-owned direct or indirect subsidiary of the Company as described
in the Prospectuses.
(b) Officer's Certificates. Any certificate signed by any officer
of the Company or any of its subsidiaries delivered to the Global Coordinator,
the Representatives or to counsel for the U.S. Underwriters shall be deemed a
representation and warranty by the Company to each U.S. Underwriter as to the
matters covered thereby.
SECTION 2. Sale and Delivery to U.S. Underwriters; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each U.S. Underwriter, severally and not
jointly, and each U.S. Underwriter, severally and not jointly, agrees to
purchase from the Company, at the price per share set forth in Schedule B, the
number of Initial U.S. Securities set forth in Schedule A opposite the name of
such U.S. Underwriter, plus any additional number of Initial U.S. Securities
which such Underwriter may become obligated to purchase pursuant to the
provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the U.S.
Underwriters, severally and not jointly, to purchase up to an additional
840,000 shares of Common Stock at the price per share set forth in Schedule B,
less an amount per share equal to any dividends or distributions declared by
the Company and payable on the Initial U.S. Securities but not payable on the
U.S. Option Securities. The option hereby granted will expire 30 days after
the date hereof and may be exercised in whole or in part from time to time only
for the purpose of covering over-allotments which may be made in connection
with the offering and distribution of the Initial U.S. Securities upon notice
by the Global Coordinator to the Company setting forth the number of U.S.
Option Securities as to which the several U.S. Underwriters are then exercising
the option and the time and date of payment and delivery for such U.S. Option
Securities. Any such time and date of delivery for the U.S. Option Securities
(a "Date of Delivery") shall be determined by the Global Coordinator, but shall
not be later than seven full business days after the exercise of said option,
nor in any event prior to the Closing Time, as hereinafter defined. If the
option is exercised as to all or any portion of the U.S. Option Securities,
each of the U.S. Underwriters, acting severally and not jointly, will purchase
that proportion of the total number of U.S. Option Securities then being
purchased which the number of Initial U.S. Securities set forth in Schedule A
opposite the name of such U.S. Underwriter bears to the total number
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of Initial U.S. Securities, subject in each case to such adjustments as the
Global Coordinator in its discretion shall make to eliminate any sales or
purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Vinson
& Elkins L.L.P., 1001 Fannin, Houston, Texas, or at such other place as shall
be agreed upon by the Global Coordinator and the Company, at 9:00 A.M. (Eastern
time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern
time) on any given day) business day after the date hereof (unless postponed in
accordance with the provisions of Section 10), or such other time not later
than ten business days after such date as shall be agreed upon by the Global
Coordinator and the Company (such time and date of payment and delivery being
herein called "Closing Time").
In addition, in the event that any or all of the U.S. Option
Securities are purchased by the U.S. Underwriters, payment of the purchase
price for, and delivery of certificates for, such U.S. Option Securities shall
be made at the above-mentioned offices, or at such other place as shall be
agreed upon by the Global Coordinator and the Company, on each Date of Delivery
as specified in the notice from the Global Coordinator to the Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery
to the Representatives for the respective accounts of the U.S. Underwriters of
certificates for the U.S. Securities to be purchased by them. It is understood
that each U.S. Underwriter has authorized the Representatives, for its account,
to accept delivery of, receipt for, and make payment of the purchase price for,
the Initial U.S. Securities and the U.S. Option Securities, if any, which it
has agreed to purchase. Merrill Lynch, individually and not as representative
of the U.S. Underwriters, may (but shall not be obligated to) make payment of
the purchase price for the Initial U.S. Securities or the U.S. Option
Securities, if any, to be purchased by any U.S. Underwriter whose funds have
not been received by the Closing Time or the relevant Date of Delivery, as the
case may be, but such payment shall not relieve such U.S. Underwriter from its
obligations hereunder.
(d) Denominations; Registration. Certificates for the Initial
U.S. Securities and the U.S. Option Securities, if any, shall be in such
denominations and registered in such names as the Representatives may request
in writing at least one full business day before the Closing Time or the
relevant Date of Delivery, as the case may be. The certificates for the
Initial U.S. Securities and the U.S. Option Securities, if any, will be made
available for examination and packaging by the Representatives in The City of
New York not later than 10:00 A.M. (Eastern time) on the business day prior to
the Closing Time or the relevant Date of Delivery, as the case may be.
SECTION 3. Covenants of the Company. The Company covenants with
each U.S. Underwriter as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify the
Global Coordinator immediately, and confirm the notice in writing, (i) when any
post-effective amendment to the Registration Statement shall become effective,
or any supplement to the Prospectuses or any amended Prospectuses shall have
been filed, (ii) of the receipt of any comments from the Commission, (iii) of
any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectuses or for additional
information, and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use
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of any preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company will
promptly effect the filings necessary pursuant to Rule 424(b) and will take
such steps as it deems necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for filing by
the Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term Sheet
or any amendment, supplement or revision to either the prospectus included in
the Registration Statement at the time it became effective or to the
Prospectuses, will furnish the Global Coordinator with copies of any such
documents a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file or use any such document to which the Global
Coordinator or counsel for the U.S. Underwriters shall object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Representatives and counsel for the U.S.
Underwriters, without charge, signed copies of the Registration Statement as
originally filed and of each amendment thereto (including exhibits filed
therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the
Representatives, without charge, a conformed copy of the Registration Statement
as originally filed and of each amendment thereto (without exhibits) for each
of the U.S. Underwriters. The copies of the Registration Statement and each
amendment thereto furnished to the U.S. Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
U.S. Underwriter, without charge, as many copies of each preliminary prospectus
as such U.S. Underwriter reasonably requested, and the Company hereby consents
to the use of such copies for purposes permitted by the 1933 Act. The Company
will furnish to each U.S. Underwriter, without charge, during the period when
the U.S. Prospectus is required to be delivered under the 1933 Act or the
Securities Exchange Act of 1934 (the "1934 Act"), such number of copies of the
U.S. Prospectus (as amended or supplemented) as such U.S. Underwriter may
reasonably request. The U.S. Prospectus and any amendments or supplements
thereto furnished to the U.S. Underwriters will be identical to the
electronically transmitted copies thereof filed with the Commission pursuant to
EDGAR, except to the extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement, the International Purchase Agreement and in the Prospectuses. If at
any time when a prospectus is required by the 1933 Act to be delivered in
connection with sales of the Securities, any event shall occur or condition
shall exist as a result of which it is necessary, in the opinion of counsel for
the U.S. Underwriters or for the Company, to amend the Registration Statement
or amend or supplement any Prospectus in order that the Prospectuses will not
include any untrue statements of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a purchaser,
or if it shall be necessary, in the opinion of such counsel, at any such time
to amend the Registration Statement or amend or supplement any Prospectus in
order to comply with the requirements of the 1933 Act or the 1933 Act
Regulations, the Company will promptly prepare and file with the Commission,
subject to Section 3(b), such amendment or supplement as
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may be necessary to correct such statement or omission or to make the
Registration Statement or the Prospectuses comply with such requirements, and
the Company will furnish to the U.S. Underwriters such number of copies of such
amendment or supplement as the U.S. Underwriters may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the U.S. Underwriters, to qualify the Securities
for offering and sale under the applicable securities laws of such states and
other jurisdictions (domestic or foreign) as the Global Coordinator may
designate and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however, that
the Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities in
any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject. In each jurisdiction in which the Securities have been
so qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant
to the 1934 Act as are necessary in order to make generally available to its
security holders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect the
listing of the Common Stock (including the Securities) on the New York Stock
Exchange.
(j) Restriction on Sale of Securities. During a period of 180
days from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock, or any securities convertible
into or exercisable or exchangeable for Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder or under
the International Purchase Agreement, or in connection with the Combination as
described in the Prospectuses, (B) any shares of Common Stock issued or options
to purchase Common Stock granted pursuant to employee benefit plans of the
Company referred to in the Prospectuses or (C) shares of Common Stock issued in
connection with acquisitions by the Company of other businesses, provided that,
(except with respect to shares issued in transactions in which the issuance or
resale of such shares will not be registered under the 1933 Act) the recipients
of such shares agree in writing for the benefit of the U.S. Underwriters not to
take any action described in clauses (i) or (ii) above with respect to such
shares until the expiration of 180 days from the date of the Prospectuses.
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(k) Reporting Requirements. The Company, during the period when
the Prospectuses are required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission pursuant
to the 1934 Act within the time periods required by the 1934 Act and the rules
and regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted as required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of this Agreement. The Underwriters will notify the
Company as to which persons will need to be so restricted. At the request of
the Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(m) Compliance with Rule 463. The Company will file with the
Commission such reports on Form SR as may be required pursuant to Rule 463 of
the 1933 Act Regulations.
SECTION 4. Payment of Expenses. (a) Expenses. The Company will
pay all expenses incident to the performance of its obligations under this
Agreement, including (i) the preparation, printing and filing of the
Registration Statement (including financial statements and exhibits) as
originally filed and of each amendment thereto, (ii) the preparation, printing
and delivery to the Underwriters of this Agreement, any Agreement among
Underwriters and such other documents as may be required in connection with the
offering, purchase, sale, issuance or delivery of the Securities, (iii) the
preparation, issuance and delivery of the certificates for the Securities to
the Underwriters, including any stock or other transfer taxes and any stamp or
other duties payable upon the sale, issuance or delivery of the Securities to
the Underwriters and the transfer of the Securities between the U.S.
Underwriters and the International Managers, (iv) the fees and disbursements of
the Company's counsel, accountants and other advisors, (v) the qualification of
the Securities under securities laws in accordance with the provisions of
Section 3(f) hereof, including filing fees and the reasonable fees and
disbursements of counsel for the Underwriters in connection therewith and in
connection with the preparation of the Blue Sky Survey and any supplement
thereto, (vi) the printing and delivery to the Underwriters of copies of each
preliminary prospectus, any Term Sheets and of the Prospectuses and any
amendments or supplements thereto, (vii) the preparation, printing and delivery
to the Underwriters of copies of the Blue Sky Survey and any supplement
thereto, (viii) the fees and expenses of any transfer agent or registrar for
the Securities, (ix) the filing fees incident to, and the reasonable fees and
disbursements of counsel to the Underwriters in connection with, the review by
the NASD of the terms of the sale of the Securities, (x) the fees and expenses
incurred in connection with the listing of the Securities on the New York
Stock Exchange and (xi) all costs and expenses of the Underwriters, including
the fees and disbursements of counsel for the Underwriters, in connection with
matters related to the Reserved Securities which are designated by the Company
for sale to employees and others.
(b) Termination of Agreement. If this Agreement is terminated by
the Representatives in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the U.S. Underwriters for all of
their out-of-pocket expenses, including the reasonable fees and disbursements
of counsel for the U.S. Underwriters.
SECTION 5. Conditions of U.S. Underwriters' Obligations. The
obligations of the several U.S. Underwriters hereunder are subject to the
accuracy of the representations and warranties of the Company
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contained in Section 1 hereof or in certificates of any officer of the Company
delivered pursuant to the provisions hereof, to the performance by the Company
of its covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at the Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the U.S.
Underwriters. A prospectus containing the Rule 430A Information shall have
been filed with the Commission in accordance with Rule 424(b) (or a
post-effective amendment providing such information shall have been filed and
declared effective in accordance with the requirements of Rule 430A) or, if the
Company has elected to rely upon Rule 434, a Term Sheet shall have been filed
with the Commission in accordance with Rule 424(b).
(b) Opinions of Counsel for the Company and the Founding
Companies. At Closing Time, the Representatives shall have received (i) the
favorable opinion, dated as of Closing Time, of Andrews & Kurth L.L.P., counsel
for the Company, in form and substance satisfactory to counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for each
of the other U.S. Underwriters to the effect set forth in Exhibit A-1 hereto
and to such further effect as counsel to the U.S. Underwriters may reasonably
request and (ii) the favorable opinion, dated as of Closing Time, of counsel
for each Founding Company reasonably acceptable to the U.S. Underwriters, in
form and substance reasonably satisfactory to counsel for the U.S.
Underwriters, together with signed or reproduced copies of such letter for each
of the other U.S. Underwriters, to the effect set forth in Exhibit A-2 hereto
and to such further effect as counsel to the U.S. Underwriters may reasonably
request.
(c) Opinion of Counsel for U.S. Underwriters. At Closing Time,
the Representatives shall have received the favorable opinion, dated as of
Closing Time, of Vinson & Elkins L.L.P., counsel for the U.S. Underwriters,
together with signed or reproduced copies of such letter for each of the other
U.S. Underwriters with respect to the matters set forth in clauses (i), (ii),
(v), (vi) (solely as to preemptive or other similar rights arising by operation
of law or under the charter or by-laws of the Company), (ix) through (xi),
inclusive, (xii), (xiv) (solely as to the information in the Prospectus under
"Description of Capital Stock--Common Stock") and the penultimate paragraph of
Exhibit A-1 hereto. In giving such opinion such counsel may rely, as to all
matters governed by the laws of jurisdictions other than the law of the State
of New York, the federal law of the United States and the General Corporation
Law of the State of Delaware, upon the opinions of counsel satisfactory to the
Representatives. Such counsel may also state that, insofar as such opinion
involves factual matters, they have relied, to the extent they deem proper,
upon certificates of officers of the Company and its subsidiaries and
certificates of public officials.
(d) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company, the Founding Companies or their subsidiaries
considered as one enterprise, whether or not arising in the ordinary course of
business, and the Representatives shall have received a certificate of the
President or a Vice President of the Company and of the chief financial or
chief accounting officer of the Company, dated as of Closing Time, to the
effect that (i) there has been no such material adverse change, (ii) the
representations and warranties in Section 1(a) hereof are true and correct with
the same force and effect as though expressly made at and as of Closing Time,
(iii) the Company has complied with all agreements and satisfied all conditions
on its part to be performed or satisfied at or prior to Closing Time, and (iv)
no stop
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order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are pending
or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the Representatives shall have received from Arthur Andersen
LLP a letter dated such date, in form and substance satisfactory to the
Representatives, together with signed or reproduced copies of such letter for
each of the other U.S. Underwriters containing statements and information of
the type ordinarily included in accountants' "comfort letters" to underwriters
with respect to the financial statements and certain financial information
contained in the Registration Statement and the Prospectuses.
(f) Bring-down Comfort Letter. At Closing Time, the
Representatives shall have received from Arthur Andersen LLP a letter, dated as
of Closing Time, to the effect that they reaffirm the statements made in the
letter furnished pursuant to subsection (e) of this Section, except that the
specified date referred to shall be a date not more than three business days
prior to Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall
have been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements contemplated hereby.
(i) Lock-up Agreements. At the date of this Agreement, the
Representatives shall have received an agreement substantially in the form of
Exhibit B hereto signed by the persons listed on Schedule C hereto.
(j) Combination Completed. The transactions contemplated by each
Acquisition Agreement shall have been consummated, with the result that each
Founding Company is a wholly-owned direct or indirect subsidiary of the Company
as described in the Prospectuses.
(k) Purchase of Initial International Securities.
Contemporaneously with the purchase by the U.S. Underwriters of the Initial
U.S. Securities under this Agreement, the International Managers shall have
purchased the Initial International Securities under the International Purchase
Agreement.
(l) Conditions to Purchase of U.S. Option Securities. In the
event that the U.S. Underwriters exercise their option provided in Section 2(b)
hereof to purchase all or any portion of the U.S. Option Securities, the
representations and warranties of the Company contained herein and the
statements in any certificates furnished by the Company or any subsidiary of
the Company hereunder shall be true and correct as of each Date of Delivery
and, at the relevant Date of Delivery, the Representatives shall have received:
(i) Officers' Certificate. A certificate, dated such
Date of Delivery, of the President or a Vice President of the Company
and of the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(d) hereof remains true and correct as of such Date of
Delivery.
(ii) Opinion of Counsel for Company. The favorable
opinion of Andrews & Kurth L.L.P., counsel for the Company, in form
and substance satisfactory to counsel for the U.S. Underwriters, dated
such Date of Delivery, relating to the U.S. Option Securities to be
purchased on such Date of Delivery and otherwise to the same effect as
the opinions required by Sections 5(b)(i) and (ii) hereof.
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(iii) Opinion of Counsel for U.S. Underwriters. The
favorable opinion of Vinson & Elkins L.L.P., counsel for the U.S.
Underwriters, dated such Date of Delivery, relating to the U.S. Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinion required by Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Arthur
Andersen LLP, in form and substance satisfactory to the
Representatives and dated such Date of Delivery, substantially in the
same form and substance as the letter furnished to the Representatives
pursuant to Section 5(f) hereof, except that the "specified date" in
the letter furnished pursuant to this paragraph shall be a date not
more than five days prior to such Date of Delivery.
(m) Additional Documents. At Closing Time and at each Date of
Delivery, counsel for the U.S. Underwriters shall have been furnished with such
documents and opinions as they may require for the purpose of enabling them to
pass upon the issuance and sale of the Securities as herein contemplated, or in
order to evidence the accuracy of any of the representations or warranties, or
the fulfillment of any of the conditions, herein contained; and all proceedings
taken by the Company in connection with the issuance and sale of the Securities
as herein contemplated shall be satisfactory in form and substance to the
Representatives and counsel for the U.S. Underwriters.
(n) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of U.S. Option
Securities on a Date of Delivery which is after the Closing Time, the
obligations of the several U.S. Underwriters to purchase the relevant Option
Securities, may be terminated by the Representatives by notice to the Company
at any time at or prior to Closing Time or such Date of Delivery, as the case
may be, and such termination shall be without liability of any party to any
other party except as provided in Section 4 and except that Sections 1, 6, 7
and 8 shall survive any such termination and remain in full force and effect.
SECTION 6. Indemnification.
(a) Indemnification of U.S. Underwriters. The Company agrees to
indemnify and hold harmless each U.S. Underwriter and each person, if any, who
controls any U.S. Underwriter within the meaning of Section 15 of the 1933 Act
or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or
the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged omission therefrom of a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement
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or omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
U.S. Underwriter through the Representatives expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto).
(b) Indemnification of Company, Directors and Officers. Each U.S.
Underwriter severally agrees to indemnify and hold harmless the Company, its
directors, each of its officers who signed the Registration Statement, and each
person, if any, who controls the Company within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act against any and all loss, liability,
claim, damage and expense described in the indemnity contained in subsection
(a) of this Section, as incurred, but only with respect to untrue statements or
omissions, or alleged untrue statements or omissions, made in the Registration
Statement (or any amendment thereto), including the Rule 430A Information and
the Rule 434 Information, if applicable, or any preliminary U.S. prospectus or
the U.S. Prospectus (or any amendment or supplement thereto) in reliance upon
and in conformity with written information furnished to the Company by such
U.S. Underwriter through the Representatives expressly for use in the
Registration Statement (or any amendment thereto) or such preliminary
prospectus or the U.S. Prospectus (or any amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it
is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. In the case of parties indemnified pursuant to
Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any
such action; provided, however, that counsel to the indemnifying party shall
not (except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one counsel (in addition to any local counsel)
separate from their own counsel for all indemnified parties in connection with
any one action or separate but similar or related actions in the same
jurisdiction arising out of the same general allegations or circumstances. No
indemnifying party shall, without the prior written consent of the indemnified
parties, settle or compromise or consent to the entry of any judgment with
respect to any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim whatsoever
in respect of which indemnification or contribution could be sought under this
Section 6 or Section 7 hereof (whether or not the indemnified parties are
actual or potential parties thereto), unless such settlement, compromise or
consent (i) includes an unconditional release of each
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indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of
any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with
the offer and sale of the Reserved Securities, the Company agrees, promptly
upon a request in writing to indemnify and hold harmless the Underwriters from
and against any and all losses, liabilities, claims, damages and expenses
incurred by them as a result of the failure of any person or entity to whom
Reserved Securities are offered to pay for and accept delivery of Reserved
Securities which, by the end of the first business day following the date of
this Agreement, were subject to a properly confirmed agreement to purchase.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the U.S. Underwriters on the other hand from the
offering of the Securities pursuant to this Agreement or (ii) if the allocation
provided by clause (i) is not permitted by applicable law, in such proportion
as is appropriate to reflect not only the relative benefits referred to in
clause (i) above but also the relative fault of the Company on the one hand and
of the U.S. Underwriters on the other hand in connection with the statements or
omissions which resulted in such losses, liabilities, claims, damages or
expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
U.S. Underwriters on the other hand in connection with the offering of the U.S.
Securities pursuant to this Agreement shall be deemed to be in the same
respective proportions as the total net proceeds from the offering of the U.S.
Securities pursuant to this Agreement (before deducting expenses) received by
the Company and the total underwriting discount received by the U.S.
Underwriters, in each case as set forth on the cover of the U.S. Prospectus,
or, if Rule 434 is used, the corresponding location on the Term Sheet, bear to
the aggregate initial public offering price of the U.S. Securities as set forth
on such cover.
The relative fault of the Company on the one hand and the U.S.
Underwriters on the other hand shall be determined by reference to, among other
things, whether any such untrue or alleged untrue statement of a material fact
or omission or alleged omission to state a material fact relates to information
supplied by the Company or by the U.S. Underwriters and the parties' relative
intent, knowledge, access to information and opportunity to correct or prevent
such statement or omission.
The Company and the U.S. Underwriters agree that it would not be just
and equitable if contribution pursuant to this Section 7 were determined by pro
rata allocation (even if the U.S. Underwriters were treated
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as one entity for such purpose) or by any other method of allocation which does
not take account of the equitable considerations referred to above in this
Section 7. The aggregate amount of losses, liabilities, claims, damages and
expenses incurred by an indemnified party and referred to above in this Section
7 shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no U.S. Underwriter
shall be required to contribute any amount in excess of the amount by which the
total price at which the U.S. Securities underwritten by it and distributed to
the public were offered to the public exceeds the amount of any damages which
such U.S. Underwriter has otherwise been required to pay by reason of any such
untrue or alleged untrue statement or omission or alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls a
U.S. Underwriter within the meaning of Section 15 of the 1933 Act or Section 20
of the 1934 Act shall have the same rights to contribution as such U.S.
Underwriter, and each director of the Company, each officer of the Company who
signed the Registration Statement, and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act or Section 20 of the
1934 Act shall have the same rights to contribution as the Company. The U.S.
Underwriters' respective obligations to contribute pursuant to this Section 7
are several in proportion to the number of Initial U.S. Securities set forth
opposite their respective names in Schedule A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of any
U.S. Underwriter or controlling person, or by or on behalf of the Company, and
shall survive delivery of the Securities to the U.S. Underwriters.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Representatives may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the U.S. Prospectus,
any material adverse change in the condition, financial or otherwise, or in the
earnings, business affairs or business prospects of the Company, the Founding
Companies and their subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business, or (ii) if there has occurred any
material adverse change in the financial markets in the United States or the
international financial markets, any outbreak of hostilities or escalation
thereof or other calamity or crisis or any change or development involving a
prospective change in national or international political, financial or
economic conditions, in each case the effect of which is such as to make it, in
the judgment of the Representatives, impracticable to market the Securities or
to enforce contracts for the sale of the Securities, or (iii) if trading in any
securities of the Company has been suspended or materially limited by the
Commission or the New York Stock Exchange, or if trading generally on the
American Stock Exchange or the New York Stock Exchange or in the Nasdaq
National Market has been suspended or materially limited, or minimum or maximum
prices for trading have
20
25
been fixed, or maximum ranges for prices have been required, by
any of said exchanges or by such system or by order of the Commission, the
National Association of Securities Dealers, Inc. or any other governmental
authority, or (iv) if a banking moratorium has been declared by either Federal
or New York authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full force
and effect.
SECTION 10. Default by One or More of the U.S. Underwriters. If one
or more of the U.S. Underwriters shall fail at Closing Time or a Date of
Delivery to purchase the Securities which it or they are obligated to purchase
under this Agreement (the "Defaulted Securities"), the Representatives shall
have the right, within 24 hours thereafter, to make arrangements for one or
more of the non-defaulting U.S. Underwriters, or any other underwriters, to
purchase all, but not less than all, of the Defaulted Securities in such
amounts as may be agreed upon and upon the terms herein set forth; if, however,
the Representatives shall not have completed such arrangements within such
24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the number of U.S. Securities to be purchased on such date, each of the
non-defaulting U.S. Underwriters shall be obligated, severally and not jointly,
to purchase the full amount thereof in the proportions that their respective
underwriting obligations hereunder bear to the underwriting obligations of all
non-defaulting U.S. Underwriters, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of U.S. Securities to be purchased on such date, this Agreement or, with
respect to any Date of Delivery which occurs after the Closing Time, the
obligation of the U.S. Underwriters to purchase and of the Company to sell the
Option Securities to be purchased and sold on such Date of Delivery shall
terminate without liability on the part of any non-defaulting U.S. Underwriter.
No action taken pursuant to this Section shall relieve any defaulting
U.S. Underwriter from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the
obligation of the U.S. Underwriters to purchase and the Company to sell the
relevant U.S. Option Securities, as the case may be, either the Representatives
or the Company shall have the right to postpone Closing Time or the relevant
Date of Delivery, as the case may be, for a period not exceeding seven days in
order to effect any required changes in the Registration Statement or
Prospectus or in any other documents or arrangements. As used herein, the term
"U.S. Underwriter" includes any person substituted for a U.S. Underwriter under
this Section 10.
SECTION 11. Notices. All notices and other communications hereunder
shall be in writing and shall be deemed to have been duly given if mailed or
transmitted by any standard form of telecommunication. Notices to the U.S.
Underwriters shall be directed to the Representatives at North Tower, World
Financial Center, New York, New York 10281-1201, attention of *; and notices to
the Company shall be directed to it at *, attention of *.
SECTION 12. Parties. This Agreement shall each inure to the benefit
of and be binding upon the U.S. Underwriters and the Company and their
respective successors. Nothing expressed or mentioned in this Agreement is
intended or shall be construed to give any person, firm or corporation, other
than the U.S.
21
26
Underwriters and the Company and their respective successors and the
controlling persons and officers and directors referred to in Sections 6 and 7
and their heirs and legal representatives, any legal or equitable right, remedy
or claim under or in respect of this Agreement or any provision herein
contained. This Agreement and all conditions and provisions hereof are
intended to be for the sole and exclusive benefit of the U.S. Underwriters and
the Company and their respective successors, and said controlling persons and
officers and directors and their heirs and legal representatives, and for the
benefit of no other person, firm or corporation. No purchaser of Securities
from any U.S. Underwriter shall be deemed to be a successor by reason merely
of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE GOVERNED
BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY IN THIS AGREEMENT REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the U.S. Underwriters and the Company in accordance with its
terms.
Very truly yours,
INTEGRATED ELECTRICAL SERVICES, INC.
By:
-----------------------------
Title:
-----------------------------
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CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH & CO.
MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
EQUITABLE SECURITIES CORPORATION
SANDERS MORRIS MUNDY INC.
By: MERRILL LYNCH, PIERCE, FENNER & SMITH
INCORPORATED
By:
-----------------------------------------------
Authorized Signatory
For themselves and as Representatives of the
other U.S. Underwriters named in Schedule A hereto.
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SCHEDULE A
Number of
Initial U.S.
Name of U.S. Underwriter Securities
------------------------ ----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated . . . . . . . . . . . . . . .
Donaldson, Lufkin & Jenrette Securities
Corporation . . . . . . . . . . . . . . .
Equitable Securities Corporation . . . . . . . . .
Sanders Morris Mundy Inc. . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . 5,600,000
=========
Sch A-1
29
SCHEDULE B
INTEGRATED ELECTRICAL SERVICES, INC.
5,600,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $*.
2. The purchase price per share for the U.S. Securities to be
paid by the several U.S. Underwriters shall be $*, being an amount equal to the
initial public offering price set forth above less $* per share; provided that
the purchase price per share for any U.S. Option Securities purchased upon the
exercise of the over-allotment option described in Section 2(b) shall be
reduced by an amount per share equal to any dividends or distributions declared
by the Company and payable on the Initial U.S. Securities but not payable on
the U.S. Option Securities.
Sch B-1
30
SCHEDULE C
PERSONS SUBJECT TO LOCK-UP
C. Byron Snyder
Jon Pollock
Jim P. Wise
Jerry Mills
Ben L. Mueller
John S. Stanfield
D. Merrill Cummings
J. Paul Withrow
Richard Muth
Robert Stalvey
Bob Weik
[Others named in prospectus as officer or director]
Sch C-1
31
SCHEDULE D
FOUNDING COMPANIES
Houston-Stafford Electric, Inc.
Stark Investments, Inc.
Mills Electrical Contractors, Inc. (including all equity
interests in Forth Worth Regional Electrical Services, L.L.C.)
BW Consolidated, Inc. (including all equity interests in
Bexar Electric Company, Ltd. and Calhoun Electric Company, Ltd.)
Pollock Electric, Inc.
Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure Coast Inc.
Muth Electric, Inc.
Amber Electric, Inc.
Summit Electric of Texas, Inc.
Charles P. Bagby Company, Inc. and General Partner, Inc. (including all equity
interests in Haymaker Electric, Ltd.)
Thurman & O'Connell Corp.
Hatfield Electric, Inc.
Ace Electric, Inc.
Reynolds Electric Corp.
Thomas Popp & Co., Inc.
Rodgers Electric Co., Inc.
Sch D-1
32
Exhibit A-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(i)
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the U.S.
Purchase Agreement and the International Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(iv) As of the Closing Time, the Company had authorized capital
stock consisting of 100,000,000 shares of Common Stock, par value $.01 per
share, and 10,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). Prior to the closing of the transactions contemplated by
each of the Acquisition Agreements and the issuance of shares of Common Stock
as contemplated thereby and by the U.S. Purchase Agreement and the
International Purchase Agreement, the Company had issued and outstanding
4,052,311 shares of Common Stock and no shares of Preferred Stock; upon
consummation of the Combination and the issuance of 12,313,026 shares of Common
Stock as contemplated by the Acquisition Agreements, (which, together with the
4,052,311 shares of Common Stock issued prior to the Combination, are all the
shares of Common Stock issued or to be issued prior to the issuance and sale of
the Securities), but without giving effect to the issuance of the Securities
pursuant to the terms of the U.S. Purchase Agreement and the International
Purchase Agreement, the Company will have issued and outstanding 16,365,337
shares of Common Stock and no shares of Preferred Stock. All of such shares
of Common Stock have been duly authorized and, when issued and delivered to the
purchasers thereof against payment therefor as provided in the Acquisition
Agreements, will be validly issued, fully paid and nonassessable. None of the
outstanding shares of capital stock of the Company was issued in violation of
the preemptive or other similar rights of any security holder of the Company.
Except as described in the Prospectuses, to our knowledge there are no
outstanding options, warrants or other rights calling for the issuance of, and
there are no commitments to issue any shares of, capital stock of the Company
or any security convertible into or exchangeable or exercisable for capital
stock of the Company.
(v) The Securities to be purchased by the U.S. Underwriters and
the International Managers from the Company have been duly authorized for
issuance and sale to the Underwriters pursuant to the U.S. Purchase Agreement
and the International Purchase Agreement, respectively, and, when issued and
delivered by the Company pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement, respectively, against payment of the
consideration set forth in the U.S. Purchase Agreement and the International
Purchase Agreement, will be validly issued and fully paid and non-assessable
and no holder of the Securities is or will be subject to personal liability by
reason of being such a holder.
A1-1
33
(vi) The issuance of the Securities is not subject to the
preemptive or other similar rights of any security holder of the Company.
(vii) Each Acquisition Agreement has been duly and validly
authorized, executed and delivered by the Company and constitutes the valid and
binding obligation of each of the Company enforceable in accordance with its
terms, except as may be limited by bankruptcy, insolvency and other laws
affecting creditors' rights generally, or as may be modified by a court of
equity.
(viii) The transactions contemplated by each Acquisition Agreement
have been consummated as described in the Prospectuses. As a result of the
Combination, all of the issued and outstanding capital stock or other equity
interest of each Founding Company and their subsidiaries is owned by the
Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim, shareholders agreement,
or voting trust, and no options, warrants or other rights to purchase,
agreements, or other obligations to issue or other rights to convert any other
obligations into shares of capital stock or ownership interests in any Founding
Company or any subsidiary thereof are outstanding.
(ix) The U.S. Purchase Agreement and the International Purchase
Agreement have been duly authorized, executed and delivered by the Company.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectuses pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and, to the best
of our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(xi) The Registration Statement including any Rule 462(b)
Registration Statement and the Rule 430A Information, as applicable, the
Prospectuses and each amendment or supplement to the Registration Statement and
the Prospectuses as of their respective effective or issue dates (other than
the financial statements and supporting schedules included therein or omitted
therefrom, as to which we need express no opinion) complied as to form in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(xii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the charter and by-laws of the Company and
the requirements of the New York Stock Exchange.
(xiii) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which the
Company or any Founding Company is a party, or to which the property of the
Company or any Founding Company is subject, before or brought by any court or
governmental agency or body, domestic or foreign, which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in the U.S. Purchase
Agreement, the International Purchase Agreement or the Acquisition Agreements
or the performance by the Company of its obligations thereunder.
(xiv) The information in the Prospectuses under the headings
"Management -- Employment Agreements," "--1997 Stock Plan," "--1997 Directors
Stock Plan;" "Certain Transactions;" "Description of
A1-2
34
Capital Stock," "Certain United States Tax Considerations for Non-United States
Holders" and "Shares Eligible For Future Sale," and in the Registration
Statement under Item 14, to the extent that it constitutes matters of law,
summaries of legal matters, the Company's charter and bylaws or legal
conclusions, has been reviewed by us and is correct in all material respects.
(xv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that are not
described as required.
(xvi) All descriptions in the Prospectuses of contracts and other
documents to which the Company or any Founding Company is a party are accurate
in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto,
and the descriptions thereof or references thereto are correct in all material
respects.
(xvii) The Company is not in violation of its charter, by-laws or
other governing documents and, to our best knowledge, no default by the Company
exists in the due performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other agreement or instrument that is
described or referred to in the Registration Statement or the Prospectuses or
filed or incorporated by reference as an exhibit to the Registration Statement.
(xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and the
1933 Act Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we express no
opinion) is necessary or required in connection with the due authorization,
execution and delivery of the U.S. Purchase Agreement and the International
Purchase Agreement or for the offering, issuance, sale or delivery of the
Securities.
(xix) No registration under the Act and no filing with, consent,
approval, authorization, order, registration or qualification of or with any
court or governmental agency or body is required for the issuance of the
Company Common Stock to the stockholders of each Founding Company pursuant to
the Acquisition Agreements or the consummation of the other transactions
contemplated by the Acquisition Agreements, except such filings, consents,
approvals, authorizations, registrations or qualifications as have been
obtained or made.
(xx) The execution, delivery and performance of the U.S. Purchase
Agreement and the International Purchase Agreement and the consummation of the
transactions contemplated in the U.S. Purchase Agreement, the International
Purchase Agreement and in the Registration Statement (including the issuance
and sale of the Securities, and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of
Proceeds") and compliance by the Company with its obligations under the U.S.
Purchase Agreement and the International Purchase Agreement do not and will
not, whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined in Section 1(a)(x) of the Purchase Agreements) under or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any Founding Company pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease or
any other agreement or instrument, known to us, to which the Company or any
Founding Company is a party or by which it or any of them may be bound, or to
which any of the property
A1-3
35
or assets of the Company or any Founding Company is subject (except for such
conflicts, breaches or defaults or liens, charges or encumbrances that would
not have a Material Adverse Effect), nor will such action result in any
violation of the provisions of the charter, by-laws or other governing
documents of the Company or any Founding Company, or any applicable law,
statute, rule, regulation, judgment, order, writ or decree, known to us, of any
government, government instrumentality or court, domestic or foreign, having
jurisdiction over the Company or any Founding Company or any of their
respective properties, assets or operations.
(xxi) To the best of our knowledge, except as set forth in the
Prospectuses, there are no persons with registration rights or other similar
rights to have any securities registered pursuant to the Registration Statement
or otherwise registered by the Company under the 1933 Act.
(xxii) The Company is not, and will not be after consummation of the
Combination or application of the proceeds of the offering of the Securities as
set forth in the Prospectuses, an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information, (except for financial statements and schedules and other financial
data included therein or omitted therefrom, as to which we make no statement),
at the time such Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectuses or any amendment or supplement thereto
(except for financial statements and schedules and other financial data
included therein or omitted therefrom, as to which we make no statement), at
the time the Prospectuses were issued, at the time any such amended or
supplemented prospectus was issued or at the Closing Time, included or includes
an untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering opinions set forth above with respect to matters
concerning the Founding Companies, such counsel may rely (A) as to matters
involving the application of the laws of the jurisdiction of incorporation or
organization of each Founding Company, upon the opinion of counsel to each
Founding Company (which opinion shall be dated and furnished to the U.S.
Representatives at the Closing Time, shall be satisfactory in form and
substance to counsel for the U.S. Underwriters and shall expressly state that
the U.S. Underwriters may rely on such opinion as if it were addressed to
them), provided that such counsel shall state in their opinion that they
believe that they and the U.S. Underwriters are justified in relying upon such
opinion, and (B), as to matters of fact (but not as to legal conclusions), to
the extent they deem proper, on certificates of responsible officers of the
Company and public officials. Such opinion shall not state that it is to be
governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
A1-4
36
Exhibit A-2
FORM OF OPINION OF COUNSEL OF EACH
FOUNDING COMPANY
TO BE DELIVERED PURSUANT TO SECTION 5(b)(ii)
(i) Such Founding Company or any subsidiary thereof that is a
corporation has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectuses and is duly qualified as
a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a Material
Adverse Effect. None of the outstanding shares of capital stock of such
Founding Company or any subsidiary thereof was issued in violation of the
preemptive or similar rights of any security holder of such Founding Company or
subsidiary. All of the issued and outstanding capital stock of such Founding
Company or any subsidiary thereof has been duly authorized and validly issued,
and is fully paid and non-assessable. Such Founding Company or subsidiary
thereof that is a partnership or limited liability company has been duly formed
and is validly existing in good standing under the laws of the jurisdiction of
organization, has power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectuses and is duly
qualified to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material Adverse
Effect.
(ii) Each Acquisition Agreement has been duly and validly
authorized by such Founding Company and its shareholders and constitutes the
valid and binding obligation of such Founding Company and its shareholders
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency and other laws affecting creditors' rights generally, or
as may be modified by a court of equity.
(iii) Neither such Founding Company nor any subsidiary is in
violation of its charter, by-laws or other governing documents and, to the best
of our knowledge, no default by such Founding Company or any of its
subsidiaries exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument that is described or referred to in the Registration Statement or
the Prospectuses or filed or incorporated by reference as an exhibit to the
Registration Statement.
In rendering opinions set forth above, such counsel may rely as to
matters of fact (but not as to legal conclusions), to the extent they deem
proper, on certificates of responsible officers of the Founding Company and
public officials. Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written policy
or other document relating to legal opinions, including, without limitation,
the Legal Opinion Accord of the ABA Section of Business Law (1991).
A2-1
37
Exhibit B
*, 1997
MERRILL LYNCH & CO.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated,
Donaldson, Lufkin & Jenrette
Securities Corporation
Equitable Securities Corporation
Sanders Morris Mundy Inc.
as Representatives of the several
U.S. Underwriters to be named in the
within-mentioned U.S. Purchase Agreement
c/o Merrill Lynch & Co.
Merrill Lynch, Pierce, Fenner & Smith
Incorporated
North Tower
World Financial Center
New York, New York 10281-1209
Re: Proposed Public Offering by Integrated Electrical Services, Inc.
Dear Sirs:
The undersigned, a stockholder and an officer and/or director of
Integrated Electrical Services, Inc., a Delaware corporation (the "Company"),
understands that Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated ("Merrill Lynch"), Donaldson, Lufkin & Jenrette Securities
Corporation, Equitable Securities Corporation and Sanders Morris Mundy Inc.
propose to enter into a U.S. Purchase Agreement (the "U.S. Purchase Agreement")
with the Company providing for the public offering of shares (the "Securities")
of the Company's common stock, par value $.01 per share (the "Common Stock").
In recognition of the benefit that such an offering will confer upon the
undersigned as a stockholder and an officer and/or director of the Company, and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the undersigned agrees with each underwriter to be
named in the U.S. Purchase Agreement that, during a period of 180 days from
the date of the U.S. Purchase Agreement, the undersigned will not, without the
prior written consent of Merrill Lynch, directly or indirectly, (i) offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant for
the sale of, or otherwise dispose of or transfer any shares of the Company's
Common Stock or any securities convertible into or exchangeable or exercisable
for Common Stock, whether now owned or hereafter acquired by the undersigned or
with respect to which the undersigned has or hereafter acquires the power of
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise.
B-1
38
Very truly yours,
Signature:
------------------------------
Print Name:
------------------------------
B-2
1
EXHIBIT 1.2
DRAFT OF 11/25/97
================================================================================
INTEGRATED ELECTRICAL SERVICES, INC.
(A DELAWARE CORPORATION)
1,400,000 SHARES OF COMMON STOCK
INTERNATIONAL PURCHASE AGREEMENT
Dated: *, 1997
================================================================================
2
Table of Contents
PAGE
----
SECTION 1. Representations and Warranties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(a) Representations and Warranties by the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(b) Officer's Certificates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
SECTION 2. Sale and Delivery to International Managers; Closing . . . . . . . . . . . . . . . . . . . . . . . . . 3
(a) Initial Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
(b) Option Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(c) Payment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
(d) Denominations; Registration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
SECTION 3. Covenants of the Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(a) Compliance with Securities Regulations and Commission Requests . . . . . . . . . . . . . . . . . . . . 5
(b) Filing of Amendments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(c) Delivery of Registration Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(d) Delivery of Prospectuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
(e) Continued Compliance with Securities Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(f) Blue Sky Qualifications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(g) Rule 158 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(h) Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(i) Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(j) Restriction on Sale of Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
(k) Reporting Requirements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(l) Compliance with NASD Rules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(m) Compliance with Rule 463 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
SECTION 4. Payment of Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(a) Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
(b) Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
SECTION 5. Conditions of International Managers' Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(a) Effectiveness of Registration Statement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(b) Opinions of Counsel for the Company and the Founding Companies . . . . . . . . . . . . . . . . . . . . 8
(c) Opinion of Counsel for International Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
(d) Officers' Certificate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(e) Accountant's Comfort Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(f) Bring-down Comfort Letter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(g) Approval of Listing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(h) No Objection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(i) Lock-up Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(j) Combination Completed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
(k) Purchase of Initial U.S. Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(l) Conditions to Purchase of International Option Securities . . . . . . . . . . . . . . . . . . . . . 10
(m) Additional Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
(n) Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
i
3
SECTION 6. Indemnification. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(a) Indemnification of International Managers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
(b) Indemnification of Company, Directors and Officers . . . . . . . . . . . . . . . . . . . . . . . . . 11
(c) Actions against Parties; Notification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
(d) Settlement without Consent if Failure to Reimburse . . . . . . . . . . . . . . . . . . . . . . . . . 12
(e) Indemnification for Reserved Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 7. Contribution . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
SECTION 9. Termination of Agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(a) Termination; General . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
(b) Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 10. Default by One or More of the International Managers . . . . . . . . . . . . . . . . . . . . . . . . 14
SECTION 11. Notices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 12. Parties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 13. GOVERNING LAW AND TIME . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SECTION 14. Effect of Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
SCHEDULES
Schedule A - List of Underwriters
Schedule B - Pricing Information
Schedule C - List of Persons subject to Lock-up
Schedule D - Founding Companies
EXHIBITS
Exhibit A-1 Form of Opinion of Company's Counsel
Exhibit A-2 Form of Opinion of Founding Company Counsel
Exhibit B Form of Lock-up Letter
ii
4
INTEGRATED ELECTRICAL SERVICES, INC.
(a Delaware corporation)
1,400,000 Shares of Common Stock
(Par Value $.01 Per Share)
INTERNATIONAL PURCHASE AGREEMENT
Dated: *, 1997
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE INTERNATIONAL
EQUITABLE SECURITIES CORPORATION
SANDERS MORRIS MUNDY INC.
as Lead Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC2Y 9LY
England
Ladies and Gentlemen:
Integrated Electrical Services, Inc., a Delaware corporation (the
"Company"), confirms its agreement with Merrill Lynch International ("Merrill
Lynch") and each of the other international underwriters named in Schedule A
hereto (collectively, the "International Managers", which term shall also
include any underwriter substituted as hereinafter provided in Section 10
hereof), for whom Merrill Lynch, Donaldson, Lufkin & Jenrette Securities
Corporation, Equitable Securities Corporation and Sanders Morris Mundy Inc. are
acting as representatives (in such capacity, the "Lead Managers"), with respect
to the issue and sale by the Company and the purchase by the International
Managers, acting severally and not jointly, of the respective numbers of shares
of Common Stock, par value $.01 per share, of the Company ("Common Stock") set
forth in said Schedule A, and with respect to the grant by the Company to the
International Managers, acting severally and not jointly, of the option
described in Section 2(b) hereof to purchase all or any part of 210,000
additional shares of Common Stock to cover over-allotments, if any. The
aforesaid 1,400,000 shares of Common Stock (the "Initial International
Securities") to be purchased by the International Managers and all or any part
of the 210,000 shares of Common Stock subject to the option described in
Section 2(b) hereof (the "International Option Securities") are hereinafter
called, collectively, the "International Securities".
It is understood that the Company is concurrently entering into an
agreement dated the date hereof (the "U.S. Purchase Agreement") providing for
the offering by the Company of an aggregate of 5,600,000 shares of Common Stock
(the "Initial U.S. Securities") through arrangements with certain underwriters
in the United States and Canada (the "U.S. Underwriters") for which Merrill
Lynch, Pierce, Fenner & Smith Incorporated, Donaldson, Lufkin & Jenrette
Securities Corporation, Equitable Securities Corporation and Sanders Morris
Mundy Inc. are acting as representatives (the "U.S. Representatives") and the
grant by the Company to the U.S. Underwriters, acting severally and not
jointly, of an option to purchase all or any part of the U.S. Underwriters' pro
rata portion of up to 840,000 additional shares of Common Stock solely to cover
overallotments, if any (the "U.S. Option Securities" and, together with the
International Option Securities, the "Option Securities"). The Initial U.S.
Securities and the U.S. Option Securities are hereinafter called the "U.S.
Securities". It is
5
understood that the Company is not obligated to sell and the International
Managers are not obligated to purchase, any Initial International Securities
unless all of the Initial U.S. Securities are contemporaneously purchased by
the U.S. Underwriters.
The International Managers and the U.S. Underwriters are hereinafter
collectively called the "Underwriters", the Initial International Securities
and the Initial U.S. Securities are hereinafter collectively called the
"Initial Securities", and the International Securities, and the U.S. Securities
are hereinafter collectively called the "Securities".
The Underwriters will concurrently enter into an Intersyndicate
Agreement of even date herewith (the "Intersyndicate Agreement") providing for
the coordination of certain transactions among the Underwriters under the
direction of Merrill Lynch & Co., Merrill Lynch, Pierce, Fenner & Smith
Incorporated (in such capacity, the "Global Coordinator").
The Company understands that the International Managers propose to
make a public offering of the International Securities as soon as the Lead
Managers deem advisable after this Agreement has been executed and delivered.
The Company and the International Managers agree that up to 700,000
shares of the Initial U.S. Securities to be purchased by the U.S. Underwriters
(the "Reserved Securities") shall be reserved for sale by the Underwriters to
certain eligible employees and persons having business relationships with the
Company, as part of the distribution of the Securities by the Underwriters,
subject to the terms of this Agreement, the applicable rules, regulations and
interpretations of the National Association of Securities Dealers, Inc. and all
other applicable laws, rules and regulations. To the extent that such Reserved
Securities are not orally confirmed for purchase by such eligible employees and
persons having business relationships with the Company by the end of the first
business day after the date of this Agreement, such Reserved Securities may be
offered to the public as part of the public offering contemplated hereby.
The Company has filed with the Securities and Exchange Commission (the
"Commission") a registration statement on Form S-1 (No. 333-38715) covering the
registration of the Securities under the Securities Act of 1933, as amended
(the "1933 Act"), including the related preliminary prospectus or prospectuses.
Promptly after execution and delivery of this Agreement, the Company will
either (i) prepare and file a prospectus in accordance with the provisions of
Rule 430A ("Rule 430A") of the rules and regulations of the Commission under
the 1933 Act (the "1933 Act Regulations") and paragraph (b) of Rule 424 ("Rule
424(b)") of the 1933 Act Regulations or (ii) if the Company has elected to rely
upon Rule 434 ("Rule 434") of the 1933 Act Regulations, prepare and file a term
sheet (a "Term Sheet") in accordance with the provisions of Rule 434 and Rule
424(b). Two forms of prospectus are to be used in connection with the offering
and sale of the Securities: one relating to the International Securities (the
"Form of International Prospectus") and one relating to the U.S. Securities
(the "Form of U.S. Prospectus"). The Form of International Prospectus is
identical to the Form of U.S. Prospectus, except for the front cover and back
cover pages and the information under the caption "Underwriting" [and the
inclusion in the Form of International Prospectus of a section under the
caption "Certain United States Tax Considerations for Non-United States
Holders."] The information included in any such prospectus or in any such Term
Sheet, as the case may be, that was omitted from such registration statement at
the time it became effective but that is deemed to be part of such registration
statement at the time it became effective (a) pursuant to paragraph (b) of Rule
430A is referred to as "Rule 430A Information" or (b) pursuant to paragraph (d)
of Rule 434 is referred to as "Rule 434 Information." Each Form of
International Prospectus and Form of U.S. Prospectus used before such
registration statement became effective, and any prospectus that omitted, as
applicable, the Rule 430A
2
6
Information or the Rule 434 Information, that was used after such effectiveness
and prior to the execution and delivery of this Agreement, is herein called a
"preliminary prospectus." Such registration statement, including the exhibits
thereto and schedules thereto at the time it became effective and including the
Rule 430A Information and the Rule 434 Information, as applicable, is herein
called the "Registration Statement." Any registration statement filed pursuant
to Rule 462(b) of the 1933 Act Regulations is herein referred to as the "Rule
462(b) Registration Statement," and after such filing the term "Registration
Statement" shall include the Rule 462(b) Registration Statement. The final
Form of International Prospectus and the final Form of U.S. Prospectus in the
forms first furnished to the Underwriters for use in connection with the
offering of the Securities are herein called the "International Prospectus" and
the "U.S. Prospectus," respectively, and collectively, the "Prospectuses."
For purposes of this Agreement, all references to the Registration Statement,
any preliminary prospectus, the International Prospectus, the U.S. Prospectus
or any Term Sheet or any amendment or supplement to any of the foregoing shall
be deemed to include the copy filed with the Commission pursuant to its
Electronic Data Gathering, Analysis and Retrieval system ("EDGAR").
At the Closing Time (defined below), the Company will acquire all of
the outstanding capital stock or other equity interests of each of the
companies listed on Schedule D (each, a "Founding Company" and, collectively,
the "Founding Companies"), in each case pursuant to a stock purchase agreement
(each an "Acquisition Agreement" and, collectively, the "Acquisition
Agreements"), each as described in the Prospectuses under the caption "Certain
Transactions - Organization of the Company" (collectively, the "Combination").
SECTION 1. Representations and Warranties.
(a) Representations and Warranties by the Company. The Company
represents and warrants to each International Manager as of the date hereof, as
of the Closing Time referred to in Section 2(c) hereof, and as of each Date of
Delivery (if any) referred to in Section 2(b) hereof, and agrees with each
International Manager, as follows:
(i) Compliance with Registration Requirements. Each of
the Registration Statement and any Rule 462(b) Registration Statement
has become effective under the 1933 Act and no stop order suspending
the effectiveness of the Registration Statement or any Rule 462(b)
Registration Statement has been issued under the 1933 Act and no
proceedings for that purpose have been instituted or are pending or,
to the knowledge of the Company, are contemplated by the Commission,
and any request on the part of the Commission for additional
information has been complied with.
At the respective times the Registration Statement, any Rule
462(b) Registration Statement and any post-effective amendments
thereto became effective and at the Closing Time (and, if any
International Option Securities are purchased, at the Date of
Delivery), the Registration Statement, the Rule 462(b) Registration
Statement and any amendments and supplements thereto complied and will
comply in all material respects with the requirements of the 1933 Act
and the 1933 Act Regulations and did not and will not contain an
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 not misleading. Neither of the Prospectuses nor any
amendments or supplements thereto, at the time the Prospectuses or any
amendments or supplements thereto were issued and at the Closing Time
(and, if any International Option Securities are purchased, at the
Date of Delivery), included or will include an untrue statement of a
material fact or omitted or will omit to state a material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. If Rule 434
is used, the Company will comply with the requirements of Rule 434 and
the Prospectuses
3
7
shall not be "materially different", as such term is used in Rule 434,
from the prospectuses included in the Registration Statement at the
time it became effective. The representations and warranties in this
subsection shall not apply to statements in or omissions from the
Registration Statement or the International Prospectus made in reliance
upon and in conformity with information furnished to the Company in
writing by any International Manager through the Lead Managers
expressly for use in the Registration Statement or the International
Prospectus.
Each preliminary prospectus and the prospectuses filed as part
of the Registration Statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
complied when so filed in all material respects with the 1933 Act
Regulations and each preliminary prospectus and the Prospectuses
delivered to the Underwriters for use in connection with this offering
was identical to the electronically transmitted copies thereof filed
with the Commission pursuant to EDGAR, except to the extent permitted
by Regulation S-T.
(ii) Independent Accountants. The accountants who
certified the financial statements and supporting schedules included
in the Registration Statement are independent public accountants as
required by the 1933 Act and the 1933 Act Regulations.
(iii) Financial Statements. The financial statements
included in the Registration Statement and the Prospectuses, together
with the related schedules and notes, present fairly the financial
position of the Company, the Founding Companies, and their respective
consolidated subsidiaries at the dates indicated and the statement of
operations, stockholders' equity and cash flows of the Company, the
Founding Companies and their consolidated subsidiaries for the periods
specified; said financial statements have been prepared in conformity
with generally accepted accounting principles ("GAAP") applied on a
consistent basis throughout the periods involved. The supporting
schedules included in the Registration Statement present fairly in
accordance with GAAP the information required to be stated therein.
The selected financial data and the summary financial information
included in the Prospectuses present fairly the information shown
therein and have been compiled on a basis consistent with that of the
audited financial statements included in the Registration Statement.
The pro forma financial statements and the related notes thereto
included in the Registration Statement and the Prospectuses present
fairly the information shown therein, have been prepared in accordance
with the Commission's rules and guidelines with respect to pro forma
financial statements and have been properly compiled on the bases
described therein, and the assumptions used in the preparation thereof
are reasonable and the adjustments used therein are appropriate to
give effect to the transactions and circumstances referred to therein.
(iv) No Material Adverse Change in Business. Since the
respective dates as of which information is given in the Registration
Statement and the Prospectuses, except as otherwise stated therein,
(A) there has been no material adverse change in the condition,
financial or otherwise, or in the earnings, business affairs or
business prospects of the Company, the Founding Companies and their
respective subsidiaries considered as one enterprise, whether or not
arising in the ordinary course of business (a "Material Adverse
Effect"), (B) there have been no transactions entered into by the
Company, the Founding Companies or their respective subsidiaries,
other than those in the ordinary course of business, which are
material with respect to the Company, the Founding Companies and their
respective subsidiaries considered as one enterprise, and (C) there
has been no dividend or distribution of any kind declared, paid or
made by the Company on any class of its capital stock or, except as
set forth in the Prospectuses, by any Founding Company on any class of
its capital stock.
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(v) Good Standing of the Company. The Company has been
duly organized and is validly existing as a corporation in good
standing under the laws of the State of Delaware and has corporate
power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectuses and to enter
into and perform its obligations under this Agreement. The Company is
duly qualified as a foreign corporation to transact business and is in
good standing in each other jurisdiction in which such qualification
is required, whether by reason of the ownership or leasing of property
or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(vi) Good Standing of Founding Companies. The Company has
no subsidiaries as of the date hereof. As of the Closing Time, the
only subsidiaries of the Company will be the Founding Companies and
their respective subsidiaries. Each Founding Company or subsidiary
thereof that is a corporation has been duly organized and is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has corporate power and authority
to own, lease and operate its properties and to conduct its business
as described in the Prospectuses and is duly qualified as a foreign
corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect. Except as
otherwise disclosed in the Registration Statement, all of the issued
and outstanding capital stock of each Founding Company or subsidiary
has been duly authorized and validly issued, is fully paid and
non-assessable, and upon consummation of the Combination, will be
owned by the Company, directly or through subsidiaries, free and clear
of any security interest, mortgage, pledge, lien, encumbrance, claim
or equity. None of the outstanding shares of capital stock of any
founding company subsidiary was issued in violation of the preemptive
or similar rights of any security holder of such subsidiary. Each
Founding Company or subsidiary thereof that is a partnership or
limited liability company has been duly formed and is validly existing
in good standing under the laws of the jurisdiction of organization,
has power and authority to own, lease and operate its properties and
to conduct its business as described in the Prospectuses and is duly
qualified to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by
reason of the ownership or leasing of property or the conduct of
business, except where the failure so to qualify or to be in good
standing would not result in a Material Adverse Effect. Exhibit 21 to
the Registration Statement sets forth a complete list of the Founding
Companies and their subsidiaries, except to the extent permitted by
the rules and regulations of the Commission.
(vii) Capitalization. As of the Closing Time, the Company
had authorized capital stock consisting of 100,000,000 shares of
Common Stock, par value $.01 per share, and 10,000,000 shares of
Preferred Stock, par value $.01 per share (the "Preferred Stock").
Prior to the closing of the transactions contemplated by each of the
Acquisition Agreements and the issuance of shares of Common Stock as
contemplated thereby and by the U.S. Purchase Agreement and the
International Purchase Agreement, the Company had issued and
outstanding 4,052,311 shares of Common Stock and no shares of
Preferred Stock; upon consummation of the Combination and the
issuance of 12,313,026 shares of Common Stock as contemplated by the
Acquisition Agreements, (which, together with the 4,052,311 shares of
Common Stock issued prior to the Combination, are all the shares of
Common Stock issued or to be issued prior to the issuance and sale of
the Securities), but without giving effect to the issuance of the
Securities pursuant to the terms of the U.S. Purchase Agreement and
the International Purchase Agreement, the Company will have issued and
outstanding 16,365,337 shares of Common Stock and no shares of
Preferred Stock. All of such shares of Common Stock have been duly
authorized and, when issued and delivered to the
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purchasers thereof against payment therefor as provided in the
Acquisition Agreements, will be validly issued, fully paid and
nonassessable. None of the outstanding shares of capital stock of the
Company was issued in violation of the preemptive or other similar
rights of any security holder of the Company. Except as described in
the Prospectuses, there are no outstanding options, warrants or other
rights calling for the issuance of, and there are no commitments to
issue any shares of, capital stock of the Company or any security
convertible into or exchangeable or exercisable for capital stock of
the Company.
(viii) Authorization of Agreement. This Agreement and the
U.S. Purchase Agreement have been duly authorized, executed and
delivered by the Company.
(ix) Authorization and Description of Securities. The
Securities to be purchased by the International Managers and the U.S.
Underwriters from the Company have been duly authorized for issuance
and sale to the International Managers pursuant to this Agreement and
the U.S. Underwriters pursuant to the U.S. Purchase Agreement,
respectively, and, when issued and delivered by the Company pursuant
to this Agreement and the U.S. Purchase Agreement, respectively,
against payment of the consideration set forth herein and the U.S.
Purchase Agreement, respectively, will be validly issued, fully paid
and non-assessable. The Common Stock conforms to all statements
relating thereto contained in the Prospectuses and such description
conforms to the rights set forth in the instruments defining the same.
No holder of the Securities will be subject to personal liability by
reason of being such a holder. The issuance of the Securities is not
subject to the preemptive or other similar rights of any security
holder of the Company.
(x) Absence of Defaults and Conflicts. Neither the
Company nor any of the Founding Companies or their respective
subsidiaries is in violation of its charter or by-laws or in default
in the performance or observance of any obligation, agreement,
covenant or condition contained in any contract, indenture, mortgage,
deed of trust, loan or credit agreement, note, lease or other
agreement or instrument to which the Company, any Founding Company or
any of their respective subsidiaries is a party or by which it or any
of them may be bound, or to which any of the property or assets of the
Company or any subsidiary is subject (collectively, "Agreements and
Instruments") except for such defaults that would not result in a
Material Adverse Effect. The execution, delivery and performance of
this Agreement, the U.S. Purchase Agreement, and the Acquisition
Agreements and the consummation of the transactions contemplated in
this Agreement, the U.S. Purchase Agreement and in the Registration
Statement (including the issuance and sale of the Securities and the
use of the proceeds from the sale of the Securities as described in
the Prospectuses under the caption "Use of Proceeds") and compliance
by the Company with its obligations under this Agreement, the U.S.
Purchase Agreement and the Acquisition Agreements have been duly
authorized by all necessary corporate action and do not and will not,
whether with or without the giving of notice or passage of time or
both, conflict with or constitute a breach of, or default or Repayment
Event (as defined below) under, or result in the creation or
imposition of any lien, charge or encumbrance upon any property or
assets of the Company, any Founding Company or any subsidiary pursuant
to, the Agreements and Instruments (except for such conflicts,
breaches or defaults or liens, charges or encumbrances that would not
result in a Material Adverse Effect), nor will such action result in
any violation of the provisions of the charter or by-laws of the
Company, any Founding Company or any subsidiary thereof or any
applicable law, statute, rule, regulation, judgment, order, writ or
decree of any government, government instrumentality or court,
domestic or foreign, having jurisdiction over the Company, any
Founding Company or any subsidiary thereof or any of their assets,
properties or operations. As used herein, a "Repayment Event" means
any event or condition which gives the holder of any note,
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debenture or other evidence of indebtedness (or any person acting on
such holder's behalf) the right to require the repurchase, redemption
or repayment of all or a portion of such indebtedness by the Company,
any Founding Company or any subsidiary thereof.
(xi) Absence of Labor Dispute. No labor dispute with the
employees of the Company, any Founding Company or any subsidiary
thereof exists or, to the knowledge of the Company, is imminent, and
neither the Company nor any Founding Company is aware of any existing
or imminent labor disturbance by the employees of any of its or any
subsidiary's principal suppliers, manufacturers, customers or
contractors, which, in either case, may reasonably be expected to
result in a Material Adverse Effect.
(xii) Absence of Proceedings. There is no action, suit,
proceeding, inquiry or investigation before or brought by any court or
governmental agency or body, domestic or foreign, now pending, or, to
the knowledge of the Company, threatened, against or affecting the
Company, any Founding Company or any subsidiary thereof, which is
required to be disclosed in the Registration Statement (other than as
disclosed therein), or which might reasonably be expected to result in
a Material Adverse Effect, or which might reasonably be expected to
materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in this Agreement,
the U.S. Purchase Agreement or the Acquisition Agreements or the
performance by the Company of its obligations hereunder or thereunder;
the aggregate of all pending legal or governmental proceedings to
which the Company, any Founding Company or any subsidiary thereof is
a party or of which any of their respective property or assets is the
subject which are not described in the Registration Statement,
including ordinary routine litigation incidental to the business,
could not reasonably be expected to result in a Material Adverse
Effect.
(xiii) Accuracy of Exhibits. There are no contracts or
documents which are required to be described in the Registration
Statement or the Prospectuses or to be filed as exhibits thereto which
have not been so described and filed as required.
(xiv) Possession of Intellectual Property. The Company,
the Founding Companies and their subsidiaries own or possess, or can
acquire on reasonable terms, adequate patents, patent rights,
licenses, inventions, copyrights, know-how (including trade secrets
and other unpatented and/or unpatentable proprietary or confidential
information, systems or procedures), trademarks, service marks, trade
names or other intellectual property (collectively, "Intellectual
Property") necessary to carry on the business now operated by them,
and neither the Company, any Founding Company nor any of its
subsidiaries has received any notice or is otherwise aware of any
infringement of or conflict with asserted rights of others with
respect to any Intellectual Property or of any facts or circumstances
which would render any Intellectual Property invalid or inadequate to
protect the interest of the Company, such Founding Company or any of
its subsidiaries therein, and which infringement or conflict (if the
subject of any unfavorable decision, ruling or finding) or invalidity
or inadequacy, singly or in the aggregate, would result in a Material
Adverse Effect.
(xv) Absence of Further Requirements. No filing with, or
authorization, approval, consent, license, order, registration,
qualification or decree of, any court or governmental authority or
agency is necessary or required for the performance by the Company of
its obligations hereunder, in connection with the offering, issuance
or sale of the Securities under this Agreement and the U.S. Purchase
Agreement or the consummation of the transactions contemplated by this
Agreement, the U.S. Purchase Agreement or the Acquisition Agreements,
except such as have been already obtained or as may be required under
the 1933 Act or the 1933 Act Regulations and foreign or state
securities or blue sky laws.
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(xvi) Possession of Licenses and Permits. The Company,
each Founding Company and their subsidiaries possess such permits,
licenses, approvals, consents and other authorizations (collectively,
"Governmental Licenses") issued by the appropriate federal, state,
local or foreign regulatory agencies or bodies necessary to conduct
the business now operated by them. The Company, each Founding Company
and their subsidiaries are in compliance with the terms and conditions
of all such Governmental Licenses, except where the failure so to
comply would not, singly or in the aggregate, have a Material Adverse
Effect. All of the Governmental Licenses are valid and in full force
and effect, except when the invalidity of such Governmental Licenses
or the failure of such Governmental Licenses to be in full force and
effect would not have a Material Adverse Effect. Neither the Company
nor any Founding Company or their subsidiaries has received any notice
of proceedings relating to the revocation or modification of any such
Governmental Licenses which, singly or in the aggregate, if the
subject of an unfavorable decision, ruling or finding, would result in
a Material Adverse Effect.
(xvii) Title to Property. The Company, each Founding
Company and their subsidiaries have good and marketable title to all
real property owned by them and good title to all other properties
owned by them, in each case, free and clear of all mortgages, pledges,
liens, security interests, claims, restrictions or encumbrances of any
kind except such as (a) are described in the Prospectuses or (b) do
not, singly or in the aggregate, materially affect the value of such
property and do not interfere with the use made and proposed to be
made of such property by the Company, the Founding Companies or any of
their subsidiaries. All of the leases and subleases material to the
business of the Company, the Founding Companies or any of their
subsidiaries, considered as one enterprise, and under which the
Company, the Founding Company or any of their subsidiaries holds
properties described in the Prospectuses, are in full force and
effect, and neither the Company nor any Founding Company or any of
their subsidiaries has any notice of any material claim of any sort
that has been asserted by anyone adverse to the rights of the Company,
such Founding Company or any subsidiary under any of the leases or
subleases mentioned above, or affecting or questioning the rights of
the Company, such Founding Company or such subsidiary to the continued
possession of the leased or subleased premises under any such lease or
sublease.
(xviii) Compliance with Cuba Act. The Company has complied
with, and is and will be in compliance with, the provisions of that
certain Florida act relating to disclosure of doing business with
Cuba, codified as Section 517.075 of the Florida statutes, and the
rules and regulations thereunder (collectively, the "Cuba Act") or is
exempt therefrom.
(xix) Investment Company Act. The Company is not, and upon
the issuance and sale of the Securities as herein contemplated, the
application of the net proceeds therefrom as described in the
Prospectuses or consummation of the Combination will not be, an
"investment company" or an entity "controlled" by an "investment
company" as such terms are defined in the Investment Company Act of
1940, as amended (the "1940 Act").
(xx) Environmental Laws. Except as described in the
Registration Statement and except as would not, singly or in the
aggregate, result in a Material Adverse Effect, (A) neither the
Company, any Founding Company or any subsidiary thereof is in
violation of any federal, state, local or foreign statute, law, rule,
regulation, ordinance, code, policy or rule of common law or any
judicial or
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administrative interpretation thereof, including any judicial or
administrative order, consent, decree or judgment, relating to
pollution or protection of human health, the environment (including,
without limitation, ambient air, surface water, groundwater, land
surface or subsurface strata) or wildlife, including, without
limitation, laws and regulations relating to the release or threatened
release of chemicals, pollutants, contaminants, wastes, toxic
substances, hazardous substances, petroleum or petroleum products
(collectively, "Hazardous Materials") or to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport
or handling of Hazardous Materials (collectively, "Environmental
Laws"), (B) the Company, the Founding Companies and their
subsidiaries have all permits, authorizations and approvals required
under any applicable Environmental Laws and are each in compliance
with their requirements, (C) there are no pending or threatened
administrative, regulatory or judicial actions, suits, demands, demand
letters, claims, liens, notices of noncompliance or violation,
investigation or proceedings relating to any Environmental Law against
the Company, any Founding Company or any of their subsidiaries and
(D) there are no events or circumstances that might reasonably be
expected to form the basis of an order for clean-up or remediation, or
an action, suit or proceeding by any private party or governmental
body or agency, against or affecting the Company, any Founding Company
or any of their subsidiaries relating to Hazardous Materials or any
Environmental Laws.
(xxi) Registration Rights. There are no persons with
registration rights or other similar rights to have any securities
registered pursuant to the Registration Statement or otherwise
registered by the Company under the 1933 Act.
(xxii) Tax Returns. The Company, each Founding Company and
each subsidiary have filed all Federal, state, local and foreign
income tax returns which have been required to be filed and have paid
all taxes indicated by said returns and all assessments received by it
or any of them to the extent that such taxes have become due and are
not being contested in good faith, except for the filing of those
returns, and the paying of those taxes, the failure to file or pay,
respectively, individually or in the aggregate, would not have a
Material Adverse Effect. All tax liabilities have been adequately
provided for in the financial statements of the Company or the
applicable Founding Company.
(xxiii) Insurance. The Company and the Founding Companies
and their subsidiaries carry, or are covered by, insurance in such
amounts and covering such risks as is reasonably adequate for the
conduct of their respective businesses and the value of their
respective properties and as is customary for companies in the
Company's industry.
(xxiv) ERISA. The Company and the Founding Companies and
their subsidiaries are in compliance in all material respects with all
presently applicable provisions of the Employee Retirement Income
Security Act of 1974, as amended, including the regulations and
published interpretations thereunder ("ERISA").
(xxv) Related Party Transactions. No relationship, direct
or indirect, exists between or among the Company or any Founding
Company or subsidiary, on the one hand, and the directors, officers,
shareholders, customers or suppliers of the Company, such Founding
Company or its subsidiaries on the other hand, which is required to be
described in the Prospectuses which is not so described.
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(xxvi) Reserved Shares. Each of the persons identified by
the Company to the Underwriters to receive Reserved Shares is a
citizen of the United States and currently is a resident of one of the
United States.
(xxvii) Consummation of Combination. As of the date of this
Agreement, all conditions to consummation of the transactions
contemplated by each Acquisition Agreement have been satisfied, with
the exception of the Closing of the sale of the Securities pursuant to
this Agreement and the U.S. Purchase Agreement. There have been no
amendments or supplements to any of the Acquisition Agreements since
the original execution thereof on October 21, 1997. The Company has
notified the Underwriters of any waiver of any conditions to
consummation of such Acquisition Agreements. The Closing (as defined
in the Acquisition Agreements) with respect to each Acquisition
Agreement has occurred. At or prior to the Closing Time, the
transactions contemplated by each Acquisition Agreement will be
consummated, with the result that each Founding Company will become a
wholly- owned direct or indirect subsidiary of the Company as
described in the Prospectuses.
(b) Officer's Certificates. Any certificate signed by any officer
of the Company or any of its subsidiaries delivered to the Global Coordinator,
the Lead Managers or to counsel for the International Managers shall be deemed
a representation and warranty by the Company to each International Manager as
to the matters covered thereby.
SECTION 2. Sale and Delivery to International Managers; Closing.
(a) Initial Securities. On the basis of the representations and
warranties herein contained and subject to the terms and conditions herein set
forth, the Company agrees to sell to each International Manager, severally and
not jointly, and each International Manager, severally and not jointly, agrees
to purchase from the Company, at the price per share set forth in Schedule B,
the number of Initial International Securities set forth in Schedule A opposite
the name of such International Manager, plus any additional number of Initial
International Securities which such International Manager may become obligated
to purchase pursuant to the provisions of Section 10 hereof.
(b) Option Securities. In addition, on the basis of the
representations and warranties herein contained and subject to the terms and
conditions herein set forth, the Company hereby grants an option to the
International Managers, severally and not jointly, to purchase up to an
additional 210,000 shares of Common Stock at the price per share set forth in
Schedule B, less an amount per share equal to any dividends or distributions
declared by the Company and payable on the Initial International Securities but
not payable on the International Option Securities. The option hereby granted
will expire 30 days after the date hereof and may be exercised in whole or in
part from time to time only for the purpose of covering over-allotments which
may be made in connection with the offering and distribution of the Initial
International Securities upon notice by the Global Coordinator to the Company
setting forth the number of International Option Securities as to which the
several International Managers are then exercising the option and the time and
date of payment and delivery for such International Option Securities. Any
such time and date of delivery for the International Option Securities (a "Date
of Delivery") shall be determined by the Global Coordinator, but shall not be
later than seven full business days after the exercise of said option, nor in
any event prior to the Closing Time, as hereinafter defined. If the option is
exercised as to all or any portion of the International Option Securities, each
of the International Managers, acting severally and not jointly, will purchase
that proportion of the total number of International Option Securities then
being purchased which the number of Initial International Securities set forth
in Schedule A opposite the name of such International Manager bears to the
total number
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of Initial International Securities, subject in each case to such adjustments
as the Global Coordinator in its discretion shall make to eliminate any sales
or purchases of fractional shares.
(c) Payment. Payment of the purchase price for, and delivery of
certificates for, the Initial Securities shall be made at the offices of Vinson
& Elkins L.L.P., 1001 Fannin, Houston, Texas, or at such other place as shall
be agreed upon by the Global Coordinator and the Company, at 9:00 A.M. (Eastern
time) on the third (fourth, if the pricing occurs after 4:30 P.M. (Eastern
time) on any given day) business day after the date hereof (unless postponed in
accordance with the provisions of Section 10), or such other time not later
than ten business days after such date as shall be agreed upon by the Global
Coordinator and the Company (such time and date of payment and delivery being
herein called "Closing Time").
In addition, in the event that any or all of the International Option
Securities are purchased by the International Managers, payment of the purchase
price for, and delivery of certificates for, such International Option
Securities shall be made at the above-mentioned offices, or at such other place
as shall be agreed upon by the Global Coordinator and the Company, on each Date
of Delivery as specified in the notice from the Global Coordinator to the
Company.
Payment shall be made to the Company by wire transfer of immediately
available funds to a bank account designated by the Company, against delivery
to the Lead Managers for the respective accounts of the International Managers
of certificates for the International Securities to be purchased by them. It
is understood that each International Manager has authorized the Lead Managers,
for its account, to accept delivery of, receipt for, and make payment of the
purchase price for, the Initial International Securities and the International
Option Securities, if any, which it has agreed to purchase. Merrill Lynch,
individually and not as representative of the International Managers, may (but
shall not be obligated to) make payment of the purchase price for the Initial
International Securities or the International Option Securities, if any, to be
purchased by any International Manager whose funds have not been received by
the Closing Time or the relevant Date of Delivery, as the case may be, but such
payment shall not relieve such International Manager from its obligations
hereunder.
(d) Denominations; Registration. Certificates for the Initial
International Securities and the International Option Securities, if any, shall
be in such denominations and registered in such names as the Lead Managers may
request in writing at least one full business day before the Closing Time or
the relevant Date of Delivery, as the case may be. The certificates for the
Initial International Securities and the International Option Securities, if
any, will be made available for examination and packaging by the Lead Managers
in The City of New York not later than 10:00 A.M. (Eastern time) on the
business day prior to the Closing Time or the relevant Date of Delivery, as the
case may be.
SECTION 3. Covenants of the Company. The Company covenants with
each International Manager as follows:
(a) Compliance with Securities Regulations and Commission
Requests. The Company, subject to Section 3(b), will comply with the
requirements of Rule 430A or Rule 434, as applicable, and will notify the
Global Coordinator immediately, and confirm the notice in writing, (i) when any
post-effective amendment to the Registration Statement shall become effective,
or any supplement to the Prospectuses or any amended Prospectuses shall have
been filed, (ii) of the receipt of any comments from the Commission, (iii) of
any request by the Commission for any amendment to the Registration Statement
or any amendment or supplement to the Prospectuses or for additional
information, and (iv) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or of any order
preventing or suspending the use
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of any preliminary prospectus, or of the suspension of the qualification of the
Securities for offering or sale in any jurisdiction, or of the initiation or
threatening of any proceedings for any of such purposes. The Company will
promptly effect the filings necessary pursuant to Rule 424(b) and will take
such steps as it deems necessary to ascertain promptly whether the form of
prospectus transmitted for filing under Rule 424(b) was received for filing by
the Commission and, in the event that it was not, it will promptly file such
prospectus. The Company will make every reasonable effort to prevent the
issuance of any stop order and, if any stop order is issued, to obtain the
lifting thereof at the earliest possible moment.
(b) Filing of Amendments. The Company will give the Global
Coordinator notice of its intention to file or prepare any amendment to the
Registration Statement (including any filing under Rule 462(b)), any Term Sheet
or any amendment, supplement or revision to either the prospectus included in
the Registration Statement at the time it became effective or to the
Prospectuses, will furnish the Global Coordinator with copies of any such
documents a reasonable amount of time prior to such proposed filing or use, as
the case may be, and will not file or use any such document to which the Global
Coordinator or counsel for the International Managers shall object.
(c) Delivery of Registration Statements. The Company has
furnished or will deliver to the Lead Managers and counsel for the
International Managers, without charge, signed copies of the Registration
Statement as originally filed and of each amendment thereto (including exhibits
filed therewith or incorporated by reference therein) and signed copies of all
consents and certificates of experts, and will also deliver to the Lead
Managers, without charge, a conformed copy of the Registration Statement as
originally filed and of each amendment thereto (without exhibits) for each of
the International Managers. The copies of the Registration Statement and each
amendment thereto furnished to the International Managers will be identical to
the electronically transmitted copies thereof filed with the Commission
pursuant to EDGAR, except to the extent permitted by Regulation S-T.
(d) Delivery of Prospectuses. The Company has delivered to each
International Manager, without charge, as many copies of each preliminary
prospectus as such International Manager reasonably requested, and the Company
hereby consents to the use of such copies for purposes permitted by the 1933
Act. The Company will furnish to each International Manager, without charge,
during the period when the International Prospectus is required to be delivered
under the 1933 Act or the Securities Exchange Act of 1934 (the "1934 Act"),
such number of copies of the International Prospectus (as amended or
supplemented) as such International Manager may reasonably request. The
International Prospectus and any amendments or supplements thereto furnished to
the International Managers will be identical to the electronically transmitted
copies thereof filed with the Commission pursuant to EDGAR, except to the
extent permitted by Regulation S-T.
(e) Continued Compliance with Securities Laws. The Company will
comply with the 1933 Act and the 1933 Act Regulations so as to permit the
completion of the distribution of the Securities as contemplated in this
Agreement, the U.S. Purchase Agreement and in the Prospectuses. If at any time
when a prospectus is required by the 1933 Act to be delivered in connection
with sales of the Securities, any event shall occur or condition shall exist as
a result of which it is necessary, in the opinion of counsel for the
International Managers or for the Company, to amend the Registration Statement
or amend or supplement any Prospectus in order that the Prospectuses will not
include any untrue statements of a material fact or omit to state a material
fact necessary in order to make the statements therein not misleading in the
light of the circumstances existing at the time it is delivered to a purchaser,
or if it shall be necessary, in the opinion of such counsel, at any such time
to amend the Registration Statement or amend or supplement any Prospectus in
order to comply with the requirements of the 1933 Act or the 1933 Act
Regulations, the Company will
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promptly prepare and file with the Commission, subject to Section 3(b), such
amendment or supplement as may be necessary to correct such statement or
omission or to make the Registration Statement or the Prospectuses comply with
such requirements, and the Company will furnish to the International Managers
such number of copies of such amendment or supplement as the International
Managers may reasonably request.
(f) Blue Sky Qualifications. The Company will use its best
efforts, in cooperation with the International Managers, to qualify the
Securities for offering and sale under the applicable securities laws of such
states and other jurisdictions (domestic or foreign) as the Global Coordinator
may designate and to maintain such qualifications in effect for a period of not
less than one year from the later of the effective date of the Registration
Statement and any Rule 462(b) Registration Statement; provided, however, that
the Company shall not be obligated to file any general consent to service of
process or to qualify as a foreign corporation or as a dealer in securities in
any jurisdiction in which it is not so qualified or to subject itself to
taxation in respect of doing business in any jurisdiction in which it is not
otherwise so subject. In each jurisdiction in which the Securities have been
so qualified, the Company will file such statements and reports as may be
required by the laws of such jurisdiction to continue such qualification in
effect for a period of not less than one year from the effective date of the
Registration Statement and any Rule 462(b) Registration Statement.
(g) Rule 158. The Company will timely file such reports pursuant
to the 1934 Act as are necessary in order to make generally available to its
security holders as soon as practicable an earnings statement for the purposes
of, and to provide the benefits contemplated by, the last paragraph of Section
11(a) of the 1933 Act.
(h) Use of Proceeds. The Company will use the net proceeds
received by it from the sale of the Securities in the manner specified in the
Prospectuses under "Use of Proceeds".
(i) Listing. The Company will use its best efforts to effect the
listing of the Securities Common Stock (including the Securities) on the New
York Stock Exchange.
(j) Restriction on Sale of Securities. During a period of 180
days from the date of the Prospectuses, the Company will not, without the prior
written consent of the Global Coordinator, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any share of Common Stock or any
securities convertible into or exercisable or exchangeable for Common Stock or
file any registration statement under the 1933 Act with respect to any of the
foregoing or (ii) enter into any swap or any other agreement or any transaction
that transfers, in whole or in part, directly or indirectly, the economic
consequence of ownership of the Common Stock or any securities convertible into
or exercisable or exchangeable for Common Stock, whether any such swap or
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Securities to be sold hereunder or under
the U.S. Purchase Agreement or in connection with the Combination as described
in the Prospectuses, (B) any shares of Common Stock issued or options to
purchase Common Stock granted pursuant to employee benefit plans of the Company
referred to in the Prospectuses or (C) shares of Common Stock issued in
connection with acquisitions by the Company of other businesses, provided that,
(except with respect to shares issued in transactions in which the issuance or
resale of such shares will not be registered under the 1933 Act) the recipients
of such shares agree in writing for the benefit of the International Managers
not to take any action described in clauses (i) or (ii) above with respect to
such shares until the expiration of 180 days from the date of the Prospectuses.
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(k) Reporting Requirements. The Company, during the period when
the Prospectuses are required to be delivered under the 1933 Act or the 1934
Act, will file all documents required to be filed with the Commission pursuant
to the 1934 Act within the time periods required by the 1934 Act and the rules
and regulations of the Commission thereunder.
(l) Compliance with NASD Rules. The Company hereby agrees that it
will ensure that the Reserved Securities will be restricted as required by the
National Association of Securities Dealers, Inc. (the "NASD") or the NASD rules
from sale, transfer, assignment, pledge or hypothecation for a period of three
months following the date of this Agreement. The Underwriters will notify the
Company as to which persons will need to be so restricted. At the request of
the Underwriters, the Company will direct the transfer agent to place a stop
transfer restriction upon such securities for such period of time. Should the
Company release, or seek to release, from such restrictions any of the Reserved
Securities, the Company agrees to reimburse the Underwriters for any reasonable
expenses (including, without limitation, legal expenses) they incur in
connection with such release.
(m) Compliance with Rule 463. The Company will file with the
Commission such reports on Form SR as may be required pursuant to Rule 463 of
the 1933 Act Regulations.
SECTION 4. Payment of Expenses.
(a) Expenses. The Company will pay all expenses incident to the
performance of its obligations under this Agreement, including (i) the
preparation, printing and filing of the Registration Statement (including
financial statements and exhibits) as originally filed and of each amendment
thereto, (ii) the preparation, printing and delivery to the Underwriters of
this Agreement, any Agreement among Underwriters and such other documents as
may be required in connection with the offering, purchase, sale, issuance or
delivery of the Securities, (iii) the preparation, issuance and delivery of the
certificates for the Securities to the Underwriters, including any stock or
other transfer taxes and any stamp or other duties payable upon the sale,
issuance or delivery of the Securities to the Underwriters and the transfer of
the Securities between the U.S. Underwriters and the International Managers,
(iv) the fees and disbursements of the Company's counsel, accountants and other
advisors, (v) the qualification of the Securities under securities laws in
accordance with the provisions of Section 3(f) hereof, including filing fees
and the reasonable fees and disbursements of counsel for the Underwriters in
connection therewith and in connection with the preparation of the Blue Sky
Survey and any supplement thereto, (vi) the printing and delivery to the
Underwriters of copies of each preliminary prospectus, any Term Sheets and of
the Prospectuses and any amendments or supplements thereto, (vii) the
preparation, printing and delivery to the Underwriters of copies of the Blue
Sky Survey and any supplement thereto, (viii) the fees and expenses of any
transfer agent or registrar for the Securities, (ix) the filing fees incident
to, and the reasonable fees and disbursements of counsel to the Underwriters in
connection with, the review by the NASD of the terms of the sale of the
Securities, (x) the fees and expenses incurred in connection with the listing
of the Securities on the New York Stock Exchange and (xi) all costs and
expenses of the Underwriters, including the fees and disbursements of counsel
for the Underwriters, in connection with matters related to the Reserved
Securities which are designated by the Company for sale to employees and
others.
(b) Termination of Agreement. If this Agreement is terminated by
the Lead Managers in accordance with the provisions of Section 5 or Section
9(a)(i) hereof, the Company shall reimburse the International Managers for all
of their out-of-pocket expenses, including the reasonable fees and
disbursements of counsel for the International Managers.
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SECTION 5. Conditions of International Managers' Obligations.
The obligations of the several International Managers hereunder are subject to
the accuracy of the representations and warranties of the Company contained in
Section 1 hereof or in certificates of any officer of the Company delivered
pursuant to the provisions hereof, to the performance by the Company of its
covenants and other obligations hereunder, and to the following further
conditions:
(a) Effectiveness of Registration Statement. The Registration
Statement, including any Rule 462(b) Registration Statement, has become
effective and at the Closing Time no stop order suspending the effectiveness of
the Registration Statement shall have been issued under the 1933 Act or
proceedings therefor initiated or threatened by the Commission, and any request
on the part of the Commission for additional information shall have been
complied with to the reasonable satisfaction of counsel to the International
Managers. A prospectus containing the Rule 430A Information shall have been
filed with the Commission in accordance with Rule 424(b) (or a post-effective
amendment providing such information shall have been filed and declared
effective in accordance with the requirements of Rule 430A) or, if the Company
has elected to rely upon Rule 434, a Term Sheet shall have been filed with the
Commission in accordance with Rule 424(b).
(b) Opinions of Counsel for the Company and the Founding
Companies. At Closing Time, the Lead Managers shall have received (i) the
favorable opinion, dated as of Closing Time, of Andrews & Kurth L.L.P., counsel
for the Company, in form and substance satisfactory to counsel for the
International Managers, together with signed or reproduced copies of such
letter for each of the other International Managers to the effect set forth in
Exhibit A-1 hereto and to such further effect as counsel to the International
Managers may reasonably request and (ii) the favorable opinion, dated as of
Closing Time, of counsel for each Founding Company reasonably acceptable to the
International Managers, in form and substance reasonably satisfactory to
counsel for the International Managers, together with signed or reproduced
copies of such letter for each of the other International Managers, to the
effect set forth in Exhibit A-2 hereto and to such further effect as counsel to
the International Managers may reasonably request.
(c) Opinion of Counsel for International Managers. At Closing
Time, the Lead Managers shall have received the favorable opinion, dated as of
Closing Time, of Vinson & Elkins L.L.P., counsel for the International
Managers, together with signed or reproduced copies of such letter for each of
the other International Managers with respect to the matters set forth in
clauses (i), (ii), (v), (vi) (solely as to preemptive or other similar rights
arising by operation of law or under the charter or by-laws of the Company),
(ix) through (xi), inclusive, (xii), (xiv) (solely as to the information in the
Prospectus under "Description of Capital Stock -- Common Stock") and the
penultimate paragraph of Exhibit A hereto. In giving such opinion such counsel
may rely, as to all matters governed by the laws of jurisdictions other than
the law of the State of New York, the federal law of the United States and the
General Corporation Law of the State of Delaware, upon the opinions of counsel
satisfactory to the Lead Managers. Such counsel may also state that, insofar
as such opinion involves factual matters, they have relied, to the extent they
deem proper, upon certificates of officers of the Company and its subsidiaries
and certificates of public officials.
(d) Officers' Certificate. At Closing Time, there shall not have
been, since the date hereof or since the respective dates as of which
information is given in the Prospectuses, any material adverse change in the
condition, financial or otherwise, or in the earnings, business affairs or
business prospects of the Company, the Founding Companies or their subsidiaries
considered as one enterprise, whether or not arising in the ordinary course of
business, and the Lead Managers shall have received a certificate of the
President or a Vice President of the Company and of the chief financial or
chief accounting officer of the Company, dated as of Closing Time, to the
effect that (i) there has been no such material adverse change, (ii) the
representations
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and warranties in Section 1(a) hereof are true and correct with the same force
and effect as though expressly made at and as of Closing Time, (iii) the
Company has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied at or prior to Closing Time, and (iv) no stop
order suspending the effectiveness of the Registration Statement has been
issued and no proceedings for that purpose have been instituted or are pending
or are contemplated by the Commission.
(e) Accountant's Comfort Letter. At the time of the execution of
this Agreement, the Lead Managers shall have received from Arthur Andersen LLP
a letter dated such date, in form and substance satisfactory to the Lead
Managers, together with signed or reproduced copies of such letter for each of
the other International Managers containing statements and information of the
type ordinarily included in accountants' "comfort letters" to underwriters with
respect to the financial statements and certain financial information contained
in the Registration Statement and the Prospectuses.
(f) Bring-down Comfort Letter. At Closing Time, the Lead Managers
shall have received from Arthur Andersen LLP a letter, dated as of Closing
Time, to the effect that they reaffirm the statements made in the letter
furnished pursuant to subsection (e) of this Section, except that the specified
date referred to shall be a date not more than three business days prior to
Closing Time.
(g) Approval of Listing. At Closing Time, the Securities shall
have been approved for listing on the New York Stock Exchange, subject only to
official notice of issuance.
(h) No Objection. The NASD has confirmed that it has not raised
any objection with respect to the fairness and reasonableness of the
underwriting terms and arrangements.
(i) Lock-up Agreements. At the date of this Agreement, the Lead
Managers shall have received an agreement substantially in the form of Exhibit
B hereto signed by the persons listed on Schedule C hereto.
(j) Combination Completed. The transactions contemplated by each
Acquisition Agreement shall have been consummated, with the result that each
Founding Company is a wholly-owned direct or indirect subsidiary of the Company
as described in the Prospectuses.
(k) Purchase of Initial U.S. Securities. Contemporaneously with
the purchase by the International Managers of the Initial International
Securities under this Agreement, the U.S. Underwriters shall have purchased the
Initial U.S. Securities under the U.S. Purchase Agreement.
(l) Conditions to Purchase of International Option Securities. In
the event that the International Managers exercise their option provided in
Section 2(b) hereof to purchase all or any portion of the International Option
Securities, the representations and warranties of the Company contained herein
and the statements in any certificates furnished by the Company or any
subsidiary of the Company hereunder shall be true and correct as of each Date
of Delivery and, at the relevant Date of Delivery, the Lead Managers shall have
received:
(i) Officers' Certificate. A certificate, dated such
Date of Delivery, of the President or a Vice President of the Company
and of the chief financial or chief accounting officer of the Company
confirming that the certificate delivered at the Closing Time pursuant
to Section 5(d) hereof remains true and correct as of such Date of
Delivery.
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(ii) Opinion of Counsel for Company. The favorable
opinion of Andrews & Kurth L.L.P., counsel for the Company, in form
and substance satisfactory to counsel for the International Managers,
dated such Date of Delivery, relating to the International Option
Securities to be purchased on such Date of Delivery and otherwise to
the same effect as the opinions required by Sections 5(b)(i) and (ii)
hereof.
(iii) Opinion of Counsel for International Managers. The
favorable opinion of Vinson & Elkins L.L.P., counsel for the
International Managers, dated such Date of Delivery, relating to the
International Option Securities to be purchased on such Date of
Delivery and otherwise to the same effect as the opinion required by
Section 5(c) hereof.
(iv) Bring-down Comfort Letter. A letter from Arthur
Andersen LLP, in form and substance satisfactory to the Lead Managers
and dated such Date of Delivery, substantially in the same form and
substance as the letter furnished to the Lead Managers pursuant to
Section 5(f) hereof, except that the "specified date" in the letter
furnished pursuant to this paragraph shall be a date not more than
five days prior to such Date of Delivery.
(m) Additional Documents. At Closing Time and at each Date of
Delivery counsel for the International Managers shall have been furnished with
such documents and opinions as they may require for the purpose of enabling
them to pass upon the issuance and sale of the Securities as herein
contemplated, or in order to evidence the accuracy of any of the
representations or warranties, or the fulfillment of any of the conditions,
herein contained; and all proceedings taken by the Company in connection with
the issuance and sale of the Securities as herein contemplated shall be
satisfactory in form and substance to the Lead Managers and counsel for the
International Managers.
(n) Termination of Agreement. If any condition specified in this
Section shall not have been fulfilled when and as required to be fulfilled,
this Agreement, or, in the case of any condition to the purchase of
International Option Securities on a Date of Delivery which is after the
Closing Time, the obligations of the several International Managers to purchase
the relevant Option Securities may be terminated by the Lead Managers by notice
to the Company at any time at or prior to Closing Time or such Date of
Delivery, as the case may be, and such termination shall be without liability
of any party to any other party except as provided in Section 4 and except that
Sections 1, 6, 7 and 8 shall survive any such termination and remain in full
force and effect.
SECTION 6. Indemnification.
(a) Indemnification of International Managers. The Company agrees
to indemnify and hold harmless each International Manager and each person, if
any, who controls any International Manager within the meaning of Section 15 of
the 1933 Act or Section 20 of the 1934 Act as follows:
(i) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, arising out of any untrue
statement or alleged untrue statement of a material fact contained in
the Registration Statement (or any amendment thereto), including the
Rule 430A Information and the Rule 434 Information, if applicable, or
the omission or alleged omission therefrom of a material fact required
to be stated therein or necessary to make the statements therein not
misleading or arising out of any untrue statement or alleged untrue
statement of a material fact included in any preliminary prospectus or
the Prospectuses (or any amendment or supplement thereto), or the
omission or alleged
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omission therefrom of a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading;
(ii) against any and all loss, liability, claim, damage
and expense whatsoever, as incurred, to the extent of the aggregate
amount paid in settlement of any litigation, or any investigation or
proceeding by any governmental agency or body, commenced or
threatened, or of any claim whatsoever based upon any such untrue
statement or omission, or any such alleged untrue statement or
omission; provided that (subject to Section 6(d) below) any such
settlement is effected with the written consent of the Company; and
(iii) against any and all expense whatsoever, as incurred
(including the fees and disbursements of counsel chosen by Merrill
Lynch), reasonably incurred in investigating, preparing or defending
against any litigation, or any investigation or proceeding by any
governmental agency or body, commenced or threatened, or any claim
whatsoever based upon any such untrue statement or omission, or any
such alleged untrue statement or omission, to the extent that any such
expense is not paid under (i) or (ii) above;
provided, however, that this indemnity agreement shall not apply to any loss,
liability, claim, damage or expense to the extent arising out of any untrue
statement or omission or alleged untrue statement or omission made in reliance
upon and in conformity with written information furnished to the Company by any
International Manager through the Lead Managers expressly for use in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
prospectus or the International Prospectus (or any amendment or supplement
thereto).
(b) Indemnification of Company, Directors and Officers. Each
International Manager severally agrees to indemnify and hold harmless the
Company, its directors, each of its officers who signed the Registration
Statement, and each person, if any, who controls the Company within the meaning
of Section 15 of the 1933 Act or Section 20 of the 1934 Act against any and all
loss, liability, claim, damage and expense described in the indemnity contained
in subsection (a) of this Section, as incurred, but only with respect to untrue
statements or omissions, or alleged untrue statements or omissions, made in the
Registration Statement (or any amendment thereto), including the Rule 430A
Information and the Rule 434 Information, if applicable, or any preliminary
international prospectus or the International Prospectus (or any amendment or
supplement thereto) in reliance upon and in conformity with written information
furnished to the Company by such International Manager through the Lead
Managers expressly for use in the Registration Statement (or any amendment
thereto) or such preliminary prospectus or the International Prospectus (or any
amendment or supplement thereto).
(c) Actions against Parties; Notification. Each indemnified party
shall give notice as promptly as reasonably practicable to each indemnifying
party of any action commenced against it in respect of which indemnity may be
sought hereunder, but failure to so notify an indemnifying party shall not
relieve such indemnifying party from any liability hereunder to the extent it
is not materially prejudiced as a result thereof and in any event shall not
relieve it from any liability which it may have otherwise than on account of
this indemnity agreement. In the case of parties indemnified pursuant to
Section 6(a) above, counsel to the indemnified parties shall be selected by
Merrill Lynch, and, in the case of parties indemnified pursuant to Section 6(b)
above, counsel to the indemnified parties shall be selected by the Company. An
indemnifying party may participate at its own expense in the defense of any
such action; provided, however, that counsel to the indemnifying party shall
not (except with the consent of the indemnified party) also be counsel to the
indemnified party. In no event shall the indemnifying parties be liable for
fees and expenses of more than one
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counsel (in addition to any local counsel) separate from their own counsel for
all indemnified parties in connection with any one action or separate but
similar or related actions in the same jurisdiction arising out of the same
general allegations or circumstances. No indemnifying party shall, without the
prior written consent of the indemnified parties, settle or compromise or
consent to the entry of any judgment with respect to any litigation, or any
investigation or proceeding by any governmental agency or body, commenced or
threatened, or any claim whatsoever in respect of which indemnification or
contribution could be sought under this Section 6 or Section 7 hereof (whether
or not the indemnified parties are actual or potential parties thereto), unless
such settlement, compromise or consent (i) includes an unconditional release of
each indemnified party from all liability arising out of such litigation,
investigation, proceeding or claim and (ii) does not include a statement as to
or an admission of fault, culpability or a failure to act by or on behalf of
any indemnified party.
(d) Settlement without Consent if Failure to Reimburse. If at any
time an indemnified party shall have requested an indemnifying party to
reimburse the indemnified party for fees and expenses of counsel, such
indemnifying party agrees that it shall be liable for any settlement of the
nature contemplated by Section 6(a)(ii) effected without its written consent if
(i) such settlement is entered into more than 45 days after receipt by such
indemnifying party of the aforesaid request, (ii) such indemnifying party shall
have received notice of the terms of such settlement at least 30 days prior to
such settlement being entered into and (iii) such indemnifying party shall not
have reimbursed such indemnified party in accordance with such request prior to
the date of such settlement.
(e) Indemnification for Reserved Securities. In connection with
the offer and sale of the Reserved Securities, the Company agrees, promptly
upon a request in writing, to indemnify and hold harmless the Underwriters from
and against any and all losses, liabilities, claims, damages and expenses
incurred by them as a result of the failure of any person or entity to whom
Reserved Securities are offered to pay for and accept delivery of Reserved
Securities which, by the end of the first business day following the date of
this Agreement, were subject to a properly confirmed agreement to purchase.
SECTION 7. Contribution. If the indemnification provided for in
Section 6 hereof is for any reason unavailable to or insufficient to hold
harmless an indemnified party in respect of any losses, liabilities, claims,
damages or expenses referred to therein, then each indemnifying party shall
contribute to the aggregate amount of such losses, liabilities, claims, damages
and expenses incurred by such indemnified party, as incurred, (i) in such
proportion as is appropriate to reflect the relative benefits received by the
Company on the one hand and the International Managers on the other hand from
the offering of the Securities pursuant to this Agreement or (ii) if the
allocation provided by clause (i) is not permitted by applicable law, in such
proportion as is appropriate to reflect not only the relative benefits referred
to in clause (i) above but also the relative fault of the Company on the one
hand and of the International Managers on the other hand in connection with the
statements or omissions which resulted in such losses, liabilities, claims,
damages or expenses, as well as any other relevant equitable considerations.
The relative benefits received by the Company on the one hand and the
International Managers on the other hand in connection with the offering of the
International Securities pursuant to this Agreement shall be deemed to be in
the same respective proportions as the total net proceeds from the offering of
the International Securities pursuant to this Agreement (before deducting
expenses) received by the Company and the total underwriting discount received
by the International Managers, in each case as set forth on the cover of the
International Prospectus, or, if Rule 434 is used, the corresponding location
on the Term Sheet, bear to the aggregate initial public offering price of the
International Securities as set forth on such cover.
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The relative fault of the Company on the one hand and the
International Managers on the other hand shall be determined by reference to,
among other things, whether any such untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates
to information supplied by the Company or by the International Managers and the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent such statement or omission.
The Company and the International Managers agree that it would not be
just and equitable if contribution pursuant to this Section 7 were determined
by pro rata allocation (even if the International Managers were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to above in this Section
7. The aggregate amount of losses, liabilities, claims, damages and expenses
incurred by an indemnified party and referred to above in this Section 7 shall
be deemed to include any legal or other expenses reasonably incurred by such
indemnified party in investigating, preparing or defending against any
litigation, or any investigation or proceeding by any governmental agency or
body, commenced or threatened, or any claim whatsoever based upon any such
untrue or alleged untrue statement or omission or alleged omission.
Notwithstanding the provisions of this Section 7, no International
Manager shall be required to contribute any amount in excess of the amount by
which the total price at which the International Securities underwritten by it
and distributed to the public were offered to the public exceeds the amount of
any damages which such International Managers has otherwise been required to
pay by reason of any such untrue or alleged untrue statement or omission or
alleged omission.
No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the 1933 Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation.
For purposes of this Section 7, each person, if any, who controls an
International Managers within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as such
International Manager, and each director of the Company, each officer of the
Company who signed the Registration Statement, and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act or
Section 20 of the 1934 Act shall have the same rights to contribution as the
Company. The International Managers' respective obligations to contribute
pursuant to this Section 7 are several in proportion to the number of Initial
International Securities set forth opposite their respective names in Schedule
A hereto and not joint.
SECTION 8. Representations, Warranties and Agreements to Survive
Delivery. All representations, warranties and agreements contained in this
Agreement or in certificates of officers of the Company or any of its
subsidiaries submitted pursuant hereto, shall remain operative and in full
force and effect, regardless of any investigation made by or on behalf of any
International Manager or controlling person, or by or on behalf of the Company,
and shall survive delivery of the Securities to the International Managers.
SECTION 9. Termination of Agreement.
(a) Termination; General. The Lead Managers may terminate this
Agreement, by notice to the Company, at any time at or prior to Closing Time
(i) if there has been, since the time of execution of this Agreement or since
the respective dates as of which information is given in the International
Prospectus, any material adverse change in the condition, financial or
otherwise, or in the earnings, business affairs or business prospects of the
Company, the Founding Companies and their subsidiaries considered as one
enterprise, whether or not arising in the ordinary course of business, or (ii)
if there has occurred any material adverse
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change in the financial markets in the United States or the international
financial markets, any outbreak of hostilities or escalation thereof or other
calamity or crisis or any change or development involving a prospective change
in national or international political, financial or economic conditions, in
each case the effect of which is such as to make it, in the judgment of the
Lead Managers, impracticable to market the Securities or to enforce contracts
for the sale of the Securities, or (iii) if trading in any securities of the
Company has been suspended or materially limited by the Commission or the New
York Stock Exchange, or if trading generally on the American Stock Exchange or
the New York Stock Exchange or in the Nasdaq National Market has been suspended
or materially limited, or minimum or maximum prices for trading have been
fixed, or maximum ranges for prices have been required, by any of said
exchanges or by such system or by order of the Commission, the National
Association of Securities Dealers, Inc. or any other governmental authority, or
(iv) if a banking moratorium has been declared by either Federal or New York
authorities.
(b) Liabilities. If this Agreement is terminated pursuant to this
Section, such termination shall be without liability of any party to any other
party except as provided in Section 4 hereof, and provided further that
Sections 1, 6, 7 and 8 shall survive such termination and remain in full force
and effect.
SECTION 10. Default by One or More of the International Managers.
If one or more of the International Managers shall fail at Closing Time or a
Date of Delivery to purchase the Securities which it or they are obligated to
purchase under this Agreement (the "Defaulted Securities"), the Lead Managers
shall have the right, within 24 hours thereafter, to make arrangements for one
or more of the non-defaulting International Managers, or any other
underwriters, to purchase all, but not less than all, of the Defaulted
Securities in such amounts as may be agreed upon and upon the terms herein set
forth; if, however, the Lead Managers shall not have completed such
arrangements within such 24-hour period, then:
(a) if the number of Defaulted Securities does not exceed 10% of
the number of International Securities to be purchased on such date, each of
the non-defaulting International Managers shall be obligated, severally and not
jointly, to purchase the full amount thereof in the proportions that their
respective underwriting obligations hereunder bear to the underwriting
obligations of all non-defaulting International Managers, or
(b) if the number of Defaulted Securities exceeds 10% of the
number of International Securities to be purchased on such date, this Agreement
or, with respect to any Date of Delivery which occurs after the Closing Time,
the obligation of the International Managers to purchase and of the Company to
sell the Option Securities to be purchased and sold on such Date of Delivery
shall terminate without liability on the part of any non-defaulting
International Manager.
No action taken pursuant to this Section shall relieve any defaulting
International Manager from liability in respect of its default.
In the event of any such default which does not result in a
termination of this Agreement or, in the case of a Date of Delivery which is
after the Closing Time, which does not result in a termination of the
obligation of the International Managers to purchase and the Company to sell
the relevant International Option Securities, as the case may be, either the
Lead Managers or the Company shall have the right to postpone Closing Time or
the relevant Date of Delivery, as the case may be, for a period not exceeding
seven days in order to effect any required changes in the Registration
Statement or Prospectus or in any other documents or arrangements. As used
herein, the term "International Manager" includes any person substituted for an
International Manager under this Section 10.
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SECTION 11. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given if
mailed or transmitted by any standard form of telecommunication. Notices to
the International Managers shall be directed to the Lead Managers at North
Tower, World Financial Center, New York, New York 10281-1201 attention of *;
and notices to the Company shall be directed to it at *, attention of *.
SECTION 12. Parties. This Agreement shall each inure to the
benefit of and be binding upon the International Managers and the Company and
their respective successors. Nothing expressed or mentioned in this Agreement
is intended or shall be construed to give any person, firm or corporation,
other than the International Managers and the Company and their respective
successors and the controlling persons and officers and directors referred to
in Sections 6 and 7 and their heirs and legal representatives, any legal or
equitable right, remedy or claim under or in respect of this Agreement or any
provision herein contained. This Agreement and all conditions and provisions
hereof are intended to be for the sole and exclusive benefit of the
International Managers and the Company and their respective successors, and
said controlling persons and officers and directors and their heirs and legal
representatives, and for the benefit of no other person, firm or corporation.
No purchaser of Securities from any International Manager shall be deemed to be
a successor by reason merely of such purchase.
SECTION 13. GOVERNING LAW AND TIME. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.
SPECIFIED TIMES OF DAY IN THIS AGREEMENT REFER TO NEW YORK CITY TIME.
SECTION 14. Effect of Headings. The Article and Section headings
herein and the Table of Contents are for convenience only and shall not affect
the construction hereof.
22
26
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to the Company a counterpart hereof,
whereupon this instrument, along with all counterparts, will become a binding
agreement between the International Managers and the Company in accordance with
its terms.
Very truly yours,
INTEGRATED ELECTRICAL SERVICES, INC.
By:
------------------------------------
Title:
---------------------------------
CONFIRMED AND ACCEPTED,
as of the date first above written:
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE INTERNATIONAL
EQUITABLE SECURITIES CORPORATION
SANDERS MORRIS MUNDY INC.
By: MERRILL LYNCH INTERNATIONAL
By:
----------------------------------------
Authorized Signatory
For themselves and as Lead Managers of the
other International Managers named in Schedule A hereto.
23
27
SCHEDULE A
Number of
Initial
International
Name of International Manager Securities
----------------------------- ----------
Merrill Lynch International . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Donaldson, Lufkin & Jenrette International . . . . . . . . . . . . . . . . . . . .
Equitable Securities Corporation . . . . . . . . . . . . . . . . . . . . . . . . .
Sanders Morris Mundy Inc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
---------
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,400,000
=========
Sch A - 1
28
SCHEDULE B
INTEGRATED ELECTRICAL SERVICES, INC.
1,400,000 Shares of Common Stock
(Par Value $.01 Per Share)
1. The initial public offering price per share for the
Securities, determined as provided in said Section 2, shall be $*.
2. The purchase price per share for the International Securities
to be paid by the several International Managers shall be $*, being an amount
equal to the initial public offering price set forth above less $* per share;
provided that the purchase price per share for any International Option
Securities purchased upon the exercise of the over-allotment option described
in Section 2(b) shall be reduced by an amount per share equal to any dividends
or distributions declared by the Company and payable on the Initial
International Securities but not payable on the International Option
Securities.
Sch B - 1
29
SCHEDULE C
Persons Subject to Lock-Up
C. Byron Snyder
Jon Pollock
Jim P. Wise
Jerry Mills
Ben L. Mueller
John S. Stanfield
D. Merrill Cummings
J. Paul Withrow
Richard Muth
Robert Stalvey
Bob Weik
[Others named in prospectus as officer or director]
Sch C - 1
30
SCHEDULE D
Founding Companies
Houston-Stafford Electric, Inc.
Stark Investments, Inc.
Mills Electrical Contractors, Inc. (including all equity
interests in Forth Worth Regional Electrical Services, L.L.C.)
BW Consolidated, Inc. (including all equity interests in Bexar Electric
Company, Ltd. and Calhoun Electric Company, Ltd.)
Pollock Electric, Inc.
Daniel Electrical Contractors, Inc. and Daniel Electrical of Treasure Coast
Inc.
Muth Electric, Inc.
Amber Electric, Inc.
Summit Electric of Texas, Inc.
Charles P. Bagby Company, Inc. and General Partner, Inc. (including all equity
interests in Haymaker Electric, Ltd.)
Thurman & O'Connell Corp.
Hatfield Electric, Inc.
Ace Electric, Inc.
Reynolds Electric Corp.
Thomas Popp & Co., Inc.
Rodgers Electric Co., Inc.
Sch D - 1
31
Exhibit A-1
FORM OF OPINION OF COMPANY'S COUNSEL
TO BE DELIVERED PURSUANT TO
SECTION 5(b)(i)
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of Delaware.
(ii) The Company has corporate power and authority to own, lease
and operate its properties and to conduct its business as described in the
Prospectuses and to enter into and perform its obligations under the U.S.
Purchase Agreement and the International Purchase Agreement.
(iii) The Company is duly qualified as a foreign corporation to
transact business and is in good standing in each jurisdiction in which such
qualification is required, whether by reason of the ownership or leasing of
property or the conduct of business, except where the failure so to qualify or
to be in good standing would not result in a Material Adverse Effect.
(iv) As of the Closing Time, the Company had authorized capital
stock consisting of 100,000,000 shares of Common Stock, par value $.01 per
share, and 10,000,000 shares of Preferred Stock, par value $.01 per share (the
"Preferred Stock"). Prior to the closing of the transactions contemplated by
each of the Acquisition Agreements and the issuance of shares of Common Stock
as contemplated thereby and by the U.S. Purchase Agreement and the
International Purchase Agreement, the Company had issued and outstanding
4,052,311 shares of Common Stock and no shares of Preferred Stock; upon
consummation of the Combination and the issuance of 12,313,026 shares of Common
Stock as contemplated by the Acquisition Agreements, (which, together with the
4,052,311 shares of Common Stock issued prior to the Combination, are all the
shares of Common Stock issued or to be issued prior to the issuance and sale of
the Securities), but without giving effect to the issuance of the Securities
pursuant to the terms of the U.S. Purchase Agreement and the International
Purchase Agreement, the Company will have issued and outstanding 16,365,337
shares of Common Stock and no shares of Preferred Stock. All of such shares
of Common Stock have been duly authorized and, when issued and delivered to the
purchasers thereof against payment therefor as provided in the Acquisition
Agreements, will be validly issued, fully paid and nonassessable. None of the
outstanding shares of capital stock of the Company was issued in violation of
the preemptive or other similar rights of any security holder of the Company.
Except as described in the Prospectuses, to our knowledge there are no
outstanding options, warrants or other rights calling for the issuance of, and
there are no commitments to issue any shares of, capital stock of the Company
or any security convertible into or exchangeable or exercisable for capital
stock of the Company.
(v) The Securities to be purchased by the U.S. Underwriters and
the International Managers from the Company have been duly authorized for
issuance and sale to the Underwriters pursuant to the U.S. Purchase Agreement
and the International Purchase Agreement, respectively, and, when issued and
delivered by the Company pursuant to the U.S. Purchase Agreement and the
International Purchase Agreement, respectively, against payment of the
consideration set forth in the U.S. Purchase Agreement and the
A1-1
32
International Purchase Agreement, will be validly issued and fully paid and
non-assessable and no holder of the Securities is or will be subject to
personal liability by reason of being such a holder.
(vi) The issuance of the Securities is not subject to the
preemptive or other similar rights of any security holder of the Company.
(vii) Each Acquisition Agreement has been duly and validly
authorized, executed and delivered by the Company and constitutes the valid and
binding obligation of each of the Company enforceable in accordance with its
terms, except as may be limited by bankruptcy, insolvency and other laws
affecting creditors' rights generally, or as may be modified by a court of
equity.
(viii) The transactions contemplated by each Acquisition Agreement
have been consummated as described in the Prospectuses. As a result of the
Combination, all of the issued and outstanding capital stock or other equity
interest of each Founding Company and their subsidiaries is owned by the
Company, directly or through subsidiaries, free and clear of any security
interest, mortgage, pledge, lien, encumbrance, claim, shareholders agreement,
or voting trust, and no options, warrants or other rights to purchase,
agreements, or other obligations to issue or other rights to convert any other
obligations into shares of capital stock or ownership interests in any Founding
Company or any subsidiary thereof are outstanding.
(ix) The U.S. Purchase Agreement and the International Purchase
Agreement have been duly authorized, executed and delivered by the Company.
(x) The Registration Statement, including any Rule 462(b)
Registration Statement, has been declared effective under the 1933 Act; any
required filing of the Prospectuses pursuant to Rule 424(b) has been made in
the manner and within the time period required by Rule 424(b); and, to the best
of our knowledge, no stop order suspending the effectiveness of the
Registration Statement or any Rule 462(b) Registration Statement has been
issued under the 1933 Act and no proceedings for that purpose have been
instituted or are pending or threatened by the Commission.
(xi) The Registration Statement including any Rule 462(b)
Registration Statement and the Rule 430A Information, as applicable, the
Prospectuses and each amendment or supplement to the Registration Statement and
the Prospectuses as of their respective effective or issue dates (other than
the financial statements and supporting schedules included therein or omitted
therefrom, as to which we need express no opinion) complied as to form in all
material respects with the requirements of the 1933 Act and the 1933 Act
Regulations.
(xii) The form of certificate used to evidence the Common Stock
complies in all material respects with all applicable statutory requirements,
with any applicable requirements of the charter and by-laws of the Company and
the requirements of the New York Stock Exchange.
(xiii) To the best of our knowledge, there is not pending or
threatened any action, suit, proceeding, inquiry or investigation, to which the
Company or any Founding Company is a party, or to which the property of the
Company or any Founding Company is subject, before or brought by any court or
governmental agency or body, domestic or foreign, which might reasonably be
expected to result in a Material Adverse Effect, or which might reasonably be
expected to materially and adversely affect the properties or assets thereof or
the consummation of the transactions contemplated in the U.S. Purchase
A1-2
33
Agreement, the International Purchase Agreement or the Acquisition Agreements
or the performance by the Company of its obligations thereunder.
(xiv) The information in the Prospectuses under the headings
"Management -- Employment Agreements," "--1997 Stock Plan," "--1997 Directors
Stock Plan;" "Certain Transactions;" "Description of Capital Stock," "Certain
United States Tax Considerations for Non-United States Holders" and "Shares
Eligible For Future Sale," and in the Registration Statement under Item 14, to
the extent that it constitutes matters of law, summaries of legal matters, the
Company's charter and bylaws or legal conclusions, has been reviewed by us and
is correct in all material respects.
(xv) To the best of our knowledge, there are no statutes or
regulations that are required to be described in the Prospectuses that are not
described as required.
(xvi) All descriptions in the Prospectuses of contracts and other
documents to which the Company or any Founding Company is a party are accurate
in all material respects; to the best of our knowledge, there are no
franchises, contracts, indentures, mortgages, loan agreements, notes, leases or
other instruments required to be described or referred to in the Registration
Statement or to be filed as exhibits thereto other than those described or
referred to therein or filed or incorporated by reference as exhibits thereto,
and the descriptions thereof or references thereto are correct in all material
respects.
(xvii) The Company is not in violation of its charter, by-laws or
other governing documents and, to our best knowledge, no default by the Company
exists in the due performance or observance of any material obligation,
agreement, covenant or condition contained in any contract, indenture,
mortgage, loan agreement, note, lease or other agreement or instrument that is
described or referred to in the Registration Statement or the Prospectuses or
filed or incorporated by reference as an exhibit to the Registration Statement.
(xviii) No filing with, or authorization, approval, consent, license,
order, registration, qualification or decree of, any court or governmental
authority or agency, domestic or foreign (other than under the 1933 Act and the
1933 Act Regulations, which have been obtained, or as may be required under the
securities or blue sky laws of the various states, as to which we express no
opinion) is necessary or required in connection with the due authorization,
execution and delivery of the U.S. Purchase Agreement and the International
Purchase Agreement or for the offering, issuance, sale or delivery of the
Securities.
(xix) No registration under the Act and no filing with, consent,
approval, authorization, order, registration or qualification of or with any
court or governmental agency or body is required for the issuance of the
Company Common Stock to the stockholders of each Founding Company pursuant to
the Acquisition Agreements or the consummation of the other transactions
contemplated by the Acquisition Agreements, except such filings, consents,
approvals, authorizations, registrations or qualifications as have been
obtained or made.
(xx) The execution, delivery and performance of the U.S. Purchase
Agreement and the International Purchase Agreement and the consummation of the
transactions contemplated in the U.S. Purchase Agreement, the International
Purchase Agreement and in the Registration Statement (including the issuance
and sale of the Securities, and the use of the proceeds from the sale of the
Securities as described in the Prospectuses under the caption "Use Of
Proceeds") and compliance by the Company with its obligations under the U.S.
Purchase Agreement and the International Purchase Agreement do not and will
A1-3
34
not, whether with or without the giving of notice or lapse of time or both,
conflict with or constitute a breach of, or default or Repayment Event (as
defined in Section 1(a)(x) of the Purchase Agreements) under or result in the
creation or imposition of any lien, charge or encumbrance upon any property or
assets of the Company or any Founding Company pursuant to any contract,
indenture, mortgage, deed of trust, loan or credit agreement, note, lease or
any other agreement or instrument, known to us, to which the Company or any
Founding Company is a party or by which it or any of them may be bound, or to
which any of the property or assets of the Company or any Founding Company is
subject (except for such conflicts, breaches or defaults or liens, charges or
encumbrances that would not have a Material Adverse Effect), nor will such
action result in any violation of the provisions of the charter, by-laws or
other governing documents of the Company or any Founding Company, or any
applicable law, statute, rule, regulation, judgment, order, writ or decree,
known to us, of any government, government instrumentality or court, domestic
or foreign, having jurisdiction over the Company or any Founding Company or any
of their respective properties, assets or operations.
(xxi) To the best of our knowledge, except as set forth in the
Prospectuses, there are no persons with registration rights or other similar
rights to have any securities registered pursuant to the Registration Statement
or otherwise registered by the Company under the 1933 Act.
(xxii) The Company is not, and will not be after consummation of the
Combination or application of the proceeds of the offering of the Securities as
set forth in the Prospectuses, an "investment company" or an entity
"controlled" by an "investment company," as such terms are defined in the 1940
Act.
Nothing has come to our attention that would lead us to believe that
the Registration Statement or any amendment thereto, including the Rule 430A
Information, (except for financial statements and schedules and other financial
data included therein or omitted therefrom, as to which we make no statement),
at the time such Registration Statement or any such amendment became effective,
contained an untrue statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the statements therein
not misleading or that the Prospectuses or any amendment or supplement thereto
(except for financial statements and schedules and other financial data
included therein or omitted therefrom, as to which we make no statement), at
the time the Prospectuses were issued, at the time any such amended or
supplemented prospectus was issued or at the Closing Time, included or includes
an untrue statement of a material fact or omitted or omits to state a material
fact necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading.
In rendering opinions set forth above with respect to matters
concerning the Founding Companies, such counsel may rely (A) as to matters
involving the application of the laws of the jurisdiction of incorporation or
organization of each Founding Company, upon the opinion of counsel to each
Founding Company (which opinion shall be dated and furnished to the U.S.
Representatives at the Closing Time, shall be satisfactory in form and
substance to counsel for the U.S. Underwriters and shall expressly state that
the U.S. Underwriters may rely on such opinion as if it were addressed to
them), provided that such counsel shall state in their opinion that they
believe that they and the U.S. Underwriters are justified in relying upon such
opinion, and (B), as to matters of fact (but not as to legal conclusions), to
the extent they deem proper, on certificates of responsible officers of the
Company and public officials. Such opinion shall not state that it is to be
governed or qualified by, or that it is otherwise subject to, any treatise,
written policy or other document relating to legal opinions, including, without
limitation, the Legal Opinion Accord of the ABA Section of Business Law (1991).
A1-4
35
Exhibit A-2
FORM OF OPINION OF COUNSEL OF EACH
FOUNDING COMPANY
TO BE DELIVERED PURSUANT TO SECTION 5(b)(ii)
(i) Such Founding Company or any subsidiary thereof that is a
corporation has been duly incorporated and is validly existing as a corporation
in good standing under the laws of the jurisdiction of its incorporation, has
corporate power and authority to own, lease and operate its properties and to
conduct its business as described in the Prospectuses and is duly qualified as
a foreign corporation to transact business and is in good standing in each
jurisdiction in which such qualification is required, whether by reason of the
ownership or leasing of property or the conduct of business, except where the
failure so to qualify or to be in good standing would not result in a Material
Adverse Effect. None of the outstanding shares of capital stock of such
Founding Company or any subsidiary thereof was issued in violation of the
preemptive or similar rights of any security holder of such Founding Company or
subsidiary. All of the issued and outstanding capital stock of such Founding
Company or any subsidiary thereof has been duly authorized and validly issued,
and is fully paid and non-assessable. Such Founding Company or subsidiary
thereof that is a partnership or limited liability company has been duly formed
and is validly existing in good standing under the laws of the jurisdiction of
organization, has power and authority to own, lease and operate its properties
and to conduct its business as described in the Prospectuses and is duly
qualified to transact business and is in good standing in each jurisdiction in
which such qualification is required, whether by reason of the ownership or
leasing of property or the conduct of business, except where the failure so to
qualify or to be in good standing would not result in a Material Adverse
Effect.
(ii) Each Acquisition Agreement has been duly and validly
authorized by such Founding Company and its shareholders and constitutes the
valid and binding obligation of such Founding Company and its shareholders
enforceable in accordance with its terms, except as may be limited by
bankruptcy, insolvency and other laws affecting creditors' rights generally, or
as may be modified by a court of equity.
(iii) Neither such Founding Company nor any subsidiary is in
violation of its charter, by-laws or other governing documents and, to the best
of our knowledge, no default by such Founding Company or any of its
subsidiaries exists in the due performance or observance of any material
obligation, agreement, covenant or condition contained in any contract,
indenture, mortgage, loan agreement, note, lease or other agreement or
instrument that is described or referred to in the Registration Statement or
the Prospectuses or filed or incorporated by reference as an exhibit to the
Registration Statement.
In rendering opinions set forth above, such counsel may rely as to
matters of fact (but not as to legal conclusions), to the extent they deem
proper, on certificates of responsible officers of the Founding Company and
public officials. Such opinion shall not state that it is to be governed or
qualified by, or that it is otherwise subject to, any treatise, written policy
or other document relating to legal opinions, including, without limitation,
the Legal Opinion Accord of the ABA Section of Business Law (1991).
A2-1
36
Exhibit B
*, 1997
MERRILL LYNCH INTERNATIONAL
Donaldson, Lufkin & Jenrette International
Equitable Securities Corporation
Sanders Morris Mundy Inc.
as Managers of the several International Managers
c/o Merrill Lynch International
Ropemaker Place
25 Ropemaker Street
London EC24 9L4
England
Re: Proposed Public Offering by Integrated Electrical Services, Inc.
Dear Sirs:
The undersigned, a stockholder and an officer and/or director of
Integrated Electrical Services, Inc., a Delaware corporation (the "Company"),
understands that Merrill Lynch International ("Merrill Lynch"), Donaldson,
Lufkin & Jenrette International, Equitable Securities Corporation, and Sanders
Morris Mundy Inc. propose to enter into an International Purchase Agreement
(the "International Purchase Agreement") with the Company providing for the
public offering of shares (the "Securities") of the Company's common stock, par
value $.01 per share (the "Common Stock"). In recognition of the benefit that
such an offering will confer upon the undersigned as a stockholder and an
officer and/or director of the Company, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
the undersigned agrees with each underwriter to be named in the International
Purchase Agreement that, during a period of 180 days from the date of the
International Purchase Agreement, the undersigned will not, without the prior
written consent of Merrill Lynch, directly or indirectly, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant for the sale of,
or otherwise dispose of or transfer any shares of the Company's Common Stock or
any securities convertible into or exchangeable or exercisable for Common
Stock, whether now owned or hereafter acquired by the undersigned or with
respect to which the undersigned has or hereafter acquires the power of
disposition, or file any registration statement under the Securities Act of
1933, as amended, with respect to any of the foregoing or (ii) enter into any
swap or any other agreement or any transaction that transfers, in whole or in
part, directly or indirectly, the economic consequence of ownership of the
Common Stock, whether any such swap or transaction is to be settled by delivery
of Common Stock or other securities, in cash or otherwise.
Very truly yours,
Signature:
-----------------------------
Print Name:
-----------------------------
B-1
1
EXHIBIT 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION OF
INTEGRATED ELECTRICAL SERVICES, INC.
Integrated Electrical Services, Inc. (the "Corporation"), a
corporation organized and existing under and by virtue of the General
Corporation Law of the State of Delaware ("DGCL"), hereby certifies as follows
pursuant to Sections 242 and 245 of the DGCL:
1. The original Certificate of Incorporation of the Corporation was filed
in the Office of the Secretary of State of the State of Delaware (the
"Secretary of State") on June 26, 1997.
2. The director and the stockholders of the Corporation, in accordance
with Sections 242 and 245 of the DGCL, adopted and approved this Amended and
Restated Certificate of Incorporation (including the amendments to the
Corporation's Certificate of Incorporation effected hereby).
3. Effective immediately upon the filing of this Amended and Restated
Certificate of Incorporation in the office of the Secretary of State, each
outstanding share of previously existing Common Stock, par value $0.01 per
share, shall be and hereby is converted into and reclassified as 2,329.6
shares of Common Stock, par value $0.01 per share. Certificates representing
reclassified shares are hereby canceled and upon presentation of the canceled
certificates to the Corporation, the holders thereof shall be entitled to
receive certificate(s) representing the new shares into which such canceled
shares have been converted.
4. The Certificate of Incorporation of the Corporation is hereby amended
and restated to read in its entirety as follows:
1. The name of the Corporation is Integrated Electrical Services,
Inc.
2. The address of its registered office in the State of Delaware
is 1209 Orange Street, Wilmington County of New Castle, Delaware 19801. The
name of its registered agent at such address is The Corporation Trust Company.
3. The nature of the business or purposes to be conducted or
promoted is to engage in any lawful act or activity for which corporations may
be organized under the General Corporation Laws of the State of Delaware.
4. The total number of shares of all classes of stock which the
Corporation shall have authority to issue is one hundred twelve million, six
hundred fifty-five thousand, seven hundred nine (112,655,709), consisting of
ten million (10,000,000) shares of preferred stock par value $.01 per share
(hereinafter called "Preferred Stock"), and one hundred million (100,000,000)
shares of common stock, par value $.01 per share (hereinafter called "Common
Stock") and two million, six
2
hundred fifty-five thousand, seven hundred nine (2,655,709) shares of
restricted voting common stock, par value $.01 per share (hereinafter called
"Restricted Voting Common Stock").
(a) The Preferred Stock may be issued from time to time
in one or more series and in such amounts as may be determined by the
Board of Directors. The voting powers, designations, preferences and
relative, participating, optional or other special rights, if any, and
the qualifications, limitations, or restrictions thereof, if any, of
the Preferred Stock of each series shall be such as are fixed by the
Board of Directors, authority so to do being hereby expressly granted,
and as are stated and expressed in a resolution or resolutions adopted
by the Board of Directors providing for the issue of such series of
Preferred Stock (herein called the "Directors' Resolution"). The
Directors' Resolution as to any series shall (1) designate the series,
(2) fix the dividend rate, if any, of such series, establish whether
dividends shall be cumulative or non-cumulative, fix the payment dates
for dividends on shares of such series and the date or dates, or the
method of determining the date or dates, if any, from which dividends
on shares of such series shall be cumulative, (3) fix the amount or
amounts payable on shares of such series upon voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the
Corporation, and (4) state the price or prices or rate or rates, and
adjustments, if any, at which, the time or times and the terms and
conditions upon which, the shares of such series may be redeemed at
the option of the Corporation or at the option of the holder or
holders of shares of such series or upon the occurrence of a specified
event, and state whether such shares may be redeemed for cash,
property or rights, including securities of the Corporation or another
entity; and such Directors' Resolutions may (i) limit the number of
shares of such series that may be issued, (ii) provide for a sinking
fund for the purchase or redemption of shares of such series and
specify the terms and conditions governing the operations of any such
fund, (iii) grant voting rights to the holders of shares of such
series, (iv) impose conditions or restrictions upon the creation of
indebtedness of the Corporation or upon the issuance of additional
Preferred Stock or other capital stock ranking on a parity therewith,
or prior thereto, with respect to dividends or distributions of assets
upon liquidation, (v) impose conditions or restrictions upon the
payment of dividends upon, or the making of other distributions to, or
the acquisition of, shares ranking junior to the Preferred Stock or to
any series thereof with respect to dividends or distributions of
assets upon liquidation, (vi) state the time or times, the price or
prices or the rate or rates of exchange and other terms, conditions
and adjustments upon which shares of any such series may be made
convertible into, or exchangeable for, at the option of the holder or
the Corporation or upon the occurrence of a specified event, shares of
any other class or classes or of any other series of Preferred Stock
or any other class or classes of stock or other securities of the
Corporation, and (vii) grant such other special rights and impose such
qualifications, limitations or restrictions thereon as shall be fixed
by the Board of Directors, to the extent not inconsistent with this
Section 4 and to the full extent now or hereafter permitted by the
laws of the State of Delaware.
Except as by law expressly provided, or except as may be
provided in any Directors' Resolution, the Preferred Stock shall have
no right or power to vote on any question or in any
-2-
3
proceeding or to be represented at, or to receive notice of, any
meeting of stockholders of the Corporation.
Preferred Stock that is redeemed, purchased or retired by the
Corporation shall, assume the status of authorized but unissued
Preferred Stock and may thereafter, subject to the provisions of any
Directors' Resolution providing for the issue of any particular series
of Preferred Stock, be reissued in the same manner as authorized but
unissued Preferred Stock.
(b) Subject to the preferred rights of the holders of
shares of any class or series of Preferred Stock as provided by the
Board of Directors with respect to any such class or series of
Preferred Stock, the holders of the Common Stock shall be entitled to
receive, as and when declared by the Board of Directors out of the
funds of the Corporation legally available therefor, such dividends
(payable in cash, stock or otherwise) as the Board of Directors may
from time to time determine, payable to stockholders of record on such
dates, not exceeding 60 days preceding the dividend payment dates, as
shall be fixed for such purpose by the Board of Directors in advance of
payment of each particular dividend. All dividends on Common Stock
shall be paid pari passu with dividends on Restricted Voting Common
Stock.
In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntary or involuntary, after the
distribution or payment to the holders of shares of any class or
series of Preferred Stock as provided by the Board of Directors with
respect to any such class or series of Preferred Stock, the remaining
assets of the Corporation available for distribution to stockholders
shall be distributed among and paid to the holders of Common Stock and
Restricted Voting Common Stock ratably in proportion to the number of
shares of Common Stock and Restricted Voting Common Stock held by them
respectively.
Except as otherwise required by law, each holder of shares of
Common Stock shall be entitled to one vote for each share of Common
Stock standing in such holder's name of the books of the Corporation.
(c) Subject to the preferred rights of the holders of
shares of any class or series of Preferred Stock as provided by the
Board of Directors with respect to any such class or series of
Preferred Stock, the holders of the Restricted Voting Common Stock
shall be entitled to receive, as and when declared by the Board of
Directors out of the funds of the Corporation legally available
therefor, such dividends (payable in cash, stock or otherwise) as the
Board of Directors may from time to time determine, payable to
stockholders of record on such dates, not exceeding 60 days preceding
the dividend payment dates, as shall be fixed for such purpose by the
Board of Directors in advance of payment of each particular dividend.
All dividends on Restricted Voting Common Stock shall be paid pari
passu with dividends on Common Stock.
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In the event of any liquidation, dissolution or winding up of
the Corporation, whether voluntarily or involuntarily, after the
distribution or payment to the holders of shares of any class or
series of Preferred Stock as provided by the Board of Directors with
respect to any such class or series of Preferred Stock, the remaining
assets of the Corporation available for distribution to stockholders
shall be distributed among and paid to the holders of Restricted
Voting Common Stock and Common Stock ratably in proportion to the
number of shares of Restricted Voting Common Stock and Common Stock
held by them respectively.
Holders of Restricted Voting Common Stock voting as a class
shall be entitled to elect one member of the Board of Directors, but
shall not otherwise be entitled to vote in the election of directors
of the Corporation. Subject to the foregoing, and except as otherwise
required by law, each holder of shares of Restricted Voting Common
Stock shall be entitled to one-half of one vote for each share of
Restricted Voting Common Stock standing in such holder's name of the
books of the Corporation.
Each share of the Restricted Voting Common Stock will
automatically convert into Common Stock on a share-for-share basis (a)
in the event of a disposition of such share of Restricted Voting
Common Stock by the holder thereof (other than a disposition which is
a distribution by a holder to its partners or beneficial owners or a
transfer to a related party of such holder (as defined in Sections
267, 707, 318 and/or 4946 of the Internal Revenue Code of 1986, as
amended)), (b) in the event any person acquires beneficial ownership
of 15% or more of the outstanding shares of Common Stock of the
Corporation, or (c) in the event any person offers to acquire 15% or
more of the outstanding shares of Common Stock of the Corporation.
After January 1, 2000, the Corporation may elect to convert
any outstanding shares of Restricted Voting Common Stock into shares
of Common Stock.
(d) The Corporation shall be entitled to treat the person
in whose name any share of its stock is registered as the owner
thereof for all purposes and shall not be bound to recognize any
equitable or other claim to, or interest in, such share on the part of
any other person, whether or not the Corporation shall have notice
thereof, except as expressly provided by applicable laws.
5. The Board of Directors is hereby authorized to create and
issue, whether or not in connection with the issuance and sale of any of its
stock or other securities, rights (the "Rights") entitling the holders thereof
to purchase from the Corporation shares of capital stock or other securities.
The times at which and the terms upon which the Rights are to be issued will 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 shall include, but not be limited to, determination
of the following:
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(a) The initial purchase price per share of the capital
stock or other securities of the Corporation to be purchased upon
exercise of the Rights;
(b) 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 Corporation;
(c) Provisions that 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 in the event of a combination,
split or recapitalization of any capital stock of the Corporation, a
change in ownership of the Corporation's securities or a
reorganization, merger, consolidation, sale of assets or other
occurrence relating to the Corporation or any capital stock of the
Corporation, and provisions restricting the ability of the Corporation
to enter into any such transaction absent an assumption by the other
party or parties thereto of the obligations of the Corporation under
such Rights;
(d) Provisions that deny the holder of a specified
percentage of the outstanding securities of the Corporation the right
to exercise the Rights and/or cause the Rights held by such holder to
become void;
(e) Provisions that permit the Corporation to redeem the
Rights; and
(f) The appointment of a Rights Agent with respect to the
Rights;
and such other provisions relating to the Rights as may be determined
by the Board of Directors.
6. No holder of stock of the Corporation shall be entitled as of
right to purchase or subscribe for any part of any unissued stock of the
Corporation or any additional stock to be issued whether or not by reason of
any increase of the authorized capital stock of the Corporation, or any bonds,
certificates of indebtedness, debentures or other securities convertible into
stock or such additional authorized issuance of new stock, but rather such
stock, bonds, certificates of indebtedness, debentures and other securities may
be issued and disposed of pursuant to resolution of the Board of Directors to
such persons, firms, corporations or associations, and upon such terms as may
be deemed advisable by the Board of Directors in the exercise of their
discretion.
7. The following provisions are inserted for the management of
the business and for the conduct of the affairs of the Corporation, and for
creating, defining, limiting and regulating the powers of the Corporation, the
directors and the stockholders.
(a) Subject to any limitation contained in the bylaws,
the Board of Directors may make bylaws, and from time to time may
alter, amend or repeal any bylaws, but any bylaws made by the Board of
Directors may be altered, amended or repealed by the stockholders at
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any meeting of stockholders by the affirmative vote of the holders of
at least 66 2/3% of the outstanding shares entitled to vote thereon,
provided notice that an amendment is to be considered and acted upon
is inserted in the notice of waiver of notice of such meeting.
(b) Any vote or votes authorizing liquidation of the
Corporation or proceedings for its dissolution may provide, subject to
(i) any agreements among and between stockholders, (ii) the rights of
creditors and (iii) rights expressly provided for particular classes
or series of stocks, for the distribution pro rata among the
stockholders of the Corporation of the assets of the Corporation,
wholly or in part in kind, whether such assets be in cash or other
property, and may authorize the Board of Directors of the Corporation
to determine the value of the different assets of the Corporation for
the purpose of such liquidation and may divide, such assets or any
part thereof among the stockholders of the Corporation in such manner
that every stockholder will receive a proportionate amount in value
(determined as aforesaid) of cash or property of the Corporation upon
such liquidation or dissolution even though each stockholder may not
receive a strictly proportionate part of each such asset.
(c) The Corporation shall, to the maximum extent
permitted from time to time under the General Corporation Law of the
State of Delaware, indemnify and upon request shall advance expenses
to any person who is or was a party or is threatened to be made a
party to any threatened, pending or completed action, suit, proceeding
or claim, whether civil, criminal, administrative or investigative, by
reason of the fact that he is or was or has agreed to be a director or
officer of the Corporation, or while a director or officer 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, including service with respect to employee
benefit plans, against expenses (including attorneys' fees and
expenses), judgments, fines, penalties and amounts paid in settlement
or incurred in connection with the investigation, preparation to
defend or defense of such action, suit, proceeding or claim, whether
civil, criminal, administrative or investigative, by reason of the
fact that he is or was or has agreed to be a director or officer of
the Corporation, or while a director or officer 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, including service with respect to employee benefit
plans, against expenses (including attorneys' fees and expenses),
judgments, fines, penalties and amounts paid in settlement or incurred
in connection with the investigation, preparation to defend or defense
of such action, suit, proceeding, claim or counterclaim initiated by
or on behalf of such person. Such indemnification shall not be
exclusive of other indemnification rights arising under any bylaw,
agreement, vote of directors or stockholders or otherwise and shall
inure to the benefit of the heirs and legal representatives of such
person. Any repeal or modification of the foregoing provisions of
this Section 7(c) shall be prospective only, and shall not adversely
affect any right or protection of a director or officer of the
Corporation existing at the time of such repeal or modification.
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(d) A director of the Corporation shall not be personally
liable to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director, except for liability (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 General Corporation Law of the State of
Delaware, or (iv) for any transaction from which the director derived
an improper personal benefit. If the General Corporation Law of the
State of Delaware 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 General Corporation Law
of the State of Delaware, as so amended. Any repeal or modification
of this Section by the stockholders of the Corporation shall be
prospective only, and shall not adversely affect any limitation on the
personal liability of a director of the Corporation existing at the
time of such repeal or modification.
8. Subject to the rights of the holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation to elect additional directors under specific circumstances:
(a) after March 1, 1998, any action required or permitted
to be taken by the stockholders of the Corporation must be effected at
a duly called annual or special meeting of stockholders of the
Corporation and may not be effected by any consent in writing of such
stockholders;
(b) special meetings of the stockholders of the
Corporation may be called only by the Chairman of the Board of
Directors and shall be called within ten (10) days after receipt of
the written request of the Board of Directors, pursuant to a
resolution approved by a majority of the whole Board of Directors; and
(c) the business permitted to be conducted at any special
meeting of the stockholders is limited to the business brought before
the meeting by the Chairman or by the Secretary at the request of a
majority of the Board of Directors.
9. The number of directors which shall constitute the whole board
shall be such as from time to time shall be fixed by, or in the manner provided
in, the bylaws, but in no case shall the number be less than two nor more than
15.
The directors shall be classified with respect to the time for which
they shall severally hold office by dividing them into three classes which
classes shall consist of an equal, or as near to equal as possible, number of
directors. As to the initial election, the director or directors of the first
class shall be elected for a term expiring at the next annual meeting of
stockholders to be held in 1998; the director or directors of the second class
for a term expiring at the annual meeting to be held in 1999; and the director
or directors of the third class for a term expiring at the annual meeting to be
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held in 2000. At each annual meeting, commencing with the annual meeting in
1998, the successor or successors to the class of directors whose term shall
expire in that year shall be elected to hold office or the term of three years,
so that the term of office or one class of directors shall expire in each year.
Any increase or decrease in the number of directors constituting the Board
shall be apportioned among the classes so as to maintain the number of
directors in each class as near as possible to one-third the whole number of
directors as so adjusted. Any director elected or appointed to fill a vacancy
shall hold office for the remaining term of the class to which such
directorship is assigned. No decrease in the number of directors constituting
the Corporation's Board of Directors shall shorten the term of any incumbent
director. Any vacancy in the Board of Directors, whether arising through
death, resignation or removal of a director, or through an increase in the
number of directors of any class, shall be filled by the majority vote of the
remaining directors, although less than a quorum, or by a sole remaining
director. The bylaws may contain any provision regarding classification of the
Corporation's directors not inconsistent with the terms hereof. The right to
cumulate votes in the election of directors is expressly prohibited.
A director of the Corporation may be removed only for cause
and only upon the affirmative vote of the holders of 66 2/3 percent of the
outstanding capital stock of the Corporation entitled to vote at an election of
directors, subject to further restrictions on removal, not inconsistent with
this Section 9, as may be contained in the bylaws.
Notwithstanding the foregoing, whenever the holders of any one
or more classes or series of Preferred Stock issued by the Corporation shall
have the right, voting separately by class or series, to elect directors at an
annual or special meeting of stockholders, the election, term of office,
filling of vacancies and other features of such directorships shall be governed
by the terms of the Directors' Resolutions applicable thereto, and such
directors so elected shall not be subject to the provisions of this Section 9
unless expressly provided by such terms.
Notwithstanding the foregoing, the holders of Restricted
Voting Common Stock voting as a class shall be entitled to elect one member of
the Board of Directors, and only the holders of the Restricted Voting Common
Stock shall be entitled to remove such member from the Board of Directors.
10. Election of directors need not be by written ballot
unless the bylaws of the Corporation shall so provide. Meetings of
stockholders may be held within or without the State of Delaware, as the bylaws
may provide. The books of the Corporation may be kept (subject to any
provisions contained in the statutes of the State of Delaware) outside the
State of Delaware at such place or places as may be designated from time to
time by the Board of Directors or the bylaws of the Corporation.
11. The Corporation reserves the right to amend, alter,
change or repeal any provision contained in this Certificate of Incorporation
in the manner set forth below, and all rights and conferred upon the directors
or stockholders of the Corporation herein or in any amendment hereof are
granted subject to this reservation.
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The affirmative vote of the holders of at least 75% of the
then outstanding shares entitled to vote thereon and the affirmative vote of
the holders of at least 75% of the then outstanding shares of each class of
stock of the Corporation voting separately as a class, shall be required to
adopt any amendment to Sections 5, 7, 8, 9 and 11 of the Certificate of
Incorporation of the Corporation.
The affirmative vote of the holders of at least a majority of
the then outstanding shares entitled to vote thereon and the affirmative vote
of the holders of at least a majority of the then outstanding shares of each
class of stock of the Corporation voting separately as a class, shall be
required to adopt any amendment to Sections 1, 2, 3, 4, 6 and 10 of the
Certificate of Incorporation of the Corporation.
IN WITNESS WHEREOF, this Amended and Restated Certificate of
Incorporation has been executed for and on behalf of the Corporation by its
officers thereunto duly authorized as of October 23, 1997.
/s/ JIM P. WISE
----------------------------------
Jim P. Wise
Chief Financial Officer
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EXHIBIT 3.2
BYLAWS
OF
INTEGRATED ELECTRICAL SERVICES, INC.
(AS AMENDED)
2
ARTICLE I
OFFICES
Section 1. The registered office of Integrated Electrical Services,
Inc.(the "Corporation") shall be in the City of Wilmington, County of New
Castle, State of Delaware.
Section 2. The Corporation may also have offices at such other places
both within and without the state of Delaware as the Board of Directors may
from time to time determine or the business of the Corporation may require.
ARTICLE II
MEETINGS OF STOCKHOLDERS
Section 1. All meetings of the stockholders for the election of
Directors shall be held at such place as may be fixed from time to time by the
Board of Directors and stated in the notice of the meeting. Meetings of
stockholders for any other purpose may be held at such time and place, within
or without the State of Delaware, as shall be stated in the notice of the
meeting or in a duly executed waiver of notice thereof.
Section 2. Annual meetings of stockholders shall be held on such date
and at such time as shall be designated from time to time by the Board of
Directors and stated in the notice of the meeting. At the annual meeting, the
stockholders shall elect by a plurality vote the Directors pursuant to Article
III of these Bylaws, and transact such other business as may properly be
brought before the meeting.
Section 3. Written notice of the annual meeting stating the place,
date and hour of the meeting shall be given to each stockholder entitled to a
vote at such meeting not less than ten (10) nor more than sixty (60) days
before the date of the meeting.
At an annual meeting of the stockholders, only such business shall be
conducted as shall have been properly brought before the meeting. To be
properly brought before an annual meeting, business must be (i) specified in
the notice of meeting (or any supplement thereto) given by or at the direction
of the Board of Directors, (ii) otherwise properly brought before the meeting
by or at the direction of the Board of Directors, or (iii) otherwise properly
brought before the meeting by a stockholder. For business to be properly
brought before an annual meeting by a stockholder, the stockholder must have
given timely notice thereof in writing to the Secretary of the Corporation. To
be timely, a stockholder's notice must be delivered to or mailed to and
received at the principal executive offices of the Corporation not less than 80
days prior to the meeting; provided, however, that in the event that less than
90 days' notice or prior public disclosure of the date of the meeting is given
or made to stockholders, notice by the stockholder to be timely must be so
received not later
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than the close of business on the tenth day following the date on which such
notice of the date of the annual meeting was mailed or such public disclosure
made.
A stockholder's notice to the Secretary shall set forth as to each
matter the stockholder proposes to bring before the annual meeting (a) a brief
description of the business desired to be brought before the annual meeting and
the reasons for conducting such business at the annual meeting, (b) the name
and address, as they appear on the Corporation's books, of the stockholder
proposing such business, (c) the class and number of shares of the Corporation
which are beneficially owned by the stockholder, and (d) any material interest
of the stockholder in such business. Notwithstanding anything in the Bylaws to
the contrary, no business shall be conducted at an annual meeting except in
accordance with the procedures set forth in this Section 3.
The presiding officer of an annual meeting shall, if the facts
warrant, determine and declare to the meeting that business was not properly
brought before the meeting in accordance with this Section 3, and if the
presiding officer should so determine, the presiding officer shall so declare
to the meeting and any such business not properly brought before the meeting
shall not be transacted.
Section 4. The officer who has charge of the stock ledger of the
Corporation shall prepare and make, at least ten (10) days before every meeting
of stockholders, a complete list of the stockholders entitled to vote at the
meeting, arranged in alphabetical order, and showing the address of each
stockholder and the number of shares registered in the name of each
stockholder. Such list shall be open to the examination of any stockholder,
for any purpose germane to the meeting, during ordinary business hours, for a
period of at least ten (10) days prior to the meeting, either at a place within
the city where the meeting is to be held, which place shall be specified in the
notice of the meeting, or, if not so specified, at the place where the meeting
is to be held. The list shall also be produced and kept at the time and place
of the meeting during the whole time thereof, and may be inspected by any
stockholder who is present.
Section 5. Special meetings of the stockholders for any purpose may
be called only by the Chairman of the Board of Directors and shall be called
within 10 days after receipt of the written request of the Board of Directors,
pursuant to a resolution approved by a majority of the entire Board of
Directors. The business permitted to be conducted at any special meeting of
the stockholders is limited to the business brought before the meeting by the
Chairman or by the Secretary at the request of a majority of the entire Board
of Directors.
Section 6. Written notice of a special meeting stating the place,
date and hour of the meeting, and the purpose or purposes for which the meeting
is called, shall be given not less than ten (10) nor more than sixty (60) days
before the date of the meeting, to each stockholder entitled to vote at such
meeting.
Section 7. The holders of a majority of the stock issued, outstanding
and entitled to vote, present in person or represented by proxy, shall
constitute a quorum at all meetings of the stockholders for the transaction of
business except as otherwise provided by statute or by the
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certificate of incorporation. If, however, such quorum shall not be present or
represented at any meeting of the stockholders, the stockholders entitled to
vote thereat, present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other than announcement
at the meeting, until a quorum shall be present or represented.
Section 8. When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting, except as otherwise required
by this Section 8, if the time and place thereof are announced at the meeting
at which the adjournment is taken. At such adjourned meeting the Corporation
may transact any business which might have been transacted at the original
meeting. If the adjournment is for more than thirty (30) days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given to each stockholder of record entitled to
vote at the meeting.
Section 9. If a quorum exists, action on a matter (other than the
election of directors) shall be approved if the votes cast in favor of the
matter exceed the votes cast opposing the matter. In determining the number of
votes cast, shares abstaining from voting or not voted on a matter will not be
treated as votes cast. The provisions of this paragraph will govern with
respect to all votes of stockholders except as otherwise provided for in these
Bylaws or in the certificate of incorporation or by a specific statutory
provision superseding the provisions contained in these Bylaws or the
certificate of incorporation.
Section 10. Each stockholder shall at every meeting of the
stockholders, subject to any restriction or qualification set forth in the
Certificate of Incorporation, be entitled to one vote in person or by proxy for
each share of the capital stock having voting power held by such stockholder,
but no proxy shall be voted after three years from its date, unless the proxy
provides for a longer period.
Section 11. After March 1, 1998, any action required or permitted to
be taken by the stockholders of the Corporation must be affected at a duly
called annual or special meeting of stockholders of the Corporation and may not
be effected by any consent in writing of such stockholders.
Section 12. At each meeting of stockholders, the Chairman or
Vice-Chairman of the Board of Directors shall preside, and the secretary shall
keep records, and in the absence of either such officer, his duty shall be
performed by a person appointed at the meeting.
ARTICLE III
DIRECTORS
Number, Nomination, Removal
Section 1. The number of Directors shall be fixed from time to time
by the Board of Directors, but shall not be less than 2 nor more than 15
persons. The Directors shall be elected at
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the annual meeting of the stockholders in accordance with the provisions of
Section 2 of this Article, and each Director elected shall hold office until
his successor is elected and qualified. Directors need not be stockholders.
Section 2. Subject to the rights of holders of any class or series of
stock having a preference over the Common Stock as to dividends or upon
liquidation, nominations for the election of Directors may be made by the Board
of Directors or a committee appointed by the Board of Directors or by any
stockholder entitled to vote in the election of Directors generally. Any
stockholder entitled to vote in the election of Directors generally may
nominate one or more persons for election as Directors at a meeting only if
written notice of such stockholder's intent to make such nomination or
nominations has been given, either by personal delivery or by United States
mail, postage prepaid, to the Secretary of the Corporation not later than 80
days prior to the date of any annual or special meeting. In the event that the
date of such annual or special meeting was not publicly announced by the
Corporation by mail, press release or otherwise more than 90 days prior to the
meeting, notice by the stockholder to be timely must be delivered to the
Secretary of the Corporation not later than the close of business on the tenth
day following the day on which such announcement of the date of the meeting was
communicated to the stockholders.
Each such notice shall set forth: (a) the name and address of the
stockholder who intends to make the nomination and of the person or persons to
be nominated; (b) a representation that the stockholder is a holder of record
of stock of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to nominate the person or persons
specified in the notice; (c) a description of all arrangements or
understandings between the stockholder and each nominee and any other person or
persons (naming such person or persons) pursuant to which the nomination or
nominations are to be made by the stockholder; (d) such other information
regarding each nominee proposed by such stockholder as would be required to be
included in a proxy statement filed pursuant to the proxy rules of the
Securities and Exchange Commission had the nominee been nominated, or intended
to be nominated, by the Board of Directors, and (e) the consent of each nominee
to serve as a Director of the Corporation if so elected.
If the presiding officer of the meeting for the election of Directors
determines that a nomination of any candidate for election as a Director at
such meeting was not made in accordance with the applicable provisions of these
Bylaws, such nomination shall be void.
Section 3. Subject to the rights of the holders of any class or
series of stock having a preference over the Common Stock as to dividends or
upon liquidation to elect additional Directors under specified circumstances,
newly created directorships resulting from any increase in the number of
Directors and any vacancy on the Board of Directors resulting from death,
resignation, disqualification, removal or other cause shall be filled solely by
the affirmative vote of a majority of the remaining Directors then in office,
even though less than a quorum of the Board of Directors. or by a sole
remaining Director. Any Director elected or chosen as provided herein shall
hold office until the sooner of the following events: (i) the expiration of the
term of the directorship to which he is appointed, (ii) such time as his
successor is elected and qualified or (iii) his resignation or removal.
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No decrease in the number of Directors constituting the Board of Directors
shall shorten the term of an incumbent Director.
Section 4. Subject to the rights of the holders of any class or
series of stock having preference over the Common Stock as to dividends or upon
liquidation to elect additional Directors under specified circumstances, any
Director may be removed from office only for cause by the stockholders in the
manner provided in this Section 4. At any annual meeting of the stockholders of
the Corporation or at any special meeting of the stockholders of the
Corporation, the notice of which shall state that the removal of a Director or
Directors is among the purposes of the meeting, the affirmative vote of the
holders of at least 66 2/3 percent of the combined voting power of the
outstanding shares of Voting Stock (as defined below), voting together as a
single class, may remove such Director or Directors for cause.
For the purpose of this Section 4, "Voting Stock" shall mean the
outstanding shares of capital stock of the Corporation entitled to vote
generally in the election of Directors. In any vote required by or provided
for in this Section 4, each share of Voting Stock shall have the number of
votes granted to it generally in the election of Directors.
Section 5. The business of the Corporation shall be managed by its
Board of Directors, which may exercise all such powers of the Corporation and
do all such lawful acts and things as are not by statute or by the certificate
of incorporation or by these Bylaws directed or required to be exercised or
done by the stockholders.
Meetings of the Board of Directors
Section 6. The Board of Directors of the Corporation may hold
meetings, both regular and special, either within or without the State of
Delaware.
Section 7. Meetings of the Board of Directors may be held at such
time and place as shall be specified in a notice given in the manner
hereinafter provided, or as shall be specified in a written waiver signed by
all of the Directors.
Section 8. Regular meetings of the Board of Directors may be held
without notice at such time and at such place as shall from time to time be
determined by the Board of Directors.
Section 9. Special meetings of the Board of Directors may be called
by the Chairman of the Board on 24 hours' notice to each Director, either
personally or by telecopy or telegram; special meetings shall be called by the
president, chief executive officer or secretary in like manner and on like
notice on the written request of three Directors.
Section 10. Except as provided in these Bylaws to the contrary, at
all meetings of the board a majority of the total number of Directors shall
constitute a quorum for the transaction of business and the vote of a majority
of the Directors entitled to vote and present at a meeting at which a
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quorum is present shall be the act of the Board of Directors, unless the
certificate of incorporation shall require a vote of a greater number. If a
quorum shall not be present at any meeting of the Board of Directors, the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
Section 11. Unless otherwise restricted by the certificate of
incorporation or these Bylaws, any action required or permitted to be taken at
any meeting of the Board of Directors, or of any committee thereof, may be
taken without a meeting, if all members of the board or committee, as the case
may be, consent thereto in writing, and the writing or writings are filed with
the minutes of proceedings of the Board of Directors or committee.
Section 12. At all meetings of the Board of Directors, business shall
be transacted in such order as from time to time the Board of Directors may
determine.
At all meetings of the Board of Directors, the Chairman or
Vice-Chairman of the Board of Directors shall preside, and in the absence of
either such Director a person shall be chosen by the board from among the
Directors present to act as chairman of the meeting.
The secretary of the Corporation shall act as secretary of the meeting
of the Board of Directors, but in the absence of the secretary, the presiding
officer may appoint any person to act as secretary of the meeting.
Executive Committee; Committees of Directors
Section 13. The Company shall have an Executive Committee of the
Board of Directors and Company that shall consist of the following persons
whether or not they are directors of the Company: the Chief Executive Officer,
the President and the Chief Operating Officers. The Executive Committee will
be responsible for, shall meet on a regular basis to consult and make decisions
regarding, and shall have oversight authority of the daily operational
management of the Company. The Executive Committee shall periodically report
to the Board of Directors.
The Board of Directors may, by resolution adopted by a majority of the
whole board, designate one (1) or more additional committees, each committee to
consist of one (1) or more Directors. The board may designate one (1) or more
directors as alternate members of any committee, who may replace any absent or
disqualified member of any meeting of the committee. In the absence or
disqualification of a member, and the alternate or alternates, if any,
designated for such member, of any committee, the member or members thereof
present at the meetings and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another director to act at
the meeting in the place of any such absent or disqualified member.
Any such committee, to the extent provided in the resolution
establishing such committee, shall have and may exercise all the powers and
authority of the Board of Directors in the management of the business and
affairs of the corporation, and may authorize the seal of the
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Corporation to be affixed to all papers which may require it; but no such
committee shall have the power or authority in reference to the following
matters: (i) approving or adopting, or recommending to the stockholders, any
action or matter expressly required by the Delaware General Corporation Law to
be submitted to stockholders for approval or (ii) adopting, amending or
repealing any bylaw of the Corporation. Such committee or committees shall
have such name or names as may be determined from time to time by resolution
adopted by the Board of Directors.
Section 14. Each committee shall keep regular minutes of its meetings
and report the same to the Board of Directors.
Compensation of Directors
Section 15. The Directors may be paid their expenses, if any, of
attendance at each meeting of the Board of Directors and may be paid a fixed
sum for attendance at each meeting of the Board of Directors or a stated salary
or retainer as Director. No such payment shall preclude any Director from
serving the Corporation in any other capacity and receiving compensation
therefor. Members of special or standing committees may be allowed like
compensation for attending committee meetings.
ARTICLE IV
NOTICES
Section 1. Whenever notice is required to be given to any Director or
stockholder pursuant to a statutory provision or the certificate of
incorporation or these Bylaws, it shall not be construed to mean personal
notice, but such notice may be given in writing, by mail, addressed to such
Director or stockholder, at his address as it appears in the records of the
Corporation, with postage thereon prepaid, and such notice shall be deemed to
be given at the time when the same shall be deposited in the United States
mail. Notice to Directors may also be given personally or by telegram or
telecopy.
Section 2. Whenever notice is required to be given pursuant to a
statutory provision or the certificate of incorporation or Bylaws, a waiver
thereof in writing, signed by the person or persons entitled to said notice,
whether before or after the time stated therein, shall be deemed equivalent
thereto.
ARTICLE V
OFFICERS
Section 1. The officers of the Corporation shall be chosen by the
Board of Directors and shall be the Chairman of the Board of Directors, a chief
executive officer, a president, a vice president, a secretary and a treasurer.
The Board of Directors may also appoint chief operating
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officers, additional vice presidents and one or more assistant secretaries and
assistant treasurers. Any number of offices may be held by the same person,
unless the certificate of incorporation or these Bylaws otherwise provide.
Section 2. The Board of Directors at its first meeting after each
annual meeting of stockholders shall choose a Chairman of the Board of
Directors, a chief executive officer, a president, one or more chief operating
officers, one or more vice presidents, a secretary and a treasurer.
Section 3. The Board of Directors may appoint such other officers and
agents as it shall deem necessary who shall hold their offices for such terms
and shall exercise such powers and perform such duties as shall be determined
from time to time by the board.
Section 4. The salaries of all officers and agents of the Corporation
shall be fixed by the Board of Directors.
Section 5. The officers of the Corporation shall hold office until
their successors are chosen and qualify. Any officer elected or appointed by
the Board of Directors may be removed at any time by the affirmative vote of a
majority of the Board of Directors. Any vacancy occurring in any office of the
Corporation shall be filled by the Board of Directors.
The Chairman of the Board of Directors
Section 6. The Chairman of the Board of Directors of the Corporation
shall preside at all meetings of stockholders and the Board of Directors. He
shall perform such duties and have such powers as usually appertain to the
office or as the Board of Directors may from time to time prescribe.
The Chief Executive Officer
Section 7. The Chief Executive Officer shall be a senior officer of
the Corporation and shall perform such duties and have such powers as usually
appertain to the office or as the Board of Directors may from time to time
prescribe. He shall have the authority to execute all documents and
instruments necessary to carry out the management of the business of the
Corporation. He shall report to the Board of Directors.
The President
Section 8. The president of the Corporation shall have general and
active management of the business of the Corporation and shall see that all
orders and resolutions of the Board of Directors are carried into effect. He
shall have the authority to execute all documents and instruments necessary to
carry out the management of the business of the Corporation. He shall execute
bonds, mortgages and other contracts requiring a seal, under the seal of the
Corporation, except where
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required or permitted by law to be otherwise signed and executed and except
where the signing and execution thereof shall be expressly delegated by the
Board of Directors to some other officer or agent of this Corporation. He
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe. He shall report to the Board of
Directors.
The Chief Operating Officers
Section 9. The chief operating officers of the Corporation shall be
responsible for the day-to-day operations of the Corporation and shall have the
authority to execute all documents and instruments necessary to carry out such
operations. They shall perform such other duties and have such other powers as
the Board of Directors may from time to time prescribe. They shall report to
the Board of Directors.
The Vice Presidents
Section 10. In the absence of the president or in the event of his
inability or refusal to act, the vice president (or in the event there is more
than one, the vice presidents in the order determined by the Board of
Directors, or, if there be no such determination, then in the order of their
election), shall perform the duties of the president, and when so acting, shall
have all the powers of and be subject to all the restrictions imposed upon the
president. The vice presidents shall perform such other duties and have such
other powers as the Board of Directors may from time to time prescribe.
The Secretary and the Assistant Secretary
Section 11. The secretary shall attend all meetings of the Board of
Directors and all meetings of the stockholders and record all the proceedings
of the meetings to be kept for that purpose and shall perform like duties for
the standing committees when required. He shall give, or cause to be given,
notice of all meetings of the stockholders and special meetings of the Board of
Directors, and shall perform such other duties as may be prescribed by the
Board of Directors or president, under whose supervision he shall be. He shall
have custody of the corporate seal of the Corporation, if any such seal be
adopted by resolution of the Board of Directors, and he, or an assistant
secretary, shall have authority to affix the same to any instrument requiring
it and when so affixed, it may be attested by his signature or by the signature
of such assistant secretary. The Board of Directors may give general authority
to any other officer to affix the seal of the Corporation and to attest the
affirming thereof by his signature.
Section 12. The assistant secretary (or if there be more than one,
the assistant secretaries in the order determined by the Board of Directors,
or, if there be no such determination, then in the order of their election)
shall, in the absence of the secretary or in the event of his inability or
refusal to act, perform the duties and exercise the powers of the secretary and
shall perform such other duties and have such other powers as the Board of
Directors may from time to time prescribe.
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The Treasurer and Assistant Treasurer
Section 13. The treasurer shall have the custody of the corporate
funds and securities and shall keep full and accurate accounts of receipts and
disbursements in books belonging to the Corporation and shall deposit all
moneys and other valuable effects in the name and to the credit of the
Corporation in such depositories as may be designated by the Board of
Directors. He shall disburse the funds of the Corporation as may be ordered by
the Board of Directors, taking proper vouchers for such disbursements, and
shall render to the president and the Board of Directors, at its regular
meetings, or when the Board of Directors so requires, an account of all his
transactions as treasurer and of the financial condition of the Corporation.
Section 14. The assistant treasurer (or, if there shall be more than
one, the assistant treasurers in the order determined by the Board of
Directors, or, if there be no such determination, then in the order of their
election) shall, in the absence of the treasurer or in the event of his
inability or refusal to act, perform the duties and exercise the powers of the
treasurer and shall perform such other duties and have such other powers as the
Board of Directors may from time to time prescribe.
ARTICLE VI
CERTIFICATES OF STOCK
Section 1. Every holder of stock in the Corporation shall be entitled
to a certificate, signed by, or in the name of the Corporation by, the Chairman
of the Board, the president or a vice president and the secretary or an
assistant secretary of the Corporation, certifying the number of shares owned
by him in the Corporation. Any signature on the certificate may be a
facsimile. If the Corporation shall be authorized to issue more than one class
of stock or more than one series of any class of stock, the designations,
preferences. and relative participating, optional or other special rights of
each class of stock or series thereof and the qualifications, limitations or
restrictions of such preferences and/or rights shall be set forth in full or
summarized on the face or back of the certificate which the Corporation shall
issue to represent such class or series of stock, provided that, except as
otherwise provided in Section 202 of the General Corporation Law of Delaware,
in lieu of the foregoing requirements, there may be set forth on the face or
back of the certificate which the Corporation shall issue to represent such
class or series of stock, a statement that the Corporation will furnish without
charge to each stockholder who so requests the designations, preferences and
relative, participating, optional or other special rights of each class of
stock or series thereof and the qualifications, limitations or restrictions of
such preferences and/or rights.
Section 2. Where a certificate is countersigned (1) by a transfer
agent other than the Corporation or its employee or, (2) by a registrar other
than the Corporation or its employee, any signature on the certificate may be a
facsimile. In case any officer, transfer agent or registrar who has signed or
whose facsimile signature has been placed upon a certificate shall have ceased
to be such officer, transfer agent or registrar before such certificate is
issued, it may be issued by the Corporation with the same effect as if he were
such officer, transfer agent or registrar at the date of issue.
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Lost Certificates
Section 3. The Board of Directors may direct a new certificate or
certificates to be issued in place of any certificate or certificates
theretofore issued by the Corporation alleged to have been lost, stolen or
destroyed, upon the making of an affidavit of that fact by the person claiming
the certificate of stock to be lost, stolen or destroyed. When authorizing
such issue of a new certificate or certificates, the Board of Directors may, in
its discretion and as a condition precedent to the issuance thereof, require
the owner of such lost, stolen or destroyed certificate or certificates, or his
legal representative, to advertise the same in such manner as it shall require
and/or to give the Corporation a bond in such sum as it may direct as indemnity
against any claim that may be made against the Corporation with respect to the
certificate alleged to have been lost, stolen or destroyed.
Transfers of Stock
Section 4. Upon surrender to the Corporation or the transfer agent of
the Corporation of a certificate for shares duly endorsed or accompanied by a
proper evidence of succession, assignment or authority to transfer, it shall be
the duty of the Corporation to issue a new certificate to the person entitled
thereto, cancel the old certificate and record the transaction upon its books.
Fixing Record Date
Section 5. In order that the Corporation may determine the
stockholders entitled to notice of or to vote at any meeting of stockholders or
any adjournment thereof, or to express consent to corporate action in writing
without a meeting prior to March 1, 1998, or entitled to receive payment of any
dividend or other distribution or allotment of any rights, or entitled to
exercise any rights in respect of any change, conversion or exchange of stock
or for the purpose of any other lawful action, the Board of Directors may fix,
in advance, a record date, which shall not be more than sixty (60) nor less
than ten (10) days before the date of such meeting, nor more than sixty (60)
days prior to any other action. A determination of stockholders of record
entitled to notice of or to vote at a meeting of stockholders shall apply to
any adjournment of the meeting; provided, however, that the Board of Directors
may fix a new record date for the adjourned meeting.
Registered Stock Holders
Section 6. The Corporation shall be entitled to recognize the
exclusive right of a person registered on its books as the owner of shares to
receive dividends, and to vote as such owner, and to hold liable for calls and
assessments a person registered on its books as the owner of shares, and shall
not be bound to recognize any equitable or other claim to or interest in such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, except as otherwise provided by the laws of
Delaware.
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ARTICLE VII
GENERAL PROVISIONS
Dividends
Section 1. Dividends upon the capital stock of the Corporation,
subject to the provisions of the certificate of incorporation, if any, may be
declared by the Board of Directors at any regular or special meetings, pursuant
to law. Dividends may be paid in cash, in property, or in shares of the
capital stock, subject to the provisions of the certificate of incorporation.
Section 2. Before payment of any dividend, there may be set aside out
of any funds of the Corporation available for dividends such sum or sums as the
Directors from time to time, in their absolute discretion, think proper as a
reserve or reserves to meet contingencies, or for equalizing dividends, or for
repairing or maintaining any property of the Corporation, or for such other
purpose as the Directors shall think conducive to the interest of the
Corporation, and the Directors may modify or abolish any such reserve in the
manner in which it was created.
Checks
Section 3. All checks or demands for money and notes of the
Corporation shall be signed by such officer or officers or such other person or
persons as the Board of Directors may from time to time designate.
Fiscal Year
Section 4. The fiscal year of the Corporation shall begin on the
first day of October of each year and end on the last day of September of each
year, unless otherwise determined by the Board of Directors.
Seal
Section 5. The corporate seal, if any such seal be adopted by
resolution of the Board of Directors, will be in such form as the Board of
Directors may prescribe. The seal may be used by causing it or a facsimile
thereof to be impressed or affixed or reproduced or otherwise placed thereon.
Interested Directors and Officers
Section 6.
(a) No contract or transaction between the Corporation
and one or more of its Directors or officers, or between the Corporation and
any other corporation, partnership, association,
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or other organization in which one or more of its Directors or officers are
Directors or officers, or have a financial interest, shall be void or voidable
solely for this reason, or solely because the Director or officer is present at
or participates in the meeting of the board or committee thereof which
authorizes the contract or transaction, or solely because his or their votes
are counted for such purposes, if;
(1) the material facts as to his relationship or interest
and as to the contract or transaction are disclosed or are known to
the Board of Directors or the committee, and the board or committee in
good faith authorizes the contract or transaction by the affirmative
votes of a majority of the disinterested Directors, even though the
disinterested Directors be less than a quorum; or
(2) the material facts as to his relationship or interest
and as to the contract or transaction are disclosed or are known to
the stockholders entitled to vote thereon, and the contract for
transaction is specifically approved in good faith by vote of the
stockholders; or
(3) the contract or transaction is fair as to the
Corporation as of the time it is authorized, approved or ratified, by
the Board of Directors, a committee thereof, or the stockholder.
(b) Common or interested Directors may be counted in
determining the presence of a quorum at a meeting of the Board of Directors or
of a committee which authorizes the contract or transaction.
ARTICLE VIII
AMENDMENTS
These Bylaws may be altered, amended or repealed, or new Bylaws may be
adopted by the affirmative vote of a majority of the entire Board of Directors
at any meeting and without the consent or vote of the stockholders. These
Bylaws may be altered, amended or repealed, or new Bylaws may be adopted by the
stockholders at any regular meeting of the stockholders or at any special
meeting of the stockholders, if notice of such alteration, amendment, repeal or
adoption of new Bylaws is contained in the notice of such meeting, by the
holders of at least 66 2/3% of the total voting power of all shares of stock of
the Corporation entitled to vote in the election of directors, considered for
purposes of this Article VIII as one class.
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ARTICLE IX
INDEMNIFICATION AND INSURANCE
Section 1. The Corporation shall, to the full extent permitted by
Section 145 of Title 8 of the General Corporation Law of the State of Delaware,
as amended from time to time, indemnify all officers and directors of the
Corporation whom it may indemnify pursuant thereto. The provisions of this
Article IX shall apply to acts or omissions occurring before or after the
adoption hereof. The right of indemnification herein provided for shall not be
exclusive of any other right to which any Director or officer may now or
hereafter be entitled under any statute, bylaw, agreement, vote of stockholders
or disinterested Directors or otherwise, shall continue as to a person who has
ceased to be such Director or officer entitled to indemnification pursuant to
this Article IX and shall inure to the benefit of the heirs, executors and
administrators of such Director or officer.
Section 2. The Corporation may purchase and maintain insurance on
behalf of any person who 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 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 liability under the provisions of this Article IX or of Section 145 of the
General Corporation Law of the State of Delaware.
Section 3. The indemnification provided by this Article IX shall be
subject to all valid and applicable laws, and, in the event this Article IX or
any of the provisions hereof or the indemnification contemplated hereby are
found to be inconsistent with or contrary to any such valid laws, the latter
shall be deemed to control, and this Article IX shall be regarded as modified
accordingly and, as so modified, shall continue in full force and effect.
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EXHIBIT 4.1
DESCRIPTION OF SPECIMEN COMMON STOCK CERTIFICATE
[FRONT]
TEMPORARY CERTIFICATE EXCHANGEABLE FOR DEFINITIVE ENGRAVED
CERTIFICATE WHEN READY FOR DELIVERY
INCORPORATED UNDER THE LAWS OF COMMON STOCK
THE STATE OF DELAWARE PAR VALUE $.01
NUMBER SHARES
C
THIS CERTIFICATE IS TRANSFERABLE CUSIP
EITHER IN CHICAGO, IL OR SEE REVERSE FOR CERTAIN
IN NEW YORK, NY DEFINITIONS
INTEGRATED ELECTRICAL
SERVICES, INC.
This certifies that
is the owner of
SHARES OF FULLY PAID AND NON-ASSESSABLE COMMON STOCK OF
Integrated Electrical Services, Inc. transferable on the books of the
Corporation by the holder hereof in person or by duly authorized attorney, upon
surrender of this certificate properly endorsed. This certificate is not valid
until countersigned by the Transfer Agent and registered by the Registrar.
Witnesseth
CERTIFICATE OF STOCK
2
/s/ C. Byron Snyder DATE
Chairman of the Board
COUNTERSIGNED AND REGISTERED
HARRIS TRUST AND SAVINGS BANK
TRANSFER AGENT
AND REGISTRAR,
/s/ C. Byron Snyder BY
Secretary AUTHORIZED SIGNATURE
INTEGRATED ELECTRICAL SERVICES, INC.
CORPORATE
SEAL
DELAWARE
[REVERSE]
INTEGRATED ELECTRICAL SERVICES, INC.
The Corporation will furnish to any stockholder, upon request and without
charge, a statement of the powers, designations, and relative rights,
preferences and limitations of each class of stock or series thereof of the
Corporation, and the qualifications, limitations or restrictions of such
preferences and/or rights. Such request may be made to the Corporation or the
Transfer Agent.
The following abbreviations, when used in the inscription on the face
of this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT - ______ (Cust)
TEN ENT - as tenants by the entireties Custodian ________(Minor) under Uniform
JT TEN - as joint tenants with rights of Gifts to Minors Act _________ (State)
survivorship and not as tenants in common
Additional abbreviations may also be used though not in the above list.
For value received, ________ hereby sell, assign and transfer unto
_____________ [PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF
ASSIGNEE] [PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS INCLUDING POSTAL ZIP CODE
OF ASSIGNEE] ___________ shares of the capital stock represented by the within
Certificate, and do hereby irrevocably constitute and appoint __________
Attorney to transfer the said stock on the books of the within-named Company
with full power of substitution in the premises. Dated, ________
3
NOTICE:
THE SIGNATURE(S) TO X__________(SIGNATURE)
THIS ASSIGNMENT MUST
CORRESPOND WITH THE X__________(SIGNATURE)
NAME(S) AS WRITTEN
UPON THE FACE OF THE THE SIGNATURE(S) SHOULD BE
CERTIFICATE IN EVERY GUARANTEED BY AN ELIGIBLE
PARTICULAR WITHOUT GUARANTOR INSTITUTION (BANKS,
ALTERATION OR STOCKBROKERS, SAVINGS AND LOAN
ENLARGEMENT OR ANY ASSOCIATIONS AND CREDIT UNIONS
CHANGE WHATEVER. WITH MEMBERSHIP IN AN APPROVED
SIGNATURE GUARANTEE MEDALLION
PROGRAM), PURSUANT TO S.E.C. RULE
17Ad-15.
SIGNATURE(S) GUARANTEED BY:
1
[Letterhead of Andrews & Kurth, L.L.P.]
4200 Texas Commerce Tower
Houston, Texas 77002
EXHIBIT 5.1
November 28, 1997
Integrated Electrical Services
2301 Preston
Houston, Texas 77003
Gentlemen:
We have acted as counsel to Integrated Electrical Services,
Inc., a Delaware corporation (the "Company"), in connection with the
preparation of its Registration Statement on Form S-1 (Registration No.
333-38715) (the "Registration Statement"), filed by the Company under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
offering and sale by the Company of up to 8,050,000 shares of its common stock,
par value $0.01 per share (the "Common Stock"). This opinion also relates to
any registration statement of the Company relating to the registration of
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act.
We have examined originals or copies of (i) the Amended and
Restated Certificate of Incorporation of the Company; (ii) the Bylaws of the
Company, as amended; (iii) certain resolutions of the Board of Directors and
the stockholders of the Company; and (iv) such other documents and records as
we have deemed necessary and relevant for purposes hereof. We have relied upon
certificates of public officials and officers of the Company as to certain
matters of fact relating to this opinion and have made such investigations of
law as we have deemed necessary and relevant as a basis hereof. We have not
independently verified any factual matter relating to this opinion.
We have assumed the genuineness of all signatures, the
authenticity of all documents, certificates and records submitted to us as
copies, and the conformity to original documents, certificates and records of
all documents, certificates and records submitted to us as copies.
Based upon the foregoing, and subject to the limitations and
assumptions set forth herein, and having due regard for such legal
considerations as we deem relevant, we are of the opinion that:
2
Integrated Electrical Services
November 25, 1997
Page 2
1. The Company is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware.
2. The issuance of the Common Stock has been duly
authorized, and when issued and delivered by the Company against payment
therefor as described in the Registration Statement, such shares will be
validly issued, fully paid and nonassessable.
The foregoing opinion is based on and is limited to the General
Corporation Law of the State of Delaware and the relevant laws of the United
States of America, and we render no opinion with respect to the laws of any
other jurisdiction.
We hereby consent to the filing of this opinion with the
Securities and Exchange Commission as Exhibit 5.1 to the Registration Statement
and to the reference to this firm under the caption "Legal Matters" in the
prospectus contained in the Registration Statement. By giving such consent, we
do not admit that we are included within the category of persons whose consent
is required under Section 7 of the Securities Act or the rules and regulations
issued thereunder. This opinion may be incorporated by reference in a
registration statement of the Company relating to the registration of
additional shares of Common Stock pursuant to Rule 462(b) under the Securities
Act, in which case the opinions expressed herein will apply to the additional
shares registered thereunder.
Very truly yours,
/s/ Andrews & Kurth, L.L.P.
1173/2397/2700
1
EXHIBIT 10.1
FOUNDERS' AND MANAGEMENT EMPLOYMENT AGREEMENT
TO BE EXECUTED BY FOUNDERS AND KEY EXECUTIVES OF IES
ANNEX V
EMPLOYMENT AGREEMENT
This Employment Agreement (the "Agreement") by and between ____________
___________________________________ (the "Company"), a _____________ corporation
and a wholly-owned subsidiary of Integrated Electrical Services, Inc., a
Delaware corporation ("IES"), and __________________________ ("Executive") is
hereby entered into effective as of the date of the consummation of the initial
public offering of the common stock of IES (the "Effective Date").
RECITALS
The following statements are true and correct:
As of the Effective Date, the Company, IES and the other subsidiaries
of IES (collectively, the "IES Companies") are engaged primarily in the
providing of electrical contracting services.
Executive is employed hereunder by the Company in a confidential
relationship wherein Executive, in the course of his employment with the
Company, has and will continue to become familiar with and aware of information
as to the Company's and IES' customers and specific manner of doing business,
including the processes, techniques and trade secrets utilized by the Company
and IES, and future plans with respect thereto, all of which has been and will
be established and maintained at great expense to the Company and IES. This
information is a trade secret and constitutes the valuable goodwill of the
Company and IES.
Therefore, in consideration of the mutual promises, terms, covenants
and conditions set forth herein and the performance of each, it is hereby
agreed as follows:
AGREEMENTS
1. Employment and Duties.
(a) The Company hereby employs Executive as _____________
of the Company. As such, Executive shall have responsibilities,
duties and authority reasonably accorded to, expected of and
consistent with Executive's position as _____________________ of the
Company and will report directly to the [______________] of the
Company. Executive hereby accepts this employment upon the terms and
conditions herein contained and, subject to paragraph 1(c), agrees to
devote substantially all of his time, attention and efforts to promote
and further the business and interests of the Company and its
affiliates.
2
(b) Executive shall faithfully adhere to, execute and
fulfill all lawful policies established by the Company.
(c) Except as set forth on Schedule 1(c) hereto,
Executive shall not, during the term of his employment hereunder,
engage in any other business activity pursued for gain, profit or
other pecuniary advantage if such activity interferes in any material
respect with Executive's duties and responsibilities hereunder. The
foregoing limitations shall not be construed as prohibiting Executive
from making personal investments in such form or manner as will
neither require his services in the operation or affairs of the
companies or enterprises in which such investments are made nor
violate the terms of paragraph 3 hereof.
(d) Executive shall be entitled to vacation in accordance
with the policies of the Company.
2. Compensation. For all services rendered by Executive, the
Company shall compensate Executive as follows:
(a) Base Salary. The base salary payable to Executive
during the term shall be $_____________________ per year, payable in
accordance with the Company's payroll procedures for officers, but not
less frequently than monthly. Such base salary may be increased from
time to time, at the discretion of the Board of Directors of IES (the
"IES Board"), in light of the Executive's position, responsibilities
and performance.
(b) Executive Perquisites, Benefits and Other
Compensation. Executive shall be entitled to receive additional
benefits and compensation from the Company in such form and to such
extent as specified below:
(i) Reimbursement for all business travel and
other out-of-pocket expenses (including those costs to
maintain any professional certifications held or obtained by
Executive) reasonably incurred by Executive in the performance
of his duties pursuant to this Agreement and in accordance
with the Company's policy for executives of the Company. All
such expenses shall be appropriately documented in reasonable
detail by Executive upon submission of any request for
reimbursement, and in a format and manner consistent with the
Company's expense reporting policy.
(ii) Executive shall, subject to the satisfaction
of any general eligible criteria, be eligible to participate
in all compensation and benefit plans and programs as are
maintained from time to time for executives of the Company.
(iii) The Company shall provide Executive with such
other perquisites as may be deemed appropriate for Executive
by the IES Board.
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3. Non-Competition Agreement.
(a) Executive recognizes that the Company's willingness
to enter into this Agreement is based in material part on Executive's
agreement to the provisions of this paragraph 3 and that Executive's
breach of the provisions of this paragraph 3 could materially damage
the Company. Subject to the further provisions of this Agreement,
Executive will not, during the term of his employment with the
Company, and for a period of two years immediately following the
termination of such for any reason whatsoever, either for Cause or in
the event the Executive terminates his employment without Good Reason,
except as may be set forth herein, directly or indirectly, for himself
or on behalf of or in conjunction with any other person, company,
partnership, corporation or business of whatever nature:
(i) engage, as an officer, director, shareholder,
owner, partner, joint venturer, or in a managerial capacity,
whether as an employee, independent contractor, consultant or
advisor, or as a sales representative, in any electrical
contracting business in direct competition with any IES
Company within 100 miles of where any IES Company conducts
business, including any territory serviced by an IES Company
during the term of Executive's employment (the "Territory");
(ii) call upon any person who is, at that time, an
employee of an IES Company for the purpose or with the intent
of enticing such employee away from or out of the employ of
the IES Company;
(iii) call upon any person or entity which is, at
that time, or which has been, within one year prior to that
time, a customer of an IES Company within the Territory for
the purpose of soliciting or selling electrical contracting
products or services in direct competition with the IES
Companies within the Territory; or
(iv) call upon any prospective acquisition
candidate, on Executive's own behalf or on behalf of any
competitor, which candidate was, to Executive's knowledge
after due inquiry, either called upon by an IES Company or for
which an IES Company made an acquisition analysis, for the
purpose of acquiring such entity.
(v) 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.
Notwithstanding the above, the foregoing covenant shall not be
deemed to prohibit Executive from acquiring as an investment (i) not
more than 1% of the capital stock of a
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competing business, whose stock is traded on a national securities
exchange, the Nasdaq Stock Market or on an over-the-counter or similar
market or (ii) not more than 5% of the capital stock of a competing
business whose stock is not publicly traded unless the Board of
Directors of the Company consents to such acquisition.
(b) Because of the difficulty of measuring economic
losses to the Company and IES as a result of a breach of the foregoing
covenant, and because of the immediate and irreparable damage that
could be caused to the Company and IES for which they would have no
other adequate remedy, Executive agrees that foregoing covenant may be
enforced by the Company, in the event of breach by him, by injunctions
and restraining orders. Executive further agrees to waive any
requirement for the Company's securing or posting of any bond in
connection with such remedies.
(c) It is agreed by the parties that the foregoing
covenants in this paragraph 3 impose a reasonable restraint on
Executive in light of the activities and business of the IES Companies
on the date of the execution of this Agreement and the current plans
of the IES Companies; but it is also the intent of the Company and
Executive that such covenants be construed and enforced in accordance
with the changing activities, business and locations of the IES
Companies throughout the term of this covenant, whether before or
after the date of termination of the employment of Executive, unless
the Executive was conducting such new business prior to any IES
Company conducting such new business. For example, if, during the
term of this Agreement, an IES Company engages in new and different
activities, enters a new business or establishes new locations for its
current activities or business in addition to or other than the
activities or business enumerated under the Recitals above or the
locations currently established therefor, then Executive will be
precluded from soliciting the customers or employees of such new
activities or business or from such new location and from directly
competing with such new business within 100 miles of its
then-established operating location(s) through the term of this
covenant, unless the Executive was conducting such new business prior
to any IES Company conducting such new business.
(d) It is further agreed by the parties hereto that, in
the event that Executive shall cease to be employed hereunder and
shall enter into a business or pursue other activities not in
competition with the electrical contracting activities of the IES
Companies or similar activities or business in locations the operation
of which, under such circumstances, does not violate clause (a)(i) of
this paragraph 3, and in any event such new business, activities or
location are not in violation of this paragraph 3 or of Executive's
obligations under this paragraph 3, if any, Executive shall not be
chargeable with a violation of this paragraph 3 if the IES Companies
shall thereafter enter the same, similar or a competitive (i)
business, (ii) course of activities or (iii) location, as applicable.
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(e) The covenants in this paragraph 3 are severable and
separate, and the unenforceability of any specific covenant shall not
affect the provisions of any other covenant. Moreover, in the event
any court of competent jurisdiction shall determine that the scope,
time or territorial restrictions set forth 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 the Agreement
shall thereby be reformed.
(f) All of the covenants in this paragraph 3 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
Executive against the Company or IES, whether predicated on this
Agreement or otherwise, shall not constitute a defense to the
enforcement by IES or the Company of such covenants. It is
specifically agreed that the period of two years (subject to the
further provisions of this Agreement) following termination of
employment stated at the beginning of this paragraph 3, during which
the agreements and covenants of Executive made in this paragraph 3
shall be effective, shall be computed by excluding from such
computation any time during which Executive is in violation of any
provision of this paragraph 3.
(g) The Company and the Stockholders hereby agree that
this covenant is a material and substantial part of this transaction.
4. Term; Termination; Rights on Termination. The term of this
Agreement shall begin on the Effective Date and continue for five years (the
"Initial Term") and, unless terminated sooner as herein provided, shall
continue thereafter at Executive's and Company's mutual election on a
year-to-year basis on the same terms and conditions contained herein in effect
as of the time of renewal (the "Extended Term"); provided, however, upon a
Change in Control (as defined in paragraph 11(d)) the term of this Agreement
shall automatically continue following such Change in Control for a period
equal to the then remaining term or two years, whichever period is longer,
unless earlier terminated as provided in paragraph 11. This Agreement and
Executive's employment may be terminated in any one of the followings ways:
(a) Death. The death of Executive shall immediately
terminate this Agreement with no severance compensation due to
Executive's estate.
(b) Disability. If, as a result of incapacity due to
physical or mental illness or injury, Executive shall have been absent
from his full-time duties hereunder for four consecutive months, then
30 days after receiving written notice (which notice may occur before
or after the end of such four-month period, but which shall not be
effective earlier than the last day of such four-month period), the
Company may terminate Executive's employment hereunder, provided that
Executive is unable to resume his full-time duties at the conclusion
of such notice period. Also, Executive may terminate his employment
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hereunder if his health should become impaired to an extent that makes
the continued performance of his duties hereunder hazardous to his
physical or mental health, provided that Executive shall have
furnished the Company with a written statement from a doctor
reasonably acceptable to the Company to such effect and provided,
further, that, at the Company's request made within 30 days of the
date of such written statement, Executive shall submit to an
examination by a doctor selected by the Company who is reasonably
acceptable to Executive or Executive's doctor and such second doctor
shall have concurred in the conclusion of Executive's doctor. In the
event this Agreement is terminated as a result of Executive's
disability, Executive shall receive from the Company, in a lump sum
payment due within 10 days of the effective date of termination, the
base salary at the rate then in effect (i) during the Initial Term,
for whatever time period, if any, is remaining under the Initial Term,
provided that such period shall not be less than one year, and (ii)
during the Extended Term, equivalent to one year of base salary.
(c) Cause. The Company may terminate this Agreement and
Executive's employment 10 days after written notice to Executive for
"Cause", which shall be: (1) Executive's willful, material and
irreparable breach of this Agreement (which remains uncured 10 days
after receipt of written notice); (2) Executive's gross negligence in
the performance or intentional nonperformance (in either case
continuing for 10 days after receipt of written notice of need to
cure) of any of Executive's material duties and responsibilities
hereunder; (3) Executive's dishonesty or fraud with respect to the
business, reputation or affairs of the Company or IES which materially
and adversely affects the Company or IES (monetarily or otherwise); or
(4) Executive's conviction of a felony crime involving moral
turpitude. In the event of a termination for Cause, Executive shall
have no right to any severance compensation.
(d) Without Cause. Executive may, without Good Reason
(as hereinafter defined) terminate this Agreement and Executive's
employment, effective 30 days after written notice is provided to the
Company. Executive may only be terminated without Cause by the
Company during either the Initial Term or Extended Term if such
termination is approved by at least 51% of the members of the IES
Board. Should Executive be terminated by the Company without Cause or
should Executive terminate with Good Reason during the Initial Term,
Executive shall receive from the Company, in a lump sum payment due on
the effective date of termination, the base salary at the rate then in
effect for whatever time period is remaining under the Initial Term or
for one year, whichever amount is greater. Should Executive be
terminated by the Company without Cause or should Executive terminate
with Good Reason during the Extended Term, Executive shall receive
from the Company, in a lump sum payment due on the effective date of
termination, the base salary at the rate then in effect equivalent to
one year of base salary. Further, any termination without Cause by
the Company or by Executive for Good Reason shall operate to shorten
the period set forth in paragraph 3(a) and during which the terms of
paragraph 3 apply to one
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year from the date of termination of employment. If Executive resigns
or otherwise terminates his employment without Good Reason, rather
than the Company terminating his employment pursuant to this paragraph
4(d), Executive shall receive no severance compensation.
Executive shall have "Good Reason" to terminate his employment
hereunder upon the occurrence of any of the following events, unless
such event is agreed to in writing by Executive: (a) Executive is
demoted by means of a material reduction in authority,
responsibilities or duties to a position of less stature or importance
within the Company than the position described in Section 1 hereof;
(b) Executive's annual base salary as then in effect is reduced; or
(c) the relocation of the Company's principal executive offices to a
location outside the greater [____________________] area or the
Company's requiring Executive to relocate anywhere other than the
Company's principal executive offices.
If termination of Executive's employment arises out of the Company's
failure to pay Executive on a timely basis the amounts to which he is entitled
under this Agreement or as a result of any other breach of this Agreement by
the Company, as determined by a court of competent jurisdiction or pursuant to
the provisions of paragraph 18 below, the Company shall pay all amounts and
damages to which Executive may be entitled as a result of such breach,
including interest thereon and all reasonable legal fees and expenses and other
costs incurred by Executive to enforce his rights hereunder. Further, none of
the provisions of paragraph 3 shall apply in the event this Agreement is
terminated as a result of a breach by the Company.
Upon termination of this Agreement for any reason provided above, in
addition to the above payments, if any, Executive shall be entitled to receive
all compensation earned and all benefits and reimbursements due through the
effective date of termination, paid to Executive in a lump sum on the effective
date. All other rights and obligations of the Company and Executive under
this Agreement shall cease as of the effective date of termination, except
that the Executive's obligations under paragraphs 3, 5, 6, 7, and 8 herein
shall survive such termination in accordance with their terms.
5. Return of Company Property. All records, designs, patents,
business plans, financial statements, manuals, memoranda, lists and other
property delivered to or compiled by Executive by or on behalf of the Company,
IES or any IES Companies or their representatives, vendors or customers which
pertain to the business of the Company or IES or any IES Companies shall be and
remain the property of the Company or IES or the IES Company, as the case may
be, and be subject at all times to their discretion and control. Likewise, all
correspondence, reports, records, charts, advertising materials and other
similar data pertaining to the business, activities or future plans of the
Company or IES or the IES Company which is collected by Executive shall be
delivered promptly to the Company without request by it upon termination of
Executive's employment.
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6. Inventions. Executive shall disclose promptly to the Company
any and all significant conceptions and ideas for inventions, improvements and
valuable discoveries, whether patentable or not, which are conceived or made by
Executive, solely or jointly with another, during the period of employment or
within one year thereafter, if conceived during employment, and which are
directly related to the business or activities of the Company and which
Executive conceives as a result of his employment by the Company. Executive
hereby assigns and agrees to assign all his interests therein to the Company or
its nominee. Whenever requested to do so by the Company, Executive shall
execute any and all applications, assignments or other instruments that the
Company shall deem necessary to apply for and obtain Letters Patent of the
United States or any foreign country or to otherwise protect the Company's
interest therein.
7. Trade Secrets. Executive agrees that he will not, during or
after the term of this Agreement, disclose the specific terms of the Company's
or IES' relationships or agreements with their respective significant vendors
or customers or any other significant and material trade secret of the Company
or IES, whether in existence or proposed, to any person, firm, partnership,
corporation or business for any reason or purpose whatsoever.
8. Confidentiality.
(a) Executive acknowledges and agrees that all
Confidential Information (as defined below) of the Company is
confidential and a valuable, special and unique asset of the Company
that gives the Company an advantage over its actual and potential,
current and future competitors. Executive further acknowledges and
agrees that Executive owes the Company a fiduciary duty to preserve
and protect all Confidential Information from unauthorized disclosure
or unauthorized use, that certain Confidential Information constitutes
"trade secrets" under applicable laws and, that unauthorized
disclosure or unauthorized use of the Company's Confidential
Information would irreparably injure the Company.
(b) Both during the term of Executive's employment and
after the termination of Executive's employment for any reason
(including wrongful termination), Executive shall hold all
Confidential Information in strict confidence, and shall not use any
Confidential Information except for the benefit of the Company, in
accordance with the duties assigned to Executive. Executive shall
not, at any time (either during or after the term of Executive's
employment), disclose any Confidential Information to any person or
entity (except other employees of the Company who have a need to know
the information in connection with the performance of their employment
duties), or copy, reproduce, modify, decompile or reverse engineer any
Confidential Information, or remove any Confidential Information from
the Company's premises, without the prior written consent of the
President of the Company, or permit any other person to do so.
Executive shall take reasonable precautions to protect the physical
security of all documents and other material containing Confidential
Information (regardless of the medium on which the Confidential
Information is stored). This Agreement
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applies to all Confidential Information, whether now known or later to
become known to Executive.
(c) Upon the termination of Executive's employment with
the Company for any reason, and upon request of the Company at any
other time, Executive shall promptly surrender and deliver to the
Company all documents and other written material of any nature
containing or pertaining to any Confidential Information and shall not
retain any such document or other material. Within five days of any
such request, Executive shall certify to the Company in writing that
all such materials have been returned.
(d) As used in this Agreement, the term "Confidential
Information" shall mean any information or material known to or used
by or for the Company (whether or not owned or developed by the
Company and whether or not developed by Executive) that is not
generally known to persons in the electrical contracting business.
Confidential information includes, but is not limited to, the
following: all trade secrets of the Company; all information that the
Company has marked as confidential or has otherwise described to
Executive (either in writing or orally) as confidential; all nonpublic
information concerning the Company's products, services, prospective
products or services, research, product designs, prices, discounts,
costs, marketing plans, marketing techniques, market studies, test
data, customers, customer lists and records, suppliers and contracts;
all Company business records and plans; all Company personnel files;
all financial information of or concerning the Company; all
information relating to operating system software, application
software, software and system methodology, hardware platforms,
technical information, inventions, computer programs and listings,
source codes, object codes, copyrights and other intellectual
property; all technical specifications; any proprietary information
belonging to the Company; all computer hardware or software manual;
all training or instruction manuals; and all data and all computer
system passwords and user codes.
9. No Prior Agreements. Executive hereby represents and
warrants to the Company that the execution of this Agreement by Executive and
his employment by the Company and the performance of his duties hereunder will
not violate or be a breach of any agreement with a former employer, client or
any other person or entity. Further, Executive agrees to indemnify the Company
for any claim, including, but not limited to, reasonable attorneys' fees and
expenses of investigation, by any such third party that such third party may
now have or may hereafter come to have against the Company based upon or
arising out of any non-competition agreement, invention or secrecy agreement
between Executive and such third party which was in existence as of the date of
this Agreement.
10. Assignment; Binding Effect. Executive understands that he has
been selected for employment by the Company on the basis of his personal
qualifications, experience and skills. Executive agrees, therefore, that he
cannot assign all or any portion of his performance under this
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Agreement. Subject to the preceding two sentences and the express provisions
of paragraph 12 below, this Agreement shall be binding upon, inure to the
benefit of and be enforceable by the parties hereto and their respective heirs,
legal representatives, successors and assigns.
11. Change in Control.
(a) Executive understands and acknowledges that the
Company may be merged or consolidated with or into another entity and
that such entity shall automatically succeed to the rights and
obligations of the Company hereunder or that the Company may undergo a
Change in Control (as defined below). In the event a Change in
Control is initiated or occurs during the Initial Term or Extended
Term, then the provisions of this paragraph 11 shall be applicable.
(b) In the event of a Change in Control wherein the
Company and Executive have not received written notice at least ten
business days prior to the date of the event giving rise to the Change
in Control from the successor to all or a substantial portion of the
Company's business and/or assets that such successor is willing as of
the closing to assume and agrees to perform the Company's obligations
under this Agreement in the same manner and to the same extent that
the Company is hereby required to perform, then Executive may, at
Executive's sole discretion, elect to terminate Executive's employment
on such Change in Control by providing written notice to the Company
prior to the closing of the transaction giving rise to the Change in
Control. In such case, the applicable provisions of paragraph 4(d)
will apply as though the Company had terminated Executive without
Cause; however, the amount of the lump sum severance payment due
Executive shall be triple the amount calculated under the terms of
paragraph 4(d), but shall in no event exceed nine times Executive's
base salary.
(c) In any Change in Control situation, Executive may, at
Executive's sole discretion, elect to terminate Executive's employment
upon the effective date of such Change in Control by providing written
notice to the Company at least five business days prior to the closing
of the transaction giving rise to the Change in Control. In such
case, the applicable provisions of paragraph 4(d) will apply as though
the Company had terminated Executive without Cause; however, the
amount of the lump sum severance payment due Executive shall be double
the amount calculated under the terms of paragraph 4(d), but shall in
no event exceed six times Executive's base salary.
(d) If, on or within two years following the effective
date of a Change in Control the Company terminates Executive's
employment other than for Cause or Executive terminates his employment
for Good Reason, or if Executive's employment with the Company is
terminated by the Company within three months before the effective
date of a Change in Control and it is reasonably demonstrated that
such termination (i) was at the
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request of a third party that has taken steps reasonably calculated to
effect a Change in Control, or (ii) otherwise arose in connection with
or anticipation of a Change in Control, then Executive shall receive
from Company, in a lump sum payment due on the effective date of
termination, the greater of (i) the equivalent of three years' base
salary at the rate then in effect, or (ii) the base salary for
whatever period is then remaining on the Initial Term, if any.
(e) A "Change in Control" shall be deemed to have
occurred if:
(i) any person, entity or group (as such terms
are used in Sections 13(d) and 14(d)(2) of the Securities
Exchange Act of 1934, as amended (the "Act"), other than the
IES Companies or an employee benefit plan of the IES
Companies, acquires, directly or indirectly, the beneficial
ownership (as defined in Section 13(d) of the Act) of any
voting security of IES and immediately after such acquisition
such person is, directly or indirectly, the beneficial owner
of voting securities representing 20% or more of the total
voting power of all of the then outstanding voting securities
of IES entitled to vote generally in the election of
directors;
(ii) upon the first purchase of IES's common stock
pursuant to a tender or exchange offer (other than a tender or
exchange offer made by IES);
(iii) the stockholders of IES shall approve a
merger, consolidation, recapitalization or reorganization of
IES, or a reverse stock split of outstanding voting
securities, or consummation of any such transaction if
stockholder approval is not obtained, other than any such
transaction which would result in at least 75% of the total
voting power represented by the voting securities of the
surviving entity outstanding immediately after such
transaction being beneficially owned by the holders of all of
the outstanding voting securities of IES immediately prior to
the transactions with the voting power of each such continuing
holder relative to other such continuing holders not
substantially altered in the transaction;
(iv) the stockholders of IES shall approve a plan
of complete liquidation or dissolution of IES or an agreement
for the sale or disposition by IES of all or substantially all
of IES's assets; or
(v) if, at any time during any period of two
consecutive years, individuals who at the beginning of such
period constitute the Board cease for any reason to constitute
at least a majority thereof, unless the election or nomination
for the election by the Company's stockholders of each new
director was approved by a vote of at least two-thirds of the
directors then still in office who were directors at the
beginning of the period.
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(f) Notwithstanding anything in this Agreement to the
contrary, a termination pursuant to paragraph 11(b), (c), or (d) shall
operate to automatically waive in full the noncompetition restrictions
imposed on Executive pursuant to paragraph 3(a).
(g) If it shall be finally determined that any payment
made or benefit provided to Executive in connection with a "change in
control" of the Company or IES, whether or not made or provided
pursuant to this Agreement, is subject to the excise tax imposed by
Section 4999 of the Internal Revenue Code of 1986, as amended, or any
successor thereto, the Company shall pay Executive an amount of cash
(the "Additional Amount") such that the net amount received by
Executive after paying all applicable taxes on such Additional Amount
shall be equal to the amount that Executive would have received if
Section 4999 were not applicable.
12. No Mitigation or Offset. Executive shall not be required to
mitigate the amount of any Company payment provided for in this Agreement by
seeking other employment or otherwise. The amount of any payment required to
be paid to Executive by the Company pursuant to this Agreement shall not be
reduced by any amounts that are owed to the Company by Executive, or by any
setoff, counterclaim, recoupment, defense or other claim, right or action.
13. Release. Notwithstanding anything in this Agreement to the
contrary, Executive shall not be entitled to receive any payments pursuant to
this Agreement unless Executive has executed (and not revoked) a general
release of all claims Executive may have against the Company and its affiliates
in a form of such release reasonably acceptable to the Company.
14. Indemnification. In the event Executive is made a party to
any threatened, pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by the Company
against Executive), by reason of the fact that he is or was performing services
under this Agreement, then the Company shall indemnify Executive against all
expenses (including attorneys' fees), judgments, fines and amounts paid in
settlement, as actually and reasonably incurred by Executive in connection
therewith. In the event that both Executive and the Company are made a party
to the same third-party action, complaint, suit or proceeding, the Company
agrees to engage competent legal representation, and Executive agrees to use
the same representation, provided that if counsel selected by the Company shall
have a conflict of interest that prevents such counsel from representing
Executive, Employee may engage separate counsel and the Company shall pay all
attorneys' fees and reasonable expenses of such separate counsel. Further,
while Executive is expected at all times to use his best efforts to faithfully
discharge his duties under this Agreement, Executive cannot be held liable to
the Company for errors or omissions made in good faith where Executive has not
exhibited gross, willful and wanton negligence and misconduct nor performed
criminal and fraudulent acts which materially damage the business of the
Company.
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15. Complete Agreement. Executive has no oral representations,
understandings or agreements with the Company, IES or any of their officers,
directors or representatives covering the same subject matter as this
Agreement. This written Agreement is the final, complete and exclusive
statement and expression of the agreement between the Company, IES and
Executive and of all the terms of this Agreement, and it cannot be varied,
contradicted or supplemented by evidence of any prior or contemporaneous oral
or written agreements. This written Agreement may not be later modified except
by a further writing signed by a duly authorized officer of the Company and
Executive, and no term of this Agreement may be waived except by writing signed
by the party waiving the benefit of such term. Without limiting the generality
of the foregoing, either party's failure to insist on strict compliance with
this Agreement shall not be deemed a waiver thereof.
16. Notice. Whenever any notice is required hereunder, it shall be
given in writing addressed as follows:
To the Company: c/o Integrated Electrical Services, Inc.
Attn:
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To Executive:
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Notice shall be deemed given and effective on the earlier of three days after
the deposit in the U.S. mail of a writing addressed as above and sent first
class mail, certified, return receipt requested, or when actually received.
Either party may change the address for notice by notifying the other party of
such change in accordance with this paragraph 16.
17. Severability; Headings. If any portion of this Agreement is
held invalid or inoperative, the other portions of this Agreement shall be
deemed valid and operative and, so far as is reasonable and possible, effect
shall be given to the intent manifested by the portion held invalid or
inoperative. The paragraph headings herein are for reference purposes only and
are not intended in any way to describe, interpret, define or limit the extent
or intent of the Agreement or of any part hereof.
18. Dispute Resolutions. Except with respect to injunctive relief
as provided in paragraph 3(b), neither party shall institute a proceeding in
any court or administrative agency to resolve a dispute between the parties
before that party has sought to resolve the dispute through direct negotiation
with the other party. If the dispute is not resolved within two weeks after a
demand for direct negotiation, the parties shall attempt to resolve the dispute
through mediation.
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If the parties do not promptly agree on a mediator, the parties shall request
the Association of Attorney Mediators in Harris County, Texas to appoint a
mediator certified by the Supreme Court of Texas. If the mediator is unable to
facilitate a settlement of the dispute within a reasonable period of time, as
determined by the mediator, the mediator shall issue a written statement to the
parties to that effect and any unresolved dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively by
arbitration, conducted before a panel of three arbitrators in Houston, Texas,
in accordance with the rules of the American Arbitration Association then in
effect. The arbitrators shall have the authority to order back-pay, severance
compensation, vesting of options (or cash compensation in lieu of vesting of
options), reimbursement of costs, including those incurred to enforce this
Agreement, and interest thereon in the event the arbitrators determine that
Executive was terminated without disability or Cause, as defined in paragraphs
4(b) and 4(c), respectively, or that the Company has otherwise materially
breached this Agreement. A decision by a majority of the arbitration panel
shall be final and binding. Judgment may be entered on the arbitrators' award
in any court having jurisdiction. The costs and expenses, including reasonable
attorneys' fees, of the prevailing party in any dispute arising under this
Agreement will be promptly paid by the other party.
19. Governing Law. This Agreement shall in all respects be
construed according to the laws of the State of Texas without regard to its
conflicts of law provisions.
20. Counterparts. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original and all
of which together shall constitute but one and the same instrument.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective for all purposes as of the Effective Date.
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By:
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Name:
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Title:
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EXECUTIVE
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EXHIBIT 10.2
INDEMNIFICATION AGREEMENT
This INDEMNIFICATION AGREEMENT is made as of____________________, 1997,
and is entered into by and between Integrated Electrical Services, Inc., a
Delaware corporation (the "Company"), and _____________("Indemnitee").
R E C I T A L S:
WHEREAS, the certificate of incorporation and bylaws of the Company
provide for the indemnification of the Company's directors and executive
officers to the maximum extent permitted from time to time under applicable law
and, along with the Delaware General Corporation Law, contemplate that the
Company may enter into agreements with respect to such indemnification; and
WHEREAS, the Board of Directors of the Company has concluded that it
is reasonable, prudent and in the best interests of the Company's stockholders
for the Company to contractually obligate itself to indemnify certain of its
Authorized Representatives (defined below) so that they will serve or continue
to serve with greater certainty that they will be adequately protected.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the Company and Indemnitee hereby agree as follows:
1. Definitions. For purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires, the
following terms shall have the following respective meanings:
"Authorized Representative" means (i) a director, officer,
employee, agent or fiduciary of the Company or any Subsidiary and (ii)
a person serving at the request of the Company or any Subsidiary as a
director, officer, employee, fiduciary or other representative of
another Enterprise.
"Enterprise" means any corporation, partnership, limited
liability company, association, joint venture, trust, employee benefit
plan or other entity.
"Expenses" means all expenses, including (without limitation)
reasonable fees and expenses of counsel.
"Liabilities" means all liabilities, including (without
limitation) the amounts of any judgments, fines, penalties, excise
taxes and amounts paid in settlement.
2
"Proceeding" means any threatened, pending or completed claim,
action (including any action by or in the right of the Company), suit
or proceeding (whether formal or informal, or civil, criminal,
administrative, legislative, arbitrative or investigative) in respect
of which Indemnitee is, was or at any time becomes, or is threatened
to be made, a party, witness, subject or target, by reason of the fact
that Indemnitee is or was an Authorized Representative or a
prospective Authorized Representative.
"Subsidiary" means, at any time, (i) any corporation of which
at least a majority of the outstanding voting stock is owned by the
Company at such time, directly or indirectly through subsidiaries, and
(ii) any other Enterprise in which the Company, directly or
indirectly, owns more than a 50% equity interest at such time.
2. Interpretation. (a) In this Agreement, unless a clear
contrary intention appears:
(i) the singular number includes the plural number and
vice versa;
(ii) reference to any gender includes each other gender;
(iii) the words "herein," "hereof" and "hereunder" and
other words of similar import refer to this Agreement as a whole and
not to any particular Section or other subdivision;
(iv) unless the context indicates otherwise, reference to
any Section means such Section hereof; and
(v) the words "including" (and with correlative meaning
"include") means including, without limiting the generality of any
description preceding such term.
(b) The Section headings herein are for convenience only
and shall not affect the construction hereof.
(c) No provision of this Agreement shall be interpreted
or construed against any party solely because that party or its legal
representative drafted such provision.
(d) In the event of any ambiguity, vagueness or other
similar matter involving the interpretation or meaning of this Agreement, this
Agreement shall be liberally construed so as to provide to Indemnitee the full
benefits contemplated hereby.
(e) If the indemnification to which Indemnitee is
entitled as respects any aspect of any claim varies between two or more
provisions of this Agreement, that provision providing the most comprehensive
indemnification shall apply.
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3. Limitation on Personal Liability. To the fullest extent
permitted by applicable law, Indemnitee shall not be personally liable to the
Company or its stockholders for monetary damages for breach of fiduciary duty
as a director of the Company, provided that the foregoing shall not eliminate
or limit the liability of Indemnitee (i) for any breach of Indemnitee's duty of
loyalty to the Company 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 relating
to unlawful dividend payments and unlawful stock purchases or redemptions or
(iv) for any transaction from which Indemnitee derived an improper personal
benefit.
4. Indemnity. (a) Subject to the following provisions of this
Agreement, the Company shall hold harmless and indemnify Indemnitee against all
Expenses and Liabilities actually incurred by Indemnitee in connection with any
Proceeding; provided, however, that no indemnity shall be paid by the Company
pursuant to this Agreement:
(i) for amounts actually paid to Indemnitee pursuant to
one or more policies of directors and officers liability insurance
maintained by the Company or pursuant to a trust fund, letter of
credit or other security or funding arrangement provided by the
Company; provided, however, that if it should subsequently be
determined that Indemnitee is not entitled to retain any such amount,
this clause (i) shall no longer apply to such amount;
(ii) in respect of remuneration paid to Indemnitee if it
shall be determined by a final judgment or other final adjudication
that payment of such remuneration was in violation of applicable law;
(iii) on account of Indemnitee's conduct which is finally
adjudged to constitute willful misconduct or to have been knowingly
fraudulent, deliberately dishonest or from which the Indemnitee
derives an improper personal benefit; or
(iv) on account of any suit in which final judgment is
rendered against Indemnitee for an accounting of profits made from the
sale or purchase by Indemnitee of securities of the Company pursuant
to the provisions of Section 16(b) of the Securities Exchange Act of
1934, as amended.
(b) If Indemnitee is entitled under any provision of this
Agreement to indemnification by the Company for only a portion (but not,
however, for the total amount) of any Expenses or Liabilities actually incurred
by Indemnitee in connection with any Proceeding, the Company shall nevertheless
indemnify Indemnitee for the portion of such Expenses and Liabilities to which
Indemnitee is entitled. If the indemnification provided for herein in respect
of any Expenses or Liabilities actually incurred by Indemnitee in connection
with any Proceeding is finally determined by a court of competent jurisdiction
to be prohibited by applicable law, then the Company, in lieu of indemnifying
Indemnitee, shall contribute to the amount paid or payable by Indemnitee as a
result of such Expenses and Liabilities in such proportion as is appropriate to
reflect (i) the relative benefits received by the Company on the one hand and
Indemnitee on the other hand from the events, circumstances, conditions,
happenings, actions or transactions from which such Proceeding arose, (ii) the
relative fault of the Company (including its other Authorized Representatives)
on the one hand and of Indemnitee on the other hand in connection with the
events,
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circumstances and happenings which resulted in such Expenses and Liabilities,
such relative fault to be determined by reference to, among other things, the
parties' relative intent, knowledge, access to information and opportunity to
correct or prevent the events, circumstances and/or happenings resulting in
such Expenses and Liabilities, and (iii) any other relevant equitable
considerations, it being agreed that it would not be just and equitable if such
contribution were determined by pro rata or other method of allocation which
does not take into account the foregoing equitable considerations.
(c) The indemnification provided herein shall be applicable only
to Proceedings commenced after the date hereof, regardless, however, of whether
they arise from acts, omissions, facts or circumstances occurring before or
after the date hereof.
(d) The indemnification provided herein shall be applicable
whether or not negligence of Indemnitee is alleged or proved, and regardless of
whether such negligence be contributory or sole.
(e) Amounts paid by the Company to Indemnitee under this Section 4
are subject to refund by Indemnitee as provided in Section 8.
5. Notification and Defense of Claims. (a) Promptly after the
receipt by Indemnitee of notice of the commencement of any Proceeding,
Indemnitee will, if a claim in respect thereof is to be made against the
Company under this Agreement, notify the Company of the commencement of such
Proceeding; provided, however, that the omission to so notify the Company will
not relieve the Company (i) from any liability which it may have to Indemnitee
under this Agreement unless, and then only to the extent that, such omission
results in insufficient time being available to permit the Company or its
counsel to effectively defend against or make timely response to any loss,
claim, damage, liability or expense resulting from such Proceeding or otherwise
has a material adverse effect on the Company's ability to promptly deal with
such loss, claim, damage, liability or expense or (ii) from any liability which
it may have to Indemnitee otherwise than under this Agreement.
(b) The following provisions shall apply with respect to any such
Proceeding as to which Indemnitee notifies the Company of the commencement
thereof:
(i) The Company shall be entitled to participate therein
at its own expense.
(ii) Except as otherwise provided below, to the extent it
may elect to do so, the Company (jointly with any other indemnifying
party similarly notified) will be entitled to assume the defense
thereof, with counsel of its own selection reasonably satisfactory to
Indemnitee. After notice from the Company to Indemnitee of its
election so to assume the defense thereof, the Company will not be
liable to Indemnitee under this Agreement for any Expenses
subsequently incurred by Indemnitee in connection with the defense of
such Proceeding other than reasonable costs of investigation or as
otherwise provided below. Indemnitee shall have the right to employ
separate counsel in such
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Proceeding but the fees and expenses of such counsel incurred after
notice from the Company of its assumption of the defense thereof shall
be at the expense of Indemnitee unless (1) the employment of separate
counsel by Indemnitee has been authorized by the Company; (2)
Indemnitee shall have reasonably concluded that there may be a
conflict of interest between the Company and Indemnitee in the conduct
of the defense of such Proceeding; or (3) the Company shall not in
fact have employed counsel to assume the defense of such Proceeding,
in each of which cases the reasonable fees and expenses of
Indemnitee's counsel shall be borne by the Company. The Company shall
not be entitled to assume the defense of any Proceeding brought by or
on behalf of the Company or as to which Indemnitee shall have made the
conclusion provided for in (2) above. Nothing in this subparagraph
(ii) shall affect the obligation of the Company to indemnify
Indemnitee against Expenses and Liabilities paid in settlement for
which it is otherwise obligated hereunder.
(iii) The Company shall not be liable to indemnify
Indemnitee under this Agreement for any amounts paid in settlement of
any Proceedings or claims effected without its prior written consent.
The Company shall not settle any Proceeding or claim in any manner
which would impose any penalty or limitation on Indemnitee without
Indemnitee's prior written consent. Neither the Company nor
Indemnitee will unreasonably withhold or delay its consent to any
proposed settlement.
6. Advancement of Expenses, etc. If requested to do so by
Indemnitee with respect to any Proceeding, the Company shall advance to or for
the benefit of Indemnitee, prior to the final disposition of such Proceeding,
the Expenses actually incurred by Indemnitee in investigating, defending or
appealing such Proceeding. Any judgments, fines or amounts to be paid in
settlement of any Proceeding shall also be advanced by the Company upon request
by Indemnitee. Advances made by the Company under this Section 6 are subject
to refund by Indemnitee as provided in Section 8.
7. Right of Indemnitee to Bring Suit. (a) If a claim for
indemnification or a claim for an advance under this Agreement is not paid in
full by the Company within 30 days after receipt by the Company from Indemnitee
of a written request or demand therefor, Indemnitee may bring suit against the
Company to recover the unpaid amount of the claim. If, in any such action,
Indemnitee makes a prima facie showing of entitlement to indemnification under
this Agreement, the Company shall have the burden of proving that
indemnification is not required under this Agreement. The only defense to any
such action shall be that indemnification is not required by this Agreement.
(b) In the event that any action is instituted by Indemnitee to
enforce Indemnitee's rights or to collect monies due to Indemnitee under this
Agreement and if Indemnitee is successful in such action, the Company shall
reimburse Indemnitee for all Expenses incurred by Indemnitee with respect to
such action.
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8. Repayment Obligation of Indemnitee. If the Company advances
or pays any amount to Indemnitee under Section 4, 6 or 7 and if it shall
thereafter be finally adjudicated that Indemnitee was not entitled to be
indemnified hereunder for all or any portion of such amount, Indemnitee shall
promptly repay such amount or such portion thereof, as the case may be, to the
Company. If the Company advances or pays any amount to Indemnitee under
Section 4, 6 or 7 and if Indemnitee shall thereafter receive all or a portion
of such amount under one or more policies of directors and officers liability
insurance maintained by the Company or pursuant to a trust fund, letter of
credit or other security or funding arrangement provided by the Company,
Indemnitee shall promptly repay such amount or such portion thereof, as the
case may be, to the Company.
9. Changes in Law. If any change after the date of this
Agreement in any applicable law, statute or rule expands the power of the
Company to indemnify Authorized Representatives, such change shall be within
the purview of Indemnitee's rights and the Company's obligations under this
Agreement. If any change after the date of this Agreement in any applicable
law, statute or rule narrows the right of the Company to indemnify an
Authorized Representative, such change shall, to the fullest extent permitted
by applicable law, leave this Agreement and the parties' rights and obligations
hereunder unaffected.
10. Continuation of Indemnity. All agreements and obligations of
the Company hereunder shall continue during the period Indemnitee is an
Authorized Representative, and shall continue after Indemnitee has ceased to
occupy such position or have such relationship so long as Indemnitee shall be
subject to any possible Proceeding.
11. Nonexclusivity. The indemnification and other rights provided
by any provision of this Agreement shall not be deemed exclusive of any other
rights to which Indemnitee may be entitled under (i) any statutory or common
law, (ii) the Company's certificate of incorporation, (iii) the Company's
bylaws, (iv) any other agreement or (v) any vote of stockholders or
disinterested directors or otherwise, both as to action in Indemnitee's
official capacity and as to action in another capacity while occupying any of
the positions or having any of the relationships referred to in this Agreement.
Nothing in this Agreement shall in any manner affect, impair or compromise any
indemnification Indemnitee has or may have by virtue of any agreement
previously entered into between Indemnitee and the Company.
12. Severability. If any provision of this Agreement shall be
held to be invalid, illegal or unenforceable (i) the validity, legality or
enforceability of the remaining provisions of this Agreement shall not be in
any way affected or impaired thereby and (ii) to the fullest extent possible,
the provisions of this Agreement shall be construed so as to give effect to the
intent manifested by the provision held invalid, illegal or unenforceable.
Each provision of this Agreement is a separate and independent portion of this
Agreement.
13. Modification and Waiver. No supplement, modification or
amendment of this Agreement shall be binding unless executed in writing by both
of the parties. No waiver of any of
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the provisions of this Agreement shall be binding unless executed in writing by
the person making the waiver nor shall such waiver constitute a continuing
waiver.
14. Notices. All notices, requests, demands and other
communications hereunder shall be in writing and shall be addressed (i) if to
the Company, at its principal office address as shown on the signature page
hereof or such other address as it may have designated by written notice to
Indemnitee for purposes hereof, directed to the attention of the Secretary and
(ii) if to Indemnitee, at Indemnitee's address as shown on the signature page
hereof or to such other address as Indemnitee may have designated by written
notice to the Company for purposes hereof. Each such notice or other
communication shall be deemed to have been duly given if (a) delivered by hand
and receipted for by the party to whom said notice or other communication shall
have been directed, (b) transmitted by facsimile transmission, at the time that
receipt of such transmission is confirmed, or (c) mailed by certified or
registered mail with postage prepaid, on the third business day after the date
on which it is so mailed.
15. Governing Law. THIS AGREEMENT SHALL BE DEEMED TO BE A
CONTRACT MADE UNDER, AND SHALL BE GOVERNED BY AND CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF TEXAS WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAW.
16. Heirs, Successors and Assigns. (a) This Agreement shall be
binding upon, inure to the benefit of and be enforceable by (i) Indemnitee and
Indemnitee's personal or legal representatives, executors, administrators,
heirs, devisees and legatees and (ii) the Company and its successors and
assigns. This Agreement shall not inure to the benefit of any other person or
Enterprise.
(b) The Company agrees to require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. As used herein, the term "Company" shall include any
successor to its business and/or assets as aforesaid which executes and
delivers the assumption and agreement provided for in this Section 16 or which
otherwise becomes bound by all terms and provisions of this Agreement by
operation of law.
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ENTERED into on the day and year first above written.
THE COMPANY:
INTEGRATED ELECTRICAL SERVICES, INC.
By:
------------------------------------
Name:
-----------------------------------
Title:
----------------------------------
Address:
Telecopier:
INDEMNITEE:
---------------------------------------
Address:
Telecopier:
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EXHIBIT 10.3
INTEGRATED ELECTRICAL SERVICES, INC.
1997 STOCK PLAN
SECTION 1. Purpose of the Plan.
The Integrated Electrical Services, Inc. 1997 Stock Plan (the "Plan")
is intended to promote the interests of Integrated Electrical Services, Inc., a
Delaware corporation (the "Company"), by encouraging officers, employees,
directors and consultants of the Company, its subsidiaries and affiliated
entities to acquire or increase their equity interest in the Company and to
provide a means whereby employees may develop a sense of proprietorship and
personal involvement in the development and financial success of the Company,
and to encourage them to remain with and devote their best efforts to the
business of the Company thereby advancing the interests of the Company and its
stockholders. The Plan is also contemplated to enhance the ability of the
Company, its subsidiaries and affiliated entities to attract and retain the
services of individuals who are essential for the growth and profitability of
the Company.
SECTION 2. Definitions.
As used in the Plan, the following terms shall have the meanings set
forth below:
"Affiliate" shall mean (i) any entity that, directly or through one or
more intermediaries, is controlled by the Company and (ii) any entity in which
the Company has a significant equity interest, as determined by the Committee.
"Award" shall mean any Option, Stock Appreciation Right, Restricted
Stock, Performance Award, Phantom Shares, Bonus Shares, Other Stock-Based Award
or Cash Award.
"Award Agreement" shall mean any written agreement, contract, or other
instrument or document evidencing any Award, which may, but need not, be
executed or acknowledged by a Participant.
"Board" shall mean the Board of Directors of the Company.
"Bonus Shares" shall mean an award of Shares granted pursuant to
Section 6(e) of the Plan.
"Cash Award" shall mean an award payable in cash granted pursuant to
Section 6(g) of the Plan.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the rules and regulations thereunder.
"Committee" shall mean the Compensation Committee of the Board.
2
"Consultant" shall mean any individual who renders consulting services
or advice to the Company or an Affiliate for a fee, including any individual
who is a member of the Board or the Board of Directors of an Affiliate.
"Employee" shall mean any employee of the Company or an Affiliate or
any person who has been extended an offer of employment by the Company or an
Affiliate.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" shall mean, with respect to Shares, the closing
price of a Share quoted on the Composite Tape, or if the Shares are not listed
on the New York Stock Exchange, on the principal United States securities
exchange registered under the Exchange Act on which such stock is listed, or if
the Shares are not listed on any such stock exchange, the last sale price, or
if none is reported, the highest closing bid quotation on the National
Association of Securities Dealers, Inc., Automated Quotations System or any
successor system then in use on the Date of Grant, or if none are available on
such day, on the next preceding day for which are available, or if no such
quotations are available, the fair market value on the date of grant of a Share
as determined in good faith by the Board. In the event the Shares are not
publicly traded at the time a determination of its fair market value is
required to be made hereunder, the determination of fair market value shall be
made in good faith by the Committee.
"Incentive Stock Option" or "ISO" shall mean an option granted under
Section 6(a) of the Plan that is intended to qualify as an "incentive stock
option" under Section 422 of the Code or any successor provision thereto.
"Non-Qualified Stock Option" or "NQO" shall mean an option granted
under Sections 6(a) of the Plan that is not intended to be an Incentive Stock
Option.
"Option" shall mean an Incentive Stock Option or a Non-Qualified Stock
Option.
"Other Stock-Based Award" shall mean an award granted pursuant to
Section 6(h) of the Plan that is not otherwise specifically provided for, the
value of which is based in whole or in part upon the value of a Share.
"Participant" shall mean any Employee or Consultant granted an Award
under the Plan.
"Performance Award" shall mean any right granted under Section 6(d)
of the Plan.
"Person" shall mean individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, government or
political subdivision thereof or other entity.
"Phantom Shares" shall mean an Award of the right to receive Shares
issued at the end of a Restricted Period which is granted pursuant to Section
6(f) of the Plan.
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"Restricted Period" shall mean the period established by the Committee
with respect to an Award during which the Award either remains subject to
forfeiture or is not exercisable by the Participant.
"Restricted Stock" shall mean any Share, prior to the lapse of
restrictions thereon, granted under Sections 6(c) of the Plan.
"Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the
Exchange Act, or any successor rule or regulation thereto as in effect from
time to time.
"SEC" shall mean the Securities and Exchange Commission, or any
successor thereto.
"Shares" or "Common Shares" or "Common Stock" shall mean the common
stock of the Company, $0.01 par value, and such other securities or property as
may become the subject of Awards of the Plan.
"Stock Appreciation Right" or "Right" shall mean any right to receive
the appreciation of Shares granted under Section 6(b) of the Plan.
"Substitute Award" shall mean Awards granted in assumption of, or in
substitution for, outstanding awards previously granted by (i) a company
acquired by the Company or one or more of its Affiliates, or (ii) a company
with which the Company or one or more of its Affiliates combines.
SECTION 3. Administration.
The Plan shall be administered by the Committee. A majority of the
Committee shall constitute a quorum, and the acts of the members of the
Committee who are present at any meeting thereof at which a quorum is present,
or acts unanimously approved by the members of the Committee in writing, shall
be the acts of the Committee. Subject to the following, the Committee, in its
sole discretion, may delegate any or all of its powers and duties under the
Plan, including the power to grant Awards under the Plan, to the President of
the Company, subject to such limitations on such delegated powers and duties as
the Committee may impose. Upon any such delegation all references in the Plan
to the "Committee", other than in Section 7, shall be deemed to include the
President; provided, however, that such delegation shall not limit the
President's right to receive Awards under the Plan. Notwithstanding the
foregoing, the President may not grant Awards to, or take any action with
respect to any Award previously granted to, a person who is an officer or a
member of the Board. Subject to the terms of the Plan and applicable law, and
in addition to other express powers and authorizations conferred on the
Committee by the Plan, the Committee shall have full power and authority to:
(i) designate Participants; (ii) determine the type or types of Awards to be
granted to a Participant; (iii) determine the number of Shares to be covered
by, or with respect to which payments, rights, or other matters are to be
calculated in connection with, Awards; (iv) determine the terms and conditions
of any Award; (v) determine whether, to what extent, and
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under what circumstances Awards may be settled or exercised in cash, Shares,
other securities, other Awards or other property, or canceled, forfeited, or
suspended and the method or methods by which Awards may be settled, exercised
canceled, forfeited, or suspended; (vi) determine whether, to what extent, and
under what circumstances cash, Shares, other securities, other Awards, other
property, and other amounts payable with respect to an Award shall be deferred
either automatically or at the election of the holder thereof or of the
Committee; (vii) interpret and administer the Plan and any instrument or
agreement relating to an Award made under the Plan; (viii) establish, amend,
suspend, or waive such rules and regulations and appoint such agents as it
shall deem appropriate for the proper administration of the Plan; and (ix) make
any other determination and take any other action that the Committee deems
necessary or desirable for the administration of the Plan. Unless otherwise
expressly provided in the Plan, all designations, determinations,
interpretations, and other decisions under or with respect to the Plan or any
Award shall be within the sole discretion of the Committee, may be made at any
time and shall be final, conclusive, and binding upon all Persons, including
the Company, any Affiliate, any Participant, any holder or beneficiary of any
Award, any stockholder and any Employee.
SECTION 4. Shares Available for Awards.
(a) Shares Available. Subject to adjustment as provided in
Section 4(c), the number of Shares with respect to which Awards may be granted
under the Plan shall be the greater of (i) 3,500,000 or (ii) 15% of the
aggregate number of Shares outstanding determined immediately after the grant
of such Award; however, Incentive Stock Options may not be granted with respect
to more than 1,000,000 Shares. If any Award is forfeited or otherwise
terminates or is canceled without the delivery of Shares or other
consideration, then the Shares covered by such Award, to the extent of such
forfeiture, termination or cancellation, shall again be Shares with respect to
which Awards may be granted.
(b) Sources of Shares Deliverable Under Awards. Any Shares
delivered pursuant to an Award may consist, in whole or in part, of authorized
and unissued Shares or of treasury Shares.
(c) Adjustments. In the event that the Committee determines that
any dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares
such that an adjustment is determined by the Committee to be appropriate in
order to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall, in such
manner as it may deem equitable, adjust any or all of (i) the number and type
of Shares (or other securities or property) with respect to which Awards may be
granted, (ii) the number and type of Shares (or other securities or property)
subject to outstanding Awards, and (iii) the grant or exercise price with
respect to any Award or, if deemed appropriate, make provision for a cash
payment to the holder of an outstanding Award; provided, in each case, that
with respect to Awards of Incentive Stock Options and Awards intended to
qualify
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as performance based compensation under Section 162(m)(4)(C) of the Code, no
such adjustment shall be authorized to the extent that such authority would
cause the Plan to violate Section 422(b)(1) of the Code or would cause such
Award to fail to so qualify under Section 162(m) of the Code, as the case may
be, or any successor provisions thereto; and provided, further, that the number
of Shares subject to any Award denominated in Shares shall always be a whole
number.
SECTION 5. Eligibility.
Any Employee and Consultant shall be eligible to be designated a
Participant. However, no Employee or Consultant may receive Options and/or
Stock Appreciation Rights with respect to more than 250,000 Shares during any
calendar year. The maximum amount of compensation that may be paid to any
Participant with respect to any single Award that is not an Option or Stock
Appreciation and which is intended to qualify as "performance based"
compensation under Section 162(m) of the Code in any calendar year shall not
exceed $4.0 million, determined as of the date of grant of such Award.
SECTION 6. Awards.
(a) Options. Subject to the provisions of the Plan, the Committee
shall have the authority to determine the Participants to whom Options shall be
granted, the number of Shares to be covered by each Option, the purchase price
therefor and the conditions and limitations applicable to the exercise of the
Option, including the following terms and conditions and such additional terms
and conditions, as the Committee shall determine, that are not inconsistent
with the provisions of the Plan.
(i) Exercise Price. The purchase price per Share
purchasable under an Option shall be determined by the Committee at
the time the Option is granted.
(ii) Time and Method of Exercise. The Committee shall
determine the time or times at which an Option may be exercised in
whole or in part, and the method or methods by which, and the form or
forms (which may include, without limitation, cash, check acceptable
to the Company, Shares already-owned for more than six months,
outstanding Awards, Shares that would otherwise be acquired upon
exercise of the Option, a "cashless-broker" exercise (through
procedures approved by the Company), other securities or other
property, or any combination thereof, having a Fair Market Value on
the exercise date equal to the relevant exercise price) in which
payment of the exercise price with respect thereto may be made or
deemed to have been made.
(iii) Incentive Stock Options. The terms of any Incentive
Stock Option granted under the Plan shall comply in all respects with
the provisions of Section 422 of the Code, or any successor provision,
and any regulations promulgated thereunder. Incentive Stock Options
may be granted only to employees of the Company and its parent
corporation and subsidiary corporations, within the meaning of Section
424 of the Code.
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(b) Stock Appreciation Rights. Subject to the provisions of the
Plan, the Committee shall have the authority to determine the Participants to
whom Stock Appreciation Rights shall be granted, the number of Shares to be
covered by each Stock Appreciation Right Award, the grant price thereof and the
conditions and limitations applicable to the exercise thereof. A Stock
Appreciation Right may be granted in tandem with another Award, in addition to
another Award, or freestanding and unrelated to another Award. A Stock
Appreciation Right granted in tandem with or in addition to another Award may
be granted either at the same time as such other Award or at a later time.
(i) Grant Price. The grant price of a Stock Appreciation
Right shall be determined by the Committee on the date of grant.
(ii) Other Terms and Conditions. Subject to the terms of
the Plan and any applicable Award Agreement, the Committee shall
determine, at or after the grant of a Stock Appreciation Right, the
term, methods of exercise, methods of settlement, and any other terms
and conditions of any Stock Appreciation Right. Any such
determination by the Committee may be changed by the Committee from
time to time and may govern the exercise of Stock Appreciation Rights
granted or exercised prior to such determination as well as Stock
Appreciation Rights granted or exercised thereafter. The Committee
may impose such conditions or restrictions on the exercise of any
Stock Appreciation Right as it shall deem appropriate.
(c) Restricted Stock. Subject to the provisions of the Plan, the
Committee shall have the authority to determine the Participants to whom
Restricted Stock shall be granted, the number of Shares of Restricted Stock to
be granted to each such Participant, the duration of the Restricted Period
during which, and the conditions, including performance criteria, if any, under
which, the Restricted Stock may be forfeited to the Company, and the other
terms and conditions of such Awards.
(i) Dividends. Dividends paid on Restricted Stock may be
paid directly to the Participant, may be subject to risk of forfeiture
and/or transfer restrictions during any period established by the
Committee or sequestered and held in a bookkeeping cash account (with
or without interest) or reinvested on an immediate or deferred basis
in additional shares of Common Stock, which credit or shares may be
subject to the same restrictions as the underlying Award or such other
restrictions, all as determined by the Committee in its discretion.
(ii) Registration. Any Restricted Stock may be evidenced
in such manner as the Committee shall deem appropriate, including,
without limitation, book-entry registration or issuance of a stock
certificate or certificates. In the event any stock certificate is
issued in respect of Restricted Stock granted under the Plan, such
certificate shall be registered in the name of the Participant and
shall bear an appropriate legend referring to the terms, conditions,
and restrictions applicable to such Restricted Stock.
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(iii) Forfeiture and Restrictions Lapse. Except as
otherwise determined by the Committee or the terms of the Award that
granted the Restricted Stock, upon termination of a Participant's
employment (as determined under criteria established by the Committee)
for any reason during the applicable Restricted Period, all Restricted
Stock shall be forfeited by the Participant and re-acquired by the
Company. The Committee may, when it finds that a waiver would be in
the best interests of the Company and not cause such Award, if it is
intended to qualify as performance based compensation under Section
162(m) of the Code, to fail to so qualify under Section 162(m) of the
Code, waive in whole or in part any or all remaining restrictions with
respect to such Participant's Restricted Stock. Unrestricted Shares,
evidenced in such manner as the Committee shall deem appropriate,
shall be issued to the holder of Restricted Stock promptly after the
applicable restrictions have lapsed or otherwise been satisfied.
(iv) Transfer Restrictions. During the Restricted Period,
Restricted Stock will be subject to the limitations on transfer as
provided in Section 6(j)(iii).
(d) Performance Awards. The Committee shall have the authority to
determine the Participants who shall receive a Performance Award, which shall
be denominated as a cash amount at the time of grant and confer on the
Participant the right to receive payment of such Award, in whole or in part,
upon the achievement of such performance goals during such performance periods
as the Committee shall establish with respect to the Award.
(i) Terms and Conditions. Subject to the terms of the
Plan and any applicable Award Agreement, the Committee shall determine
the performance goals to be achieved during any performance period,
the length of any performance period, the amount of any Performance
Award and the amount of any payment or transfer to be made pursuant to
any Performance Award.
(ii) Payment of Performance Awards. Performance Awards
may be paid (in cash and/or in Shares, in the sole discretion of the
Committee) in a lump sum or in installments following the close of the
performance period, in accordance with procedures established by the
Committee with respect to such Award.
(e) Bonus Shares. The Committee shall have the authority, in its
discretion, to grant Bonus Shares to Participants. Each Bonus Share shall
constitute a transfer of an unrestricted Share to the Participant, without
other payment therefor, as additional compensation for the Participant's
services to the Company.
(f) Phantom Shares. The Committee shall have the authority to
grant Awards of Phantom Shares to Participants upon such terms and conditions
as the Committee may determine.
(i) Terms and Conditions. Each Phantom Share Award shall
constitute an agreement by the Company to issue or transfer a
specified number of Shares or pay an
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amount of cash equal to a specified number of Shares, or a combination
thereof to the Participant in the future, subject to the fulfillment
during the Restricted Period of such conditions, including performance
objectives, if any, as the Committee may specify at the date of grant.
During the Restricted Period, the Participant shall not have any right
to transfer any rights under the subject Award, shall not have any
rights of ownership in the Phantom Shares and shall not have any right
to vote such shares.
(ii) Dividends. Any Phantom Share award may provide that
any or all dividends or other distributions paid on Shares during the
Restricted Period be credited in a cash bookkeeping account (without
interest) or that equivalent additional Phantom Shares be awarded,
which account or shares may be subject to the same restrictions as the
underlying Award or such other restrictions as the Committee may
determine.
(g) Cash Awards. The Committee shall have the authority to
determine the Participants to whom Cash Awards shall be granted, the amount,
and the terms or conditions, if any, as additional compensation for the
Participant's services to the Company or its Affiliates. A Cash Award may be
granted (simultaneously or subsequently) separately or in tandem with another
Award and may entitle a Participant to receive a specified amount of cash from
the Company upon such other Award becoming taxable to the Participant, which
cash amount may be based on a formula relating to the anticipated taxable
income associated with such other Award and the payment of the Cash Award.
(h) Other Stock-Based Awards. The Committee may also grant to
Participants an Other Stock-Based Award, which shall consist of a right which
is an Award denominated or payable in, valued in whole or in part by reference
to, or otherwise based on or related to, Shares as is deemed by the Committee
to be consistent with the purposes of the Plan. Subject to the terms of the
Plan, the Committee shall determine the terms and conditions of any such Other
Stock- Based Award.
(i) Replacement Grants. Awards may be granted from time to
time in substitution for similar awards held by employees of other corporations
who become Participants as the result of a merger or consolidation of the
employing corporation with the Company or any subsidiary, or the acquisition by
the Company or any subsidiary of the assets of the employing corporation, or
the acquisition by the Company or any subsidiary or an affiliate of stock of
the employing corporation. The terms and conditions of substitute Awards
granted may vary from the terms and conditions set forth in the Plan, to the
extent the Committee, at the time of grant, deems it appropriate to conform, in
whole or in part, to the provisions of awards in substitution for which they
are granted.
(j) General.
(i) Awards May Be Granted Separately or Together. Awards
may, in the discretion of the Committee, be granted either alone or in
addition to, in tandem with, or in substitution for any other Award
granted under the Plan or any award granted under any other plan of
the Company or any Affiliate. Awards granted in addition to or in
tandem with other Awards or awards granted under any other plan of the
Company or any Affiliate may
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be granted either at the same time as or at a different time from the
grant of such other Awards or awards.
(ii) Forms of Payment by Company Under Awards. Subject to
the terms of the Plan and of any applicable Award Agreement, payments
or transfers to be made by the Company or an Affiliate upon the grant,
exercise or payment of an Award may be made in such form or forms as
the Committee shall determine, including, without limitation, cash,
Shares, other securities, other Awards or other property, or any
combination thereof, and may be made in a single payment or transfer,
in installments, or on a deferred basis, in each case in accordance
with rules and procedures established by the Committee. Such rules
and procedures may include, without limitation, provisions for the
payment or crediting of reasonable interest on installment or deferred
payments.
(iii) Limits on Transfer of Awards.
(A) Except as provided in (C) below, each Award,
and each right under any Award, shall be exercisable only by
the Participant during the Participant's lifetime, or, if
permissible under applicable law, by the Participant's
guardian or legal representative as determined by the
Committee.
(B) Except as provided in (C) below, no Award and
no right under any such Award may be assigned, alienated,
pledged, attached, sold or otherwise transferred or encumbered
by a Participant otherwise than by will or by the laws of
descent and distribution (or, in the case of Restricted Stock,
to the Company) and any such purported assignment, alienation,
pledge, attachment, sale, transfer or encumbrance shall be
void and unenforceable against the Company or any Affiliate.
(C) Notwithstanding anything in the Plan to the
contrary, to the extent specifically provided by the Committee
with respect to a grant, an Award other than an Incentive
Stock Option may be transferred to immediate family members or
related family trusts, limited partnerships or similar
entities or on such terms and conditions as the Committee may
establish.
(iv) Term of Awards. The term of each Award shall be for
such period as may be determined by the Committee; provided, that in
no event shall the term of any Award exceed a period of 10 years from
the date of its grant.
(v) Share Certificates. All certificates for Shares or
other securities of the Company or any Affiliate delivered under the
Plan pursuant to any Award or the exercise thereof shall be subject to
such stop transfer orders and other restrictions as the Committee may
deem advisable under the Plan or the rules, regulations, and other
requirements of the SEC, any stock exchange upon which such Shares or
other securities are then listed, and any
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applicable Federal or state laws, and the Committee may cause a legend
or legends to be put on any such certificates to make appropriate
reference to such restrictions.
(vi) Consideration for Grants. Awards may be granted for
no cash consideration or for such consideration as the Committee
determines including, without limitation, such minimal cash
consideration as may be required by applicable law.
(vii) Delivery of Shares or other Securities and Payment by
Participant of Consideration. No Shares or other securities shall be
delivered pursuant to any Award until payment in full of any amount
required to be paid pursuant to the Plan or the applicable Award
Agreement (including, without limitation, any exercise price, tax
payment or tax withholding) is received by the Company. Such payment
may be made by such method or methods and in such form or forms as the
Committee shall determine, including, without limitation, cash,
Shares, other securities, other Awards or other property, withholding
of Shares, cashless exercise with simultaneous sale, or any
combination thereof; provided that the combined value, as determined
by the Committee, of all cash and cash equivalents and the Fair Market
Value of any such Shares or other property so tendered to the Company,
as of the date of such tender, is at least equal to the full amount
required to be paid pursuant to the Plan or the applicable Award
Agreement to the Company.
(viii) Performance Criteria and Payment Limits. The
Committee shall establish performance goals applicable to those Awards
(other than Options and Rights) the payment of which is intended by
the Committee to qualify as "performance-based compensation" as
described in Section 162(m)(4)(C) of the Code. Until changed by the
Committee, the performance goals shall be based upon the attainment of
such target levels of net income, cash flows, return on equity, profit
margin or sales, stock price, and/or earnings per share as may be
specified by the Committee. Which factor or factors to be used with
respect to any grant, and the weight to be accorded thereto if more
than one factor is used, shall be determined by the Committee at the
time of grant. With respect to any Restricted Stock Award, Phantom
Stock Award, or Cash Award granted in tandem with, and expressed as a
percentage of, a Share-denominated Award, which is intended to qualify
as "performance-based compensation", the maximum payment to any
Participant with respect to such Award in any calendar year shall be
an amount (in cash and/or in Shares) equal to the Fair Market Value of
the number of Shares subject to such Award.
SECTION 7. Amendment and Termination.
Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Award Agreement or in the Plan:
(i) Amendments to the Plan. The Board or the Committee
may amend, alter, suspend, discontinue, or terminate the Plan without
the consent of any stockholder, Participant, other holder or
beneficiary of an Award, or other Person; provided, however,
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notwithstanding any other provision of the Plan or any Award
Agreement, without the approval of the stockholders of the Company no
such amendment, alteration, suspension, discontinuation, or
termination shall be made that would increase the total number of
Shares available for Awards under the Plan, except as provided in
Section 4(c) of the Plan.
(ii) Amendments to Awards. The Committee may waive any
conditions or rights under, amend any terms of, or alter any Award
theretofore granted, provided no change, other than pursuant to
Section 7(c), in any Award shall reduce the benefit to Participant
without the consent of such Participant. Notwithstanding the
foregoing, with respect to any Award intended to qualify as
performance-based compensation under Section 162(m) of the Code, no
adjustment shall be authorized to the extent such adjustment would
cause the Award to fail to so qualify.
(iii) Adjustment of Awards Upon the Occurrence of Certain
Unusual or Nonrecurring Events. The Committee is hereby authorized to
make adjustments in the terms and conditions of, and the criteria
included in, Awards in recognition of unusual or nonrecurring events
(including, without limitation, the events described in Section 4(c)
of the Plan) affecting the Company, any Affiliate, or the financial
statements of the Company or any Affiliate, or of changes in
applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan. Notwithstanding the
foregoing, with respect to any Award intended to qualify as
performance-based compensation under Section 162(m) of the Code, no
adjustment shall be authorized to the extent such adjustment would
cause the Award to fail to so qualify.
SECTION 8. Change in Control.
Notwithstanding any other provision of this Plan to the contrary, in
the event of a Change in Control of the Company all outstanding Awards
automatically shall become fully vested immediately prior to such Change in
Control (or such earlier time as set by the Committee), all restrictions, if
any, with respect to such Awards shall lapse, and all performance criteria, if
any, with respect to such Awards shall be deemed to have been met in full. For
purposes of this Plan, a "Change in Control" shall be deemed to occur:
(i) any person, entity or group (as such terms are used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Act"), other than the Company or its subsidiaries or an
employee benefit plan of the Company or its subsidiaries, acquires,
directly or indirectly, the beneficial ownership (as defined in Section
13(d) of the Act) of any voting security of the Company and immediately
after such acquisition such person is, directly or indirectly, the
beneficial owner of voting securities representing 20% or more of the
total voting power of all of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors;
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(ii) upon the first purchase of the Company's common stock
pursuant to a tender or exchange offer (other than a tender or exchange
offer made by the Company);
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization or reorganization of the Company, or a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which would result in at least 75% of the total
voting power represented by the voting securities of the surviving
entity outstanding immediately after such transaction being beneficially
owned by the holders of all of the outstanding voting securities of the
Company immediately prior to the transactions with the voting power of
each such continuing holder relative to other such continuing holders
not substantially altered in the transaction;
(iv) the stockholders of the Company shall approve a plan of
complete liquidation or dissolution of the Company or an agreement for
the sale or disposition by the Company of all or substantially all of
the Company's assets; or
(v) if, at any time during any period of two consecutive
years, individuals who at the beginning of such period constitute the
Board cease for any reason to constitute at least a majority thereof,
unless the election or nomination for the election by the Company's
stockholders of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at
the beginning of the period.
SECTION 9. General Provisions.
(a) No Rights to Awards. No Employee, Participant or other Person
shall have any claim to be granted any Award, and there is no obligation for
uniformity of treatment of Employees, Participants, or holders or beneficiaries
of Awards. The terms and conditions of Awards need not be the same with
respect to each recipient.
(b) Withholding. The Company or any Affiliate is authorized to
withhold from any Award, from any payment due or transfer made under any Award
or under the Plan or from any compensation or other amount owing to a
Participant the amount (in cash, Shares, other securities, Shares that would
otherwise be issued pursuant to such Award, other Awards or other property) of
any applicable taxes payable in respect of an Award, its exercise, the lapse of
restrictions thereon, or any payment or transfer under an Award or under the
Plan and to take such other action as may be necessary in the opinion of the
Company to satisfy all obligations for the payment of such taxes. In addition,
the Committee may provide, in an Award Agreement, that the Participant may
direct the Company to satisfy such Participant's tax obligation through the
withholding of Shares otherwise to be acquired upon the exercise or payment of
such Award.
(c) No Right to Employment. The grant of an Award shall not be
construed as giving a Participant the right to be retained in the employ of the
Company or any Affiliate. Further, the
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Company or an Affiliate may at any time dismiss a Participant from employment,
free from any liability or any claim under the Plan, unless otherwise expressly
provided in the Plan or in any Award Agreement.
(d) Governing Law. The validity, construction, and effect of the
Plan and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of Delaware and applicable Federal law.
(e) Severability. If any provision of the Plan or any Award is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Award, or would disqualify the Plan or any
Award under any law deemed applicable by the Committee, such provision shall be
construed or deemed amended to conform to the applicable laws, or if it cannot
be construed or deemed amended without, in the determination of the Committee,
materially altering the intent of the Plan or the Award, such provision shall
be stricken as to such jurisdiction, Person or Award and the remainder of the
Plan and any such Award shall remain in full force and effect.
(f) Other Laws. The Committee may refuse to issue or transfer any
Shares or other consideration under an Award if, acting in its sole discretion,
it determines that the issuance of transfer or such Shares or such other
consideration might violate any applicable law or regulation or entitle the
Company to recover the same under Section 16(b) of the Exchange Act, and any
payment tendered to the Company by a Participant, other holder or beneficiary
in connection with the exercise of such Award shall be promptly refunded to the
relevant Participant, holder or beneficiary.
(g) No Trust or Fund Created. Neither the Plan nor the Award shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company or any Affiliate and a Participant
or any other Person. To the extent that any Person acquires a right to receive
payments from the Company or any Affiliate pursuant to an Award, such right
shall be no greater than the right of any general unsecured creditor of the
Company or any Affiliate.
(h) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Award, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any
rights thereto shall be canceled, terminated, or otherwise eliminated.
(i) Headings. Headings are given to the Sections and subsections of
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
(j) Parachute Tax Gross-Up. To the extent that the grant, payment,
or acceleration of vesting or payment, whether in cash or stock, of any Award
made to a Participant under the Plan (a "Benefit") is subject to a golden
parachute excise tax under Section 4999(a) of the Code (a
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"Parachute Tax"), the Company shall pay such person an amount of cash (the
"Gross-up Amount") such that the "net" Benefit received by the person under this
Plan, after paying all applicable Parachute Taxes (including those on the
Gross-up Amount) and any federal or state taxes on the Gross-up Amount, shall be
equal to the Benefit that such person would have received if such Parachute Tax
had not been applicable.
SECTION 10. Effective Date of the Plan.
The Plan shall be effective as of the date of its approval by the Board.
SECTION 11. Term of the Plan.
No Award shall be granted under the Plan after the 10th anniversary of
the approved date. However, unless otherwise expressly provided in the Plan or
in an applicable Award Agreement, any Award granted prior to such termination,
and the authority of the Board or the Committee to amend, alter, adjust,
suspend, discontinue, or terminate any such Award or to waive any conditions or
rights under such Award, shall extend beyond such termination date.
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EXHIBIT 10.4
INTEGRATED ELECTRICAL SERVICES, INC.
1997 DIRECTORS STOCK PLAN
SECTION 1. Purpose of the Plan.
The Integrated Electrical Services, Inc. 1997 Directors Stock Plan
(the "Plan") is intended to promote the interests of Integrated Electrical
Services, Inc., a Delaware corporation (the "Company"), by providing the
non-employee directors of the Company with stock options whereby they may
develop a sense of proprietorship and personal involvement in the development
and financial success of the Company, and to encourage them to devote their
best efforts to the business of the Company thereby advancing the interests of
the Company and its stockholders. The Plan is also contemplated to enhance the
ability of the Company to attract highly qualified individuals to serve as
non-employee directors of the Company.
SECTION 2. Definitions.
As used in the Plan, the following terms shall have the meanings set
forth below:
"Affiliate" shall mean (i) any entity that, directly or through one or
more intermediaries, is controlled by the Company and (ii) any entity in which
the Company has a significant equity interest, as determined by the Committee.
"Board" shall mean the Board of Directors of the Company.
"Committee" shall mean the Compensation Committee of the Board.
"Director" shall mean a member of the Board who is a "non-employee
director" for purposes of Rule 16b-3.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
"Fair Market Value" shall mean, with respect to Shares, the closing
price of a Share quoted on the Composite Tape, or if the Shares are not listed
on the New York Stock Exchange, on the principal United States securities
exchange registered under the Exchange Act on which such stock is listed, or if
the Shares are not listed on any such stock exchange, the last sale price, or
if none is reported, the highest closing bid quotation on the National
Association of Securities Dealers, Inc., Automated Quotations System or any
successor system then in use on the Date of Grant, or if none are available on
such day, on the next preceding day for which are available, or if no such
quotations are available, the fair market value on the date of grant of a Share
as determined in good faith by the Board. In the event the Shares are not
publicly traded at the time a determination of its fair market value is
required to be made hereunder, the determination of fair market value shall be
made in good faith by the Committee.
2
"Option" shall mean an option granted under the Plan.
"Option Agreement" shall mean any written agreement, contract, or
other instrument or document evidencing any Option, which may, but need not, be
executed or acknowledged by a Participant.
"Participant" shall mean each Person who has an outstanding Option.
"Person" shall mean individual, corporation, partnership, association,
joint-stock company, trust, unincorporated organization, government or
political subdivision thereof or other entity.
"Rule 16b-3" shall mean Rule 16b-3 promulgated by the SEC under the
Exchange Act, or any successor rule or regulation thereto as in effect from
time to time.
"SEC" shall mean the Securities and Exchange Commission, or any
successor thereto.
"Shares" or "Common Shares" or "Common Stock" shall mean the common
stock of the Company, $0.01 par value.
SECTION 3. Administration.
The Plan shall be administered by the Committee. A majority of the
Committee shall constitute a quorum, and the acts of the members of the
Committee who are present at any meeting thereof at which a quorum is present,
or acts unanimously approved by the members of the Committee in writing, shall
be the acts of the Committee. Subject to the terms of the Plan and applicable
law, and in addition to other express powers and authorizations conferred on
the Committee by the Plan, the Committee shall have full power and authority
to: (i) determine the members of the Board who are Directors; (ii) interpret
and administer the Plan and any instrument or agreement relating to Options
granted under the Plan; (iii) establish, amend, suspend, or waive such rules
and regulations and appoint such agents as it shall deem appropriate for the
proper administration of the Plan; and (iv) make any other determination and
take any other action that the Committee deems necessary or desirable for the
administration of the Plan. Unless otherwise expressly provided in the Plan,
all designations, determinations, interpretations, and other decisions under or
with respect to the Plan or any Option shall be within the sole discretion of
the Committee, may be made at any time and shall be final, conclusive, and
binding upon all Persons, including the Company, any Participant, any holder or
beneficiary of any Option and any stockholder.
SECTION 4. Shares Available for Options.
(a) Shares Available. Subject to adjustment as provided in
Section 4(c), the number of Shares with respect to which Options may be granted
under the Plan shall be 250,000. If any Option is forfeited, terminates or is
canceled without the delivery of Shares or other consideration, then the
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Shares covered by such Option, to the extent of any such forfeiture,
termination or cancellation, shall again be Shares with respect to which
Options may be granted.
(b) Sources of Shares Deliverable Under Options. Any Shares
delivered pursuant to an Option may consist, in whole or in part, of authorized
and unissued Shares or of treasury Shares.
(c) Adjustments. In the event that the Committee determines that
any dividend or other distribution (whether in the form of cash, Shares, other
securities, or other property), recapitalization, stock split, reverse stock
split, reorganization, merger, consolidation, split-up, spin-off, combination,
repurchase, or exchange of Shares or other securities of the Company, issuance
of warrants or other rights to purchase Shares or other securities of the
Company, or other similar corporate transaction or event affects the Shares
such that an adjustment is determined by the Committee to be appropriate in
order to prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan, then the Committee shall, in such
manner as it may deem equitable, adjust any or all of (i) the number and type
of Shares (or other securities or property) with respect to which Options may
be granted, (ii) the number and type of Shares (or other securities or
property) subject to outstanding Options, and (iii) the grant or exercise price
with respect to any Option; and provided, further, that the number of Shares
subject to any Option shall always be a whole number.
SECTION 5. Eligibility.
Each member of the Board who is a Director automatically shall be a
Participant.
SECTION 6. Options.
(a) Initial Grants. Each Director who serves in such capacity on
the date of the closing of the initial public offering of the Common Stock (the
"IPO") shall automatically receive, on such date, an Option for 5,000 shares of
Common Stock. Each person who is elected as a Director for the first time
after such IPO date shall automatically receive, on the date of his or her
election, an Option for 5,000 shares of Common Stock.
(b) Annual Grants. On each September 30th that this Plan is in
effect, each Director on that day shall automatically receive an Option for
5,000 shares of Common Stock.
(c) Exercise Price. Subject to adjustment pursuant to Section
4(c), the purchase price per Share purchasable under an Option shall be the
Fair Market Value per Share at the time the Option is granted.
(d) Vesting. Subject to the further provisions of the Plan, each
Option shall become vested (exercisable) as to 20% of the shares of Common
Stock granted on each anniversary of the date of grant of such Option.
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(e) Time and Method of Exercise. An Option may be exercised in
whole or in part by cash, check acceptable to the Company, Shares already owned
for more than six months, a "cashless-broker" exercise (through procedures
approved by the Company), or any combination thereof, having a Fair Market
Value on the exercise date equal to the relevant exercise price.
(f) Term. Each Option shall expire 10 years from its date of
grant, but shall be subject to earlier termination as follows: Options, to the
extent exercisable as of the date the Participant ceases to serve as a member
of the Board, must be exercised within three months of such date unless such
termination results from the Participant's death or disability, in which case
the Participant's Options may be exercised by the Participant's legal
representative or the person to whom the Participant's rights shall pass by
will or the laws of descent and distribution, as the case may be, within one
year from the date of termination; provided, however, that such event shall not
extend the normal expiration date of such Options.
(g) Automatic Limits. In the event that the number of shares of
Common Stock available for grants under this Plan is insufficient to make all
automatic grants provided for in paragraphs (a) or (b) above on the applicable
date, then all Directors who are entitled to a grant on such date shall share
ratably in the number of shares then available for grant under this Plan, and
shall have no right to receive a grant with respect to the deficiencies in the
number of available shares and all future grants under this Section 6 shall
terminate.
(h) Discretionary Grants. The Board may make additional grants of
Options to a Director when, in the discretion of the Board, such additional
grant is merited by the circumstances. Such discretionary grants shall be on
such terms as the Board may establish for the grant.
(i) Limits on Transfer of Options.
(A) Except as provided in (C) below, each Option, and
each right under any Option, shall be exercisable only by the
Participant during the Participant's lifetime, or, if permissible
under applicable law, by the Participant's guardian or legal
representative as determined by the Committee.
(B) Except as provided in (C) below, no Option and no
right under any such Option may be assigned, alienated, pledged,
attached, sold or otherwise transferred or encumbered by a Participant
otherwise than by will or by the laws of descent and distribution and
any such purported assignment, alienation, pledge, attachment, sale,
transfer or encumbrance shall be void and unenforceable against the
Company.
(C) Notwithstanding anything in the Plan to the contrary,
an Option may be transferred to immediate family members or related
family trusts, limited partnerships or similar entities or on such
terms and conditions as the Committee may establish.
-4-
5
(j) Share Certificates. All certificates for Shares or other
securities of the Company or any affiliate delivered under the Plan pursuant to
any Option or the exercise thereof shall be subject to such stop transfer
orders and other restrictions as the Committee may deem advisable under the
Plan or the rules, regulations, and other requirements of the SEC, any stock
exchange upon which such Shares or other securities are then listed, and any
applicable Federal or state laws, and the Committee may cause a legend or
legends to be put on any such certificates to make appropriate reference to
such restrictions.
(k) Delivery of Shares or other Securities and Payment by
Participant of Consideration. No Shares or other securities shall be delivered
pursuant to any Option until payment in full of any amount required to be paid
pursuant to the Plan or the applicable Option agreement (including, without
limitation, any exercise price, tax payment or tax withholding) is received by
the Company.
SECTION 7. Amendment and Termination.
Except to the extent prohibited by applicable law and unless otherwise
expressly provided in an Option Agreement or in the Plan:
(i) Amendments to the Plan. The Board or the Committee
may amend, alter, suspend, discontinue, or terminate the Plan without
the consent of any stockholder, Participant, other holder or
beneficiary of an Option, or other Person; provided, however,
notwithstanding any other provision of the Plan or any Option
Agreement, without the approval of the stockholders of the Company no
such amendment, alteration, suspension, discontinuation, or
termination shall be made that would increase the total number of
Shares available for Options under the Plan, except as provided in
Section 4(c) of the Plan.
(ii) Adjustment of Options Upon the Occurrence of Certain
Unusual or Nonrecurring Events. The Committee is hereby authorized to
make adjustments in the terms and conditions of, and the criteria
included in, Options in recognition of unusual or nonrecurring events
(including, without limitation, the events described in Section 4(c)
of the Plan) affecting the Company, any Affiliate, or the financial
statements of the Company or any Affiliate, or of changes in
applicable laws, regulations, or accounting principles, whenever the
Committee determines that such adjustments are appropriate in order to
prevent dilution or enlargement of the benefits or potential benefits
intended to be made available under the Plan.
SECTION 8. Change in Control.
Notwithstanding any other provision of this Plan to the contrary, in
the event of a Change in Control of the Company all outstanding Options
automatically shall become fully vested immediately prior to such Change in
Control (or such earlier time as set by the Committee). For purposes of this
Plan, a "Change in Control" shall be deemed to occur:
-5-
6
(i) any person, entity or group (as such terms are used in
Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934, as
amended (the "Act"), other than the Company or its subsidiaries or an
employee benefit plan of the Company or its subsidiaries, acquires,
directly or indirectly, the beneficial ownership (as defined in Section
13(d) of the Act) of any voting security of the Company and immediately
after such acquisition such person is, directly or indirectly, the
beneficial owner of voting securities representing 20% or more of the
total voting power of all of the then outstanding voting securities of
the Company entitled to vote generally in the election of directors;
(ii) upon the first purchase of the Company's common stock
pursuant to a tender or exchange offer (other than a tender or exchange
offer made by the Company);
(iii) the stockholders of the Company shall approve a merger,
consolidation, recapitalization or reorganization of the Company, or a
reverse stock split of outstanding voting securities, or consummation of
any such transaction if stockholder approval is not obtained, other than
any such transaction which would result in at least 75% of the total
voting power represented by the voting securities of the surviving
entity outstanding immediately after such transaction being beneficially
owned by the holders of all of the outstanding voting securities of the
Company immediately prior to the transactions with the voting power of
each such continuing holder relative to other such continuing holders
not substantially altered in the transaction;
(iv) the stockholders of the Company shall approve a plan of
complete liquidation or dissolution of the Company or an agreement for
the sale or disposition by the Company of all or substantially all of
the Company's assets; or
(v) if, at any time during any period of two consecutive
years, individuals who at the beginning of such period constitute the
Board cease for any reason to constitute at least a majority thereof,
unless the election or nomination for the election by the Company's
stockholders of each new director was approved by a vote of at least
two-thirds of the directors then still in office who were directors at
the beginning of the period.
SECTION 9. General Provisions.
(a) No Rights to Options. No Participant or other Person shall have
any claim to be granted any Option, and there is no obligation for uniformity
of treatment of Participants or holders or beneficiaries of Options.
(b) Withholding. The Company is authorized to withhold from any
Option or from any compensation or other amount owing to a Participant the
amount (in cash, Shares, other securities, Shares that would otherwise be
issued pursuant to such Option, other Options or other property) of any
applicable taxes payable in respect of an Option, its exercise, or any payment
or transfer under an Option or under the Plan and to take such other action as
may be necessary in the opinion of the
-6-
7
Company to satisfy all obligations for the payment of such taxes. In addition,
the Participant may direct the Company to satisfy such Participant's tax
obligation through the withholding of Shares otherwise to be acquired upon the
exercise or payment of such Option.
(c) No Right to Continued Board Membership. The grant of an Option
shall not be construed as giving a Participant the right to be a member of the
Board.
(d) Governing Law. The validity, construction, and effect of the
Plan and any rules and regulations relating to the Plan shall be determined in
accordance with the laws of the State of Delaware and applicable Federal law.
(e) Severability. If any provision of the Plan or any Option is or
becomes or is deemed to be invalid, illegal, or unenforceable in any
jurisdiction or as to any Person or Option, or would disqualify the Plan or any
Option under any law deemed applicable by the Committee, such provision shall
be construed or deemed amended to conform to the applicable laws, or if it
cannot be construed or deemed amended without , in the determination of the
Committee, materially altering the intent of the Plan or the Option, such
provision shall be stricken as to such jurisdiction, Person or Option and the
remainder of the Plan and any such Option shall remain in full force and
effect.
(f) Other Laws. The Committee may refuse to issue or transfer any
Shares or other consideration under an Option if, acting in its sole
discretion, it determines that the issuance of transfer or such Shares or such
other consideration might violate any applicable law or regulation or entitle
the Company to recover the same under Section 16(b) of the Exchange Act, and
any payment tendered to the Company by a Participant, other holder or
beneficiary in connection with the exercise of such Option shall be promptly
refunded to the relevant Participant, holder or beneficiary.
(g) No Trust or Fund Created. Neither the Plan nor the Option shall
create or be construed to create a trust or separate fund of any kind or a
fiduciary relationship between the Company and a Participant or any other
Person. To the extent that any Person acquires a right to receive payments
from the Company pursuant to an Option, such right shall be no greater than the
right of any general unsecured creditor of the Company.
(h) No Fractional Shares. No fractional Shares shall be issued or
delivered pursuant to the Plan or any Option, and the Committee shall determine
whether cash, other securities, or other property shall be paid or transferred
in lieu of any fractional Shares or whether such fractional Shares or any
rights thereto shall be canceled, terminated, or otherwise eliminated.
(i) Headings. Headings are given to the Sections and subsections of
the Plan solely as a convenience to facilitate reference. Such headings shall
not be deemed in any way material or relevant to the construction or
interpretation of the Plan or any provision thereof.
-7-
8
(j) Parachute Tax Gross-Up. To the extent that the grant, payment,
or acceleration of vesting or payment, whether in cash or stock, of any Option
made to a Participant under the Plan (a "Benefit") is subject to a golden
parachute excise tax under Section 4999(a) of the Internal Revenue Code (a
"Parachute Tax"), the Company shall pay such person an amount of cash (the
"Gross-up Amount") such that the "net" Benefit received by the person under
this Plan, after paying all applicable Parachute Taxes (including those on the
Gross-up Amount) and any federal or state taxes on the Gross-up Amount, shall
be equal to the Benefit that such person would have received if such Parachute
Tax had not been applicable.
SECTION 10. Effective Date of the Plan.
The Plan shall be effective as of the date of its approval by the Board.
SECTION 11. Term of the Plan.
No Option shall be granted under the Plan after the 10th anniversary of
the approved date. However, unless otherwise expressly provided in the Plan,
any Option granted prior to such termination, and the authority of the Board or
the Committee to amend, alter, adjust, or terminate such Option shall extend
beyond such termination date.
-8-
1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated November 14, 1997 on the financial statements of the following
businesses included in or made a part of this registration statement: Integrated
Electrical Services, Inc.; BW Consolidated, Inc. and Subsidiaries;
Houston-Stafford Electric, Inc. and Consolidated Entity; 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
Company, Inc.; Summit Electric of Texas, Inc.; and Rodgers Electric Company,
Inc.; and to all references to our firm included in this registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
November 28, 1997
5
1,000
YEAR
SEP-30-1997
OCT-01-1996
SEP-30-1997
2,492
0
12,091
342
2,878
19,557
3,499
(1,374)
24,470
(14,143)
(968)
0
0
(295)
(7,913)
(24,470)
81,575
81,575
(64,831)
(64,831)
11,049
0
(187)
5,508
(2,192)
3,316
0
0
0
3,316
0
0
1
EXHIBIT 99.1
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form S-1 of Integrated Electrical
Services, Inc. ("IES") as a director to be appointed after consummation of the
initial public offering of IES.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 24th day of November, 1997.
By: /s/ THOMAS E. WHITE
---------------------------------
Name: Thomas E. White
2
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form S-1 of Integrated Electrical
Services, Inc. ("IES") as a director to be appointed after consummation of the
initial public offering of IES.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 24th day of November, 1997.
By: /s/ ALAN SIELBECK
------------------------
Name: Alan Sielbeck
3
CONSENT
The undersigned hereby consents to being named in the Registration
Statement (the "Registration Statement") on Form S-1 of Integrated Electrical
Services, Inc. ("IES") as a director to be appointed after consummation of the
initial public offering of IES.
IN WITNESS WHEREOF, the undersigned has executed this Consent effective
as of the 24th day of November, 1997.
By: /s/ RICHARD L. TUCKER
--------------------------------
Name: Richard L. Tucker
