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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JANUARY 23, 1998
REGISTRATION NO. 333-38715
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 4
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)
---------------------
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)
---------------------
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. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ____________
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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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 JANUARY 23, 1998
PROSPECTUS
7,000,000 SHARES
[IES 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. ("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 $13.00 and $15.00 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 Common Stock has been approved for listing upon notice of issuance 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)
- ------------------------------------------------------------------------------------------------------------------------
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 , 1998.
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MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SUNTRUST EQUITABLE SECURITIES
SANDERS MORRIS MUNDY
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The date of this Prospectus is , 1998.
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[MAP OF LOCATIONS AND OTHER GRAPHICS]
[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.]
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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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, Co., Inc. and General Partner, Inc. (collectively, "Haymaker"), Summit
Electric of Texas, Incorporated ("Summit"), Thurman & O'Connell Corporation
("Thurman & O'Connell"), Rodgers Electric Company, Inc. ("Rodgers"), Hatfield
Electric, Inc. ("Hatfield"), Ace Electric, Inc. ("Ace"), Reynolds Electric Corp.
("Reynolds") and Thomas Popp & Company ("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 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 and as a condition to the closing of
the Offerings, IES will acquire 15 electrical contracting and maintenance
service companies and a related supply company with pro forma combined revenues
of $312.7 million for the year ended September 30, 1997, making the Company 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 23% 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 electrical 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 23% 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 22% 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
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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 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 maintenance 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 acquisitions, the Company intends to
maintain existing business names and identities to retain goodwill for
marketing purposes.
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THE OFFERINGS
Common Stock offered:
U.S. Offering..................... 5,600,000
International Offering............ 1,400,000
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Total..................... 7,000,000
=========
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."
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 voting common stock, par value $0.01("Restricted Common
Stock"), issued to the founder and Chairman of the Board of IES and trusts
for the benefit of his children. Excludes options to purchase 300,000 shares
which are currently outstanding and options to purchase 2,343,600 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
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 "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
-----------
Gross profit.............................................. 64,975
Selling, general and administrative expenses(a)........... 35,938
Goodwill amortization(b).................................. 4,094
-----------
Income from operations.................................... 24,943
Interest and other income (expense), net(c)............... 249
-----------
Income before income taxes................................ 25,192
Provision for income taxes................................ 11,161
-----------
Net income(d)............................................. $ 14,031
===========
Net income per share...................................... $ .64
===========
Shares used in computing pro forma net income per
share(e)............................................... 22,075,967
===========
PRO FORMA(F)(G)
--------------------------
AS OF SEPTEMBER 30, 1997
--------------------------
COMBINED AS ADJUSTED(H)
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BALANCE SHEET DATA:
Working capital........................................... $(35,884)(i) $ 45,848
Total assets.............................................. 252,599 270,770
Long-term debt, net of current maturities................. 18,541 13,983
Total stockholders' equity................................ 120,881 207,171
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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. Additionally, excludes the $13.6 million non-recurring, non-cash
compensation charge recognized by IES related to the issuance of Common
Stock to management. 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 $0.7 million attributable to
$8.1 million of historical debt which will be repaid with proceeds from the
Offerings or distributed prior to the Acquisitions, net of additional
interest expense of $1.0 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 and
Chairman of the Board of IES and trusts for the benefit of his children and
(iv) 5,590,631 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 2,343,600 shares which are
expected to be granted at the initial public 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 $30.6 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 the following (collectively, the "Owner Amounts"): (i)
transfers of approximately $5.7 million of nonoperating assets, net of
liabilities, (ii) transfers of approximately $11.6 million of cash
(including $2.7 million of proceeds from the Offerings) and (iii) the
issuance of approximately $13.3 million of notes payable to certain owners
of the Founding Companies which will be retired with new borrowings under
the proposed credit facility. 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)(B) YEAR ENDED
----------------------------- SEPTEMBER 30,
1994 1995 1996 1997(C)
------- ------- ------- -------------
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(B):
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) The other Founding Companies are Ace, Hatfield, Popp and Reynolds, 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.
(c) 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.
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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 maintenance service industry are currently
experiencing shortages of qualified electricians, and there can be no assurance
that the Company will be able to maintain an adequate skilled labor force
necessary to operate efficiently, that the Company's labor expenses will not
increase as a result of a shortage in the supply of skilled technicians or that
the Company will not have to curtail its planned internal growth as a result of
labor shortages. See "Business -- Company Operations -- Employee Screening,
Training and Development."
COMPETITION
The electrical contracting industry is highly competitive and is served by
small, owner-operated private companies, public companies and several large
regional companies. Additionally, the Company could face competition in the
future from other competitors entering the market, including public utilities.
Certain of the Company's larger competitors offer a greater range of services,
such as mechanical construction, plumbing and heating, ventilation and air
conditioning services. In certain geographic regions, the Company may not be
eligible to compete for certain contracts because its employees are not subject
to collective bargaining arrangements. See "Business -- Industry Overview."
Competition in the electrical contracting industry depends on a number of
factors, including price. Certain of the Company's competitors may have lower
overhead cost structures and may, therefore, be able to provide their services
at lower rates than the Company. See "Business -- Competition."
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 to obtain a bank line of credit for
$65 million for working capital, capital expenditures, other corporate purposes
and acquisitions. The line of credit will be subject to customary drawing
conditions and the execution of certain loan documentation. See "Management's
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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 or will
be 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). Approximately $2.7 million, or 3% of the net proceeds
of the Offerings, will be used to pay a portion of the cash transfers related to
the Owner Amounts of certain Founding Companies. In addition, approximately $6.4
million, or approximately 7% of the net proceeds of the Offerings, will be used
to repay the estimated outstanding indebtedness of the Founding Companies at the
closing of the Offerings. Net proceeds available for acquisitions, working
capital and general corporate purposes will be approximately $19.7 million, or
23% of the net proceeds of the Offerings. In connection with the Acquisitions,
the Company expects to incur approximately $13.3 million in indebtedness to fund
a portion of the Owner Amounts which will be retired with new borrowings under
the proposed credit facility. See "Use of Proceeds" and "Certain Transactions."
BENEFITS TO FOUNDER AND MANAGEMENT
In connection with services rendered, 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 and trusts for the benefit of his children were
exchanged for Restricted Common Stock, holders of 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
capital 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. Advances to the Company from Mr. Snyder
amounted to approximately $1.6 million as of September 30, 1997. The initial $1
million of such advances bears interest at a stated rate (8.5% as of the date of
this Prospectus), and additional advances bear interest at LIBOR plus 1.5%. See
"Use of Proceeds."
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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 Common Stock has been approved for
listing upon notice of issuance on the NYSE, but no assurance can be given that
an 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 the date of this Prospectus, 1,396,602 shares of Common Stock and
2,655,709 shares of Restricted Common Stock were issued and outstanding.
Simultaneously with the closing of the Offerings, the owners 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 (i) approximately 2,628,600 shares of
Common Stock issued pursuant to the Company's 1997 Stock Plan, and (ii) 15,000
shares of Common Stock issued pursuant to the Company's 1997 Directors Stock
Plan. A total of 3,500,000 shares will be issuable pursuant to the 1997 Stock
Plan, and a total of 250,000 shares will be issuable pursuant to the 1997
Directors 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.
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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 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 $12.18 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. Houston-Stafford 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 Offerings. 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 Offerings. 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, Texas 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
its 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. The predecessor entity of Bexar was founded in 1962 and
operates primarily in the areas around the cities of San Antonio, New Braunfels
and Laredo, Texas. The predecessor entity of Calhoun was founded in 1958 and
operates in the counties around San Antonio. On a consolidated 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 in his present
position with Bexar-Calhoun and will become 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. The predecessor entity of 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 in his present position with Muth 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 in his present
position with Daniel 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 in his
present position with Amber following consummation of the Offerings.
HAYMAKER. The predecessor entity of Haymaker was founded in 1978. 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 Charles P. Bagby, Co.,
Inc., will sign a five-year employment agreement with IES to continue in his
present position with Charles P. Bagby, Co., Inc. 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 to 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 in his present position with
Thurman & O'Connell 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 for 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-
15
20
and-build projects undertaken on negotiated rather than bid terms. Rodgers has
approximately 32 employees. Terry Earnheart, president of Rodgers, will sign a
five-year employment agreement with IES to continue in his present position with
Rodgers following consummation of the Offerings.
HATFIELD. The predecessor entity of Hatfield was founded in 1984 and
operates in the greater Phoenix, Arizona 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 in his present position with Hatfield 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 in their present positions with Ace following consummation of the
Offerings. Robert Stalvey will also become a director of the Company following
consummation of the Offerings.
REYNOLDS. The predecessor entity of 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 in his present position with Reynolds 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 in their present
positions with Popp 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.
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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 or will be
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. Approximately $2.7 million of the net proceeds
will be used to pay a portion of the cash transfers related to the Owner Amounts
of certain 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 8.9% and matures at various
dates from December 1997 through October 2012. In connection with the
Acquisitions, the Company expects to issue approximately $13.3 million of notes
payable to fund a portion of the Owner Amounts. Following the consummation of
the Offerings, such notes payable to owners of the Founding Companies will be
repaid with borrowings under the proposed credit facility. 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. The initial $1 million of such advances bears interest at a stated
rate (8.5% as of the date of this Prospectus), and additional advances bear
interest at LIBOR plus 1.5%. See "Certain Transactions."
The approximately $19.7 million of remaining net proceeds ($33.4 million if
the Underwriters' over-allotment options are exercised in full) 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 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 execution of certain 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."
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22
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)................ $ 18,541 $ 13,983
-------- --------
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................................ 137,064 223,284
Retained deficit.......................................... (16,346) (16,346)
-------- --------
Total stockholders' equity........................ 120,881 207,171
-------- --------
Total capitalization.............................. $139,422 $221,154
======== ========
- ---------------
(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 $13.3 million in notes payable incurred to fund a portion of the
Owner Amounts to certain owners of the Founding Companies. Following the
consummation of the Offerings, such notes payable to owners of the Founding
Companies will be repaid with borrowings under the proposed credit facility.
See "Certain Transactions."
(e) Excludes 300,000 shares related to stock options which are currently
outstanding and shares related to approximately 2,343,600 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 and Chairman of the Board of IES and trusts for the benefit of his
children. See "Description of Common Stock."
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23
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 $43.8 million, or approximately $2.68 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 which have been or will be funded by
advances from Mr. Snyder), the pro forma combined net tangible book value of the
Company would have been $42.4 million, or $1.82 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
$12.18 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....................................... $(2.68)
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............................................. 1.82
------
Dilution in net tangible book value per share to new
investors................................................. $12.18
======
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 and
owners of the Founding Companies and (ii) 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% $(43,802,754) $(2.68)
New investors.............................. 7,000,000 30.0 98,000,000 14.00
----------- ----- ------------
Total.................................... 23,365,336 100.0% $ 54,197,246
=========== ===== ============
- ---------------
(a) See "Certain Transactions" for a discussion of the issuance of Restricted
Common Stock and Common Stock to the founder and Chairman of the Board of
IES and trusts for the benefit of his children, and the owners of Founding
Companies 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, and has been
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."
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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, 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
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
------- ------- ------- ------- ------- ------------- ------- -------
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
======= ======= ======= ======= ======= ======= ======= =======
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25
YEAR ENDED
SEPTEMBER 30, 1997
------------------
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).................................. 4,094
----------
Income from operations.................................... 24,943
Interest and other income (expense), net(c)............... 249
----------
Income before income taxes................................ 25,192
Provision for income taxes................................ 11,161
----------
Net income(d)............................................. $ 14,031
==========
Net income per share...................................... $ .64
==========
Shares used in computing pro forma net income per
share(e)................................................ 22,075,967
==========
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)
------ ------ ------ ------ ------- ------------- ----------- -----------------
BALANCE SHEET DATA:
Working capital...... $1,845 $2,001 $2,134 $2,675 $ 4,671 $ 5,414 $(35,884)(j) $ 45,848
Total assets......... 5,570 6,582 8,809 9,357 13,226 24,470 252,599 270,770
Long-term debt, net
of current
maturities......... 719 505 927 634 1,295 968 18,541 13,983
Total stockholders'
equity............. 2,224 2,325 1,952 3,104 5,351 8,208 120,881 207,171
- ---------------
(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. Additionally, excludes the $13.6 million non-recurring, non-cash
compensation charge recognized by IES related to the issuance of Common
Stock to management. 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 $0.7 million attributable to
$8.1 million of historical debt which will be repaid with proceeds from the
Offerings or distributed prior to the Acquisitions, net of additional
interest expense of $1.0 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 and
Chairman of the Board of IES and trusts for the benefit of his children and
(iv) 5,590,631 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 2,343,600 shares which are
expected to be granted at the initial public offering price upon
consummation of the Offerings. See "Description of Capital Stock."
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26
(f) Historical balance sheet data are for Houston-Stafford as of the applicable
periods.
(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 other financial information and historical financial
statements, and notes thereto, included elsewhere in this Prospectus.
(h) Reflects $30.6 million of Owner Amounts that will be transferred in
connection with the Acquisitions to the owners of the Founding Companies.
This amount will be funded through the following: (i) transfers of
approximately $5.7 million of nonoperating assets, net of liabilities, (ii)
transfers of approximately $11.6 million of cash (including $2.7 million of
proceeds from the Offerings) and (iii) the issuance of approximately $13.3
million of notes payable to certain owners of the Founding Companies which
will be retired with new borrowings under the proposed credit facility. 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.
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27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the Founding
Companies' Financial Statements, and related notes thereto, and "Selected
Financial Data" appearing elsewhere in this Prospectus.
The Company's revenues are derived primarily from electrical construction
and maintenance services provided to commercial, industrial and residential
customers. Of the Company's pro forma combined year ended September 30, 1997
revenues of $312.7 million, 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.
Revenues from fixed-price construction and renovation contracts are generally
accounted for on a percentage-of-completion basis, using the cost-to-cost
method. The cost-to-cost method measures the percentage completion of a contract
based on total costs incurred to date compared to total estimated costs at
completion. Maintenance and other service revenues are recognized as the
services are performed.
Cost of services consists primarily of salaries and benefits of employees,
subcontracted services, materials, parts and supplies, depreciation, fuel and
other vehicle expenses and equipment rentals. The Company's gross margin, which
is gross profit expressed as a percentage of revenues, depends on the relative
proportions of costs related to labor and materials. On jobs in which a higher
percentage of the cost of services consists of labor costs, the Company
typically achieves higher gross margins than on jobs where materials represent
more of the cost of services. Materials costs can be calculated with relatively
greater accuracy than labor costs, and the Company seeks to maintain higher
margins on its labor-intensive projects to compensate for the potential
variability of labor costs for these projects. Selling, general and
administrative expenses consist primarily of compensation and related benefits
for owners, administrative salaries and benefits, advertising, office rent and
utilities, communications and professional fees. Certain owners and certain key
employees of the 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 costs of integrating the companies acquired in the
Acquisitions.
The Company has sold an aggregate of 1,396,602 shares of Common Stock to
its management and has recorded (for financial statement presentation purposes)
a non-recurring, non-cash compensation charge of $13.6 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, 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 $4.1 million
per year.
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
23
28
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 historical 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 certain
Founding Companies 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(c)... 23,752 13 28,506 13 34,528 13 42,006 13
-------- --- -------- --- -------- --- -------- ---
Income from operations....... $ 7,755 4% $ 10,703 6% $ 21,326 8% $ 22,969 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.
(c) The supplemental unaudited pro forma combined results for the year ended
September 30, 1997 exclude the $13.6 million non-recurring, non-cash
compensation charge recognized by IES in September 1997 related to the
issuance of Common Stock to management.
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 $11.1 million, or 16%, from fiscal 1996 to the year ended
September 30, 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 fiscal 1996 to the year ended September 30, 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 fiscal 1996 to the year
ended September 30, 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 fiscal 1996 to the year ended September 30,
1997, primarily due to an
24
29
increase in large commercial contracts, increased data cabling work and higher
revenues for service work. Haymaker's revenues increased $4.2 million, or 54%,
from fiscal 1996 to the year ended September 30, 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 fiscal 1996
and the year ended September 30, 1997. The most significant decline in revenue
of $0.8 million occurred at Bexar-Calhoun, primarily due to the completion in
fiscal 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 the year ended
September 30, 1997.
Gross profit increased $9.1 million, or 16%, from $55.9 million for fiscal
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, $1.4
million or 59% at Pollock and $1.3 million or 79% at Amber. Houston-Stafford's
gross margin increased from 18% in fiscal 1996 to 20% in the year ended
September 30, 1997, Daniel's gross margin increased from 23% to 27%, Pollock's
gross margin increased from 14% to 18% and Amber's gross margin increased from
12% to 18%. 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 lower than expected
margins 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 fiscal 1996 to $42.0 million in the year ended September 30,
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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30
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 $1.2 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 attributable 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
attributable 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 attributable to the
addition of infrastructure associated with its growth. Mills' increase in
selling, general and administrative expenses was attributable 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 $1.6 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 attributable to favorable pricing related to increased demand.
Mills' gross profit and gross margin increases are primarily attributable 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
attributable to the addition of administrative infrastructure associated with
its growth. Mills' increase in selling, general and administrative expenses was
attributable to increased business volume and
26
31
increases in discretionary bonus and savings plan distributions. Bexar-Calhoun's
increase in selling, general and administrative expenses was attributable 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
anticipates that it will have up to approximately $21.5 million of pro forma
cash and cash equivalents, $45.8 million of pro forma working capital and no
outstanding indebtedness other than debt relating to Owner Amounts and capital
lease obligations totaling $14.3 million. The Founding Companies' historical
indebtedness of $8.1 million is anticipated to be transferred to the owners of
the Founding Companies or otherwise repaid from the proceeds of the Offerings.
On a combined basis, the Founding Companies generated $12.4 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 $8.1 million on a combined basis and was primarily used for debt repayment
and capital distributions.
The Company has entered into an agreement with a commercial bank under
which it expects to enter into a credit facility effective following the closing
of the Offerings. According to the 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 amounts borrowed under the proposed credit
facility will bear interest at an annual rate equal to either (a) the London
interbank offered rate ("LIBOR") plus 1.0% to 2.0%, as determined by the ratio
of the Company's total funded debt to EBITDA (as defined in the credit facility)
or (b) the higher of (i) the bank's prime rate and (ii) the Federal Funds rate
plus 0.5%, plus up to an additional 0.5% as determined by the ratio of the
Company's total funded debt to EBITDA. Commitment fees of 0.25% to 0.375%, as
determined by the ratio of the Company's total funded debt to EBITDA, will be
due on any unused borrowing capacity under the credit facility. 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 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 and execution of certain definitive loan documentation. Following the
consummation of the Offerings, the $13.3 million of notes payable to owners of
the Founding Companies issued in connection with the funding a portion of the
Owner Amounts will be repaid with borrowings under the credit facility.
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.
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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.
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, or 46%, 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, or 30%, 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.
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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 periods. The increase in gross
profit amounts and percentages is primarily attributable to favorable pricing
related to the increase in demand and higher discounts on certain long-term
material purchase commitments.
Selling, general and administrative expenses increased 30% from $6.0
million to $7.8 million. The increase was attributable to the addition of
administrative infrastructure necessary to support Houston-Stafford's growth and
the establishment of a new merit bonus system. Selling, general and
administrative expenses as a percentage of revenues remained constant during
1996 when compared to 1995.
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 Houston-Stafford 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 13% in 1995 when
compared to 1994 as a result of the additional infrastructure necessary to
support Houston-Stafford'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, which declined compared
to fiscal 1996 as a result of an increase in accounts receivable and costs and
estimated earnings in excess of billings on contracts in progress, both of which
represented offsets to net income generated during the period. 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, which represents a decline compared to
fiscal 1996 as a result of an increase in accounts receivable and costs and
estimated earnings in excess of billings on contracts in progress, both of which
represented offsets to net income generated during the period. 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.
Days sales outstanding in accounts receivable increased from 35 days as of
December 31, 1996 to 43 days as of September 30, 1997 (both calculated based on
sales for the years then ended). Such change is attributable to the effects on
receivables outstanding at September 30, 1997 of increased levels of sales
during the second and third quarters of 1997 due to seasonality and the
additional electrical supply company revenues.
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Houston-Stafford generated $2.7 million in net cash from operating
activities for the year ended December 31, 1996, primarily due to an increase in
collections of accounts receivable and billings on contracts in progress. 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.
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 21%, from $43.7 million for the nine
months ended September 30, 1996 to $52.6 million for the nine months ended
September 30, 1997, primarily as a result of the acquisition of Regional
Electric, which specializes in commercial and industrial electrical contracting
and fire alarm, data cabling and control system installation in the greater Fort
Worth area.
Gross profit decreased $1.1 million, or 11%, during the first nine months
of 1997 as compared to the nine months ended September 30, 1996. Gross margin
decreased from 22% to 16% due to a decrease in demand for higher margin, complex
industrial work offset by an increase in demand for lower margin commercial
work, as well as a planned increase in the operating infrastructure at Regional
Electric to support Mill's growth strategy in the Fort Worth market.
Selling, general and administrative expenses increased 30% from $3.8
million to $5.0 million. The increase was attributable to a full year of general
and administrative expenses relating to the June 1996 acquisition of Regional
Electric, and a $0.2 million severance payment to the former owner of Regional
Electric.
Mills results for the year ended 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
30
35
margin commercial work, as well as a planned increase in the operating
infrastructure at Regional Electric to support Mill's growth strategy in the
Fort Worth market.
Selling, general and administrative expenses increased 15% from $7.6
million to $8.8 million. The increase was attributable to a full year of general
and administrative expenses relating to the June 1996 acquisition of Regional
Electric, and a $0.2 million severance payment to the former owner of Regional
Electric.
Mills results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $30.1 million, or 86%, from $35.3 million for the year
ended December 31, 1995 to $65.4 million for the year ended December 31, 1996,
primarily due to the acquisition of Regional Electric in June 1996 (which
represents approximately $5.2 million of 1996 revenues), an increase in demand
for large and complex industrial construction contracts for manufacturing and
distribution facilities in the greater Dallas area for which only a select group
of electrical contractors have the resources and expertise to bid and a 30%
increase in maintenance and service revenues resulting from Mills' focus on
increasing its maintenance and service revenues.
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.
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36
Mills generated $7.9 million in net cash from operating activities for the
year ended December 31, 1996, as a result of increased profitability. Net cash
used in investing activities was approximately $0.6 million, representing $0.9
million used for the purchase of property and equipment, partly offset by $0.3
million, net, in collection of loans. Net cash used in financing activities was
$3.9 million for the year ended December 31, 1996, primarily for distribution of
dividends to stockholders. At December 31, 1996, Mills had a $2.0 million
revolving line of credit that was originally scheduled to expire June 1, 1997
and was extended to June 1, 1999. At December 31, 1996, there were no
outstanding draws against this line of credit.
At December 31, 1996, Mills had working capital of $5.5 million and total
debt obligations of $0.6 million.
BEXAR-CALHOUN RESULTS OF OPERATIONS
Bexar was founded in 1966 and operates primarily in the areas around the
cities of San Antonio, New Braunfels and Laredo, Texas. Calhoun was founded in
1958 and operates in the counties around San Antonio.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, YEAR ENDED 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 3%, from $33.0 million for the year
ended December 31, 1996, to $32.2 million for the year ended September 30, 1997,
primarily due to the completion in 1996 of an unusually large electrical
construction contract for a state university in Laredo, Texas.
Gross profit decreased $0.8 million, or 10%, from $8.0 million for the year
ended December 31, 1996, to $7.2 million for the year ended September 30, 1997.
Gross margins decreased to 22% from 24% over these periods. The decrease in
gross profit related to completion of the large state university contract in
1996 and gross margin declined due to a change in customer mix associated with a
decrease in higher margin retail construction in San Antonio.
Selling, general and administrative expenses remained relatively constant
in 1997 as compared to 1996.
32
37
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 attributable to higher revenues.
Selling, general and administrative expenses did not significantly change
from 1995 to 1996. Selling, general and administrative expenses declined as a
percentage of revenue from 13% in 1995 to 11% in 1996.
Bexar-Calhoun 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 $1.6 million, or 30%, from $5.2 million in 1994 to
$6.8 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
and equipment and loans to stockholders. Net cash used in financing activities
of $1.5 million resulted from stockholder distributions net of debt repayments.
Bexar-Calhoun generated $3.3 million of net cash from operating activities
for the year ended September 30, 1997. Net cash used in investing activities was
approximately $1.1 million, primarily for additions of property and equipment.
Net cash used in financing activities of $1.9 million primarily resulted from
stockholder distributions and repayments of debt.
At September 30, 1997, Bexar-Calhoun had working capital of $4.2 million
and total debt of $0.9 million.
Bexar-Calhoun generated $2.7 million in net cash from operating activities
for the year ended December 31, 1996, primarily from net income offset by growth
in working capital. Net cash used in investing activities was approximately $0.6
million for additions to property and equipment net of stockholder loan
repayments. Net cash used by financing activities was $2.8 million for the year
ended December 31, 1996 primarily as a result of stockholder distributions net
of debt repayments.
At 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.
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38
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
ELEVEN MONTHS ENDED
YEARS ENDED OCTOBER 31, YEAR ENDED 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%
======= === ======= === ======= ==== ======= === ======= ===
Pollock results for the eleven months ended September 30, 1997 compared to
eleven months ended September 30, 1996
Revenues increased $4.5 million, or 34%, from $13.3 million for the eleven
months ended September 30, 1996 to $17.8 million for the eleven months ended
September 30, 1997, primarily due to an increase in large commercial contracts,
increased data cabling work and higher revenues for service and small project
work.
Gross profit increased $1.3 million, or 81%, from $1.7 million for the
eleven months ended September 30, 1996 to $3.0 million for the eleven months
ended September 30, 1997. Gross margin increased to 17% from 12% over these
periods. The gross profit and gross margin increases in 1997 when compared to
1996 are primarily attributable to specific low margin or loss contracts in 1996
that did not recur in 1997.
Selling, general and administrative expenses increased 21% from $2.1
million to $2.5 million due to the addition of certain strategic management
personnel. As a percentage of revenues, selling, general and administrative
expenses actually decreased in 1997 over 1996 by 2%.
Pollock results for the year ended September 30, 1997 compared to the year
ended October 31, 1996
Revenues increased $4.5 million, or 28%, from $15.8 million for the year
ended October 31, 1996 to $20.3 million for the year ended September 30, 1997,
primarily due to an increase in large commercial contracts, increased data
cabling work, and higher revenues from service work.
Gross profit increased $1.4 million, or 59%, from $2.2 million for the year
ended October 31, 1996 to $3.6 million for the year ended September 30, 1997.
Gross margin increased to 18% from 14% over these periods. The gross profit and
gross margin increases in 1997 when compared to 1996 are primarily attributable
to specific low margin or loss contracts in 1996 that did not recur in 1997.
Selling, general and administrative expenses increased 18% from $2.5
million to $2.9 million due to the addition of certain strategic management
personnel. As a percent of revenues, selling, general and administrative
expenses decreased in 1997 over 1996 by 1%.
Pollock results for the 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 Pollock's growth strategy, including the
addition of data cabling expertise.
34
39
POLLOCK LIQUIDITY AND CAPITAL RESOURCES
Pollock used $0.1 million of net cash for operating activities during the
eleven months ended September 30, 1997. Net cash used in investing activities
was approximately $0.1 million, primarily for increases in the leasing of
capital assets. Net cash provided by financing activities of $0.3 million
resulted from additional short-term line of credit borrowings.
Net cash from operating activities for the year ended September 30, 1997
was not material in amount. Net cash used in investing activities was
approximately $0.2 million, primarily for increases in the leasing of capital
assets. Net cash provided by financing activities of $0.5 million resulted from
additional short-term line of credit borrowings.
At September 30, 1997, Pollock had working capital of $0.6 million and
total debt of $1.8 million.
Pollock used $0.7 million in net cash from operating activities for the
year ended October 31, 1996, primarily to fund working capital requirements. Net
cash used in investing activities was approximately $0.2 million for additions
to property and equipment. Net cash provided by financing activities was $0.7
million for the year ended October 31, 1996 primarily as a result of short-term
line of credit borrowings.
At October 31, 1996 Pollock had working capital of $0.5 million and total
debt of $1.5 million.
MUTH RESULTS OF OPERATIONS
Muth was founded in 1970 and has seven offices located in South Dakota,
including its headquarters in Mitchell. Muth also from time to time operates in
Wyoming, Montana, Nebraska and Minnesota.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, YEAR ENDED 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 $2.0 million, or 16%, from $12.5 million for the nine
months ended September 30, 1996 to $14.5 million for the nine months ended
September 30, 1997, due to a significant increase in market demand that was
offset by work delays caused by the harsh winter, which lasted from November
1996 through early April 1997.
Gross profit increased $0.2 million, or 10%, from $2.8 million for the nine
months ended September 30, 1996 to $3.0 million for the nine months ended
September 30, 1997. Gross margin decreased to 21% from 22% over these periods.
The decreases in the gross margin are solely attributable to the harsh winter
and related work delays in early 1997.
Selling, general and administrative expenses increased 5% from $2.1 million
to $2.3 million. The increase was attributable to the increase in market demand
and related infrastructure costs.
35
40
Muth results for the year ended September 30, 1997 compared to the year ended
December 31, 1996
Revenues increased $2.0 million, or 12%, from $16.8 million for the fiscal
period ended December 31, 1996 to $18.8 million for the fiscal year ended
September 30, 1997, due to a significant increase in market demand that was
offset by work delays caused by the harsh winter, which lasted from November
1996 through early April 1997.
Gross profit increased $0.3 million, or 7%, from $4.0 million for the
fiscal period ended December 31, 1996 to $4.3 million for the fiscal year ended
September 30, 1997. The increase in gross profit is attributable to increased
market demand that was offset by work delays caused by the harsh winter, which
lasted from November 1996 through early April 1997. Gross margin decreased to
23% from 24% over these periods.
Muth results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $0.8 million, or 5%, from $16.0 million for the year
ended December 31, 1995 to $16.8 million for the year ended December 31, 1996,
due to increased market demands for electrical contracting services, slightly
offset by delays caused by the harsh winter, which started in November 1996 and
continued through early April 1997.
Gross profit increased $0.2 million, or 5%, from $3.8 million for the year
ended December 31, 1995 to $4.0 million for the year ended December 31, 1996.
There was no significant change in gross margin. The gross profit and gross
margin increases in 1996 when compared to 1995 were attributable to increased
margins on service work in 1996 and increased revenues.
Selling, general and administrative expenses remained constant over these
periods.
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, or 4%, 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 $0.2 million, primarily for additions to property and equipment.
Net cash used in financing activities of $0.4 million primarily related to
distributions to stockholders.
Muth generated $0.5 million of net cash from operating activities for the
fiscal year ended September 30, 1997. Net cash used in investing activities was
approximately $0.2 million, primarily for additions to property and equipment.
Net cash used in financing activities of $0.3 million primarily relates to
payments of short-term debt.
At September 30, 1997, Muth had working capital of $2.3 million and total
debt of $0.5 million. Muth currently has no long-term debt. Cash requirements
increased for the fiscal year ended September 30, 1997 as a result of a higher
proportion of government contracts, which typically have payment periods of 45
to 60 days rather than the 20-day period typical for private contracts.
Muth generated $0.5 million in net cash from operating activities for the
year ended December 31, 1996, primarily from earnings net of investments in
working capital. Net cash used in investing activities was approximately $0.4
million for additions to property and equipment. Net cash used by financing
activities was
36
41
$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,
Florida. In addition to commercial and industrial contracting, Daniel services
high-end residential construction and repairs on a time-and-material basis, from
both its Miami and Vero Beach, Florida locations.
The following table sets forth selected statement of operations data and
such data as a percentage of revenues for the periods indicated:
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%.
37
42
Daniel results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues increased $0.6 million, or 4%, from $12.0 million for the year
ended December 31, 1995 to $12.6 million for the year ended December 31, 1996,
primarily due to increased revenues from negotiated contracts in process during
the year ended December 31, 1996.
Gross profit increased $2.6 million, or 786%, from $0.3 million for the
year ended December 31, 1995 to $2.9 million for the year ended December 31,
1996. Gross margin increased from 3% to 23%, as a result of cost overruns
incurred in 1995 on certain projects and an increase in labor efficiencies and
an increase in higher margin high-rise residential contracts.
Selling, general and administrative expenses increased $0.4 million, or
25%, from $1.5 million for the year ended December 31, 1995 to $1.9 million for
the year ended December 31, 1996, as a result of the increase in revenues.
DANIEL LIQUIDITY AND CAPITAL RESOURCES
Daniel generated $1.8 million in net cash from operating activities for the
nine months ended September 30, 1997, primarily due to an increase in accounts
receivable and accounts payable, both of which represented offsets to net income
generated during the period. Net cash used in investing activities was
approximately $0.9 million, principally for capital expenditures. Net cash used
in financing activities was approximately $0.3 million, principally for
shareholder distributions net of long-term borrowings.
Daniel generated $2.0 million in net cash from operating activities for the
year ended September 30, 1997, primarily due to an increase in accounts
receivable and accounts payable, both of which represented offsets to net income
generated during the period. Net cash used in investing activities was
approximately $1.3 million, principally for capital expenditures. Net cash used
in financing activities was approximately $0.4 million, principally for
shareholder distributions net of long-term borrowings.
Working capital as of September 30, 1997 was $4.5 million, and total debt
outstanding was $0.7 million, of which $0.6 million was owed to a shareholder.
Days sales outstanding in accounts receivable increased from 42 days as of
December 31, 1996, to 68 days as of September 30, 1997. Such increase is
attributable to an increase in sales during the second and third quarters of
1997.
Daniel generated $1.2 million in net cash from operating activities for the
year ended December 31, 1996, primarily due to an increase in collections of
deposits and billings on contracts in progress. Net cash used in investing
activities was approximately $0.5 million, principally for capital expenditures
and increases in mutual fund investments. Net cash used in financing activities
was approximately $0.4 million, principally for debt repayments.
Working capital as of December 31, 1996 was $2.4 million, and total debt
outstanding was $0.6 million, all of which was owed to a shareholder.
38
43
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:
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, YEAR ENDED 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
Revenues increased $2.5 million, or 24%, from $10.6 million for the nine
months ended September 30, 1996 to $13.1 million for the nine months ended
September 30, 1997, primarily from three large retail construction contracts in
1997.
Gross profit increased $1.3 million, or 70%, from $1.9 million in 1996 to
$3.2 million in 1997. Gross margin increased from 18% to 24% over these periods.
The improvement in gross margin was attributable to an increase in the number of
commercial contracts with higher gross margins recognized.
Selling, general and administrative expenses increased 22% from $1.0
million to $1.2 million for the nine months ended September 30, 1996 compared to
the nine months ended September 30, 1997.
Amber results 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.
39
44
AMBER LIQUIDITY AND CAPITAL RESOURCES
Amber generated $0.7 million of net cash from operating activities for the
nine months ended September 30, 1997. Net cash used in investing activities was
approximately $0.3 million, primarily for additions to property and equipment.
Net cash used in financing activities was not material in amount for the nine
months ended September 30, 1997.
Amber generated $0.7 million of net cash from operating activities for the
year ended September 30, 1997. Net cash used in investing activities was
approximately $0.3 million, primarily for additions to property and equipment.
Net cash provided by financing activities was not material for the year ended
September 30, 1997.
At September 30, 1997, Amber had working capital of $1.8 million and total
debt of $0.7 million.
Amber generated $0.7 million in net cash from operating activities for the
year ended December 31, 1996, primarily for earnings and reductions in working
capital. Net cash used in investing activities was approximately $0.2 million
for additions of property and equipment. Net cash provided by financing
activities was not material for the year ended December 31, 1996.
At December 31, 1996, Amber had working capital of $0.6 million and total
debt of $0.7 million.
HAYMAKER RESULTS OF OPERATIONS
Haymaker was founded in 1981, is headquartered in Birmingham, Alabama, and
operates in Alabama, northwest Florida and North Carolina. Haymaker's revenues
in fiscal 1996 were primarily from commercial and industrial contracting
services.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
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% $ 492 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 $0.6 million, or 92%, from $0.7 million for the nine
months ended September 30, 1996 to $1.3 million for the same period in 1997.
Gross margin increased to 14% in 1997 from 13% in 1996 over these periods. The
increase in gross profit and gross margin was attributable to higher demand and
lower than expected costs and certain fixed price contracts.
Selling, general and administrative expenses increased 126% from $0.4
million for the nine months ended September 30, 1996, to $0.8 million for the
nine months ended September 30, 1997. The increase was attributable to higher
bonus distributions under Haymaker's incentive compensation plan.
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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 owners of equity interests in consolidated
entities.
At September 30, 1997, Haymaker had working capital of $1.6 million and no
debt.
Haymaker used $0.1 million in net cash from operating activities for the
year ended December 31, 1996. Net cash used by financing activities was $0.4
million for the year ended December 31, 1996 primarily as a result of
distributions to owners of equity interests in consolidated entities.
At December 31, 1996 Haymaker had working capital of $1.3 million and no
debt.
SUMMIT RESULTS OF OPERATIONS
Summit was founded in 1987 and is located in Houston, Texas. Summit's
revenues in its fiscal year ended March 31, 1997 were primarily from commercial
and industrial contracting. Summit has specialized expertise in data cable
design and installation and lighting design.
The following table sets forth selected statement of operations data as a
percentage of revenues for the periods indicated:
YEAR ENDED YEAR ENDED SIX MONTHS ENDED SEPTEMBER 30,
MARCH 31, 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.
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Gross profit increased $0.1 million, or 17%, from $0.8 million for the six
months ended September 30, 1996 to $0.9 million for the six months ended
September 30, 1997. Gross margin increased from 14% to 15% from 1996 to 1997.
The increase in gross profit was primarily attributable to high profitability on
certain jobs with tight deadlines, partially offset by the write-off of a
receivable from a contractor which went bankrupt.
Selling, general and administrative expenses increased 18% from $0.7
million to $0.8 million. The increase was attributable to management bonuses,
higher insurance and business promotional expenses.
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 9% from $1.3 million
to $1.5 million due to increases in management bonuses, higher insurance and
business promotional expenses. As a percentage of revenues, selling, general and
administrative expenses remained constant.
SUMMIT LIQUIDITY AND CAPITAL RESOURCES
Summit generated $0.1 million of net cash from operating activities for the
six months ended September 30, 1997. Net cash provided by investing activities
and net cash provided by financing activities were not material in amount for
the six months ended September 30, 1997.
Summit generated near break-even levels of net cash from operating
activities for the year ended September 30, 1997. Summit used $0.2 million of
net cash from investing activities for the year ended September 30, 1997
primarily for the purchase of service trucks. Net cash provided by financing
activities of $0.2 million resulted from borrowings of long-term debt.
At September 30, 1997, Summit had working capital of $0.6 million and total
debt of $0.9 million.
Summit generated near break-even levels of net cash from operating
activities for the year ended March 31, 1997. Net cash used in investing
activities was approximately $0.2 million primarily for the purchase of service
trucks. Net cash provided by financing activities was $0.2 million for the year
ended March 31, 1997 primarily as a result of long-term borrowings.
At March 31, 1997 Summit had working capital of $0.6 million and total debt
of $0.9 million.
THURMAN & O'CONNELL RESULTS OF OPERATIONS
Thurman & O'Connell was founded in 1988. It is headquartered in Louisville,
Kentucky, and operates primarily in Louisville and the surrounding areas.
Thurman & O'Connell's revenues in 1996 and 1997 were primarily from commercial
and industrial contracting, with an emphasis on institutional and commercial
properties.
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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, ----------------------------
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 overbudget
projects for which Thurman & O'Connell shares in the cost savings provided to
its customers. Gross margin increased from 32% in the nine months ended
September 30, 1996 to 49% in the nine months ended September 30, 1997 due to a
large multi-year lower profit margin hospital project that was completed in
1996.
Selling, general and administrative expenses did not change significantly
between the nine months ended September 30, 1997 and the nine months ended
September 30, 1996.
Thurman & O'Connell results 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 margin increased to 46% from 33% over these periods. The gross profit and
gross margin increases in 1997 when compared to 1996 are attributable to
favorable pricing on certain overbudget projects for which Thurman & O'Connell
shared in the cost savings it provided to its customers.
Selling, general and administrative expenses did not change significantly
between the year ended September 30, 1997 and the year ended December 31, 1996.
Thurman & O'Connell results for the year ended December 31, 1996 compared to
the year ended December 31, 1995
Revenues decreased $0.1 million, or 4%, from $4.7 million in 1995 to $4.6
million in 1996, primarily due to the completion of a large multi-year hospital
project in 1996.
Gross profit increased $0.1 million, or 5%, from $1.4 million in 1995 to
$1.5 million in 1996. Gross margin increased 3% from 30% in 1995 to 33% in 1996.
Selling, general and administrative expenses remained relatively constant
between 1995 and 1996.
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THURMAN & O'CONNELL LIQUIDITY AND CAPITAL RESOURCES
Thurman & O'Connell generated $0.9 million of net cash for operating
activities for the nine months ended September 30, 1997. Net cash used in
investing activities was not material in amount. Net cash used by financing
activities of $1.2 million primarily resulted from distributions to
stockholders.
Thurman & O'Connell generated $0.9 million of net cash from operating
activities for the year ended September 30, 1997. Net cash provided and used in
investing activities was not material in amount. Net cash used in financing
activities was $1.2 million, primarily for distributions to stockholders.
At September 30, 1997, Thurman & O'Connell had working capital of $1.5
million and total debt of $0.1 million.
Thurman & O'Connell generated $1.3 million in net cash from operating
activities for the year ended December 31, 1996, primarily from earnings net of
investments in working capital. Net cash used by financing activities was $0.6
million for the year ended December 31, 1996 primarily as a result of
distributions to stockholders and payments on debt.
At December 31, 1996 Thurman & O'Connell had working capital of $1.3
million and total debt of $0.1 million.
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 and as a condition to the closing of
the Offerings, IES will acquire 15 electrical contracting and maintenance
service companies and a related supply company with pro forma combined revenues
of $312.7 million for the year ended September 30, 1997, making the Company 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 23% 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.
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 service businesses.
Commercial and Industrial Market. Commercial and industrial consumers of
electrical contracting and maintenance services include general contractors;
developers; consulting engineers; architects; owners and managers of large
retail establishments, office buildings, apartments and condominiums; theaters
and
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restaurants; hotels and casinos; manufacturing and processing facilities; arenas
and convention centers; hospitals; school districts; military and other
government agencies; airports; prisons and car lots. High-rise residential
projects are viewed as commercial rather than residential projects because the
electrical wiring methods and field skills require similar techniques.
Commercial and industrial electrical construction is most often performed by a
subcontractor for a general contractor, although an electrical contractor may
also perform services directly as a prime contractor. Generally, contracts are
obtained through a competitive bid process or on negotiated terms through
ongoing customer relationships.
Typically, electrical contracting services for the industrial and
commercial market involve wiring a structure to specifications set by the
customer, increasingly with design-and-build engineering expertise provided by
the electrical contractor. The normal commercial or industrial job is wired
through pipe or conduit, which is installed through metal or concrete
structures. Some commercial and industrial contractors prefabricate certain
components offsite, at the contractor's office or at the facilities of a
subcontractor or manufacturer, and these items are transported to the job site
ready to be installed.
From fiscal 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 23% 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
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 22% 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
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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 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.
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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 maintenance 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.
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 services. The Company's per call
maintenance services are initiated when a customer requests emergency repair
service or the Company calls the client to schedule periodic maintenance work.
Service technicians are scheduled for the call or routed to the customer's
residence or business by the dispatcher. Service personnel work out of the
Company's service vehicles, which carry an inventory of equipment, tools, parts
and supplies needed to complete the typical variety of jobs. The technician
assigned to a service call travels to the residence or business, interviews the
customer, diagnoses the problem, prepares and discusses a price quotation,
performs the work and often collects payment from the customer. Most work is
warrantied for one year. 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
revenues for the year ended September 30, 1997. As a result of emphasis on
quality and worker reliability, management and a dedicated sales and work force
at the 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
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and convention centers; hospitals; school districts; military and other
government agencies; airports; prisons and car lots. The Company intends to
continue its emphasis on developing and maintaining relationships with its
customers by providing superior, high-quality service.
Employee Screening, Training and Development. The Company is committed to
providing the highest level of customer service through the development of a
highly trained workforce. Employees are encouraged to complete a progressive
training program to advance their technical competencies and to ensure that they
understand and follow the applicable codes, the Company's safety practices and
other internal policies. The Company supports and funds continuing education for
its employees, as well as apprenticeship training for its technicians under the
Bureau of Apprenticeship and Training of the Department of Labor and similar
state agencies. Employees who train as apprentices for four years may seek to
become journeymen electricians and, after additional years of experience, master
electricians. The Company pays progressive increases in compensation to
employees who acquire such additional training, and more highly trained
employees serve as foremen, estimators and project managers. The Company's
master electricians are licensed in one or more cities or other jurisdictions in
order to obtain the permits required in the Company's business, and certain
master electricians have also obtained specialized licenses in areas such as
security systems and fire alarm installation. In some areas, licensing boards
have set continuing education requirements for maintenance of licenses. Because
of the lengthy and difficult training and licensing process for electricians,
the Company believes that the number, skills and licenses of its employees
constitute a competitive strength in the industry.
The Company actively recruits and screens applicants for its technical
positions and has established programs in some locations to recruit apprentice
technicians directly from high 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
-------- ----------- ----
Birmingham, AL............................ 3,800 Offices
Phoenix, AZ............................... 6,900 Offices
Scottsdale, AZ............................ 6,400 Warehouse/Offices
Milford, CT............................... 900 Warehouse/Offices
Miami, FL................................. 19,000 Warehouse/Offices
Ocoee, FL................................. 12,800 Warehouse/Offices
Vero Beach, FL............................ 3,550 Warehouse/Offices
Aceworth, GA.............................. 5,256 Warehouse/Offices
Duluth, GA................................ 3,875 Warehouse/Offices
Valdosta, GA.............................. 11,084 Warehouse/Offices
Louisville, KY............................ 17,000 Warehouse/Offices
Monroe, NC................................ 4,500 Warehouse/Offices
Henderson, NV............................. 1,500 Warehouse/Offices
Cincinnati, OH............................ 6,000 Warehouse/Offices
Deadwood, SD.............................. 2,650 Warehouse/Offices
Huron, SD................................. 5,000 Warehouse/Offices/Showroom
Mitchell, SD.............................. 14,439 Warehouse/Offices
Mitchell, SD.............................. 8,000 Offices
Rapid City, SD............................ 5,830 Warehouse/Offices
Sioux Falls, SD........................... 5,000 Warehouse/Offices
Spearfish, SD............................. 1,825 Warehouse/Offices
Watertown, SD............................. 5,020 Warehouse/Offices
Austin, TX................................ 3,465 Warehouse/Offices
Austin, TX................................ 2,970 Warehouse/Offices
Austin, TX................................ 1,200 Warehouse/Offices
Dallas, TX................................ 32,424 Warehouse/Offices
Fort Worth, TX............................ 18,000 Warehouse/Offices
Grapevine, TX............................. 6,850 Warehouse/Offices
Houston, TX............................... 23,040 Warehouse/Offices
Houston, TX............................... 19,000 Warehouse
Houston, TX............................... 8,722 Warehouse/Offices
Katy, TX.................................. 5,000 Warehouse/Offices
Laredo, TX................................ 1,700 Warehouse/Offices
New Braunfels, TX......................... 3,164 Warehouse/Offices
Rowlett, TX............................... 4,000 Warehouse/Offices
Saginaw, TX............................... 37,000 Warehouse/Offices
San Antonio, TX........................... 16,692 Warehouse/Offices
San Antonio, TX........................... 13,492 Warehouse/Offices
San Antonio, TX........................... 6,535 Warehouse/Offices
San Antonio, TX........................... 5,588 Warehouse/Offices
San Antonio, TX........................... 5,000 Warehouse/Offices
Spring, TX................................ 5,500 Warehouse/Offices
Stafford, TX.............................. 15,000 Warehouse/Offices
Stafford, TX.............................. 10,500 Warehouse/Offices
Stafford, TX.............................. 3,500 Warehouse/Offices
Stafford, TX.............................. 3,500 Warehouse/Offices
Stafford, TX.............................. 1,661 Office
Webster, TX............................... 7,054 Warehouse/Offices
Everrett, WA.............................. 9,000 Lot
Everrett, WA.............................. 3,500 Warehouse/Offices
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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. See "Risk
Factors -- Competition."
REGULATIONS
The Company's operations are subject to various federal, state and local
laws and regulations, including (i) licensing requirements applicable to
electricians; (ii) building and electrical codes; (iii) regulations relating to
consumer protection, including those governing residential service agreements
and (iv) regulations relating to worker safety and protection of the
environment. The Company believes it has all required licenses to conduct its
operations and is in substantial compliance with applicable regulatory
requirements. Failure of the Company to comply with applicable regulations could
result in substantial fines or revocation of the Company's operating licenses.
Many state and local regulations governing electricians require permits and
licenses to be held by individuals. In some cases, a required permit or license
held by a single individual may be sufficient to authorize specified activities
for all the Company's electricians who work in the state or county that issued
the permit or license. The Company intends to implement a policy to ensure that,
where possible, any such permits or licenses that may be material to the
Company's operations in a particular geographic region are held by at least two
Company employees within that region.
LITIGATION
Each of the Founding Companies has, from time to time, been a party to
litigation arising in the normal course of its business, most of which involves
claims for personal injury or property damage incurred in connection with its
operations. Management believes that none of these actions will have a material
adverse effect on the financial condition or results of operations of the
Company.
EMPLOYEES
At September 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...................... 37 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 five years.
John S. Stanfield joined the Company as Vice President -- Mergers and
Acquisitions in October 1997. From March 1996 to October 1997, he 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 joined the Company as Vice President -- Mergers and
Acquisitions in October 1997. Mr. Cummings has served as a consultant to the
Company since its inception in June 1997. From February 1997 through June 1997
he served as a consultant to C. Byron Snyder and his privately owned
corporations. From 1992 through 1996, Mr. Cummings served as Vice President and
Chief Financial Officer for J A Interests, Inc., a private asset management
company, and its commonly owned affiliates, including Southern Jet Management,
Inc., a general aviation services and charter company. From 1982 through January
1992, Mr. Cummings held various positions with Arthur Andersen LLP. Mr. Cummings
is a Certified Public Accountant.
J. Paul Withrow has served as Vice President and Chief Accounting Officer
of the Company since October 1997. From 1987 to 1997, Mr. Withrow held various
positions with Arthur Andersen LLP. Mr. Withrow is a Certified Public
Accountant.
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 1997 Stock 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.
The Board of Directors is divided into three classes of directors, with
directors serving staggered three-year terms, expiring at the annual meeting of
stockholders following the 1998 fiscal year (Class I), 1999 fiscal year (Class
II) and 2000 fiscal year (Class III), 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. Effective
upon consummation of the Offerings, the Board of Directors will be classified as
follows: Class I--C. Byron Snyder, Jon Pollock, Bob Weik and Alan R. Sielbeck;
Class II--Jerry Mills, Richard Muth and Richard L. Tucker; Class III--Ben L.
Mueller, Robert Stalvey and Thomas E. White, Jr.
C. Byron Snyder and trusts for the benefit of his children, as the holders
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 holders of the
Restricted Common Stock may remove the director such holders are entitled to
elect. See "Description of Capital Stock."
DIRECTOR COMPENSATION
Directors who are employees of the Company or a subsidiary do not receive
additional compensation for serving as directors. Each director who is not an
employee of the Company or a subsidiary will receive a fee of $2,000 for
attendance at each Board of Directors meeting and $1,000 for each committee
meeting (unless held on the same day as a Board of Directors meeting). Directors
of the Company will be reimbursed for reasonable out-of-pocket expenses incurred
in attending meetings of the Board of Directors or committees thereof, and for
other expenses reasonably incurred in their capacity as directors of the
Company. Each non-employee director will receive stock options to purchase 5,000
shares of Common Stock upon initial election
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to the Board of Directors and thereafter an annual grant of 5,000 options on
each September 30 on which the non-employee director continues to serve. See
"-- 1997 Directors Stock Plan."
EXECUTIVE COMPENSATION
The Company was incorporated in June 1997 and, prior to the 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" (i) by the employee upon thirty days' written notice or (ii) by the
Company upon approval of 51% of the Board of Directors. The employment
agreements provide that the Company shall pay each executive officer the annual
salary set forth above under "-- Executive Compensation," which salary may be
increased by the Board of Directors. Such agreements also provide that each
executive officer will be reimbursed for out-of-pocket business expenses and
shall be eligible to participate in all benefit plans and programs as are
maintained from time to time by the Company. All employment agreements provide
that if the officer's employment is terminated by the Company without "cause" or
is terminated by the officer for "good reason," the officer will be entitled to
receive a lump sum severance payment at the effective time of termination equal
to the base salary (at the rate then in effect) for the greater of (i) the time
period remaining under the term of the agreement or (ii) one year. In addition,
the time period during which such officer is restricted from competing with the
Company will be shortened from two years to one year.
The employment agreements contain certain provisions concerning a
change-in-control of the Company, including the following: (i) in the event the
officer's employment is terminated within two years following the change in
control by the Company other than for "cause" or by the officer for "good
reason," or the officer is terminated by the Company within three months prior
to the change in control at the request of the acquirer in anticipation of the
change in control, the officer will be entitled to receive a lump sum severance
amount equal to the greater of (i) three years' base salary or (ii) the base
salary for whatever period is then remaining on the initial term and the
provisions which restrict competition with the Company shall not apply; (ii) in
any change-of-control situation, the officer may elect to terminate his
employment by giving five business days' written notice prior to the closing of
the transaction giving rise to the change-in-control, which will be deemed a
termination of employment by the Company without "cause," and the provisions of
the employment agreement governing the same will apply, except that the
severance amount otherwise payable shall be doubled (but not to exceed six times
the officer's base pay) (if the successor does not give written notice of its
acceptance of the Company's obligations under the employment agreement at least
ten business days prior to the anticipated closing date, the severance amount
shall be tripled, but not to exceed nine times base salary) and provisions which
restrict competition with the Company shall not apply; and (iii) if any payment
to the officer is subject to the 20% excise tax on excess parachute payments,
the officer shall be made "whole" on a net aftertax basis. A change in control
is generally defined to occur upon (i) the acquisition by any person of 20% or
more of the total voting power of the outstanding securities of the Company,
(ii) the first purchase pursuant to a tender or exchange offer for Common Stock,
(iii) the approval of certain mergers, sale of substantially all the assets, or
dissolution of the Company or (iv) a change in a majority of the members of the
Company's Board of Directors.
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
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in control. If the aggregate present value of the parachute payments to certain
individuals, including officers, equals or exceeds three times that individual's
"base amount" (generally, the individual's average annual compensation from the
Company for the five calendar years ending before the date of the change in
control), then all parachute amounts in excess of the base amount are "excess"
parachute payments. An individual will be subject to a 20% excise tax on excess
parachute amounts and the Company will not be entitled to a tax deduction for
such payments.
1997 STOCK PLAN
The Company's 1997 Stock Plan was adopted by the Board of Directors and
stockholders in October 1997. The purpose of the 1997 Stock Plan is to provide
officers, employees and consultants with additional incentives by increasing
their ownership interests in the Company. Individual awards under the 1997 Stock
Plan may take the form of one or more of: (i) either incentive stock options
("ISOs") or non-qualified stock options ("NQSOs"); (ii) stock appreciation
rights; (iii) restricted or phantom stock; (iv) bonus stock awards; (v) awards
not otherwise provided for, the value of which is based in whole or in part upon
the value of the Common Stock and (vi) cash awards that may or may not be based
on the achievement of performance goals, including goals related to one or more
of the following: cash flow, return on equity, sales, profit margin, earnings
per share and stock price.
The Compensation Committee or the Company's President, to the extent such
duties are delegated to him by the Compensation Committee, will administer the
1997 Stock Plan and select the individuals who will receive awards and establish
the terms and conditions of those awards. The Compensation Committee will not be
eligible to receive awards under the plan, and the President will not have the
authority to make grants to officers or directors of the Company. See
"Management -- Directors and Executive Officers" for the composition of the
Compensation Committee following the consummation of the Offerings. The maximum
number of shares of Common Stock that may be subject to outstanding awards,
determined immediately after the grant of any award, may not exceed the greater
of 3,500,000 shares or 15% of the aggregate number of shares of Common Stock
outstanding; provided, however, that ISOs may not be granted with respect to
more than 1,000,000 shares. Shares of Common Stock which are attributable to
awards which have expired, terminated or been canceled or forfeited are
available for issuance or use in connection with future awards. The maximum
number of shares of Common Stock with respect to which any person may receive
options and stock appreciation rights in any year is 250,000 shares and the
maximum value of any other amount may not exceed $4 million as of the date of
its grant.
The 1997 Stock Plan will remain in effect for ten years, unless earlier
terminated by the Board of Directors. The 1997 Stock Plan may be amended by the
Board of Directors or the Compensation Committee without the consent of the
stockholders of the Company, except that any amendment will be subject to
stockholder approval if required by any federal or state law or regulation or by
the rules of any stock exchange or automated quotation system on which the
Common Stock may then be listed or quoted.
NQSOs to purchase 150,000 shares of Common Stock have been granted to each
of Mr. Wise and Mr. Wombwell. 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,
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(ii) the automatic grant to each non-employee director of an option to purchase
5,000 shares upon such person's initial election as a director and (iii) an
automatic annual grant to each non-employee director of an option to purchase
5,000 shares on each September 30th on which such director remains a
non-employee director. All options will have an exercise price per share equal
to the fair market value of the Common Stock on the date of grant, will vest
over five years at the rate of 20% per year and will expire on the earliest of
(i) ten years from the date of grant, (ii) three months after termination of
service as a director, other than due to death or disability or (iii) one year
following a termination of employment due to death or disability. In addition,
options can be granted to a non-employee director upon such terms as the Board
determines, whenever it believes such additional grant is appropriate. The
maximum number of shares of Common Stock that may be subject to outstanding
awards determined immediately after the grant of any award is 250,000.
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
The Company was founded in June 1997 by C. Byron Snyder. In connection with
the formation of IES, IES issued to Mr. Snyder, the Snyder Children's Trust and
D. Merril Cummings a total of 2,329,600 shares of Common Stock for nominal
consideration. The shares issued to the Snyder Children's Trust were
subsequently transferred to two separate trusts, each for the benefit of one of
Mr. Snyder's children. Mr. Snyder is currently president and a director of the
Company. The trustees of the trusts are independent third parties not subject to
control by Mr. Snyder. In September 1997, IES issued an additional 442,589
shares to Mr. Snyder and such trusts. The total value of the shares (based upon
a value of $10.50 per share) issued to Mr. Snyder and the trusts will be
recognized as acquisition costs in connection with the Acquisitions. In October
1997, Mr. Snyder and the trusts exchanged 2,655,709 shares of Common Stock for
an equal number of shares of Restricted Common Stock. Mr. Snyder 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. The initial $1 million of such advances bears interest at a stated rate
(8.5% as of the date of this Prospectus), and additional advances bear interest
at LIBOR plus 1.5%. 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 1997 Directors Stock Plan, effective upon the
consummation of the Offerings, to each of the non-employee directors of the
Company.
Simultaneously with the closing of the 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 with proceeds from the
Offerings. In connection with the Acquisitions, owners of certain of the
Founding Companies will receive the Owner Amounts, as described below. The
Company expects to issue approximately $13.3 million of notes payable to fund a
portion of the Owner Amounts. Following the consummation of the Offerings, such
notes payable will be repaid with borrowings under the proposed credit facility.
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
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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 September 30, 1997, which represents
historical indebtedness, excluding (a) indebtedness transferred to owners of the
Founding Companies, (b) capital lease obligations and (c) indebtedness incurred
to fund a portion of the Owner Amounts:
SHARES OF
COMMON TOTAL
CASH STOCK DEBT
------- ---------- ------
(DOLLARS IN THOUSANDS)
Houston-Stafford..................................... $15,643 3,352,039 $1,120
Mills................................................ 11,637 2,493,657 400
Bexar-Calhoun........................................ 8,696 1,863,397 179
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............................................... 1,900 321,506 794
Thurman & O'Connell.................................. 2,331 499,600 95
Rodgers.............................................. 1,684 360,725 94
Hatfield............................................. 972 208,357 331
Ace.................................................. 892 191,056 --
Reynolds............................................. 939 201,191 400
Popp................................................. 976 209,158 --
------- ---------- ------
Total...................................... $57,461 12,313,025 $6,418
======= ========== ======
The foregoing table does not include Owner Amounts (based on September 30,
1997 balances) having an aggregate net book value of $30.6 million, as follows:
$5.9 million to be received by the owners of Houston-Stafford, $9.4 million to
be received by the owners of Mills, $2.0 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. The Owner Amounts were determined on the basis of negotiations between the
Founding Companies and IES in connection with entering into the various stock
purchase agreements. The Owner Amounts consist of transfers of cash in excess of
an agreed amount, nonoperating assets and liabilities, and net earnings of the
Founding Companies from July 1, 1997, through the date of the closing of the
Acquisitions.
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 1994, 1995 and 1996, Houston-Stafford made payments totaling
$174,000, $124,000 and $187,000, respectively, to the Brown-Mueller Joint
Venture, a general partnership of which Mr. Mueller is a member, for lease
payments on certain real properties used as electrical shops. For the year ended
September 30, 1997, such lease payments totaled $109,000. Mr. Mueller 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. Mr. Mueller will receive
approximately $5 million and 1.1 million shares of Common Stock in connection
with the Acquisitions in exchange for such promissory note, as well as 0.2
million shares for his new role as a member of IES management. Houston-Stafford
will recognize a non-cash, non-recurring compensation charge of approximately
$18.0 million related to the transfer of such cash and shares of Common Stock to
Mr. Mueller at the time of the Acquisitions.
Pursuant to a 5-year lease agreement effective November 1, 1997,
Houston-Stafford agreed to lease certain facilities owned by Mr. Mueller in
Spring, Texas. Such lease agreement provides for an annual rent of $20,000,
which the Company believes is not in excess of fair rental value for such
facilities.
During fiscal 1994, Mills derived contract revenues of $187,000 from CIMA
Services, Inc. ("CIMA"), an electrical services company of which Mr. Mills was a
part owner until October 1997. Additionally, during fiscal 1994, Mills paid
$2,900,000 to CIMA for material purchases. At December 31, 1994, Mills had
outstanding accounts receivable from CIMA of $145,000 and accounts payable to
CIMA of $294,000. Mr. Mills 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, $156,000 for 1996 and $117,000 for the nine
months ended September 30, 1997.
During 1995, Mr. Weik incurred indebtedness from Bexar-Calhoun of which the
largest aggregate amount outstanding at any time was $647,000. All of such
indebtedness was repaid as of April 18, 1997. Mr. Weik 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 is not in
excess of fair rental value for such facilities.
Pollock leases certain real property from Mr. Pollock. Amounts paid
pursuant to this lease were $20,000 for fiscal 1995, $36,000 for fiscal 1996 and
$36,000 for fiscal 1997.
Since January 1, 1996, Mr. Muth has from time to time incurred indebtedness
from Muth, of which the largest aggregate amount outstanding at any time was
$205,000. All amounts owed by Mr. Muth to Muth will be repaid prior to the
closing of the Offerings. Mr. Muth 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. Concurrently with the closing of the Acquisitions, Ace
will enter into a five year lease, with a five year option period, with Mr.
Stalvey and his brother. Initial annual rent 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(b).............................................. 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(c)............................................. 473,324 2.0
Alan R. Sielbeck(d)......................................... -- *
Robert Stalvey.............................................. 95,528 *
Richard L. Tucker(d)........................................ -- *
Bob Weik(e)................................................. 1,499,469 6.4
Thomas E. White, Jr.(d)..................................... -- *
Roy D. Brown(d)............................................. 1,608,979 6.9
All executive officers and directors as a group (15
persons)(f)............................................... 9,660,718 41.3%
- ---------------
* Less than one percent.
(a) Includes 1,118,194 shares held by trusts for the benefit of Mr. Snyder's
children, as to which Mr. Snyder disclaims beneficial ownership. Consists
entirely of Restricted Common Stock, which represents all of the Restricted
Common Stock outstanding. The holders of Restricted Common Stock, voting
together as a single class, are entitled to elect one member of the
Company's Board of Directors and to one-half of one vote for each share held
on all other matters on which they are entitled to vote. Holders of
Restricted Common Stock are not entitled to vote on the election of any
other directors. Such shares may be converted to Common Stock in certain
circumstances. See "Description of Capital Stock."
(b) Includes 465,914 shares of Common Stock held by the Pollock Family
Partnership, Ltd.
(c) Includes 25,689 shares of Common Stock owned by Mr. Muth's wife, as to which
Mr. Muth disclaims beneficial ownership.
(d) 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.
Mr. Brown's address is Houston-Stafford Electric, Inc., 10203 Mula Circle,
Stafford, Texas 77477.
(e) Includes 74,536 shares of Common Stock owned by two related trusts, as to
which Mr. Weik disclaims beneficial ownership.
(f) 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, 2,655,709 shares of Restricted Common
Stock, par value $0.01 per share, and 10,000,000 shares of preferred stock, par
value $0.01 per share. 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 and Restricted
Common Stock will be issued and outstanding, assuming no exercise of the
Underwriters' over-allotment options. 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 in the event of a disposition of such share of
Restricted Common Stock by the holder thereof (other than a distribution by a
holder to its partners or beneficial owners, or a transfer to a related party of
such holders (as defined in Sections 267, 707, 318 and/or 4946 of the Internal
Revenue Code of 1986, as amended)).
The Common Stock has been approved for listing upon notice of issuance 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 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,
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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 directors' and officers' liability insurance. The foregoing provisions
may extend to liabilities arising due to violations of the federal securities
laws. It is the position of the Securities and Exchange Commission (the
"Commission") that indemnification for liabilities under the Securities Act is
against public policy and is, therefore, unenforceable.
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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,
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 and Restricted 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 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.
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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 Commission. Sales under Rule 144 are also subject to certain manner
of sale provisions, notice requirements and the availability of current public
information about the Company. A person who is not deemed to have been an
affiliate of the Company at any time for 90 days preceding a sale and who has
beneficially owned his shares for at least two years would be entitled to sell
such shares under Rule 144 without regard to the volume
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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 (i) the issuance of 3,500,000 shares of its
Common Stock in accordance with the terms of the 1997 Stock Plan and (ii) the
issuance of 250,000 shares of its Common Stock in accordance with the terms of
the 1997 Directors Stock Plan. Options to purchase 300,000 shares have been
granted under the 1997 Stock Plan and it is anticipated that approximately
2,343,600 shares of Common Stock will be granted upon the closing of the
Offerings to certain other officers, directors and former stockholders of the
Company and 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 1997 Stock 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, 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, (ii) any shares of Common Stock issued or options
to purchase Common Stock granted pursuant to the Company's benefit plans
described herein or (iii) with respect to directors and executive officers,
certain pledges of securities. 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 aggregate, these
groups hold 16,365,336 shares of Common Stock and Restricted Common Stock. If
the
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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 Non-U.S. Holders
of Common Stock. A "Non-U.S. Holder" is any 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. This summary is for general
information only and does not address all of the United States federal income
and estate tax considerations that may be relevant to Non-U.S. Holders in light
of their particular circumstances or to Non-U.S. Holders that may be subject to
special treatment under United States federal income tax laws. 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 and other applicable
authorities, all of which are subject to change, possibly with retroactive
effect. Prospective purchasers of Common Stock are advised to consult their tax
advisors regarding the federal, state and local and foreign income and other tax
consequences of acquiring, holding and disposing of Common Stock.
DIVIDENDS
Dividends paid to a Non-U.S. Holder on shares of Common Stock will be
subject to withholding of United States federal income tax at a 30 percent rate
(or such lower rate as may be provided by an applicable income tax treaty
between the United States and a foreign country) unless the dividends are
effectively connected with the conduct of a trade or business of the Non-U.S.
Holder within the United States (or in the case of an applicable tax treaty are
attributable to a United States permanent establishment maintained by such
Non-U.S. Holder). Dividends that are effectively connected with the conduct of a
trade or business within the United States (or are attributable to a United
States permanent establishment) will be subject to United States federal income
tax on a net income basis (that is, after allowance for applicable deductions)
which is not collected by withholding provided the Non-U.S. Holder files the
appropriate certification with the Company or its agent. Any such effectively
connected dividends received by a foreign corporation may, under certain
circumstances, be subject to an additional "branch profits tax" at a 30 percent
rate or such lower rate as may be specified by an applicable income tax treaty.
Under United States Treasury Regulations currently in effect, dividends
paid to an address outside the United States will be presumed to be paid to a
resident of the country of address (unless the payor has knowledge to the
contrary) for purposes of the withholding tax rules discussed above and for
purposes of determining the applicability of a tax treaty rate. Under
recently-issued United States Treasury Regulations that are effective for
payments made after December 31, 1998 ("Final Regulations"), a Non-U.S. Holder
of Common Stock who wishes to claim the benefit of a tax treaty rate would be
required to satisfy applicable certification requirements. In addition, under
such Final Regulations, in the case of Common Stock held by a foreign
partnership, (i) the certification requirement generally would be applied to the
partners of the partnership, and (ii) the partnership would be required to
provide certain information, including a United States taxpayer identification
number.
A Non-U.S. Holder of Common Stock that is eligible for a reduced rate of
United States withholding tax pursuant to a tax treaty may obtain a refund of
any excess amounts currently withheld by filing an appropriate claim for refund
with the Internal Revenue Service.
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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 the conduct of 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 nor does such holder maintain an office or other
fixed place of business in the United States to which such gain is attributable;
(iii) such 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.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company must report annually to the Internal Revenue Service and to
each Non-U.S. Holder the amount of dividends paid to, and the tax withheld with
respect to, each Non-U.S. Holder. These reporting requirements apply regardless
of whether withholding was reduced by an applicable tax treaty. Copies of these
information returns may also be made available under the provisions of a treaty
or information exchange agreement with the tax authorities in the country in
which the Non-U.S. Holder resides. Under current law, U.S. backup withholding
tax (which is a withholding tax imposed at the rate of 31 percent on certain
payments to persons who fail to furnish the information required under U.S.
information reporting requirements) generally will not apply to dividends paid
on Common Stock to a Non-U.S. Holder at an address outside the United States
unless the payor has knowledge that the payee is a United States person.
However, under the Final Regulations described above, dividends paid on Common
Stock after December 31, 1998 may be subject to backup withholding unless
applicable certification requirements are satisfied.
Payment of the proceeds from a sale of Common Stock to or through a U.S.
office of a broker will be subject to information reporting and backup
withholding unless the owner certifies as to its status as a Non-U.S. Holder
under penalties of perjury or otherwise establishes an exemption. Payment of the
proceeds from a sale of Common Stock to or through a non-U.S. office of a broker
generally will not be subject to information reporting or backup withholding;
however, if such broker is (i) a United States person, (ii) a "controlled
foreign corporation", or (iii) a foreign person that derives 50 percent or more
of its gross income from the conduct of a trade or business in the United
States, such payment will be subject to information reporting (but currently not
backup withholding, although the issue of whether backup withholding should
apply is under consideration by the Internal Revenue Service) unless such broker
has documentary evidence in its records that the owner is a Non-U.S. Holder and
certain other conditions are met or the owner otherwise establishes an
exemption.
Any amounts withheld under the backup withholding rules will be credited
against the Non-U.S. Holder's federal income tax liability, if any, or refunded,
provided the required information is furnished to the Internal Revenue Service.
ESTATE TAX
The fair market value of Common Stock owned (or treated as owned) by an
individual at the time of his death will be includible in his gross estate for
U.S. federal estate tax purposes and thus may be subject to U.S. estate tax,
even though the individual at the time of death is neither a citizen of nor
domiciled in the United States, 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.........
SunTrust Equitable Securities Corporation...................
Sanders Morris Mundy Inc....................................
---------
Total.......................................... 5,600,000
=========
The Company has also entered into an international purchase agreement (the
"International Purchase Agreement") with Merrill Lynch International, Donaldson,
Lufkin & Jenrette International, SunTrust Equitable Securities Corporation and
Sanders Morris Mundy Inc. outside the United States and Canada (the
"International Managers" and, together with the U.S. Underwriters, the
"Underwriters"), for whom Merrill Lynch International is acting as
representative. 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, (ii) any shares of Common Stock issued or options
to purchase Common Stock granted pursuant to the Company's benefit plans
described herein or (iii) with respect to directors and executive officers,
certain pledges of securities.
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 Offerings, (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
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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 Common Stock has been approved for listing upon notice of issuance 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.
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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. A
partner in Andrews & Kurth L.L.P., will become Senior Vice President, General
Counsel and Secretary of the Company upon completion of the Offerings. The
partner owns 100,000 shares of Common Stock and options to purchase 150,000
shares of Common Stock, subject to vesting.
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 Commission a Registration Statement on Form
S-1 (together with all amendments, schedules and exhibits thereto the
"Registration Statement") under the Securities Act with respect to the Common
Stock offered hereby. This Prospectus, which is included as part of the
Registration Statement, does not contain all the information contained in the
Registration Statement, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement and the exhibits and schedules
thereto. Statements made in the Prospectus as to the contents of any contract,
agreement or other document are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement shall be deemed
qualified in its entirety by such reference. The Registration Statement and the
exhibits thereto may be inspected, without charge, at the public reference
facilities maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549, and at the Commission's regional offices
at Citicorp Center, 500 West Madison Street, Room 1400, Chicago, IL 60661, and 7
World Trade Center, Suite 1300, New York, NY 10048 or on the Internet at
http://www.sec.gov. Copies of such material can also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
Prior to filing the Registration Statement of which this Prospectus is a
part, the Company was not subject to the reporting requirements of Section 13 or
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act").
Upon effectiveness of the Registration Statement, the Company will become
subject to the informational and periodic reporting requirements of the Exchange
Act, and in accordance therewith, will file periodic reports, proxy statements,
and other information with the Commission. Such periodic reports, proxy
statements, and other information will be available for inspection and copying
at the public reference facilities and other regional offices referred to above.
The Company intends to register the securities offered by the Registration
Statement under the Exchange Act simultaneously with the effectiveness of the
Registration Statement and to furnish its stockholders with annual reports
containing audited financial statements and such other reports as may be
required from time to time by law or the New York Stock Exchange.
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INDEX TO FINANCIAL STATEMENTS
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
Consolidated Balance Sheets............................ F-11
Consolidated Statements of Operations.................. F-12
Consolidated Statements of Cash Flows.................. F-13
Consolidated Statements of Stockholders' Equity........ F-14
Notes to Consolidated 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
79
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, CO., 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 Stockholder's Equity..................... 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, INCORPORATED
Report of Independent Public Accountants............... F-116
Balance Sheets......................................... F-117
Statements of Operations............................... F-118
Statements of Cash Flows............................... F-119
Statements of Stockholder's Equity..................... F-120
Notes to Financial Statements.......................... F-121
THURMAN & O'CONNELL CORPORATION
Report of Independent Public Accountants............... F-128
Balance Sheets......................................... F-129
Statements of Operations............................... F-130
Statements of Cash Flows............................... F-131
Statements of Stockholders' Equity..................... F-132
Notes to Financial Statements.......................... F-133
RODGERS ELECTRIC COMPANY, INC.
Report of Independent Public Accountants............... F-139
Balance Sheet.......................................... F-140
Statement of Operations................................ F-141
Statement of Cash Flows................................ F-142
Statement of Stockholders' Equity...................... F-143
Notes to Financial Statements.......................... F-144
F-2
80
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 in the United States and Canada and outside the United States and
Canada (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 reflected 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 Offerings, as if they had
occurred on September 30, 1997. The unaudited pro forma combined statement of
operations gives 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 changes in salary, bonuses, benefits and lease payments, these
changes have been reflected in the unaudited pro forma combined statement 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 combined 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 combined financial
position or results of operations would actually have been if such transactions
in fact had occurred on those dates and are not necessarily representative of
IES's combined financial position or results of operations for any future
period. Since the 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 historical financial statements and notes
thereto included elsewhere in this Prospectus. See also "Risk Factors" included
elsewhere herein.
F-3
81
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
Inventories............................. 25 541 23 -- 2,878 93 898 18 --
Prepaid expenses and other.............. 244 100 1,700 338 1,162 779 381 554 170
------ ------- ------ ------ ------- ------- ------ ------ ------
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 -- -- 1,830 443 -- -- 318
GOODWILL, NET............................ -- -- -- -- 958 173 -- -- --
------ ------- ------ ------ ------- ------- ------ ------ ------
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
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 19
------ ------- ------ ------ ------- ------- ------ ------ ------
Total current liabilities............. 2,449 3,336 3,353 2,187 14,143 10,281 3,260 6,378 2,503
------ ------- ------ ------ ------- ------- ------ ------ ------
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 and minority
interest.............................. -- 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 stockholders............ -- -- -- -- -- -- -- -- --
Additional paid-in capital.............. -- 205 -- -- 112 175 -- 9 --
Retained earnings and unrealized
gain/loss on stock.................... 2,091 7,126 4,482 1,893 8,926 10,410 3,371 886 1,034
Treasury stock.......................... (434) -- -- -- (1,125) (51) -- -- --
------ ------- ------ ------ ------- ------- ------ ------ ------
Total stockholders' equity............ 1,658 7,351 4,490 1,894 8,208 10,535 3,445 896 1,035
------ ------- ------ ------ ------- ------- ------ ------ ------
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 $ -- $ (8,952) $ 1,796 $ 19,731
Accounts receivable..................... 679 623 3,548 -- (1,620) 57,925 --
Less-Allowance.......................... 17 15 61 -- -- 1,568 --
------ ------ ------ -------- -------- -------- --------
Accounts Receivable, net.............. 662 608 3,487 -- (1,620) 56,357 --
------ ------ ------ -------- -------- -------- --------
Costs and profits recognized in excess
of billings........................... 52 20 1,088 -- -- 6,906 --
Inventories............................. 213 -- 344 -- -- 5,033 --
Prepaid expenses and other.............. 24 73 213 1,560 (1,719) 5,579 (1,560)
------ ------ ------ -------- -------- -------- --------
Total current assets.................. 2,111 1,519 5,961 1,560 (12,291) 75,671 18,171
PROPERTY AND EQUIPMENT, NET.............. 301 393 1,057 6 (3,921) 10,559 --
OTHER ASSETS............................. -- 175 -- -- (1,169) 1,646 --
GOODWILL, NET............................ -- -- -- -- 163,592 164,723 --
------ ------ ------ -------- -------- -------- --------
Total assets.......................... $2,412 $2,087 $7,018 $ 1,566 $146,211 $252,599 $ 18,171
====== ====== ====== ======== ======== ======== ========
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 1,565 -- 36,097 (1,560)
Billings in excess of costs and profits
recognized............................ 361 109 430 -- -- 9,669 --
Income taxes payable.................... -- 213 -- -- -- 2,354 --
Other................................... -- -- 73 -- 406 1,069 --
------ ------ ------ -------- -------- -------- --------
Total current liabilities............. 630 846 3,639 1,565 56,985 111,555 (63,561)
------ ------ ------ -------- -------- -------- --------
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities............................ 88 58 398 -- 15,189 18,541 (4,558)
Deferred income taxes................... -- 75 5 -- 869 1,033 --
Other long-term liabilities and minority
interest.............................. -- -- 6 -- (2,428) 589 --
------ ------ ------ -------- -------- -------- --------
Total long-term liabilities........... 88 133 409 -- 13,630 20,163 (4,558)
------ ------ ------ -------- -------- -------- --------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock............................ 300 15 42 41 (663) 137 70
Restricted common stock................. -- -- -- -- 26 26 --
Receivable from stockholders............ -- -- -- (40) 40 -- --
Additional paid-in capital.............. -- -- 198 13,618 122,747 137,064 86,220
Retained earnings and unrealized
gain/loss on stock.................... 1,394 1,093 2,760 (13,618) (48,194) (16,346) --
Treasury stock.......................... -- -- (30) -- 1,640 -- --
------ ------ ------ -------- -------- -------- --------
Total stockholders' equity............ 1,694 1,108 2,970 1 75,596 120,881 86,290
------ ------ ------ -------- -------- -------- --------
Total liabilities and stockholders'
equity.............................. $2,412 $2,087 $7,018 $ 1,566 $146,211 $252,599 $ 18,171
====== ====== ====== ======== ======== ======== ========
AS
ADJUSTED
--------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............... $ 21,527
Accounts receivable..................... 57,925
Less-Allowance.......................... 1,568
--------
Accounts Receivable, net.............. 56,357
--------
Costs and profits recognized in excess
of billings........................... 6,906
Inventories............................. 5,033
Prepaid expenses and other.............. 4,019
--------
Total current assets.................. 93,842
PROPERTY AND EQUIPMENT, NET.............. 10,559
OTHER ASSETS............................. 1,646
GOODWILL, NET............................ 164,723
--------
Total assets.......................... $270,770
========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt.... $ 365
Accounts payable and accrued expenses... 34,537
Billings in excess of costs and profits
recognized............................ 9,669
Income taxes payable.................... 2,354
Other................................... 1,069
--------
Total current liabilities............. 47,994
--------
LONG-TERM LIABILITIES:
Long-term debt, net of current
maturities............................ 13,983
Deferred income taxes................... 1,033
Other long-term liabilities and minority
interest.............................. 589
--------
Total long-term liabilities........... 15,605
--------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock............................ 207
Restricted common stock................. 26
Receivable from stockholders............ --
Additional paid-in capital.............. 223,284
Retained earnings and unrealized
gain/loss on stock.................... (16,346)
Treasury stock.......................... --
--------
Total stockholders' equity............ 207,171
--------
Total liabilities and stockholders'
equity.............................. $270,770
========
F-4
82
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 13,618 (19,686)
GOODWILL AMORTIZATION.............................. -- -- -- -- -- -- 4,094
------- ------- ------ ------ ------- -------- -------
INCOME (LOSS) FROM OPERATIONS...................... 726 78 1,365 466 519 (13,618) 15,592
OTHER INCOME (EXPENSE):
Interest expense.................................. (172) (79) (6) (7) (87) -- (255)
Other, net........................................ 3 23 70 36 129 -- 316
------- ------- ------ ------ ------- -------- -------
Other income (expense), net....................... (169) (56) 64 29 42 -- 61
------- ------- ------ ------ ------- -------- -------
INCOME (LOSS) BEFORE INCOME TAXES.................. 557 22 1,429 495 561 (13,618) 15,653
PROVISION (BENEFIT) FOR INCOME TAXES............... 214 21 46 178 (51) 7,583
------- ------- ------ ------ ------- -------- -------
NET INCOME (LOSS).................................. $ 343 $ 1 $1,383 $ 317 $ 612 $(13,618) $ 8,070
======= ======= ====== ====== ======= ======== =======
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.............................. 4,094
-----------
INCOME (LOSS) FROM OPERATIONS...................... 24,943
OTHER INCOME (EXPENSE):
Interest expense.................................. (1,081)
Other, net........................................ 1,330
-----------
Other income (expense), net....................... 249
-----------
INCOME (LOSS) BEFORE INCOME TAXES.................. 25,192
PROVISION (BENEFIT) FOR INCOME TAXES............... 11,161
-----------
NET INCOME (LOSS).................................. $ 14,031
===========
NET INCOME PER SHARE............................... $ .64
===========
SHARES USED IN COMPUTING PRO FORMA NET INCOME PER
SHARE(1).......................................... 22,075,967
===========
- ---------------
(1) Includes (a) 2,655,709 shares issued to the IES founder and chairman of the
board, (b) 1,396,602 shares issued to management of IES, (c) 12,313,025
shares issued to owners of the Founding Companies and (d) 5,590,631 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 1,409,369
shares excluded reflect an equivalent number of shares related to 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
83
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 (the Acquisitions) concurrently
with and as a condition to 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. 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 reflected 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 (including 3.9 million of the 4.1 million shares issued to the
corporate management of IES, the founder and Chairman of the Board of IES and
the trusts for the benefit of his children, which are reflected as additional
acquisition cost) was determined using an estimated fair value of $10.50 per
share (or $134.2 million), which is less than the estimated initial public
offering price of $14.00 per share due primarily to restrictions on the sale and
transferability of the shares issued. The total estimated purchase price of
$176.0 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 $30.6 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
84
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 $30.6
million of previously undistributed earnings and nonoperating assets and
liabilities to the owners of the Founding Companies, which is expected
to be funded using $11.6 million of cash (including $2.7 million of
Offerings proceeds), $5.7 million of nonoperating assets, net of
liabilities, and notes payable to owners of $13.3 million which will be
retired with new borrowings under the proposed credit facility.
(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 IES stockholders.
(d) Records the purchase of the Founding Companies by IES consisting of
notes payable of $41.8 million and 12,780,340 shares of Common Stock
valued at $10.50 per share (or $134.2 million) for a total estimated
purchase price of $176.0 million resulting in excess purchase price of
$163.8 million over the net assets acquired of $12.2 million (see Note
2).
The following reconciles the combined historical net assets of the
Founding Companies to the net assets acquired (in
thousands):
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).............................................. (30,638) 5,879 (24,759)
Other purchase adjustments, net........................ (71) -- (71)
------- ------- -------
Net assets after transfers and purchase adjustments.... $14,576 $(2,330) $12,246
======= ======= =======
(e) Records the noncash, non-recurring compensation charge related to the
exchange of cash and shares of Common Stock for a note receivable from
an officer of Houston-Stafford. The compensation charge has not been
included in the accompanying unaudited pro forma combined statement of
operations as it represents a non-recurring charge directly related to
the Acquisitions.
(f) Records the net 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 and net of estimated offering costs, including
underwriters commissions and discounts, accounting, legal and other
estimated Offerings costs of $11.7 million).
(g) Records payment of the cash portion of the consideration to the
stockholders of the Founding Companies of $57.5 million in connection
with the Acquisitions (see (b) and (d) above), the expected repayment of
remaining historical short- and long-term debt totaling $6.4 million and
the payment of $2.7 million of the Owner Amounts.
The following tables summarize unaudited pro forma combined balance sheet
adjustments (in thousands):
ADJUSTMENT
-------------------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
-------- -------- -------- -------- -------- -----------
ASSETS
Current assets --
Cash and cash equivalents.................. $ (8,952) $ -- $ -- $ -- $ -- $ (8,952)
Accounts receivable........................ (1,620) -- -- -- -- (1,620)
Prepaid expenses and other................. (1,719) -- -- -- -- (1,719)
-------- -------- -------- -------- -------- --------
Total current assets................. (12,291) -- -- -- -- (12,291)
Property and equipment, net.................. (3,921) -- -- -- -- (3,921)
Other assets................................. (1,169) -- -- -- -- (1,169)
Goodwill, net................................ -- -- -- 163,592 -- 163,592
-------- -------- -------- -------- -------- --------
Total assets......................... $(17,381) $ -- $ -- $163,592 $ -- $146,211
======== ======== ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Current maturities of long-term debt....... $ (882) $ 15,643 $ -- $ 41,818 $ -- $ 56,579
Other...................................... -- -- -- 406 -- 406
-------- -------- -------- -------- -------- --------
Total current liabilities............ (882) 15,643 -- 42,224 -- 56,985
-------- -------- -------- -------- -------- --------
Long-term debt, net of current maturities.... 15,189 -- -- -- -- 15,189
Deferred income taxes........................ -- -- -- 869 -- 869
Other long-term liabilities.................. (1,051) -- -- (1,377) -- (2,428)
-------- -------- -------- -------- -------- --------
Total long-term liabilities.......... 14,138 -- -- (508) -- 13,630
-------- -------- -------- -------- -------- --------
Stockholders' equity --
Common stock............................... -- -- (262) (401) -- (663)
Restricted common stock.................... -- -- -- 26 -- 26
Receivable from stockholders............... -- -- 40 -- -- 40
Additional paid-in capital................. -- (15,643) (14,521) 134,895 18,016 122,747
Retained earnings.......................... (30,637) -- 13,618 (13,159) (18,016) (48,194)
Treasury stock............................. -- -- 1,125 515 -- 1,640
-------- -------- -------- -------- -------- --------
Total stockholders' equity........... (30,637) (15,643) -- 121,876 -- 75,596
-------- -------- -------- -------- -------- --------
Total liabilities and stockholders'
equity............................. $(17,381) $ -- $ -- $163,592 $ -- $146,211
======== ======== ======== ======== ======== ========
F-7
85
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
ADJUSTMENT
------------------- POST-MERGER
(F) (G) ADJUSTMENTS
------- -------- -----------
ASSETS
Current assets --
Cash and cash equivalents................................. $86,290 $(66,559) $ 19,731
Prepaid expenses and other................................ -- (1,560) (1,560)
------- -------- --------
Total current assets................................ 86,290 (68,119) 18,171
------- -------- --------
Total assets........................................ $86,290 $(68,119) $ 18,171
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities --
Current maturities of long-term debt...................... $ -- $(62,001) $(62,001)
Accounts payable and accrued expenses..................... -- (1,560) (1,560)
------- -------- --------
Total current liabilities........................... -- (63,561) (63,561)
------- -------- --------
Long-term debt, net of current maturities................... -- (4,558) (4,558)
------- -------- --------
Total long-term liabilities......................... -- (4,558) (4,558)
------- -------- --------
Stockholders' equity --
Common stock.............................................. 70 -- 70
Additional paid-in capital................................ 86,220 -- 86,220
------- -------- --------
Total stockholders' equity.......................... 86,290 -- 86,290
------- -------- --------
Total liabilities and stockholders' equity.......... $86,290 $(68,119) $ 18,171
======= ======== ========
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
(a) Reflects the $6.1 million reduction in salaries, bonuses and benefits
and lease payments to the owners of the Founding Companies. These
reductions in salaries, bonuses and benefits and lease payments have
been agreed prospectively in accordance with the terms of employment
agreements executed as part of the Acquisitions. Such employment
agreements are primarily for five years, contain restrictions related
to competition and provide severance for termination of employment in
certain circumstances.
(b) Reflects the amortization of goodwill 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, non-cash compensation
charge of $13.6 million recorded by IES for common stock issued to
management for nominal consideration. Also, reflects interest expense
of $1.0 million on borrowings of $13.3 million necessary to fund the
transfers discussed in 3.(a) above, net of interest savings of $0.7
million on the $8.1 million of historical debt to be repaid using
proceeds from the Offerings or to be transferred to the Founding
Companies as discussed in 3.(a) above. The additional $1.0 million of
interest expense was calculated utilizing an assumed annual effective
interest rate of approximately 7.5%.
(d) Reflects the incremental provision for federal and state income taxes
at a 38% overall tax rate, before non-deductible goodwill and other
permanent items, relating to the other statements of operations
adjustments and for income taxes on the pretax income of Founding
Companies that have historically elected S Corporation tax status.
F-8
86
INTEGRATED ELECTRICAL SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes unaudited pro forma combined statement of
operations adjustments (in thousands):
ADJUSTMENT
-------------------------------------- PRO FORMA
(A) (B) (C) (D) ADJUSTMENTS
------- ------- -------- ------- -----------
Selling, general and administrative
expenses......................... $(6,068) $ -- $(13,618) $ -- $(19,686)
Goodwill amortization.............. -- 4,094 -- -- 4,094
------- ------- -------- ------- --------
Income (loss) from operations.... 6,068 (4,094) 13,618 -- 15,592
Other income (expense) --
Interest expense................. -- -- (255) -- (255)
Other, net....................... -- 316 -- -- 316
------- ------- -------- ------- --------
Other income (expense), net...... -- 316 (255) -- 61
------- ------- -------- ------- --------
Income (loss) before income
taxes......................... 6,068 (3,778) 13,363 -- 15,653
Provision for income taxes......... -- -- -- 7,583 7,583
------- ------- -------- ------- --------
Net income (loss).................. $ 6,068 $(3,778) $ 13,363 $(7,583) $ 8,070
======= ======= ======== ======= ========
F-9
87
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
(see Note 1) 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
88
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
89
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
90
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)
Purchase of business................................. -- -- -- (100) -- (100)
Collections of notes receivable...................... -- -- -- 77 -- 77
------- ------- ------- ------- ------- -------
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 $ 111 $ 143
Income taxes....................................... 104 225 1,482 2,050 332 900
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
91
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
(SEE NOTE 1)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' 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
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 (unaudited)........... -- -- -- 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
92
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
93
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, 1996 and September 30, 1997 and the nine months
ended September 30, 1996 and 1997 (in thousands):
NINE MONTHS
YEAR ENDED ENDED
---------------------------- SEPTEMBER 30,
DECEMBER 31, SEPTEMBER 30, -------------
1996 1997 1996 1997
------------ ------------- ----- -----
(UNAUDITED)
Treasury stock purchased........................ $800 $ -- 800 --
Debt assumed in treasury stock purchase
transaction................................... 800 -- 800 --
Purchase price of real property................. 496 396 396 296
Debt assumed in connection with purchase of
property...................................... 368 321 343 296
Receivables reduced in connection with purchase
of property................................... 79 26 53 --
Debt assumed in connection with prepayments..... -- 31 -- 31
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
94
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 consolidated financial position
or results of operations of the Company.
F-17
95
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
96
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
97
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 with total borrowing
capacity 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
98
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
99
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
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 (in thousands):
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 (in
thousands):
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
100
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
(in thousands):
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
------- -------- -------------
(IN THOUSANDS)
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 Roy 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
101
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. Subsequent to the August 1996
transaction, Mr. Mueller remained an officer of the Company and was paid cash
compensation of approximately $372,000 during the last four months of 1996 and
approximately $252,000 during the first nine months of 1997. These amounts have
been reflected as compensation expense in the accompanying income statements for
the applicable periods.
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.
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.
F-24
102
HOUSTON-STAFFORD ELECTRIC, INC. AND CONSOLIDATED ENTITY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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
second guarantor. This guaranty expires in December of 1997 and is in the amount
of $750,000.
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.
13. SUBSEQUENT EVENT CONDITIONAL UPON IES TRANSACTION (UNAUDITED):
As a condition of the definitive agreement with IES discussed in Note 1,
the Company will recognize a non-cash, non-recurring compensation charge of
approximately $18.0 million related to the exchange of cash and 1.1 million
shares of Common Stock for a note payable by the Company to an officer of the
Company, and the issuance of 0.2 million shares to such officer for his new role
as IES management.
F-25
103
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
104
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................................ 13,618
Retained deficit.......................................... (13,618)
-------
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
105
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................ 13,618
--------
LOSS BEFORE INCOME TAXES.................................... (13,618)
PROVISION FOR INCOME TAXES.................................. --
--------
NET LOSS.................................................... $(13,618)
========
The accompanying notes are an integral part of these financial statements.
F-28
106
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.................................................. $(13,618)
Non-cash compensation charge.............................. 13,618
Adjustments to reconcile net loss to net cash used in
operating activities --
Changes in assets and liabilities --
Increase in deferred offering costs.................. (1,560)
Increase in amounts due to stockholder............... 1,565
--------
Net cash provided by 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
107
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.................... 2,329,600 $23 $ -- $ -- $ -- $23
ISSUANCE OF ADDITIONAL SHARES
TO MANAGEMENT............... 1,722,711 18 -- -- -- 18
NET INCOME (LOSS)............. -- -- -- 13,618 (13,618) --
RECEIVABLE FROM STOCKHOLDERS
FOR STOCK ISSUED............ -- -- (40) -- -- (40)
--------- --- ---- ------- -------- ---
BALANCE, September 30, 1997... 4,052,311 $41 $(40) $13,618 $(13,618) $ 1
========= === ==== ======= ======== ===
- ---------------
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
108
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 founder and current primary stockholder, on
behalf of the Company. The Company's founder and primary stockholder has also
committed to fund future organization expenses and offering costs. As of
September 30, 1997, costs of approximately $1,560,000 have been incurred in
connection with the Offerings, and such costs will be a reduction of the
proceeds from the Offerings. IES has treated these costs as deferred offering
costs in the accompanying balance sheet. 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 2,329,600 shares (as restated for the 2,329.6-for-one stock split
discussed below) of common stock at $.01 par value (Common Stock). IES
subsequently issued another 1,722,711 shares (as restated for the
2,329.6-for-one stock split discussed below) of Common Stock at $.01 par value
to certain management of IES. Consequently, as restated for the 2,329.6-for-one
stock split discussed below, the Company had issued a total of 2,655,709 shares
to its founder and Chairman of the Board, and certain trusts established for the
benefit of his children, and an aggregate of 1,396,602 shares to other executive
management of the Company. As a result of the issuance of shares to management
for nominal consideration, the Company recorded for financial statement
presentation purposes, a nonrecurring, noncash compensation charge of $13.6
million, calculated based on the fair value of such shares which has been
determined to be $9.10 and $9.80 per share (a discount of 35% and 30%,
respectively, from the estimated initial public offering price) for the shares
issued in June 1997 and September 1997, respectively. The fair value of such
shares was based on specific factors related to the Company and the transaction
including restrictions on transferability and sale, the time value of money
during the holding period and the substantive progress of the transaction at
each issuance date. The nonrecurring compensation charge discussed above does
not include any of the shares issued to the founder and chairman of the board,
and certain trusts established for the benefit of his children. The shares
issued to the founder and Chairman of the Board, and such trusts, will be
reflected as acquisition costs in connection with the Acquisitions.
IES effected a 2,329.6-for-one stock split in October 1997, for each share
of common stock of the Company then outstanding. In addition, the Company
increased the number of authorized shares of common stock to 100,000,000 and
increased the number of authorized shares of $.01 par value preferred stock to
10,000,000. The effects of the Common Stock split and the increase in the shares
of authorized common stock have been retroactively reflected on the balance
sheet, statement of stockholders' equity and in the accompanying notes.
Additionally, the difference between the initial capitalization and the par
value of
F-31
109
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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 common stock will convert into Common
Stock upon disposition by the holder of such shares.
Stock Plan
In September 1997, the Company's board of directors and stockholders
approved the Company's 1997 Stock Plan (the Plan), which provides for the
granting or awarding of incentive or nonqualified stock options, stock
appreciation rights, restricted or phantom stock, and other incentive awards to
directors, officers, key employees and consultants of the Company. The number of
shares authorized and reserved for issuance under the Plan is the greater of 3.5
million shares or 15% of the aggregate number of shares of Common Stock
outstanding. The terms of the option awards will be established by the
Compensation Committee of the Company's board of directors. The Company intends
to file a registration statement on Form S-8 under the Securities Act of 1933
registering the issuance of shares upon exercise of options granted under this
Plan. The Company 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 nonemployee directors. The
number of shares authorized and reserved for issuance under the Directors' Plan
is 250,000 shares. The Directors' Plan provides for the automatic grant of
options to purchase 5,000 shares to each nonemployee director serving in such
capacity at the commencement of the Offerings.
Each nonemployee director will be granted options to purchase an additional
5,000 shares at the time of an initial election of such director. In addition,
each director will be automatically granted options to purchase 5,000 shares
annually at each September 30 on which such director remains a director. All
options will have an exercise price based on the fair market value at the date
of grant and have vesting terms similar to options granted under the Stock Plan
discussed above.
The Directors' Plan allows nonemployee directors to receive additional
option grants in amounts and at terms as deemed appropriate by the Company's
board of directors.
3. STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
F-32
110
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(APB) Opinion No. 25 under which compensation expense is recorded to the extent
that the fair market value of the related stock is in excess of the options
exercise price at date of grant. Entities electing to remain with the accounting
in APB Opinion No. 25 must make pro forma disclosures of net income and earnings
per share as if the fair value method of accounting prescribed in SFAS No. 123
had been applied. The Company will measure compensation expense attributable to
stock options based on the method prescribed in APB Opinion No. 25 and will
provide the required pro forma disclosure of net income and earnings per share,
as applicable, in the notes to future consolidated annual financial statements.
4. NEW ACCOUNTING PRONOUNCEMENTS:
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises rather
than primary and fully diluted earnings per share as previously required. Under
the provisions of this statement, basic earnings per share will be computed
based on weighted average shares outstanding and will exclude dilutive
securities such as options and warrants. Diluted earnings per share will be
computed including the impacts of all potentially dilutive securities. The
Company 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 shares, and conversion
and exercise prices. 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 as
additional minimum pension liability changes, currency translation adjustments,
and unrealized gains and losses on available for sale securities).
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, Co., Inc. and General Partner, Inc.
Houston-Stafford Electric, Inc. and Stark Investments, Inc.
Mills Electrical Contractors, Inc.
Muth Electric, Inc.
Pollock Electric Inc.
Reynolds Electric Corp.
Rodgers Electric Company, Inc.
Summit Electric of Texas, Incorporated
Thomas Popp & Company
Thurman & O'Connell Corporation
F-33
111
INTEGRATED ELECTRICAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The aggregate consideration that will be paid by IES to acquire the
Founding Companies is estimated to be approximately $57.5 million in cash and
will be 12.3 million shares of Common Stock. Additionally, approximately 3.9
million of the 4.1 million shares issued to the IES founder and Chairman of the
Board and certain trusts, and certain other management, will be reflected as
acquisition costs as part of the acquisition transactions.
In addition, the Company has entered into employment agreements with
certain key executives of the Founding Companies and the executive officers of
IES. These employment agreements generally prohibit such individuals from
disclosing confidential information and trade secrets, and restrict such
individuals from competing with the Company for a period of two years following
termination of employment. The initial term of these employment agreements is
five years with provisions for annual extensions at the end of the initial term.
6. EVENTS SUBSEQUENT TO THE DATE OF THE REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED)
The Company expects to enter into a credit facility effective following the
closing of the Offerings. 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.
Amounts borrowed under the proposed credit facility will bear interest at an
annual rate equal to either (a) the London interbank offered rate ("LIBOR") plus
1.0% to 2.0%, as determined by the ratio of the Company's total funded debt to
EBITDA (as defined in the credit facility) or (b) the higher of (i) the bank's
prime rate and (ii) the Federal Funds rate plus 0.5%, plus up to 0.5%, as
determined by the ratio of the Company's total funded debt to EBITDA. Commitment
fees of 0.25% to 0.375%, as determined by the ratio of the Company's total
funded debt to EBITDA, will be due on any unused borrowing capacity under the
credit facility. 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 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 and execution of certain
definitive loan documentation.
F-34
112
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Mills Electrical Contractors, Inc.:
We have audited the accompanying consolidated balance sheets of Mills
Electrical Contractors, Inc., a Texas corporation, and Subsidiary as of December
31, 1995 and 1996 and September 30, 1997, and the related consolidated
statements of operations, cash flows and stockholders' equity for each of the
three years in the period ended December 31, 1996 and for the year ended
September 30, 1997. 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
113
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:
Line-of-Credit and current maturities of long-term debt... $ 131 $ 294 $ 643
Accounts payable and accrued expenses --
Trade.................................................. 4,439 8,886 7,672
Related parties........................................ 23 633 --
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 1,746 4,523 1,966
Unearned revenue and other current liabilities............ 98 -- --
------- ------- -------
Total current liabilities......................... 6,437 14,336 10,281
------- ------- -------
LONG-TERM DEBT, net of current maturities................... 260 333 169
MINORITY INTEREST........................................... -- 3 75
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value, 1,000 shares authorized, 855
shares issued and 727 shares outstanding............... 1 1 1
Additional paid-in capital................................ 175 175 175
Retained earnings......................................... 3,824 7,240 10,410
Treasury stock, 128 shares, at cost....................... (51) (51) (51)
------- ------- -------
Total stockholders' equity........................ 3,949 7,365 10,535
------- ------- -------
Total liabilities and stockholders' equity........ $10,646 $22,037 $21,060
======= ======= =======
The accompanying notes are an integral part of these consolidated financial
statements.
F-36
114
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
115
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED YEAR ENDED NINE MONTHS
DECEMBER 31, SEPTEMBER 30, ENDED SEPTEMBER 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 $ 93 $ 105
The accompanying notes are an integral part of these consolidated financial
statements.
F-38
116
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
117
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
The accompanying consolidated financial statements include the accounts of
Mills Electrical Contractors, Inc. (Mills), a Texas corporation, and its 89%
owned subsidiary, Fort Worth Regional Electrical Systems, L.L.C. (RES), a Texas
limited liability company (collectively, the Company). The subsidiary was formed
during 1996. In September 1997, Mills sold 10% of the capital stock of RES to an
officer of RES at net book value per share resulting in proceeds to the Company
of $71,000. Financial statements prior to 1996 reflect only the accounts of
Mills. All significant intercompany transactions have been eliminated in
consolidation.
The Company focuses on providing electrical system installation and repair
services primarily for mid-sized to large commercial facilities as well as
residential facilities. The Company performs the majority of its contract work
under fixed price contracts, with contract terms generally ranging from 12 to 36
months. The Company performs the majority of its work in the Dallas-Fort Worth,
Texas, area.
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 consolidated financial statements for the nine months ended
September 30, 1996 and 1997, are unaudited and have been prepared pursuant to
the rules and regulations of the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of the Company's management, the unaudited interim consolidated
financial statements contain all adjustments (consisting of normal recurring
adjustments) considered necessary for a fair presentation. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year.
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 and the
nine months ended September 30, 1996 and 1997:
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
SEPTEMBER 30, -------------
1994 1995 1996 1997 1996 1997
---- ---- ---- ------------- ----- -----
(UNAUDITED)
Property acquired in capital lease
transactions........................ $290 $195 $254 $17 $237 $ --
Goodwill recognized in purchase
transactions........................ $ -- $ -- $185 -- 185 --
F-40
118
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 the purchase of the rights to the name "Regional
Electric Systems" from an individual who became an officer of RES. The acquired
assets were recorded at their estimated fair market value using the purchase
method of accounting. The transaction resulted in the recognition of goodwill of
approximately $185,000 which is being amortized over a 20 year period.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a construction contract. Revenues from construction
contracts are recognized on the percentage-of-completion method measured by the
percentage of costs incurred to date to total estimated costs for each contract.
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
119
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 consolidated financial statements of the Company
include only a provision for state income taxes and do not include a provision
for current or deferred federal income taxes. The Company intends to terminate
its S Corporation status concurrently with the effective date of the Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's consolidated financial
statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the consolidated financial position or results of operations
of the Company.
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
120
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 of) 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
121
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 the line of credit and long-term debt as of September 30,
1997, are as follows (in thousands):
Year ending September 30 --
1998................................................... $643
1999................................................... 143
2000................................................... 26
----
$812
====
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
$156,000, $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
F-44
122
MILLS ELECTRICAL CONTRACTORS, INC. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
lease rate. The rent paid under this related-party lease was approximately
$60,000 for the year ended September 30, 1997. The Company also rents certain
office equipment and warehouse space under several operating lease agreements
which vary in length and terms. The rent paid under these lease agreements was
approximately $8,000, $45,000 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
Accounts receivable from sale of subsidiary stock...... -- -- 71
Interest receivable from CIMA and officer.............. 1 -- --
Accounts payable to CIMA............................... 23 633 --
Contract revenues from CIMA............................ 1,116 1,257 1,368
Purchases of material from CIMA........................ 812 1,080 2,062
Interest income received from CIMA and officers........ 38 14 1
Minority interest in net income of RES................. -- 3 (2)
Liability attributable to minority interest............ -- 3 75
Capital lease obligation to an officer of RES.......... -- 116 82
Payments under capital lease obligation with an officer
of RES............................................... -- 31 54
Payments under operating leases with officers of the
Company.............................................. 26 232 270
Additionally, the Company has guaranteed an officer note at a bank with an
outstanding balance of approximately $125,000 at September 30, 1997. The
Company's property and equipment has been cross-pledged as collateral.
8. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution profit-sharing plan that covers all
employees meeting certain age and service requirements. Company contributions to
the plan are at the discretion of the board of directors. Contributions to the
plan charged to operations in 1994, 1995, 1996 and the year ended September 30,
1997 were $186,000, $450,000, $789,000 and $789,000, respectively.
F-45
123
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
124
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
125
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
126
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
127
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 1,197 132 202 128 198
The accompanying notes are an integral part of these consolidated financial
statements.
F-50
128
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
129
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS, ORGANIZATION AND BASIS OF PRESENTATION:
BW Consolidated, Inc. (the Company), a Nevada S Corporation, and
Subsidiaries, two of which are Texas limited partnerships, focuses on providing
electrical system installation and repair services primarily for residential and
mid-sized to large commercial facilities. The Company performs the majority of
its contract work under fixed-price contracts with contract terms generally
ranging from three to 24 months. The Company performs the majority of its work
in Texas.
In January 1996, the original parent company, Bexar Enterprises, Inc., a
Nevada C Corporation, was merged with BW Investments, Inc., Bexar Electric
Company, Inc., and Calhoun Electric Company, Inc., all wholly owned
subsidiaries. The survivor of the merger was Calhoun Electric Company, Inc., a
Texas S Corporation, and its 90 percent owned subsidiary, Bexar Electric
Company, Ltd. (BEC), a Texas limited partnership. The 10 percent minority
interest in the partnership was purchased by employees of Bexar Electric
Company, Ltd. An additional 10 percent minority interest in Bexar Electric
Company, Ltd. (a Texas limited partnership), was purchased by employees of the
Company in January 1997.
In May 1997, Calhoun Electric Company, Inc., a Texas S Corporation,
transferred its assets and liabilities to Calhoun Electric Company, Ltd. (CEC),
a Texas limited partnership. Subsequent to this transfer, Calhoun Electric
Company, Inc., a Texas S Corporation, reorganized as a Nevada S Corporation and
changed its name to BW Consolidated, Inc.
The accompanying financial statements present BW Consolidated, Inc. (and
its predecessors), together with its majority-owned subsidiaries on a
consolidated basis. All significant intercompany activity has been eliminated in
consolidation. Additionally, minority interests in subsidiaries of BW
Consolidated, Inc. have been reflected as "Minority Interest in Consolidated
Subsidiary" in the accompanying consolidated financial statements.
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 employee 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.
F-52
130
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments with an original
maturity of three months or less when purchased to be cash equivalents.
Supplemental Cash Flow Information (in thousands)
The Company had the following noncash investing and financing activities
for the years ended December 31, 1994, 1995 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.
F-53
131
BW CONSOLIDATED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provisions in construction contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience with
similar contracts in recent years, the retention balance at each balance sheet
date will be collected within the subsequent fiscal year.
The current asset, "Costs and estimated earnings in excess of billings on
uncompleted contracts," represents revenues recognized in excess of amounts
billed. The current liability, "Billings in excess of costs and estimated
earnings on uncompleted contracts,"' represents billings in excess of revenues
recognized.
Warranty Costs
The Company warrants labor for the first year after installation of new
electrical systems and servicing of existing electrical systems. A reserve for
warranty costs is recorded based upon the historical level of warranty claims
and management's estimate of future costs.
Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company has elected S Corporation status effective January 1, 1996, as
defined by the Internal Revenue Code, whereby the Company itself is not subject
to taxation for federal purposes. Under S Corporation status, the stockholders
report their share of the Company's taxable earnings or losses in their personal
tax returns. Consequently, the accompanying financial statements of the Company
do not include a provision for current or deferred income taxes (see Note 7).
The Company intends to terminate its S Corporation status concurrently with the
effective date of the Offerings (see Note 1).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 10 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncements
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
property and its carrying value. Adoption of this standard did not have a
material effect on the consolidated financial position or results of operations
of the Company.
F-54
132
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
133
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 (1)
------- ------- -------
$ (420) $ (567) $ (616)
======= ======= =======
Costs and estimated earnings in excess of
billings......................................... $ 186 $ 182 $ 224
Billings in excess of costs and estimated
earnings......................................... (606) (749) (840)
------- ------- -------
$ (420) $ (567) $ (616)
======= ======= =======
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
134
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 the year ended September 30, 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
135
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
136
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 consolidated balance
sheets approximates their fair value.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's consolidated
financial position or results of operations.
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
137
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
138
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
139
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
140
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
141
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
142
MUTH ELECTRIC, INC.
STATEMENTS OF STOCKHOLDERS' 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 (unaudited)........ -- -- (375) (375)
Net income (unaudited)........................... -- -- 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
143
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 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 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
144
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
Offerings.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 9 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective November 1, 1996, the Company adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
F-67
145
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
146
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 $ 7,250
Estimated earnings, net of losses.................... 1,914 1,277 2,082
-------- ------- -------
11,129 8,436 9,332
Less -- Billings to date............................. (10,889) (8,180) (9,200)
-------- ------- -------
$ 240 $ 256 $ 132
======== ======= =======
Costs and estimated earnings in excess of billings on
uncompleted contracts.............................. $ 545 $ 436 $ 675
Less: Billings in excess of costs and estimated
earnings on uncompleted contracts.................. (305) (180) (543)
-------- ------- -------
$ 240 $ 256 $ 132
======== ======= =======
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
147
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
148
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Pollock Electric Inc.:
We have audited the accompanying balance sheets of Pollock Electric Inc., a
Texas corporation, as of October 31, 1995 and 1996 and September 30, 1997, and
the related statements of operations, cash flows and stockholder's equity for
the years then ended. 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
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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
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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
154
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
155
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
156
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,
----------- -------------
1997............................................. $36 $--
1998............................................. 36 36
1999............................................. 3 6
--- ---
$75 $42
=== ===
F-79
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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:
Federal and state income taxes are as follows (in thousands):
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 (in thousands):
YEAR ENDED YEAR ENDED
OCTOBER 31, SEPTEMBER 30,
-------------- -------------
1995 1996 1997
----- ----- -------------
Income tax expense (benefit) 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
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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 (in thousands):
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
(in thousands):
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
159
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
160
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
161
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Charles P. Bagby, Co., Inc.:
We have audited the accompanying balance sheets of Charles P. Bagby, Co.,
Inc., an Alabama S-Corporation, as of December 31, 1996 and September 30, 1997,
and the related statements of operations, cash flows and stockholder's equity
for the years ended December 31, 1996 and September 30, 1997 and for the nine
months ended September 30, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Charles P. Bagby, Co., Inc.
as of December 31, 1996 and September 30, 1997, and the results of its
operations and its cash flows for the years ended December 31, 1996 and
September 30, 1997, and for the nine months ended September 30, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-84
162
CHARLES P. BAGBY, CO., 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
163
CHARLES P. BAGBY, CO., 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
164
CHARLES P. BAGBY, CO., 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
165
CHARLES P. BAGBY, CO., 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
166
CHARLES P. BAGBY, CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Charles P. Bagby, Co., Inc. (an Alabama S-Corporation), and its
majority-owned subsidiary, Haymaker Electric, Ltd. (collectively, the
"Company"), focuses on providing electrical system installation and repair
services primarily for mid-sized to large commercial facilities. The Company
performs the majority of its contract work under cost-plus-fee contracts and
fixed price contracts, with contract terms generally ranging from two to 18
months. The Company performs the majority of its work in the state of Alabama.
All significant intercompany activity has been eliminated in consolidation.
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 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
167
CHARLES P. BAGBY, CO., 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
168
CHARLES P. BAGBY, CO., 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
169
CHARLES P. BAGBY, CO., 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
170
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
171
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
172
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
173
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
174
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
175
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
176
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
177
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
178
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
179
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
180
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:
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
181
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
182
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
183
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 combined financial
statements.
F-106
184
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 combined financial
statements.
F-107
185
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 combined financial
statements.
F-108
186
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 combined financial
statements.
F-109
187
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
188
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 $141,000 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
Offerings.
F-111
189
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
190
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
191
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
192
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
193
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Summit Electric of Texas, Incorporated:
We have audited the accompanying balance sheets of Summit Electric of
Texas, Incorporated, a Texas corporation, as of March 31, 1997 and September 30,
1997, and the related statements of operations, cash flows and stockholder's
equity for the years then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Summit Electric of Texas,
Incorporated as of March 31, 1997 and September 30, 1997, and the results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
November 14, 1997
F-116
194
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
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 19
------ ------
Total current liabilities......................... 2,232 2,503
------ ------
LONG-TERM DEBT, net of current maturities................... 101 88
DEFERRED TAX LIABILITY...................................... 11 11
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $1 par value, 10,000 shares authorized,
1,000 shares issued and outstanding.................... 1 1
Retained earnings......................................... 991 1,034
------ ------
Total stockholder's equity........................ 992 1,035
------ ------
Total liabilities and stockholder's equity........ $3,336 $3,637
====== ======
The accompanying notes are an integral part of these financial statements.
F-117
195
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
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
196
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
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..................................... 35 19 19 3
The accompanying notes are an integral part of these financial statements.
F-119
197
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDER'S
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
BALANCE, March 31, 1996............................ 1,000 $1 $ 977 $ 978
Net income....................................... -- -- 14 14
----- -- ------ ------
BALANCE, March 31, 1997............................ 1,000 1 991 992
Net income (unaudited)........................... -- -- 43 43
----- -- ------ ------
BALANCE, September 30, 1997........................ 1,000 $1 $1,034 $1,035
===== == ====== ======
The accompanying notes are an integral part of these financial statements.
F-120
198
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Summit Electric of Texas, Incorporated (the Company), a Texas corporation,
focuses on providing electrical system installation and repair services
primarily for mid-sized to large commercial facilities. The Company performs the
majority of its contract work under fixed price contracts, with contract
duration generally ranging from two to eight months. The Company performs the
majority of its work primarily in Houston, Texas.
On a limited basis, the Company provides auto repair and restoration
services to its sole stockholder (the Stockholder) and third parties. The
revenues and cost of services related to such activities have not been removed
from the Company's results of operations for the year ended March 31, 1997 and
September 30, 1997, as such amounts are not material.
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.
F-121
199
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
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
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.
F-122
200
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED
USEFUL LIVES MARCH 31, SEPTEMBER 30,
IN YEARS 1997 1997
------------ --------- -------------
Transportation equipment......................... 5 $ 450 $ 447
Machinery and equipment.......................... 7 11 11
Computer and telephone equipment................. 5 84 84
Leasehold improvements........................... 31.5 52 52
Furniture and fixtures........................... 7 43 43
----- -----
640 637
Less -- Accumulated depreciation and
amortization................................... (417) (457)
----- -----
Property and equipment, net............ $ 223 $ 180
===== =====
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
==== =======
F-123
201
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
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,
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
expired September 30, 1997, and bears interest at 1 percent above the prime
lending rate. The weighted average interest rate under this line of credit was
9.25 percent for fiscal 1997. The line of credit is secured by contracts
receivable, equipment, furniture and fixtures, and the personal guarantee of the
Stockholder. Outstanding borrowings under this line of credit at March 31, 1997,
total $788,142.
On September 30, 1997, the Company negotiated an amendment to its existing
bank line of credit (the Amended Line of Credit). The Amended Line of Credit has
a $1,500,000 borrowing base and is due
F-124
202
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
October 3, 1998. The Amended Line of Credit bears interest at 1 percent above
the prime lending rate. Outstanding borrowings under this line of credit at
September 30, 1997, total $779,458.
The bank line of credit requires the Company to maintain certain net worth
and profitability covenants. At March 31, 1997 and September 30, 1997, the
Company was in compliance with its line-of-credit covenants, as amended.
6. LEASES:
The Company leases a facility from a company which is owned by the
Company's stockholder. The lease expires on November 30, 1998. The rent paid
under this related-party lease was approximately $96,000 for each of the years
ended March 31, 1997 and September 30, 1997. 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,
1997 1997
--------- -------------
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
=== ===
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
=== ===
F-125
203
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
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 (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
==== ====
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 the years ended 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.
F-126
204
SUMMIT ELECTRIC OF TEXAS, INCORPORATED
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
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.
In addition, the Company grants credit, generally without collateral, to
its customers, which are primarily general contractors located in Houston,
Texas. Consequently, the Company is subject to potential credit risk related to
changes in business and economic factors within Houston, Texas. However,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
F-127
205
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-128
206
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 STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 13 $ 6 $ 7
Accounts payable and accrued expenses..................... 663 242 262
Dividends payable to stockholders......................... 160 200 --
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 1,652 479 361
------ ------ ------
Total current liabilities......................... 2,488 927 630
------ ------ ------
LONG-TERM DEBT, net of current maturities................... 96 93 88
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, no par value, 2,000 shares authorized, 200
shares issued and outstanding.......................... 300 300 300
Retained earnings......................................... 832 1,192 1,394
------ ------ ------
Total stockholders' equity........................ 1,132 1,492 1,694
------ ------ ------
Total liabilities and stockholders' equity........ $3,716 $2,512 $2,412
====== ====== ======
The accompanying notes are an integral part of these financial statements.
F-129
207
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-130
208
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 $ 5 $ 4
Taxes..................................... $ 6 $ 26 $ 50 $ 23 $ 47
The accompanying notes are an integral part of these financial statements.
F-131
209
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-132
210
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 $51,000 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-133
211
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 Offerings (as
defined in Note 1).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote for discussion of significant
estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in
the event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. The effect of any
impairment would be to 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-134
212
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
==== ==== ====
F-135
213
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-136
214
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, 1997 and December 31, 1996, the redemption price was determined to
be $5,141 per share.
Upon the death of any stockholder, the Company shall redeem the stock held
by such stockholder provided that the redemption is requested in writing by the
personal representative of the deceased stockholder within two months of the
appointment of such representative or the Company elects to redeem such stock
within the same two-month period. The redemption price pursuant to this
paragraph is the same as described above. Such redemption price may be paid in
full at the closing or in installments, the down payment being the greater of
one-fifth of redemption price or any life insurance proceeds received by the
Company resulting from the death of the stockholder with the balance payable in
quarterly installments over not more than five years with interest at the prime
rate. Coverage under the key-man term life insurance purchased by the Company
totaled $1,000,000 as of December 31, 1995 and 1996 and September 30, 1997.
10. DIVIDENDS:
As long as the election made by the stockholders to report the operations
of the Company on their individual federal and state income tax returns remains
in effect, the board of directors of the Company is required to declare a
dividend, subsequent to the close of the Company's tax year and prior to the
date when payment of individual income taxes is required, to provide the
stockholders sufficient cash to pay any applicable individual income taxes
resulting from the inclusion of the Company's taxable income on their individual
income tax returns. In addition, at the discretion of the Company's board of
directors, an additional
F-137
215
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-138
216
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Rodgers Electric Company, Inc.:
We have audited the accompanying balance sheet of Rodgers Electric Company,
Inc., a Washington corporation, as of September 30, 1997, and the related
statement of operations, cash flows and stockholders' equity for the year then
ended. 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-139
217
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 STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term debt, including current maturities of long-term
debt................................................... $ 36
Accounts payable and accrued expenses..................... 488
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 109
Income taxes payable...................................... 213
------
Total current liabilities......................... 846
------
LONG-TERM DEBT, net of current maturities................... 58
DEFERRED TAX LIABILITY...................................... 75
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $100 par value, 500 shares authorized, 150
shares issued and outstanding.......................... 15
Retained earnings......................................... 1,093
------
Total stockholders' equity........................ 1,108
------
Total liabilities and stockholders' equity........ $2,087
======
The accompanying notes are an integral part of these financial statements.
F-140
218
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 income, 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-141
219
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-142
220
RODGERS ELECTRIC COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
COMMON STOCK TOTAL
---------------- RETAINED STOCKHOLDERS'
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-143
221
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 a straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation expense was
approximately $47,000 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 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-144
222
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.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
probable.
Income Taxes
The Company follows the asset and liability method of accounting for income
taxes in accordance with Statement of Financial Accounting Standards (SFAS) No.
109. Under this method, deferred assets and liabilities are recorded for future
tax consequences of temporary differences between the financial reporting and
tax bases of assets and liabilities and are measured using enacted tax rates and
laws.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 11 for discussion of
significant estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective April 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. The effect of any impairment would be to expense the difference
between the fair value of such property and its carrying value. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
F-145
223
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..................................... $ 20
Less-Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (109)
----
Net liability..................................... $(89)
====
F-146
224
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):
YEAR ENDED SEPTEMBER 30 --
--------------------------
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 lease payments of $2,200 per month.
7. INCOME TAXES:
Federal income taxes are $178,000 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
SEPTEMBER 30,
1997
-------------
Provision at the statutory rate............................. $173
Increase resulting from --
Permanent differences, mainly meals and entertainment..... 5
----
$178
====
F-147
225
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)
----
Net 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, 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 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, including cyclical changes in the aerospace industry.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
F-148
226
======================================================
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.................... 1
Risk Factors.......................... 9
The Company........................... 14
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Financial Data............... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 45
Management............................ 53
Certain Transactions.................. 58
Principal Stockholders................ 62
Description of Capital Stock.......... 63
Shares Eligible for Future Sale....... 66
Certain United States Federal Tax
Consequences to Non-U.S. Holders.... 68
Underwriting.......................... 70
Legal Matters......................... 73
Experts............................... 73
Additional Information................ 73
Index to Financial Statements......... F-1
------------------------
UNTIL , 1998 (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 LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH & CO.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SUNTRUST EQUITABLE SECURITIES
SANDERS MORRIS MUNDY
, 1998
======================================================
227
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 JANUARY 23, 1998
PROSPECTUS
7,000,000 SHARES
[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 $13.00 and $15.00 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 Common Stock has been approved for listing upon notice of issuance 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 , 1998.
------------------------
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
SUNTRUST EQUITABLE SECURITIES
SANDERS MORRIS MUNDY
------------------------
The date of this Prospectus is , 1998.
228
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
[MAP OF LOCATIONS AND OTHER GRAPHICS]
[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.]
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.
229
[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 is acting as
representative (the "Lead Manager"), 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..................
SunTrust 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, SunTrust
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 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 Manager has 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
70
230
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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 Manager for 30 days after the date of this Prospectus, to purchase
up to an aggregate of 210,000 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 840,000 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, (ii) any shares of Common Stock issued or options
to purchase Common Stock granted pursuant to the Company's benefit plans
described herein or (iii) with respect to directors and executive officers,
certain pledges of securities.
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 Offerings, (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
amount of the selling concession from the Underwriters and selling group members
who sold those shares as part of the Offerings.
71
231
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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 Common Stock has been approved for listing upon notice of issuance 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 date hereof,
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 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.
72
232
[ALTERNATE PAGE FOR INTERNATIONAL PROSPECTUS]
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.
73
233
[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.................... 1
Risk Factors.......................... 9
The Company........................... 14
Use of Proceeds....................... 17
Dividend Policy....................... 17
Capitalization........................ 18
Dilution.............................. 19
Selected Financial Data............... 20
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 23
Business.............................. 45
Management............................ 53
Certain Transactions.................. 58
Principal Stockholders................ 62
Description of Capital Stock.......... 63
Shares Eligible for Future Sale....... 66
Certain United States Federal Tax
Consequences to Non-U.S. Holders.... 68
Underwriting.......................... 70
Legal Matters......................... 74
Experts............................... 74
Additional Information................ 74
Index to Financial Statements......... F-1
------------------------
UNTIL , 1998 (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 LOGO]
COMMON STOCK
------------------------
PROSPECTUS
------------------------
MERRILL LYNCH INTERNATIONAL
DONALDSON, LUFKIN & JENRETTE
INTERNATIONAL
SUNTRUST EQUITABLE SECURITIES SANDERS MORRIS MUNDY
, 1998
======================================================
234
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................................................. 144,100
Accounting Fees and Expenses................................ 3,200,000
Legal Fees and Expenses..................................... 950,000
Printing Expenses........................................... 250,000
Transfer Agent's Fees....................................... 7,500
Miscellaneous............................................... 199,234
----------
Total..................................................... $4,800,000
==========
- ---------------
(a) The amounts set forth above, except for the SEC and NASD fees, are in each
case estimated.
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Subsection (a) of section 145 of the General Corporation Law of the State
of Delaware empowers a corporation to indemnify any person who was or is a party
or is threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with such action, suit or proceeding if he acted
in good faith and in a manner he reasonably believed to be in or not opposed to
the best interests of the corporation, and, with respect to any criminal action
or proceeding, had no reasonable cause to believe his conduct was unlawful.
Subsection (b) of Section 145 empowers a corporation to indemnify any
person who was or is a party or is threatened to be made a party to any
threatened, pending or completed action, or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person acted in any of the capacities set forth above, against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the corporation, except that no indemnification may be made in
respect of any claim, issue or matter as to which such person shall have been
made to be liable to the corporation unless and only to the extent that the
Court of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Court of Chancery or such
other court shall deem proper.
Section 145 further provides that to the extent a director or officer of a
corporation has been successful on the merits or otherwise in the defense of any
action, suit or proceeding referred to in subsections (a) and (b) of Section 145
in the defense of any claim, issue or matter therein, he shall be indemnified
against expenses (including attorneys' fees) actually and reasonably incurred by
him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled; that indemnification provided for by Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of such person's heirs, executors and administrators; and empowers the
corporation to purchase and maintain insurance on behalf of a director or
officer of the corporation against any liability asserted against him and
incurred by him in any such capacity, or arising out of his status as such
II-1
235
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
236
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 Employee 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., and 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
237
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, as amended.
**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.
*10.5 -- Form of Credit Agreement among the Company, the Financial Institutions named therein
and NationsBank of Texas, N.A., including form of Subsidiary Guaranty Agreement,
form of Pledge Agreement, form of promissory note, and form of swing line note.
*10.6 -- Form of Agreement to be entered into by the Company and the stockholders set forth
on Schedule A thereto.
**21.1 -- List of Subsidiaries.
**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 directors to serve.
- ---------------
* 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.
II-4
238
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 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
239
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THE REGISTRANT
HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON,
STATE OF TEXAS, ON JANUARY 23, 1998.
Integrated Electrical Services, Inc.
By: /s/ C. BYRON SNYDER
----------------------------------
C. Byron Snyder
President and Chairman of
the Board of Directors
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, THIS AMENDMENT
TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED ON JANUARY 23, 1998.
SIGNATURE TITLE
/s/ C. BYRON SNYDER President and Chairman of the
- ----------------------------------------------------- Board of Directors
C. Byron Snyder (Principal Executive
Officer)
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/ C. BYRON SNYDER
- -----------------------------------------------------
(C. Byron Snyder, 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
240
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 Employee 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. and 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.
241
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, as amended.
**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.
*10.5 -- Form of Credit Agreement among the Company, the Financial Institutions named therein
and NationsBank of Texas, N.A., including form of Subsidiary Guaranty Agreement,
form of Pledge Agreement, form of promissory note, and form of swing line note.
*10.6 -- Form of Agreement to be entered into by the Company and the stockholders set forth
on Schedule A thereto.
**21.1 -- List of Subsidiaries.
**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 directors to serve.
- ---------------
* Filed herewith.
** Previously filed.
2
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
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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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8
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
-9-
10
CERTIFICATE OF AMENDMENT
OF THE
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 (the "DGCL"), does hereby certify:
FIRST: That the name of the Corporation is Integrated Electrical
Services, Inc. The Amended and Restated Certificate of Incorporation of the
Corporation was filed with the Delaware Secretary of State's Office on October
23, 1997.
SECOND: That in lieu of a meeting and vote of directors, the
Board of Directors of the Corporation, by unanimous written consent filed with
the minutes of proceedings of the Board of Directors of the Corporation in
accordance with the provisions of Section 141(f) of the DGCL, adopted
resolutions approving and declaring advisable the following amendments to the
Certificate of Incorporation of the Corporation:
NOW, THEREFORE BE IT RESOLVED, that, effective upon approval by
the stockholders of the Corporation, Article 4, Section (c) of the Amended and
Restated Certificate of Incorporation of the Corporation be, and it hereby is,
amended to read in its entirety as follows:
"(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.
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.
11
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 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))."
RESOLVED, FURTHER, that, effective upon approval by the
stockholders of the Corporation, Article 9 of the Amended and Restated
Certificate of Incorporation be, and it hereby is, amended to read in its
entirety as follows:
"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 following the end of
the 1998 fiscal year; the director or directors of the second class for
a term expiring at the annual meeting to be held following the end of
the 1999 fiscal year; and the director or directors of the third class
for a term expiring at the annual meeting to be held following the end
of the 2000 fiscal year. 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
12
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."
THIRD: That said amendments were duly adopted by the
stockholders of the Corporation in accordance with the applicable provisions of
Sections 228 and 242 of the DGCL.
IN WITNESS WHEREOF, the Corporation has caused this certificate
to be signed by Jim P. Wise, its Senior Vice President and Chief Financial
Officer, this 22nd day of December, 1997.
INTEGRATED ELECTRICAL SERVICE, INC.
By: /s/ Jim P. Wise
----------------------------------
Name: Jim P. Wise
Title: Senior Vice President and
Chief Financial Officer
1
EXHIBIT 10.5
[Execution Version]
CREDIT AGREEMENT
Among
INTEGRATED ELECTRICAL SERVICES, INC.
as Borrower,
THE FINANCIAL INSTITUTIONS
NAMED IN THIS CREDIT AGREEMENT
as Banks,
and
NATIONSBANK OF TEXAS, N.A.,
as Agent for the Banks
$65,000,000
January 30, 1998
Arranged By:
NATIONSBANC MONTGOMERY SECURITIES L.L.C.
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TABLE OF CONTENTS
ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.1 Certain Defined Terms . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 Computation of Time Periods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.3 Accounting Terms; Preparation of Financials . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
1.4 Types . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
1.5 Interpretation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
ARTICLE 2. CREDIT FACILITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.1 Revolving Loan Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.2 Letter of Credit Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
2.3 Swing Line Facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
2.4 Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
2.5 Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
2.6 Breakage Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27
2.7 Increased Costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
2.8 Illegality . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.9 Market Failure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.10 Payment Procedures and Computations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
2.11 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
2.12 Change of Lending Office. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
ARTICLE 3. CONDITIONS PRECEDENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
3.1 Conditions Precedent to Initial Extension of Credit . . . . . . . . . . . . . . . . . . . . . . . . 33
3.2 Conditions Precedent to Each Extension of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . 34
ARTICLE 4. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.2 Authorization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.3 Enforceability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
4.4 Absence of Conflicts and Approvals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.5 Investment Companies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.6 Public Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.7 Financial Condition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.8 Condition of Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35
4.9 Litigation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
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4.10 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.11 Laws and Regulations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.12 Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
4.13 ERISA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.14 Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
4.15 True and Complete Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
ARTICLE 5. COVENANTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.1 Organization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37
5.2 Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
5.3 Inspection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
5.4 Use of Proceeds . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.5 Financial Covenants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40
5.6 Debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.7 Liens . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.8 Other Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
5.9 Corporate Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.10 Distributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
5.11 Transactions with Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.12 Insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.13 Investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
5.14 Lines of Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.15 Compliance with Laws . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.16 Environmental Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.17 ERISA Compliance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.18 Payment of Certain Claims . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
5.19 Subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
ARTICLE 6. DEFAULT AND REMEDIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.1 Events of Default . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45
6.2 Termination of Revolving Loan Commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.3 Acceleration of Credit Obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.4 Cash Collateralization of Letters of Credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.5 Default Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47
6.6 Right of Setoff . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.7 Actions Under Credit Documents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.8 Remedies Cumulative . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
6.9 Application of Payments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48
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ARTICLE 7. THE AGENT AND THE ISSUING BANK . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7.1 Authorization and Action . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7.2 Reliance, Etc. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 49
7.3 Affiliates . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
7.4 Bank Credit Decision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
7.5 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 50
7.6 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
7.7 Successor Agent and Issuing Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
ARTICLE 8. MISCELLANEOUS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.1 Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.2 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.3 Modifications, Waivers, and Consents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
8.4 Survival of Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.5 Assignment and Participation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53
8.6 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
8.7 Choice of Law . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.8 Forum Selection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.9 Service of Process . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56
8.10 Waiver of Jury Trial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.11 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
8.12 No Further Agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57
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EXHIBITS
Exhibit A - Form of Compliance Certificate
Exhibit B - Form of Revolving Loan Borrowing Request
Exhibit C - Form of Continuation/Conversion Request
Exhibit D - Form of Revolving Loan Note
Exhibit E - Form of Assignment and Acceptance
Exhibit F - Closing Documents List
Exhibit G - Form of Joinder Agreement
Exhibit H - Form of Acquisition Certificate
SCHEDULES
Schedule I - Administrative Information (Borrower; Agent; Banks)
Schedule II - Disclosures (Existing Other Debt; Existing Subsidiaries)
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CREDIT AGREEMENT
This Credit Agreement dated as of January 30, 1998, is among
Integrated Electrical Services, Inc., a Delaware corporation, as Borrower, the
financial institutions named herein, as Banks, and NationsBank of Texas, N.A.,
as Agent for the Banks.
The parties hereto agree as follows:
ARTICLE 1. DEFINITIONS AND ACCOUNTING TERMS.
1.1 Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (unless otherwise indicated,
such meanings to be equally applicable to both the singular and plural forms of
the terms defined):
"Acquisition" means the direct or indirect purchase or acquisition,
whether in one or more related transactions, of any Person or group of Persons
or any related group of assets, liabilities, or securities of any Person or
group of Persons.
"Acquisition Advance Date" means the date on which the first amounts
are advanced hereunder by the Banks or the Swing Line Lender in connection with
any Acquisition.
"Acquisition Certificate" means an acquisition certificate executed by
a Responsible Officer of the Borrower in substantially the form of Exhibit H.
"Affiliate" means, as to any Person, any other Person that, directly
or indirectly, through one or more intermediaries, controls, is controlled by,
or is under common control with, such Person or any Subsidiary of such Person.
The term "control" (including the terms "controlled by" or "under common
control with") means the possession, directly or indirectly, of the power to
direct or cause the direction of the management and policies of a Person,
whether through ownership, by contract, or otherwise.
"Agent" means NationsBank in its capacity as an agent pursuant to
Article 7 and any successor agent pursuant to Section 7.7.
"Agent Fee Letter" means the confidential letter agreement dated as of
November 26, 1997, between the Borrower, the Agent, and the Arranger regarding
certain fees owed by the Borrower to the Agent in connection with this
Agreement.
"Agreement" means this Credit Agreement.
"Applicable Margin" means, with respect to interest rates, unused
commitment fees, and letter of credit fees and as of any date of its
determination, an amount equal to the percentage amount set forth in the table
below opposite the applicable ratio of (a) the consolidated Debt of the
Borrower as of the end of the fiscal quarter then most recently ended to (b)
the consolidated EBITDA of the Borrower for the four fiscal quarters then most
recently ended:
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Applicable Margin
Debt LIBOR Tranches and Applicable Margin Applicable Margin
to EBITDA Letter of Credit Fee Prime Rate Tranche Commitment Fee
--------- -------------------- ------------------ ---------------
less than 1.00 1.00% 0.00% 0.250%
>1.00 but #1.50 1.25% 0.00% 0.250%
>1.50 but #2.00 1.50% 0.00% 0.300%
>2.00 2.00% 0.50% 0.375%
Until delivery of the first Compliance Certificate, the foregoing ratio shall
be deemed to be 1.01. Thereafter, the ratio and resulting Applicable Margin
shall be based upon Schedule B or Schedule D, at the Borrower's option, of the
most recent Compliance Certificate delivered to the Agent pursuant to Section
5.2(a) or Section 5.2(b) (provided that for the period from the determination
of the Applicable Margin based on the first Compliance Certificate until the
date when the Applicable Margin is reset based upon the Compliance Certificate
for the period ending June 30, 1998, the ratio shall be deemed to be the
greater of the ratio as so determined or 1.01 and the Applicable Margin shall
be set accordingly).
Any adjustments to the Applicable Margin shall become effective on the 45th
day following the last day of each fiscal quarter or on the 90th day following
the last day of each fiscal year as applicable; provided, however, that if any
such Compliance Certificate is not delivered when required hereunder, the
Applicable Margin shall be deemed to be the maximum percentage amount in each
table from such 45th or 90th day until such Compliance Certificate is received
by the Agent.
Upon any change in the Applicable Margin, the Agent shall promptly notify the
Borrower and the Banks of the new Applicable Margin.
"Applicable Lending Office" means, with respect to each Bank and for
any particular type of transaction, the office of such Bank set forth in
Schedule I to this Agreement (or in the applicable Assignment and Acceptance by
which such Bank joined this Agreement) as its applicable lending office for
such type of transaction or such other office of such Bank as such Bank may
from time to time specify in writing to the Borrower and the Agent for such
particular type of transaction.
"Arranger" means NationsBanc Montgomery Securities L.L.C., formerly
known as NationsBanc Montgomery Securities, Inc.
"Assignment and Acceptance" means an Assignment and Acceptance in
substantially the form of Exhibit E executed by an assignor Bank, an assignee
Bank, and the Agent, in accordance with Section 8.5.
"Banks" means the lenders listed as Banks on the signature pages of
this Agreement and each Eligible Assignee that shall become a party to this
Agreement pursuant to Section 8.5(b).
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"Base Rate" means, for any day, the fluctuating rate per annum of
interest equal to the greater of (a) the Prime Rate in effect on such day or
(b) the Federal Funds Rate in effect on such day plus 0.50%.
"Borrower" means Integrated Electrical Services, Inc., a Delaware
corporation.
"Business Day" means any Monday through Friday during which commercial
banks are open for business in Houston, Texas, Dallas, Texas, and, if the
applicable Business Day relates to any LIBOR Tranche, on which dealings are
carried on in the London interbank market.
"Capital Expenditures" means, with respect to any Person and any
period of its determination, the consolidated expenditures of such Person
during such period that are required to be included in or are reflected by the
consolidated property, plant, or equipment accounts of such Person, or any
similar fixed asset or long term capitalized asset accounts of such Person, on
the consolidated balance sheet of such Person in conformity with generally
accepted accounting principles.
"Capital Leases" means, with respect to any Person, any lease of any
property by such Person which would, in accordance with generally accepted
accounting principles, be required to be classified and accounted for as a
capital lease on the balance sheet of such Person.
"Cash Taxes" means, with respect to any Person and for any period of
its determination, the consolidated cash taxes paid by such Person during such
period, or with respect to any Persons which were organized as partnerships or
subchapter S corporations during such period, all amounts distributed by such
Persons to their respective partners or shareholders with respect to taxes
during such period.
"Change of Control" means, with respect to the Borrower, (a) the
direct or indirect acquisition after the date hereof by any Person or related
Persons constituting a group of (i) beneficial ownership of issued and
outstanding shares of Voting Securities of the Borrower, the result of which
acquisition is that such Person or such group possesses 35% or more of the
combined voting power of all then-issued and outstanding Voting Securities of
the Borrower or (ii) the power to elect, appoint, or cause the election or
appointment of at least a majority of the members of the board of directors of
the Borrower, or (b) the individuals who, at the beginning of any period of 12
consecutive months, constitute the Borrower's board of directors (together with
any new director whose election by the Borrower's board of directors or whose
nomination for election by the Borrower's stockholders entitled to vote thereon
was approved by a vote of at least a majority of the directors then still in
office who either were directors at the beginning of such period or whose
election or nomination for election was previously so approved) cease for any
reason (other than death or disability) to constitute a majority of the
Borrower's board of directors then in office.
"Code" means the Internal Revenue Code of 1986, as amended, or any
successor statute.
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"Commonly Controlled Entity" means, with respect to any Person, any
other Person which is under common control with such Person within the meaning
of Section 414 of the Code.
"Compliance Certificate" means a compliance certificate executed by a
Responsible Officer of the Borrower in substantially the form of Exhibit A,
including the following attached Schedules:
Schedule A: The applicable financial reports provided under
Section 5.2(a) or 5.2(b) ending on the date of the computation of the
financial covenants.
Schedule B: The computation of the financial covenants under this
Agreement based upon the financial reports in Schedule A to the
Compliance Certificate in a form acceptable to the Agent.
Schedule C: A schedule of any adjustments to the financial
reports in Schedule A to the Compliance Certificate that are requested
by the Borrower to reflect the financial results of Acquisitions made
prior to the end of the applicable period, together with the
supporting financial reports of the Acquisitions from which the
Borrower prepared such adjustments, prepared in accordance with
Section 1.3(c) and otherwise in a form acceptable to the Agent.
Schedule D: The computation of the financial covenants under this
Agreement based upon the financial reports in Schedule C to the
Compliance Certificate in a form acceptable to the Agent.
"Continuation/Conversion Request" means a Continuation/Conversion
Request in substantially the form of Exhibit C executed by a Responsible
Officer of the Borrower and delivered to the Agent.
"Contract Status Report" means a report, in form and substance
acceptable to the Agent, detailing the status of each contract of any
Restricted Entity which contract has a value equal to or greater than
$7,500,000.
"Credit Documents" means this Agreement, the Revolving Loan Notes, the
Swing Line Note, the Agent Fee Letter, the Letter of Credit Documents, the
Guaranty, the Security Documents, the Interest Hedge Agreements, and each other
agreement, instrument, or document executed at any time in connection with this
Agreement.
"Credit Obligations" means all principal, interest, fees,
reimbursements, indemnifications, and other amounts now or hereafter owed by
the Borrower to the Agent and the Banks (or with respect to the Interest Hedge
Agreements, any Affiliates of the Banks) under this Agreement, the Revolving
Loan Notes, the Swing Line Note, the Letter of Credit Documents, and the other
Credit Documents and any increases, extensions, and rearrangements of those
obligations under any
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amendments, supplements, and other modifications of the documents and agreements
creating those obligations.
"Credit Parties" means the Borrower and the Guarantors.
"Debt" means, with respect to any Person, without duplication, (a)
indebtedness of such Person for borrowed money, (b) obligations of such Person
evidenced by bonds, debentures, notes, or other similar instruments, (c)
obligations of such Person to pay the deferred purchase price of property or
services (other than trade debt and normal operating liabilities incurred in
the ordinary course of business), (d) obligations of such Person as lessee
under Capital Leases, (e) obligations of such Person under or relating to
letters of credit, guaranties, purchase agreements, or other creditor
assurances assuring a creditor against loss in respect of indebtedness or
obligations of others of the kinds referred to in clauses (a) through (d) of
this definition, (f) nonrecourse indebtedness or obligations of others of the
kinds referred to in clauses (a) through (e) of this definition secured by any
Lien on or in respect of any property of such Person, and (g) obligations of
such Person evidenced by preferred stock or other equity interests in such
Person which provide for mandatory redemption, mandatory payment of dividends,
or similar rights to the payment of money. For the purposes of determining the
amount of any Debt, the amount of any Debt described in clause (e) of the
definition of Debt shall be valued at the maximum amount of the contingent
liability thereunder, the amount of any Debt described in clause (f) that is
not covered by clause (e) shall be valued at the lesser of the amount of the
Debt secured or the book value of the property securing such Debt, and the
amount of any Debt described in clause (g) shall be valued at the stated
redemption value of such Debt as of the date of determination.
"Default" means (a) an Event of Default or (b) any event or condition
which with notice or lapse of time or both would, unless cured or waived,
become an Event of Default.
"Default Rate" means, with respect to any amount due hereunder, a per
annum interest rate equal to (a) if such amount is either outstanding principal
accruing interest based upon a rate established elsewhere in this Agreement or
accrued but unpaid interest thereon, the sum of (i) the interest rate
established elsewhere in this Agreement from time to time for such principal
amount, including any applicable margin, plus (ii) 2.00% per annum or (b) in
all other cases, the Base Rate in effect from time to time plus the Applicable
Margin for the Prime Rate Tranche in effect from time to time plus 2.00% per
annum.
"Derivatives" means any swap, hedge, cap, collar, or similar
arrangement providing for the exchange of risks related to price changes in any
commodity, including money.
"Dollars or $" means lawful money of the United States of America.
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"EBITDA" means, with respect to any Person and for any period of its
determination, the consolidated net income of such Person for such period, plus
the consolidated interest expense and income taxes of such Person for such
period, plus the consolidated depreciation and amortization of such Person for
such period, in each case excluding extraordinary items (except extraordinary
losses incurred subsequent to the date of the initial public offering of the
Borrower, which shall remain included).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended.
"Eligible Assignee" means, with respect to any assignment hereunder at
the time of such assignment, any commercial bank organized under the laws of
the United States or any of the countries parties to the Organization for
Economic Cooperation and Development or any political subdivision of any
thereof which has primary capital (or its equivalent) of not less than
$250,000,000, is approved by the Agent, and, so long as no Event of Default
exists, is approved by the Borrower, in either case, such approval not to be
unreasonably withheld.
"Environmental Law" means all federal, state, and local laws, rules,
regulations, ordinances, orders, decisions, agreements, and other requirements
now or hereafter in effect relating to the pollution, destruction, loss, or
injury of the environment, the presence of any contaminant in the environment,
the protection, cleanup, remediation, or restoration of the environment, the
creation, handling, transportation, use, or disposal of any waste product in
the environment, exposure of persons to any contaminant, waste, or hazardous
substance in the environment, and the health and safety of employees in
relation to their environment.
"Event of Default" has the meaning specified in Section 6.1.
"Federal Funds Rate" means, for any period, a fluctuating per annum
interest rate equal for each day during such period to the weighted average of
the rates on overnight Federal funds transactions with members of the Federal
Reserve System arranged by Federal funds brokers, as published for such day
(or, if such day is not a Business Day, for the next preceding Business Day) by
the Federal Reserve Bank of New York, or, if such rate is not so published for
any day which is a Business Day, the average of the quotations for any such day
on such transactions received by the Agent from three Federal funds brokers of
recognized standing selected by it.
"Federal Reserve Board" means the Board of Governors of the Federal
Reserve System or any of its successors.
"Guaranty" means the Guaranty dated as of January 30, 1998, made by
the Subsidiaries of the Borrower in favor of the Agent guaranteeing the Credit
Obligations.
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"Guarantors" means (a) the Subsidiaries of the Borrower that have
executed the Guaranty in connection with the execution of this Agreement and
(b) any future Subsidiaries of the Borrower that join the Guaranty pursuant to
Section 5.19.
"Hazardous Materials" means any substance or material identified as a
hazardous substance pursuant to the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended and as now or hereafter in
effect; any substance or material regulated as a hazardous waste pursuant to
the Resource Conservation and Recovery Act of 1976, as amended and as now or
hereafter in effect; and any substance or material designated as a hazardous
substance or hazardous waste pursuant to any other Environmental Law.
"Highest Lawful Rate" means the maximum lawful interest rate, if any,
that at any time or from time to time may be contracted for, charged, or
received under the laws applicable to the relevant Bank which are presently in
effect or, to the extent allowed by law, under such applicable laws which may
hereafter be in effect and which allow a higher maximum nonusurious interest
rate than applicable laws now allow. The maximum lawful rate under this
Agreement shall be the weekly indicated rate ceiling under Article 5069-1.04 of
the Texas Revised Civil Statutes, as amended, unless any other lawful rate
ceiling exceeds the rate ceiling so determined, and then the higher rate
ceiling shall apply.
"Interest Expense" means, with respect to any Person and for any
period of its determination, the consolidated interest expense of such Person
during such period.
"Interest Hedge Agreements" means any swap, hedge, cap, collar, or
similar arrangement between the Borrower and any Bank (or any Affiliate of any
Bank) providing for the exchange of risks related to price changes in the
interest rate on the Revolving Loan Advances under this Agreement.
"Interest Period" means, with respect to each LIBOR Tranche, the
period commencing on the date of such LIBOR Tranche and ending on the last day
of the period selected by the Borrower pursuant to the provisions below. The
duration of each such Interest Period shall be one, two, three, or six months,
in each case as the Borrower may select in the applicable Revolving Loan
Borrowing Request or Continuation/Conversion Request (unless there shall exist
any Default or Event of Default, in which case the Borrower may only select one
month Interest Periods); provided, however, that:
(a) whenever the last day of any Interest Period would otherwise
occur on a day other than a Business Day, the last day of such Interest Period
shall be extended to occur on the next succeeding Business Day; provided that
if such extension would cause the last day of such Interest Period to occur in
the next following calendar month, the last day of such Interest Period shall
occur on the next preceding Business Day;
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(b) any Interest Period which begins on the last Business Day of
the calendar month (or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period) shall end on the
last Business Day of the calendar month in which it would have ended if there
were a numerically corresponding day in such calendar month; and
(c) the Borrower may not select an Interest Period for any LIBOR
Tranche which ends after the Revolving Loan Maturity Date.
"Issuing Bank" means NationsBank and any successor issuing bank pursuant to
Section 7.7.
"LIBOR" means, for any LIBOR Tranche for any Interest Period therefor,
the rate per annum (rounded upwards, if necessary, to the nearest 1/100 of 1%)
appearing on Telerate Page 3750 (or any successor page) as the London interbank
offered rate for deposits in Dollars at approximately 11:00 a.m. (London time)
two Business Days prior to the first day of such Interest Period for a term
comparable to such Interest Period. If for any reason such rate is not
available, the term "LIBOR" shall mean, for any LIBOR Tranche for any Interest
Period therefor, the rate per annum (rounded upwards, if necessary, to the
nearest 1/100 of 1%) appearing on Reuters Screen LIBO Page as the London
interbank offered rate for deposits in Dollars at approximately 11:00 a.m.
(London time) two Business Days prior to the first day of such Interest Period
for a term comparable to such Interest Period; provided, however, if more than
one rate is specified on Reuters Screen LIBO Page, the applicable rate shall be
the arithmetic mean of all such rates.
"LIBOR Tranche" shall mean any Tranche which bears interest based upon
the LIBOR, as determined in accordance with Section 2.5.
"Letter of Credit" means any commercial or standby letter of credit
issued by the Issuing Bank for the account of the Borrower pursuant to the
terms of this Agreement.
"Letter of Credit Application" means the Issuing Bank's standard form
letter of credit application for either a commercial or standby letter of
credit, as the case may be, which has been executed by the Borrower and
accepted by the Issuing Bank in connection with the issuance of a Letter of
Credit.
"Letter of Credit Application Amendment" means the Issuing Bank's
standard form application to amend a letter of credit for either a commercial
or standby letter of credit, as the case may be, which has been executed by a
Borrower and accepted by the Issuing Bank in connection with the increase or
extension of a Letter of Credit.
"Letter of Credit Collateral Account" means a special cash collateral
account pledged to the Agent containing cash deposited pursuant to Sections
2.2(d) or 6.4 to be maintained with the Agent in accordance with Section
2.2(g).
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"Letter of Credit Documents" means all Letters of Credit, Letter of
Credit Applications, Letter of Credit Application Amendments, and agreements,
documents, and instruments entered into in connection with or relating thereto.
"Letter of Credit Exposure" means, as of any date of its
determination, the aggregate outstanding undrawn amount of Letters of Credit
plus the aggregate of the reimbursement obligations of the Borrower under the
Letter of Credit Applications and this Agreement.
"Letter of Credit Sublimit" means $10,000,000.
"Lien" means any mortgage, lien, pledge, charge, deed of trust,
security interest, encumbrance, or other type of preferential arrangement to
secure or provide for the payment of any obligation of any Person, whether
arising by contract, operation of law, or otherwise (including any title
retention for such purposes under any conditional sale agreement, any Capital
Lease, or any other title transfer or retention agreement).
"Majority Banks" means, at any time, Banks holding more than 66 2/3%
of the then aggregate unpaid principal amount of the Revolving Loan Notes held
by the Banks and the Letter of Credit Exposure of the Banks at such time;
provided that if no such principal amount or Letter of Credit Exposure is then
outstanding, "Majority Banks" shall mean Banks having more than 66 2/3% of the
aggregate amount of the Revolving Loan Commitments at such time.
"Material Adverse Change" means any material adverse change in the
business, operations, or financial condition of the Borrower and its
Subsidiaries on a consolidated basis.
"NationsBank" means NationsBank of Texas, N.A., in its individual
capacity.
"Net Worth" means, with respect to any Person and as of any date of
its determination, the excess of (a) the assets of such Person over (b) the
liabilities of such Person.
"PBGC" means Pension Benefit Guaranty Corporation or its successor.
"Permitted Debt" means all of the following Debt:
(a) Debt in the form of the Credit Obligations;
(b) Debt in the form of indebtedness for borrowed money
and letters of credit owed by any Subsidiary of the Borrower prior to
the acquisition of such Subsidiary by the Borrower in an Acquisition
transaction, or owed by any Person that is the subject of any
Acquisition assumed by the Borrower or any Subsidiary of the Borrower
in connection with such Acquisition, provided that with respect to any
such indebtedness, arrangements satisfactory to the Agent for the
repayment of such indebtedness within 30 days following
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the closing of the Acquisition are made prior to the closing of the
Acquisition and such arrangements are executed;
(c) Debt in the form of (i) purchase money indebtedness
and Capital Leases, (ii) indebtedness for borrowed money and letters
of credit owed by any Subsidiary of the Borrower prior to the
acquisition of such Subsidiary by the Borrower in an Acquisition
transaction, or owed by any Person that is the subject of any
Acquisition assumed by the Borrower or any Subsidiary of the Borrower
in connection with such Acquisition, and (iii) other indebtedness,
which Debt under clauses (i), (ii), and (iii) together are in an
aggregate outstanding amount not to exceed $3,000,000;
(d) Debt in the form of Subordinated Debt;
(e) Debt in the form of Qualified Preferred Stock; and
(f) Debt in the form of reimbursement obligations for
performance bonds issued in the ordinary course of business.
"Permitted Investments" means all of the following investments:
(a) investments (including investments in the form of
loans) in wholly-owned Subsidiaries of the Borrower;
(b) investments in the form of loans, guaranties, open
accounts, and other extensions of trade credit in the ordinary course
of business;
(c) investments in commercial paper, bankers'
acceptances, loan participation agreements, and other similar
investments, in each case, maturing in twelve months or less from the
date of issuance and which, at the time of acquisition are rated A-2
or better by Standard & Poor's Corporation and P-2 or better by
Moody's Investors Services, Inc;
(d) investments in direct obligations of the United
States, or investments in any Person which investments are guaranteed
by the full faith and credit of the United States, in either case
maturing in twelve months or less from the date of acquisition thereof
and repurchase agreements having a term of less than one year and
fully collateralized by such obligations which are entered into with
banks or trust companies described in clause (e) below or brokerage
companies having net worth in excess of $250,000,000;
(e) investments in time deposits or certificates of
deposit maturing within one year from the date such investment is
made, issued by a bank or trust company organized under the laws of
the United States or any state thereof having capital, surplus, and
undivided profits aggregating at least $250,000,000 or a foreign
branch thereof and whose long-term
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certificates of deposit are, at the time of acquisition thereof, rated
A-2 by Standard & Poor's Corporation or Prime-2 by Moody's Investors
Services, Inc.;
(f) investments in money market funds which invest solely
in the types of investments described in paragraphs (c) through (e)
above; and
(g) loans and advances to directors, officers, and
employees of the Credit Parties made in the ordinary course of
business in an aggregate outstanding amount not to exceed $250,000.
In valuing any investments for the purpose of applying the limitations set
forth in this Agreement, such investments shall be taken at the original cost
thereof (but without reduction for any subsequent appreciation or depreciation
thereof) less any amount actually repaid or recovered on account of capital or
principal (but without reduction for any offsetting investments made by the
investee in the investor). For purposes of this Agreement, at any time when a
corporation becomes a Subsidiary of the Borrower, all investments of such
corporation at such time shall be deemed to have been made by such corporation
at such time.
"Permitted Liens" means all of the following Liens:
(a) Liens securing the Credit Obligations;
(b) Liens securing purchase money debt, Capital Leases,
and assumed or acquired indebtedness for borrowed money and letters of
credit permitted under clause (b) of the definition of Permitted Debt
provided that no such Lien is spread to cover any property not (i)
purchased in connection with the incurrence of such Debt, in the case
of purchase money debt, or (ii) covered by such Lien at the time of
the assumption or acquisition of the indebtedness secured thereby, in
the case of assumed or acquired indebtedness for borrowed money and
letters of credit; and
(c) Liens arising in the ordinary course of business
which are not incurred in connection with the borrowing of money, the
obtaining of advances or credit, or payment of legal judgments and
which do not materially detract from the value of any Restricted
Entity's assets or materially interfere with any Restricted Entity's
business, including such (i) Liens for taxes, assessments, or other
governmental charges or levies; (ii) Liens in connection with worker's
compensation, unemployment insurance, or other social security, old
age pension, or public liability obligations; (iii) Liens in the form
of legal or equitable encumbrances deemed to exist by reason of
negative pledge covenants and other covenants or undertakings of like
nature; (iv) Liens in the form of vendors', carriers', warehousemen's,
repairmen's, mechanics', workmen's, materialmen's, construction, or
other like Liens arising by operation of law in the ordinary course of
business or incident to the construction or improvement of any
property, including liens securing reimbursement obligations for
performance bonds
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issued in the ordinary course of business; and (v) Liens in the form
of zoning restrictions, easements, licenses, and other restrictions on
the use of real property or minor irregularities in title thereto
which do not materially impair the use of such property in the
operation of the business of the applicable Restricted Entity or the
value of such property.
"Person" means an individual, partnership, corporation (including a
business trust), joint stock company, trust, unincorporated association, joint
venture, or other entity, or a government or any political subdivision or
agency thereof, or any trustee, receiver, custodian, or similar official.
"Plan" means any (a) employee medical benefit plan under Section 3(1)
of ERISA, (b) employee pension benefit plan under Section 3(2) of ERISA, (c)
multiemployer plan under Section 4001(a)(3) of ERISA, and (d) employee account
benefit plan under Section 3(2) of ERISA.
"Pledge Agreement" means the Pledge Agreement dated as of January 30,
1998, made by Borrower and the Subsidiaries of Borrower in favor of the Agent
granting the Agent a security interest in the capital stock of each Subsidiary
(whether direct or indirect) of Borrower to secure the Credit Obligations.
"Prime Rate" means, for any day, the fluctuating per annum interest
rate in effect on such day equal to the rate of interest publicly announced by
the Agent as its prime rate, whether or not the Borrower has notice thereof.
"Prime Rate Borrowing" shall mean that portion of any Revolving Loan
Borrowing which bears interest based upon the Base Rate as determined in
accordance with Section 2.5.
"Prime Rate Tranche" shall mean the Tranche which bears interest based
upon the Base Rate, as determined in accordance with Section 2.5.
"Prohibited Transaction" means any transaction set forth in Section
406 of ERISA or Section 4975 of the Code.
"Qualified Preferred Stock" means, with respect to the Borrower and as
of any date of its issuance, any shares of preferred stock of the Borrower that
(a) is issued after the date of this Agreement, (b) provides for its mandatory
redemption on a date, if at all, that is on or after the first anniversary of
the latest maturity of any of the Credit Obligations at the time issued, and
(c) provides in the applicable certificate of designation for the redemption of
such shares and for the blockage of Restricted Payments in respect of such
shares during the existence of a Default or an Event of Default (i) on the
terms and conditions set forth on Schedule IV, or (ii) on terms approved by the
Agent and the Majority Banks in their sole discretion, all such provisions to
be in form and content satisfactory to the Agent and the Majority Banks in
their sole discretion.
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"ratable share" or "pro rata share" means, with respect to any Bank
and as of any date of its determination, either (a) the ratio of such Bank's
Revolving Loan Commitment at such time to the aggregate Revolving Loan
Commitments at such time or (b) if the Revolving Loan Commitments have been
terminated, the ratio of such Bank's aggregate outstanding Revolving Loan
Advances and share of the Letter of Credit Exposure at such time to the
aggregate outstanding Revolving Loan Advances and Letter of Credit Exposure at
such time.
"Registration Statement" means the public offering registration
statement of the Borrower as filed with the Securities and Exchange Commission
on October 24, 1997, and as refiled on November 28, 1997, under Registration
Number 333-38715.
"Related Parties" means, with respect to any Person, such Person's
stockholders, directors, officers, employees, agents, Affiliates, successors,
and assigns, and their respective stockholders, directors, officers, employees,
and agents, and, with respect to any Person that is an individual, such
Person's family relations and heirs.
"Reportable Event" means any of the events set forth in Section 4043
of ERISA.
"Responsible Officer" means, with respect to any Person, such Person's
Chief Executive Officer, President, Chief Financial Officer, Secretary,
Treasurer, or any other officer of such Person designated by any of the
foregoing in writing from time to time.
"Restricted Entities" means the Borrower and each Subsidiary of the
Borrower.
"Restricted Payment" means the declaration or making by any Person of
any (a) dividends; (b) purchase, redemption, retirement, or other acquisition
for value any of its capital stock now or hereafter outstanding, or any
distribution of assets to its stockholders as such, whether in cash, assets, or
in obligations of it; (c) allocation or other setting apart of any sum for the
payment of any dividend or distribution on, or for the purchase, redemption, or
retirement of, any shares of its capital stock; or (d) making of any other
distribution by reduction of capital or otherwise in respect of any shares of
its capital stock; in each case, other than any such dividends, distributions,
and payments payable in such Person's common stock.
"Revolving Loan" means the aggregate outstanding principal amount of
the Revolving Loan Borrowings.
"Revolving Loan Advance" means the outstanding principal from a Bank
which represents such Bank's ratable share of a Revolving Loan Borrowing.
"Revolving Loan Borrowing" means any aggregate amount of principal
advanced on the same day and pursuant to the same Revolving Loan Borrowing
Request under the revolving loan facility created in Section 2.1.
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"Revolving Loan Borrowing Request" means a Revolving Loan Borrowing
Request in substantially the form of Exhibit B executed by a Responsible
Officer of the Borrower and delivered to the Agent.
"Revolving Loan Commitment" means, for any Bank, the amount set forth
below such Bank's name on the signature pages of this Agreement as its
Revolving Loan Commitment, or if such Bank has entered into any Assignment and
Acceptance since the date of this Agreement, as set forth for such Bank as its
Revolving Loan Commitment in the Register maintained by the Agent pursuant to
Section 8.5(c), in each case as such amount may be terminated pursuant to
Section 6.2.
"Revolving Loan Maturity Date" means January 31, 2001.
"Revolving Loan Note" means a promissory note of the Borrower payable
to the order of a Bank, in substantially the form of Exhibit D, evidencing the
indebtedness of the Borrower to such Bank resulting from Revolving Loan
Advances made by such Bank to the Borrower.
"Security Agreement" means the Security Agreement dated as of January
30, 1998, made by the Borrower and the Subsidiaries of the Borrower in favor of
the Agent granting the Agent a security interest in the accounts receivable of
each such Credit Party to secure the Credit Obligations.
"Security Documents" means the Security Agreement, the Pledge
Agreement, and any other document creating or consenting to Liens in favor of
the Agent securing Credit Obligations.
"Subordinated Debt" means, with respect to the Borrower and as of any
date of its issuance, any unsecured indebtedness for borrowed money for which
the Borrower is directly and primarily obligated that (a) arises after the date
of this Agreement, (b) does not have any stated maturity before the latest
maturity of any of the Credit Obligations at the time incurred, (c) has terms
that are no more restrictive than the terms of the Credit Documents, and (d) is
expressly subordinated to the Credit Obligations (i) on the terms and
conditions set forth on Schedule III, or (ii) on terms approved by the Agent
and the Majority Banks in their sole discretion, including payment
subordination, remedy subordination, and related terms satisfactory to the
Agent and the Majority Banks in their sole discretion.
"Subsidiary" means, with respect to any Person, any other Person, a
majority of whose outstanding Voting Securities (other than directors'
qualifying shares) shall at any time be owned by such Person or one or more
Subsidiaries of such person.
"Swing Line Lender" means NationsBank.
"Swing Line Loan" means the aggregate outstanding principal amount of
the advances made under the Swing Line Note.
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"Swing Line Note" means the promissory note of the Borrower in the
principal amount of $5,000,000 payable to the order of the Swing Line Lender
evidencing the indebtedness of the Borrower to the Swing Line Lender resulting
from advances to the Borrower under the line of credit created thereunder.
"Tranche" means any tranche of principal outstanding under the
Revolving Loan accruing interest on the same basis whether created in
connection with new advances of principal under the Revolving Loan pursuant to
Section 2.5(a)(i) or by the continuation or conversion of existing tranches of
principal under such Loan pursuant to Section 2.5(a)(ii) and shall include the
Prime Rate Tranche or any LIBOR Tranche.
"Type" has the meaning set forth in Section 1.4.
"Voting Securities" means (a) with respect to any corporation, any
capital stock of the corporation having general voting power under ordinary
circumstances to elect directors of such corporation, (b) with respect to any
partnership, any partnership interest having general voting power under
ordinary circumstances to elect the general partner or other management of the
partnership, and (c) with respect to any other Person, such ownership interests
in such Person having general voting power under ordinary circumstances to
elect the management of such Person, in each case irrespective of whether at
the time any other class of stock, partnership interests, or other ownership
interest might have special voting power or rights by reason of the happening
of any contingency.
1.2 Computation of Time Periods. In this Agreement in the
computation of periods of time from a specified date to a later specified date,
the word "from" means "from and including" and the words "to" and "until" each
means "to but excluding."
1.3 Accounting Terms; Preparation of Financials.
(a) All accounting terms, definitions, ratios, and other
tests described herein shall be construed in accordance with United States
generally accepted accounting principles applied on a consistent basis with
those applied in the preparation of the Registration Statement, except as
expressly set forth in this Agreement.
(b) The Restricted Entities shall prepare their financial
statements in accordance with United States generally accepted accounting
principles applied on a consistent basis with those applied in the preparation
of the Registration Statement, unless otherwise approved in writing by the
Agent. In accordance with the foregoing, (i) any Acquisition which is
permitted to be treated as a pooling transaction shall be treated as a pooling
transaction, and following such an Acquisition the consolidated financial
statements of the Borrower shall be adjusted to reflect the results of such
Acquisition during the periods prior to such Acquisition in accordance with
generally accepted accounting principles and (ii) any Acquisition which is not
permitted to be treated as a pooling transaction shall be treated as an asset
purchase, without adjustment for prior periods.
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(c) Where expressly permitted in this Agreement, the
Borrower may elect to use the compliance calculations set forth in Schedule D
of a Compliance Certificate to calculate the Applicable Margin or compliance
with a financial covenant under this Agreement. In such case the accounting
terms, definitions, ratios, and other tests used in making such calculation
shall be construed as required by paragraph (a) above except that the
consolidated financial results of the Borrower shall be deemed to be the
adjusted consolidated financial results of the Borrower set forth in Schedule C
of the Compliance Certificate. The Borrower shall prepare Schedule C and D of
the Compliance Certificate in accordance with the following provisions:
(i) The Borrower may select one or more
Acquisitions for inclusion in the adjustments permitted in Schedule C
or D of the Compliance Certificate; provided that if the inclusion of
any Acquisition results in an increase in the consolidated EBITDA of
the Borrower over the consolidated EBITDA of the Borrower required to
be reported in Schedule A or B of the Compliance Certificate, then the
Borrower must include all Acquisitions which would cause a decrease in
the consolidated EBITDA of the Borrower in Schedule C and D of the
Compliance Certificate.
(ii) If the Acquisition is treated as a pooling
transaction, the Borrower shall adjust the pooling accounting
treatment of the Acquisition to reflect nonrecurring items (both
positive and negative) that are permitted to be adjusted in accordance
with the guidelines established by the Securities and Exchange
Commission for acquisition accounting for reported acquisitions by
public companies or as approved by the Agent.
(iii) If the Acquisition is not treated as a
pooling transaction, the financial results of the acquired Person or
assets shall be added to the applicable financial results of the
Borrower in the same manner as if such transaction were a pooling
transaction with such adjustments thereto as are required to reflect
nonrecurring items (both positive and negative) that are permitted to
be adjusted in accordance with the guidelines established by the
Securities and Exchange Commission for acquisition accounting for
reported acquisitions by public companies or as approved by the Agent.
(iv) No Acquisition may be included in Schedule C
or D of the Compliance Certificate at the request of the Borrower
unless the financial reports of the acquired Person or assets from
which Schedule C and D are prepared are audited financial reports
prepared by independent certified public accounting firms of national
standing or are approved by the Agent.
1.4 Types. The "Type" of a Tranche refers to the determination
whether such tranche is a LIBOR Tranche or the Prime Rate Tranche.
1.5 Interpretation. Article, Section, Schedule, and Exhibit
references are to this Agreement, unless otherwise specified. All references
to instruments, documents, contracts, and
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agreements are references to such instruments, documents, contracts, and
agreements as the same may be amended, supplemented, and otherwise modified from
time to time, unless otherwise specified. The word "including" shall mean
"including but not limited to." The word "or" shall mean "and/or" wherever
necessary to prevent interpretation of any provision against the Agent or the
Banks. Whenever the Borrower has an obligation under this Agreement and the
Credit Documents the expense of complying with that obligation shall be an
expense of the Borrower unless otherwise specified. Whenever any determination
is to be made by the Agent or any Bank, such determination shall be in such
Person's sole discretion unless otherwise specified in this Agreement. If any
provision in this Agreement and the Credit Documents is held to be illegal,
invalid, not binding, or unenforceable, such provision shall be fully severable
and this Agreement and the Credit Documents shall be construed and enforced as
if such illegal, invalid, not binding, or unenforceable provision had never
comprised a part of this Agreement and the Credit Documents, and the remaining
provisions shall remain in full force and effect. This Agreement and the Credit
Documents have been reviewed and negotiated by sophisticated parties with access
to legal counsel and shall not be construed against the drafter. In the event
of a conflict between this Agreement and any other Credit Documents, this
Agreement shall control.
ARTICLE 2. CREDIT FACILITIES.
2.1 Revolving Loan Facility.
(a) Revolving Loan Commitments. Each Bank severally
agrees, on the terms and conditions set forth in this Agreement and for the
purposes set forth in Section 5.4, to make Revolving Loan Advances to the
Borrower as such Bank's ratable share of Revolving Loan Borrowings requested by
the Borrower from time to time on any Business Day during the period from the
date of this Agreement until the Revolving Loan Maturity Date provided that the
aggregate outstanding principal amount of Revolving Loan Advances made by such
Bank plus such Bank's ratable share of the Swing Line Loan plus such Bank's
ratable share of the Letter of Credit Exposure shall not exceed such Bank's
Revolving Loan Commitment. Revolving Loan Borrowings must be made in an amount
equal to or greater than $1,000,000, in the case of any Revolving Loan
Borrowing comprised of a LIBOR Tranche, or $1,000,000, in the case of any Prime
Rate Borrowing, and be made in multiples of $500,000, in the case of any
Revolving Loan Borrowing comprised of a LIBOR Tranche, or $100,000, in the case
of any Prime Rate Borrowing. Within the limits expressed in this Agreement,
the Borrower may from time to time borrow, prepay, and reborrow Revolving Loan
Borrowings. The indebtedness of the Borrower to the Banks resulting from the
Revolving Loan Advances made by the Banks shall be evidenced by Revolving Loan
Notes made by the Borrower.
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(b) Method of Advancing
(i) Each Revolving Loan Borrowing shall be made
pursuant to a Revolving Loan Borrowing Request given by the Borrower to the
Agent in writing or by telecopy not later than the time required pursuant to
Section 2.5(a)(i) to select the interest rate basis for the Revolving Loan
Borrowing. Each Revolving Loan Borrowing Request shall be fully completed and
shall specify the information required therein, and shall be irrevocable and
binding on the Borrower. Upon receipt of the Revolving Loan Borrowing Request
by the Agent, the Agent shall promptly forward notice of the Revolving Loan
Borrowing to the Banks. Each Bank shall, before 1:00 p.m. (local time at the
Applicable Lending Office of the Agent) on the date of the requested Revolving
Loan Borrowing, make available from its Applicable Lending Office to the Agent
at the Agent's Applicable Lending Office, in immediately available funds, such
Bank's ratable share of such Revolving Loan Borrowing. Subject to the
satisfaction of all applicable conditions precedent, after receipt by the Agent
of such funds, the Agent shall, by 4:00 p.m. (local time at the Applicable
Lending Office of the Agent), on the date requested for such Revolving Loan
Borrowing make such Revolving Loan Borrowing available to the Borrower in
immediately available funds at any account of Borrower which is designated in
writing by the Borrower to the Agent.
(ii) Unless the Agent shall have received notice
from a Bank before the date of any Revolving Loan Borrowing that such Bank
shall not make available to the Agent such Bank's ratable share of such
Revolving Loan Borrowing, the Agent may assume that such Bank has made its
ratable share of such Revolving Loan Borrowing available to the Agent on the
date of such Revolving Loan Borrowing in accordance with paragraph (i) above
and the Agent may, in reliance upon such assumption, make available to the
Borrower on such date a corresponding amount. If and to the extent that such
Bank shall not have so made its ratable share of such Revolving Loan Borrowing
available to the Agent, such Bank agrees that it shall pay interest on such
amount for each day from the date such amount is made available to the Borrower
by the Agent until the date such amount is paid to the Agent by such Bank at
the Federal Funds Rate in effect from time to time, provided that with respect
to such Bank if such amount is not paid by such Bank by the end of the second
day after the Agent makes such amount available to the Borrower, the interest
rates specified above shall be increased by a per annum amount equal to 2.00%
on the third day and shall remain at such increased rate thereafter. Interest
on such amount shall be due and payable by such Bank upon demand by the Agent.
If such Bank shall pay to the Agent such amount and interest as provided above,
such amount so paid shall constitute such Bank's Revolving Loan Advance as part
of such Revolving Loan Borrowing for all purposes of this Agreement even though
not made on the same day as the other Revolving Loan Advances comprising such
Revolving Loan Borrowing. In the event that such Bank has not repaid such
amount by the end of the fifth day after such amount was made available to the
Borrower, the Borrower agrees to repay to the Agent on demand such amount,
together with interest on such amount for each day from the date such amount
was made available to the Borrower until the date such amount is repaid to the
Agent at the interest rate charged to the Borrower for such Revolving Loan
Borrowing under the terms of this Agreement.
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(iii) The failure of any Bank to make available its
ratable share of any Revolving Loan Borrowing shall not relieve any other Bank
of its obligation, if any, to make available its ratable share of such
Revolving Loan Borrowing. No Bank shall be responsible for the failure of any
other Bank to honor such other Bank's obligations hereunder, including any
failure to make available any funds as part of any Revolving Loan Borrowing.
(c) Prepayment.
(i) The Borrower may prepay the outstanding
principal amount of the Revolving Loan pursuant to written notice given by the
Borrower to the Agent in writing or by telecopy not later than (A) 1:00 p.m.
(local time at the Applicable Lending Office of the Agent) on the third
Business Day before the date of the proposed prepayment, in the case of the
prepayment of any portion of the Revolving Loan which is comprised of LIBOR
Tranches, or (B) 11:00 a.m. (local time at the Applicable Lending Office of the
Agent) on the same Business Day of the proposed prepayment, in the case of the
prepayment of any portion of the Revolving Loan comprised solely of the Prime
Rate Tranche. Each such notice shall specify the principal amount and Tranche
or Tranches of the Revolving Loan which shall be prepaid, the date of the
prepayment, and shall be irrevocable and binding on the Borrower. Prepayments
of the Revolving Loan shall be made in integral multiples of $500,000, in the
case of prepayments of any LIBOR Tranches, or $100,000, in the case of
prepayments of the Prime Rate Tranche. If the prepayment would cause the
aggregate outstanding principal amount of any LIBOR Tranche comprising all or
any part of the Revolving Loan or the aggregate outstanding principal amount of
the Prime Rate Tranche comprising all or any part of the Revolving Loan, to be
less than $1,000,000, in the case of any such LIBOR Tranche, or $1,000,000, in
the case of the Prime Rate Tranche, the prepayment must be in an amount equal
to the entire outstanding principal amount of such LIBOR Tranche under the
Revolving Loan or the entire outstanding principal amount of the Prime Rate
Tranche under the Revolving Loan, as the case may be. Upon receipt of any
notice of prepayment, the Agent shall give prompt notice of the intended
prepayment to the Banks. For each such notice given by the Borrower, the
Borrower shall prepay the Revolving Loan in the specified amount on the
specified date as set forth in such notice. The Borrower shall have no right
to prepay any principal amount of the Revolving Loan except as provided in this
Section 2.1(c)(i).
(ii) Each prepayment of principal of any LIBOR
Tranche under the Revolving Loan pursuant to this Section 2.1(c) shall be
accompanied by payment of all accrued but unpaid interest on the principal
amount prepaid and any amounts required to be paid pursuant to Section 2.6 as a
result of such prepayment.
(d) Repayment. The Borrower shall pay to the Agent for
the ratable benefit of the Banks the aggregate outstanding principal amount of
the Revolving Loan on the Revolving Loan Maturity Date.
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2.2 Letter of Credit Facility.
(a) Commitment for Letters of Credit. The Issuing Bank
shall, on the terms and conditions set forth in this Agreement and for the
purposes set forth in Section 5.4, issue, increase, and extend Letters of
Credit at the request of the Borrower from time to time on any Business Day
during the period from the date of this Agreement until the Revolving Loan
Maturity Date provided that (i) the Letter of Credit Exposure shall not exceed
the Letter of Credit Sublimit and (ii) the aggregate outstanding principal
amount of Revolving Loan Borrowings plus the Letter of Credit Exposure plus the
Swing Line Loan shall not exceed the aggregate amount of the Revolving Loan
Commitments. No Letter of Credit may have an expiration date later than 12
months after its issuance date, and each Letter of Credit which is
self-extending beyond its expiration date must be cancelable upon no more than
30 days notice prior to each extension period given by the Issuing Bank to the
beneficiary of such Letter of Credit. No Letter of Credit may have an
expiration date later than 12 months after the Revolving Loan Maturity Date
unless approved by the Issuing Bank, the Agent, and the Banks. Each Letter of
Credit must be in form and substance acceptable to the Issuing Bank. The
indebtedness of the Borrower to the Issuing Bank resulting from Letters of
Credit requested by the Borrower shall be evidenced by the Letter of Credit
Applications made by the Borrower.
(b) Requesting Letters of Credit. Each Letter of Credit
shall be issued, increased, or extended pursuant to a Letter of Credit
Application or Letter of Credit Application Amendment, as applicable, given by
the Borrower to the Issuing Bank in writing or by telecopy promptly confirmed
in writing, such Letter of Credit Application or Letter of Credit Application
Amendment being given not later than 1:00 p.m. (local time at the Applicable
Lending Office of the Agent) on the third Business Day before the date of the
proposed issuance, increase, or extension of the Letter of Credit. Each Letter
of Credit Application or Letter of Credit Application Amendment shall be fully
completed and shall specify the information required therein (including the
proposed form of the Letter of Credit or change thereto), and shall be
irrevocable and binding on the Borrower. Upon receipt by the Issuing Bank of
the Letter of Credit Application or Letter of Credit Application Amendment, the
Issuing Bank shall give prompt notice thereof to the Agent, and the Agent shall
promptly inform the Banks of the proposed Letter of Credit or change thereto.
Subject to the satisfaction of all applicable conditions precedent, the Issuing
Bank shall, by 4:00 p.m. (local time at the Applicable Lending Office of the
Agent), on the date requested by the Borrower for the issuance, increase, or
extension of such Letter of Credit issue, increase, or extend such Letter of
Credit to the specified beneficiary. Upon the date of the issuance, increase,
or extension of a Letter of Credit, the Issuing Bank shall be deemed to have
sold to each other Bank and each other Bank shall be deemed to have purchased
from the Issuing Bank a ratable participation in the related Letter of Credit
or change thereto. The Issuing Bank shall notify the Agent of each Letter of
Credit issued, increased, or extended and the date and amount of each Bank's
participation in such Letter of Credit, and the Agent shall in turn notify the
Banks.
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(c) Reimbursements for Letters of Credit. With respect
to any Letter of Credit and in accordance with the related Letter of Credit
Application, the Borrower agrees to pay to the Issuing Bank on demand fees due
with respect to such Letter of Credit as specified in Section 2.4(b)). If the
Borrower does not pay upon demand of the Issuing Bank any amount due to the
Issuing Bank under any Letter of Credit Application, in addition to any rights
the Issuing Bank may have under such Letter of Credit Application, the Issuing
Bank may upon written notice to the Agent request the satisfaction of such
obligation by the making of a Revolving Loan Borrowing. Concurrently with such
notice to the Agent, the Issuing Bank will use reasonable efforts provide like
notice to the Borrower, provided that failure to provide such notice to the
Borrower at such time shall not invalidate the effectiveness of such request
for a Revolving Loan Borrowing. Upon such request, the Borrower shall be
deemed to have requested the making of a Revolving Loan Borrowing in the amount
of such obligation and the transfer of the proceeds thereof to the Issuing
Bank. Such Revolving Loan Borrowing shall be a Prime Rate Borrowing. The
Agent shall promptly forward notice of such Revolving Loan Borrowing to the
Borrower and the Banks, and each Bank shall, in accordance with the procedures
of Section 2.1(b), other than limitations on the size of Revolving Loan
Borrowings, and notwithstanding the failure of any conditions precedent, make
available such Bank's ratable share of such Revolving Loan Borrowing to the
Agent, and the Agent shall promptly deliver the proceeds thereof to the Issuing
Bank for application to such Bank's share of the obligations under such Letter
of Credit. The Borrower hereby unconditionally and irrevocably authorizes,
empowers, and directs the Issuing Bank to make such requests for Revolving Loan
Borrowings on behalf of the Borrower, and the Banks to make Revolving Loan
Advances to the Agent for the benefit of the Issuing Bank in satisfaction of
such obligations. The Agent and each Bank may record and otherwise treat the
making of such Revolving Loan Borrowings as the making of Revolving Loan
Borrowings to the Borrower under this Agreement as if requested by the
Borrower. Nothing herein is intended to release the Borrower's obligations
under any Letter of Credit Application, but only to provide an additional
method of payment therefor. The making of any Revolving Loan Borrowing under
this Section 2.2(c) shall not constitute a cure or waiver of any Default or
Event of Default, other than the payment Default or Event of Default which is
satisfied by the application of the amounts deemed advanced hereunder, caused
by the Borrower's failure to comply with the provisions of this Agreement or
any Letter of Credit Application.
(d) Prepayments of Letters of Credit. In the event that
any Letters of Credit shall be outstanding according to their terms after the
Revolving Loan Maturity Date, the Borrower shall pay to the Agent an amount
equal to the Letter of Credit Exposure allocable to such Letters of Credit to
be held in the Letter of Credit Collateral Account and applied in accordance
with paragraph (g) below.
(e) Obligations Unconditional. The obligations of the
Borrower and each Bank under this Agreement and the Letter of Credit
Applications to make payments as required to reimburse the Issuing Bank for
draws under Letters of Credit and to make other payments due in respect of
Letters of Credit shall be unconditional and irrevocable, and shall be paid
strictly in accordance with the terms of this Agreement and the Letter of
Credit Applications under all
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circumstances, including: (i) any lack of validity or enforceability of any
Letter of Credit Document; (ii) any amendment, waiver, or consent to departure
from any Letter of Credit Document; (iii) the existence of any claim, set-off,
defense, or other right which the Borrower or any Bank may have at any time
against any beneficiary or transferee of any Letter of Credit (or any Persons
for whom any such beneficiary or any such transferee may be acting), the
Issuing Bank, or any other person or entity, whether in connection with the
transactions contemplated in this Agreement or any unrelated transaction; (iv)
any statement or any other document presented under such Letter of Credit
proving to be forged, fraudulent, invalid, or insufficient in any respect or
any statement therein being untrue or inaccurate in any respect; or (v) payment
by the Issuing Bank under any Letter of Credit against presentation of a draft
or certificate which does not comply with the terms of such Letter of Credit;
provided, however, that nothing contained in this paragraph (d) shall be deemed
to constitute a waiver of any remedies of the Borrower or any Bank in
connection with the Letters of Credit or the Borrower's or such Bank's rights
under paragraph (e) below.
(f) Liability of Issuing Bank. The Issuing Bank shall
not be liable or responsible for: (i) the use which may be made of any Letter
of Credit or any acts or omissions of any beneficiary or transferee in
connection therewith; (ii) the validity, sufficiency, or genuineness of
documents related to Letters of Credit, or of any endorsement thereon, even if
such documents should prove to be in any or all respects invalid, insufficient,
fraudulent, or forged; (iii) payment by the Issuing Bank against presentation
of documents which do not strictly comply with the terms of a Letter of Credit,
including failure of any documents to bear any reference or adequate reference
to the relevant Letter of Credit; or (iv) any other circumstances whatsoever in
making or failing to make payment under any Letter of Credit (INCLUDING THE
ISSUING BANK'S OWN NEGLIGENCE); except that the Issuing Bank shall be liable to
the Borrower or any Bank to the extent of any direct, as opposed to
consequential, damages suffered by the Borrower or such Bank which the Borrower
or such Bank proves were caused by (A) the Issuing Bank's gross negligence or
willful misconduct in determining whether documents presented under a Letter of
Credit comply with the terms of such Letter of Credit, (B) the Issuing Bank's
willful failure to make or delay in making lawful payment under any Letter of
Credit after the presentation to it of documentation strictly complying with
the terms and conditions of such Letter of Credit or the Issuing Bank's payment
of greater than the maximum amount permitted under any Letter of Credit, or (C)
the Issuing Bank's negligence in the handling of money.
(g) Letter of Credit Collateral Account.
(i) If the Borrower is required to deposit funds
in the Letter of Credit Collateral Account pursuant to Sections 2.2(d) or 6.4,
then the Borrower and the Agent shall establish the Letter of Credit Collateral
Account and the Borrower shall execute any documents and agreements, including
the Agent's standard form assignment of deposit accounts, that the Agent
reasonably requests in connection therewith to establish the Letter of Credit
Collateral Account and grant the Agent a first priority security interest in
such account and the funds therein. The Borrower hereby pledges to the Agent
and grants the Agent a security interest in the Letter of Credit Collateral
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Account, whenever established, all funds held in the Letter of Credit
Collateral Account from time to time, and all proceeds thereof as security for
the payment of the Obligations.
(ii) Funds held in the Letter of Credit Collateral
Account shall be held as cash collateral for obligations with respect to
Letters of Credit and promptly applied by the Agent at the request of the
Issuing Bank to any reimbursement or other obligations under Letters of Credit
that exist or occur. To the extent that any surplus funds are held in the
Letter of Credit Collateral Account above the Letter of Credit Exposure, during
the existence of an Event of Default the Agent may (A) hold such surplus funds
in the Letter of Credit Collateral Account as cash collateral for the Credit
Obligations or (B) apply such surplus funds to any Credit Obligations in
accordance with Section 6.9. If no Default exists, the Agent shall release to
the Borrower at the Borrower's written request any funds held in the Letter of
Credit Collateral Account above the amounts required by Section 2.2(d).
(iii) Funds held in the Letter of Credit Collateral
Account shall be invested in money market funds of the Agent or in another
investment if mutually agreed upon by the Borrower and the Agent, but the Agent
shall have no other obligation to make any other investment of the funds
therein. The Agent shall exercise reasonable care in the custody and
preservation of any funds held in the Letter of Credit Collateral Account and
shall be deemed to have exercised such care if such funds are accorded
treatment substantially equivalent to that which the Agent accords its own
property, it being understood that the Agent shall not have any responsibility
for taking any necessary steps to preserve rights against any parties with
respect to any such funds.
2.3 Swing Line Facility.
(a) Commitment. The Swing Line Lender agrees, on the
terms and conditions set forth in the Swing Line Note, to make advances to the
Borrower under the Swing Line Note. No Bank shall have any rights thereunder
(but each Bank shall have the obligation to reimburse the Swing Line Lender in
accordance with paragraph (b) below). The indebtedness of the Borrower to the
Swing Line Lender resulting from the advances under the Swing Line Note made by
the Swing Line Lender shall be evidenced by the Swing Line Note made by the
Borrower.
(b) Reimbursements for Swing Line Loan Obligations. With
respect to the Swing Line Loan and the interest, premium, fees, and other
amounts owed by the Borrower to the Swing Line Lender in connection with the
Swing Line Note, and in accordance with the terms of the Swing Line Note, the
Borrower agrees to pay to the Swing Line Lender such amounts when due and
payable to the Swing Line Lender under the Swing Line Note. If the Borrower
does not pay to the Swing Line Lender any such amounts when due and payable to
the Swing Line Lender under the Swing Line Note, in addition to any rights the
Swing Line Lender may have under such Swing Line Note, the Swing Line Lender
may upon written notice to the Agent request the satisfaction of such
obligation by the making of a Revolving Loan Borrowing in the amount of any
such amounts not paid when due and payable. Concurrently with such notice to
the Agent, the Swing Line Lender will
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use reasonable efforts provide like notice to the Borrower, provided that
failure to provide such notice to the Borrower at such time shall not
invalidate the effectiveness of such request for a Revolving Loan Borrowing.
Upon such request, the Borrower shall be deemed to have requested the making of
a Revolving Loan Borrowing in the amount of such obligation and the transfer of
the proceeds thereof to the Swing Line Lender. Such Revolving Loan Borrowing
shall be a Prime Rate Borrowing. The Agent shall promptly forward notice of
such Revolving Loan Borrowing to the Borrower and the Banks, and each Bank
shall, in accordance with the procedures of Section 2.1(b), other than
limitations on the size of Revolving Loan Borrowings, and notwithstanding the
failure of any conditions precedent, make available such Bank's ratable share
of such Revolving Loan Borrowing to the Agent, and the Agent shall promptly
deliver the proceeds thereof to the Swing Line Lender for application to such
amounts owed to the Swing Line Lender. The Borrower hereby unconditionally and
irrevocably authorizes, empowers, and directs the Swing Line Lender to make
such requests for Revolving Loan Borrowings on behalf of the Borrower, and the
Banks to make Revolving Loan Advances to the Agent for the benefit of the Swing
Line Lender in satisfaction of such obligations. The Agent and each Bank may
record and otherwise treat the making of such Revolving Loan Borrowings as the
making of a Revolving Loan Borrowing to the Borrower under this Agreement as if
requested by the Borrower. Nothing herein is intended to release the
Borrower's obligations under the Swing Line Note, but only to provide an
additional method of payment therefor. The making of any Borrowing under this
Section 2.3(b) shall not constitute a cure or waiver of any Default or Event of
Default, other than the payment Default or Event of Default which is satisfied
by the application of the amounts deemed advanced hereunder, caused by the
Borrower's failure to comply with the provisions of this Agreement or the Swing
Line Note.
2.4 Fees.
(a) Commitment Fees. The Borrower shall pay to the Agent
for the ratable benefit of the Banks an unused commitment fee in an amount
equal to the product of the Applicable Margin for unused commitment fees in
effect from time to time multiplied by the average daily amount by which (i)
the aggregate amount of the Revolving Loan Commitments exceeds (ii) the
aggregate outstanding principal amount of the Revolving Loan plus the Letter of
Credit Exposure. The unused commitment fee shall be due and payable in arrears
on the last day of each calendar quarter and on the Revolving Loan Maturity
Date.
(b) Fees for Letters of Credit. For each Letter of
Credit issued by the Issuing Bank, the Borrower shall pay to the Agent for the
ratable benefit of the Banks a letter of credit fee equal to the Applicable
Margin for letter of credit fees per annum on the face amount of such Letter of
Credit for the stated term of such Letter of Credit, with a minimum fee of
$500. In addition, for each Letter of Credit issued by the Issuing Bank, the
Borrower shall pay to the Agent for the benefit of the Issuing Bank a fronting
fee of 0.125% per annum on the face amount of such Letter of Credit for the
stated term of such Letter of Credit, with a minimum fee of $500. The Borrower
shall pay such letter of credit fees for each Letter of Credit quarterly in
arrears within ten days after when billed therefor by the Issuing Bank.
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(c) Agent Fee Letter. The Borrower shall pay to the
parties specified therein the fees and other amounts payable under the Agent
Fee Letter.
2.5 Interest.
(a) Election of Interest Rate Basis. The Borrower may
select the interest rate basis for the Revolving Loan in accordance with the
terms of this Section 2.5(a):
(i) Under the Revolving Loan Borrowing Request
provided to the Agent in connection with the making of each Revolving Loan
Borrowing, the Borrower shall select the amount and the Type of the Tranches,
and for each LIBOR Tranche selected, any permitted Interest Period for each
such LIBOR Tranche, which will comprise such Revolving Loan Borrowing, provided
that (A) at no time shall there be more than ten separate LIBOR Tranches
outstanding and (B) each LIBOR Tranche must be in a principal amount equal to
or greater than $1,000,000 and be made in multiples of $500,000, and the Prime
Rate Tranche must be in a principal amount equal to or greater than$1,000,000
and be made in multiples of $100,000. Such interest rate elections must be
provided to the Agent in writing or by telecopy not later than 1:00 p.m. (local
time at the Applicable Lending Office of the Agent) on the third Business Day
before the date of any proposed Revolving Loan Borrowing comprised of a LIBOR
Tranche or 11:00 a.m. (local time at the Applicable Lending Office of the
Agent) on the same day of any proposed Revolving Loan Borrowing which is a
Prime Rate Borrowing. The Agent shall promptly forward copies of such interest
rate elections to the Banks. In the case of any Revolving Loan Borrowing
comprised of a LIBOR Tranche, upon determination by the Agent, the Agent shall
promptly notify the Borrower and the Banks of the applicable interest rate for
such Tranche.
(ii) With respect to any Tranche, the Borrower may
continue or convert any portion of any LIBOR Tranche or the Prime Rate Tranche
to form new LIBOR Tranches or increase or decrease the amount of the Prime Rate
Tranche in accordance with this paragraph. Each such continuation or
conversion shall be deemed to create a new LIBOR Tranche or increase or
decrease the amount of the Prime Rate Tranche, as applicable, for all purposes
of this Agreement. Each such continuation or conversion shall be made pursuant
to a Continuation/Conversion Request given by the Borrower to the Agent in
writing or by telecopy not later than 1:00 p.m. (local time at the Applicable
Lending Office of the Agent) on the third Business Day before the date of the
proposed continuation or conversion. Each Continuation/Conversion Request
shall be fully completed and shall specify the information required therein,
and shall be irrevocable and binding on the Borrower. The Agent shall promptly
forward notice of the continuation or conversion to the Banks. In the case of
any continuation or conversion into LIBOR Tranches, upon determination by the
Agent, the Agent shall notify the Borrower and the Banks of the applicable
interest rate. Continuations and conversions of LIBOR Tranches shall be made
in integral multiples of $500,000, and continuations and conversions of the
Prime Rate Tranche shall be made in integral multiples of $100,000. No
continuation or conversion shall be permitted if such continuation or
conversion would cause the aggregate outstanding principal amount of any LIBOR
Tranche which would remain
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outstanding to be less than $1,000,000, or the aggregate outstanding principal
amount of the Prime Rate Tranche which would remain outstanding to be less than
$1,000,000. At no time shall there be more than ten separate LIBOR Tranches
outstanding. Any conversion of an existing LIBOR Tranche is subject to Section
2.5. Subject to the satisfaction of all applicable conditions precedent, the
Agent and the Banks shall before close of business on the date requested by the
Borrower for the continuation or conversion, make such continuation or
conversion.
(iii) At the end of the Interest Period for any
LIBOR Tranche if the Borrower has not continued or converted such LIBOR Tranche
into new Tranches as provided for in paragraph (ii) above, the Borrower shall
be deemed to have continued such LIBOR Tranche as a new LIBOR Tranche with an
Interest Period of one month. All of the Prime Rate Tranche shall continue as
the Prime Rate Tranche unless the Borrower converts such Prime Rate Tranche as
provided for in paragraph (ii) above.
(b) LIBOR Tranches. Each LIBOR Tranche shall bear
interest during its Interest Period at a per annum interest rate equal to the
sum of the LIBOR for such Tranche plus the Applicable Margin for LIBOR Tranches
in effect from time to time. The Borrower shall pay to the Agent for the
ratable benefit of the Banks all accrued but unpaid interest on each LIBOR
Tranche on the last day of the applicable Interest Period for such LIBOR
Tranche (and with respect to LIBOR Tranches with Interest Periods of greater
than three months, on the date which is three months after the first date of
the Interest Period for such LIBOR Tranche), when required upon prepayment as
specified elsewhere in this Agreement, on any date when such LIBOR Tranche is
prepaid in full, and on the Revolving Loan Maturity Date.
(c) Prime Rate Tranche. The Prime Rate Tranche shall
bear interest at a per annum interest rate equal to the Base Rate in effect
from time to time plus the Applicable Margin for the Prime Rate Tranche in
effect from time to time. The Borrower shall pay to the Agent for the ratable
benefit of the Banks all accrued but unpaid interest on the aggregate
outstanding principal amount of the Prime Rate Tranche on the last day of each
calendar quarter, when required upon prepayment as specified elsewhere in this
Agreement, on any date the Prime Rate Tranche is prepaid in full, and on the
Revolving Loan Maturity Date.
(d) Usury Protection.
(i) If, with respect to any Bank and the
Borrower, the effective rate of interest contracted for by such Bank with the
Borrower under the Credit Documents, including the stated rates of interest
contracted for hereunder and any other amounts contracted for under the Credit
Documents which are deemed to be interest, at any time exceeds the Highest
Lawful Rate, then the outstanding principal amount of the loans made by such
Bank to the Borrower hereunder shall bear interest at a rate which would make
the effective rate of interest on the loans made by such Bank to the Borrower
under the Credit Documents equal the Highest Lawful Rate until the difference
between the amounts which would have been due by the Borrower to such Bank at
the stated rates
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and the amounts which were due by the Borrower to such Bank at the Highest
Lawful Rate (the "Lost Interest") has been recaptured by such Bank. If, when
the loans made hereunder are repaid in full, the Lost Interest has not been
fully recaptured by such Bank pursuant to the preceding paragraph, then, to the
extent permitted by law, the interest rates charged by such Bank to the
Borrower hereunder shall be retroactively increased such that the effective
rate of interest on the loans made by such Bank to the Borrower under the
Credit Documents was at the Highest Lawful Rate since the effectiveness of this
Agreement to the extent necessary to recapture the Lost Interest not recaptured
pursuant to the preceding sentence and, to the extent allowed by law, the
Borrower shall pay to such Bank the amount of the Lost Interest remaining to be
recaptured by such Bank.
(ii) In calculating all sums paid or agreed to be
paid to any Bank by the Borrower for the use, forbearance, or detention of
money under the Credit Documents, such amounts shall, to the extent permitted
by applicable law, be amortized, prorated, allocated, and spread in equal parts
throughout the term of the Credit Documents.
(iii) NOTWITHSTANDING THE FOREGOING OR ANY OTHER
TERM IN THIS AGREEMENT AND THE CREDIT DOCUMENTS TO THE CONTRARY, it is the
intention of each Bank and the Borrower to conform strictly to any applicable
usury laws. Accordingly, if any Bank contracts for, charges, or receives any
consideration from the Borrower which constitutes interest in excess of the
Highest Lawful Rate, then any such excess shall be canceled automatically and,
if previously paid, shall at such Bank's option be applied to the outstanding
amount of the loans made hereunder by such Bank to the Borrower or be refunded
to the Borrower.
2.6 Breakage Costs. If (i) any payment of principal on or any
conversion of any LIBOR Tranche is made on any date other than the last day of
the Interest Period for such LIBOR Tranche, whether as a result of any
voluntary or mandatory prepayment (other than a prepayment upon the occurrence
of any event subject to Section 2.8 or 2.9), any acceleration of maturity, or
any other cause, (ii) any payment of principal on any LIBOR Tranche is not made
when due, or (iii) any LIBOR Tranche is not borrowed, converted, or prepaid in
accordance with the respective notice thereof provided by the Borrower to the
Agent, whether as a result of any failure to meet any applicable conditions
precedent for borrowing, conversion, or prepayment, the permitted cancellation
of any request for borrowing, conversion, or prepayment, the failure of the
Borrower to provide the respective notice of borrowing, conversion, or
prepayment, or any other cause not specified above which is created by the
Borrower, then the Borrower shall pay to each Bank upon demand any amounts
required to compensate such Bank for any losses, costs, or expenses, including
lost profits and administrative expenses, which are reasonably allocable to
such action, including losses, costs, and expenses related to the liquidation
or redeployment of funds acquired or designated by such Bank to fund or
maintain such Bank's ratable share of such LIBOR Tranche or related to the
reacquisition or redesignation of funds by such Bank to fund or maintain such
Bank's ratable share of such LIBOR Tranche following any liquidation or
redeployment of such funds caused by such action. Such Bank need not prove
matched funding of any particular funds, and a certificate as to
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the amount of such loss, cost, or expense detailing the calculation thereof and
certifying that such Bank customarily charges such amounts to its other
customers in similar circumstances submitted by such Bank to the Borrower shall
be conclusive and binding for all purposes, absent manifest error.
2.7 Increased Costs.
(a) Cost of Funds. If due to either (i) any introduction
of, change in, or change in the interpretation of any law or regulation, in
each case, after the date of this Agreement or (ii) compliance with any
guideline or request from any central bank or other governmental authority
having appropriate jurisdiction (whether or not having the force of law) given
after the date of this Agreement, there shall be any increase in the costs of
any Bank attributable to (x) committing to make any Revolving Loan Advance or
obtaining funds for the making, funding, or maintaining of such Bank's ratable
share of any LIBOR Tranche in the relevant interbank market or (y) committing
to make Letters of Credit or issuing, funding, or maintaining Letters of Credit
(including any increase in any applicable reserve requirement specified by the
Federal Reserve Board, including those for emergency, marginal, supplemental,
or other reserves), then the Borrower shall pay to such Bank upon demand any
amounts required to compensate such Bank for such increased costs, such amounts
being due and payable upon demand by such Bank. A certificate as to the cause
and amount of such increased cost detailing the calculation of such cost and
certifying that such Bank customarily charges such amounts to its other
customers in similar circumstances submitted by such Bank to the Borrower shall
be conclusive and binding for all purposes, absent manifest error. No Bank may
make any claim for compensation under this Section 2.7(a) for increased costs
incurred before 90 days prior to the delivery of any such certificate.
(b) Capital Adequacy. If, due to either (i) any
introduction of, change in, or change in the interpretation of any law or
regulation, in each case, after the date of this Agreement or (ii) compliance
with any guideline or request from any central bank or other governmental
authority having appropriate jurisdiction (whether or not having the force of
law) given after the date of this Agreement, there shall be any increase in the
capital requirements of any Bank or its parent or holding company attributable
to (x) committing to make Revolving Loan Advances or making, funding, or
maintaining Revolving Loan Advances or (y) committing to make Letters of Credit
or issuing, funding, or maintaining Letters of Credit, as such capital
requirements are allocated by such Bank, then the Borrower shall pay to such
Bank upon demand any amounts required to compensate such Bank or its parent or
holding company for such increase in costs (including an amount equal to any
reduction in the rate of return on assets or equity of such Bank or its parent
or holding company), such amounts being due and payable upon demand by such
Bank. A certificate as to the cause and amounts detailing the calculation of
such amounts and certifying that such Bank customarily charges such amounts to
its other customers in similar circumstances submitted by such Bank to the
Borrower shall be conclusive and binding for all purposes, absent manifest
error. No Bank may make any claim for compensation under this Section 2.7(b)
for increased costs incurred before 90 days prior to the delivery of any such
certificate.
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2.8 Illegality. Notwithstanding any other provision in this
Agreement, if it becomes unlawful for any Bank to obtain deposits or other
funds for making or funding such Bank's ratable share of any LIBOR Tranche in
the relevant interbank market, such Bank shall so notify the Borrower and the
Agent and such Bank's commitment to create LIBOR Tranches shall be suspended
until such condition has passed, all LIBOR Tranches applicable to such Bank
shall be converted to the Prime Rate Tranche as of the end of each applicable
Interest Period or earlier if necessary, and all subsequent requests for LIBOR
Tranches shall be deemed to be requests for Prime Rate Borrowings or
continuations and conversions of the Prime Rate Tranche, as applicable, with
respect to such Bank.
2.9 Market Failure. Notwithstanding any other provision in this
Agreement, if the Agent determines that: (a) quotations of interest rates for
the relevant deposits referred to in the definition of "LIBOR" are not being
provided in the relevant amounts, or maturities for purposes of determining the
rate of interest referred to in the definition of "LIBOR" or (b) the relevant
rates of interest referred to in the definition of "LIBOR" which are used as
the basis to determine the rate of interest for LIBOR Tranches will not
adequately cover the cost to any Bank of making or maintaining such Bank's
ratable share of any LIBOR Tranche, then if the Agent so notifies the Borrower,
the Agent and the Banks' commitment to create LIBOR Tranches shall be suspended
until such condition has passed, all LIBOR Tranches shall be converted to the
Prime Rate Tranche as of the end of each applicable Interest Period or earlier
if necessary, and all subsequent requests for LIBOR Tranches shall be deemed to
be requests for Prime Rate Borrowings or continuations and conversions of the
Prime Rate Tranche, as applicable, with respect to such Bank.
2.10 Payment Procedures and Computations.
(a) Payment Procedures. Time is of the essence in
this Agreement and the Credit Documents. All payment hereunder shall be made
in Dollars. The Borrower shall make each payment under this Agreement and
under the Revolving Loan Notes not later than 12:00 noon (local time at the
Applicable Lending Office of the Agent) on the day when due to the Agent at the
Agent's Applicable Lending Office in immediately available funds. All payments
by the Borrower hereunder shall be made without any offset, abatement,
withholding, deduction, counterclaim, or reduction. Upon receipt of payment
from the Borrower of any principal, interest, or fees due to the Banks, the
Agent shall promptly after receipt thereof distribute to the Banks their
ratable share of such payments for the account of their respective Applicable
Lending Offices. If and to the extent that the Agent shall not have so
distributed to any Bank its ratable share of such payments, the Agent agrees
that it shall pay interest on such amount for each day after the day when such
amount is made available to the Agent by the Borrower until the date such
amount is paid to such Bank by the Agent at the Federal Funds Rate in effect
from time to time, provided that if such amount is not paid by the Agent by the
end of the third day after the Borrower makes such amount available to the
Agent, the interest rates specified above shall be increased by a per annum
amount equal to 2.00% on the fourth day and shall remain at such increased rate
thereafter. Interest on such amount shall be due and payable by the Agent upon
demand by such Bank. Upon receipt of other amounts due solely to the Agent,
the
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Issuing Bank, the Swing Line Lender, or a specific Bank, the Agent shall
distribute such amounts to the appropriate party to be applied in accordance
with the terms of this Agreement.
(b) Agent Reliance. Unless the Agent shall have received
written notice from the Borrower prior to any date on which any payment is due
to the Banks that the Borrower shall not make such payment in full, the Agent
may assume that the Borrower has made such payment in full to the Agent on such
date and the Agent may, in reliance upon such assumption, cause to be
distributed to each Bank on such date an amount equal to the amount then due
such Bank. If and to the extent the Borrower shall not have so made such
payment in full to the Agent, each Bank shall repay to the Agent forthwith on
demand such amount distributed to such Bank, together with interest thereon
from the date such amount is distributed to such Bank until the date such Bank
repays such amount to the Agent, at an interest rate equal to, the Federal
Funds Rate in effect from time to time, provided that with respect to such
Bank, if such amount is not repaid by such Bank by the end of the second day
after the date of the Agent's demand, the interest rates specified above shall
be increased by a per annum amount equal to 2.00% on the third day after the
date of the Agent's demand and shall remain at such increased rate thereafter.
(c) Sharing of Payments. Each Bank agrees that if it
should receive any payment (whether by voluntary payment, by realization upon
security, by the exercise of the right of setoff or banker's lien, by
counterclaim or cross action, by the enforcement of any right under the Credit
Documents, or otherwise) in respect of any obligation of the Borrower to pay
principal, interest, fees, or any other obligation incurred under the Credit
Documents in a proportion greater than the total amount of such principal,
interest, fees, or other obligation then owed and due by the Borrower to such
Bank bears to the total amount of principal, interest, fees, or other
obligation then owed and due by the Borrower to all of the Banks immediately
prior to such receipt, then such Bank receiving such excess payment shall
purchase for cash without recourse from the other Banks an interest in the
obligations of the Borrower to such Banks in such amount as shall result in a
participation by all of the Banks, in proportion with the Banks' respective pro
rata shares, in the aggregate unpaid amount of principal, interest, fees, or
any such other obligation, as the case may be, owed by the Borrower to all of
the Banks; provided that if all or any portion of such excess payment is
thereafter recovered from such Bank, such purchase shall be rescinded and the
purchase price restored to the extent of such recovery, in proportion with the
Banks' respective pro rata shares, but without interest.
(d) Authority to Charge Accounts. The Agent, if and to
the extent payment owed to the Agent or any Bank is not made when due, may
charge from time to time against any account of the Borrower with the Agent any
amount so due. The Agent agrees promptly to notify the Borrower after any such
charge and application made by the Agent provided that the failure to give such
notice shall not affect the validity of such charge and application.
(e) Interest and Fees. Unless expressly provided for in
this Agreement, (i) all computations of interest based on the Prime Rate
(including the Base Rate, when applicable) shall be made on the basis of a
365/366 day year, as the case may be, (ii) all computations of interest based
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on the Federal Funds Rate (including the Base Rate, when applicable) shall be
made on the basis of a 360 day year, (iii) all computations of interest based
upon the LIBOR shall be made on the basis of a 360 day year, and (iv) all
computations of fees shall be made on the basis of a 360 day year, in each case
for the actual number of days (including the first day, but excluding the last
day) occurring in the period for which such interest or fees are payable. Each
determination by the Agent of an interest rate or fee shall be conclusive and
binding for all purposes, absent manifest error.
(f) Payment Dates. Whenever any payment shall be stated
to be due on a day other than a Business Day, such payment shall be made on the
next succeeding Business Day, and such extension of time shall in such case be
included in the computation of payment of interest or fees, as the case may be.
If the time for payment for an amount payable is not specified in this
Agreement or in any other Credit Document, the payment shall be due and payable
on demand by the Agent or the applicable Bank.
2.11 Taxes.
(a) No Deduction for Certain Taxes. Any and all payments
by the Borrower shall be made free and clear of and without deduction for any
and all present or future taxes, levies, imposts, deductions, charges, or
withholdings, and all liabilities with respect thereto, other than taxes
imposed on the income and franchise taxes imposed on the Agent, any Bank, or
the Applicable Lending Office thereof by any jurisdiction in which any such
entity is a citizen or resident or any political subdivision of such
jurisdiction (all such nonexcluded taxes, levies, imposts, deductions, charges,
withholdings, and liabilities being hereinafter referred to as "Taxes"). If
the Borrower shall be required by law to deduct any Taxes from or in respect of
any sum payable to the Agent, any Bank, or the Applicable Lending Office
thereof, (i) the sum payable shall be increased as may be necessary so that,
after making all required deductions (including deductions applicable to
additional sums payable under this Section 2.11), such Person receives an
amount equal to the sum it would have received had no such deductions been
made; (ii) the Borrower shall make such deductions; and (iii) the Borrower
shall pay the full amount deducted to the relevant taxation authority or other
authority in accordance with applicable law.
(b) Other Taxes. The Borrower agrees to pay any present
or future stamp or documentary taxes or any other excise or property taxes,
charges, or similar levies which arise from any payment made or from the
execution, delivery, or registration of, or otherwise with respect to, this
Agreement or the other Credit Documents (other than those which become due as a
result of any Bank joining this Agreement as a result of any Assignment and
Acceptance, which shall be paid by the Bank which becomes a Bank hereunder as a
result of such Assignment and Acceptance).
(c) Foreign Bank Withholding Exemption. Each Bank and
Issuing Bank that is not incorporated under the laws of the United States of
America or a state thereof agrees that it shall deliver to the Borrower and the
Agent (i) two duly completed copies of United States Internal Revenue Service
Form 1001 or 4224 or successor applicable form, as the case may be, certifying
in
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each case that such Bank is entitled to receive payments under this Agreement
and the Revolving Loan Notes payable to it, without deduction or withholding of
any United States federal income taxes, (ii) if applicable, an Internal Revenue
Service Form W-8 or W-9 or successor applicable form, as the case may be, to
establish an exemption from United States backup withholding tax, and (iii) any
other governmental forms which are necessary or required under an applicable
tax treaty or otherwise by law to reduce or eliminate any withholding tax,
which have been reasonably requested by the Borrower. Each Bank which delivers
to the Borrower and the Agent a Form 1001 or 4224 and Form W-8 or W-9 pursuant
to the next preceding sentence further undertakes to deliver to the Borrower
and the Agent two further copies of the said letter and Form 1001 or 4224 and
Form W-8 or W-9, or successor applicable forms, or other manner of
certification, as the case may be, on or before the date that any such letter
or form expires or becomes obsolete or after the occurrence of any event
requiring a change in the most recent letter and form previously delivered by
it to the Borrower and the Agent, and such extensions or renewals thereof as
may reasonably be requested by the Borrower and the Agent certifying in the
case of a Form 1001 or 4224 that such Bank is entitled to receive payments
under this Agreement without deduction or withholding of any United States
federal income taxes. If an event (including without limitation any change in
treaty, law or regulation) has occurred prior to the date on which any delivery
required by the preceding sentence would otherwise be required which renders
all such forms inapplicable or which would prevent any Bank from duly
completing and delivering any such letter or form with respect to it and such
Bank advises the Borrower and the Agent that it is not capable of receiving
payments without any deduction or withholding of United States federal income
tax, and in the case of a Form W-8 or W-9, establishing an exemption from
United States backup withholding tax, such Bank shall not be required to
deliver such letter or forms. The Borrower shall withhold tax at the rate and
in the manner required by the laws of the United States with respect to
payments made to a Bank failing to provide the requisite Internal Revenue
Service forms in a timely manner. Each Bank which fails to provide to the
Borrower in a timely manner such forms shall reimburse the Borrower upon demand
for any penalties paid by the Borrower as a result of any failure of the
Borrower to withhold the required amounts that are caused by such Bank's
failure to provide the required forms in a timely manner.
2.12 Change of Lending Office.
(a) Each Bank agrees that if it makes any demand for payment under
Section 2.7 or 2.11(a), or if any adoption or change of the type described in
Section 2.8 shall occur with respect to it, it will use reasonable efforts
(consistent with its internal policy and legal and regulatory restrictions and
so long as such efforts would not be disadvantageous to it, as determined in
its sole discretion) to designate a different lending office if the making of
such a designation would reduce or obviate the need for the Borrower to make
payments under Section 2.7 or 2.11(a), or would eliminate or reduce the effect
of any adoption or change described in Section 2.8.
(b) If any Bank (including any participant Bank under Section 8.5)
shall assert that any adoption or change of the type described in Section 2.8
hereof has occurred with respect to it, or if
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any Bank (including any participant Bank under Section 8.5) requests
compensation under Section 2.7, or if the Borrower is required to pay any
additional amount to any Bank or any authority for the account of any Bank
pursuant to Section 2.11, then the Borrower may, at its expense and effort, upon
notice to such Bank and the Agent, require such Bank to, and such Bank promptly
shall, assign and delegate, without recourse (in accordance with and subject to
the restrictions contained in Section 8.5), all its interests, rights, and
obligations under this Agreement to an assignee that shall assume such
obligations (which assignee may be another Bank, if a Bank accepts such
assignment); provided that (i) if such assignee is not a Bank or an Affiliate
thereof, the Borrower shall have received the prior written consent of the Agent
and the Issuing Bank which consents shall not unreasonably be withheld or
delayed, (ii) such Bank shall have received payment of an amount equal to the
aggregate outstanding principal of such Bank's Revolving Loan Advances and its
participations in Letters of Credit, accrued interest thereon, accrued fees and
all other amounts payable to it hereunder, from the assignee (at least to the
extent of such outstanding principal) and the Borrower (in the case of all other
amounts), and (iii) in the case of any such assignment resulting from a claim
for compensation under Section 2.7 or payment required to be made pursuant to
Section 2.11, such assignment will result in a reduction in such compensation or
payments compared to the compensation or payments payable to the assigning Bank.
A Bank shall not be required to make any such assignment and delegation if,
prior thereto, as a result of a waiver by such Bank or otherwise, the
circumstances entitling the Borrower to require such assignment and delegation
no longer exist or cease to apply.
ARTICLE 3. CONDITIONS PRECEDENT.
3.1 Conditions Precedent to Initial Extension of Credit. The
obligation of each Bank to make the initial extension of credit under this
Agreement, including the making of any Revolving Loan Advances and the issuance
of any Letters of Credit, and the obligation of the Swing Line Lender to make
any advances under the Swing Line Loan shall be subject to the following
conditions precedent:
(a) Documents. The Borrower shall have delivered or
shall have caused to be delivered the documents and other items listed on
Exhibit F, together with any other documents requested by the Agent to document
the agreements and intent of the Credit Documents, each in form and with
substance satisfactory to the Agent;
(b) Initial Public Offering; Mergers. The Borrower shall
have completed on or before February 15, 1998, an initial public offering with
proceeds to the Borrower, net of underwriter's fees and transaction costs, of
not less than $69,000,000, and the Agent shall have received evidence
satisfactory to the Agent that the mergers and other transactions described in
the Registration Statement shall have been completed to the satisfaction of the
Agent in conformity with laws and on conditions and terms satisfactory to the
Agent; and
(c) Material Adverse Change. No Material Adverse Change
shall have occurred since September 30, 1997 (as determined for the Borrower
and all of its post initial public offering
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Subsidiaries as reflected in the proforma combined financial statements
contained in the Registration Statement).
3.2 Conditions Precedent to Each Extension of Credit. The
obligation of each Bank to make any extension of credit under this Agreement,
including the making of any Revolving Loan Advances and the issuance, increase,
or extension of any Letters of Credit, and the obligation of the Swing Line
Lender to make any advances under the Swing Line Loan shall be subject to the
further conditions precedent that on the date of such extension of credit:
(a) Representations and Warranties. As of the date of
the making of any extension of credit hereunder, the representations and
warranties contained in each Credit Document shall be true and correct in all
material respects as of such date (and the Borrower's request for the making of
any extension of credit hereunder shall be deemed to be a restatement,
representation, and additional warranty of the representations and warranties
contained in each Credit Document as of such date); and
(b) Default. As of the date of the making of any
extension of credit hereunder, there shall exist no Default or Event of
Default, and the making of the extension of credit would not cause a Default or
Event of Default.
ARTICLE 4. REPRESENTATIONS AND WARRANTIES. The Borrower represents and
warrants to the Agent and each Bank, and with each request for any extension of
credit hereunder, including the making of any Revolving Loan Advances, and the
issuance, increase, or extension of any Letters of Credit, again represents and
warrants to the Agent and each Bank, as follows:
4.1 Organization. As of the date of this Agreement, each
Restricted Entity (a) is duly organized, validly existing, and in good standing
under the laws of such Person's respective jurisdiction of organization and (b)
is duly licensed, qualified to do business, and in good standing in each
jurisdiction in which such Person is organized, owns property, or conducts
operations to the extent that any failure to be so licensed, qualified, or in
good standing in accordance with this clause (b) could reasonably be expected
to cause a Material Adverse Change.
4.2 Authorization. The execution, delivery, and performance by
each Credit Party of the Credit Documents to which such Credit Party is a party
and the consummation of the transactions contemplated thereby (a) do not
contravene the organizational documents of such Credit Party, (b) have been
duly authorized by all necessary corporate action of each Credit Party, and (c)
are within each Credit Party's corporate powers.
4.3 Enforceability. Each Credit Document to which any Credit
Party is a party has been duly executed and delivered by each Credit Party
which is a party to such Credit Document and constitutes the legal, valid, and
binding obligation of each such Credit Party, enforceable against each such
Credit Party in accordance with such Credit Document's terms, except as limited
by
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applicable bankruptcy, insolvency, reorganization, moratorium, or similar laws
at the time in effect affecting the rights of creditors generally and subject
to the availability of equitable remedies.
4.4 Absence of Conflicts and Approvals. The execution, delivery,
and performance by each Credit Party of the Credit Documents to which such
Credit Party is a party and the consummation of the transactions contemplated
thereby, (a) do not result in any violation or breach of any provisions of, or
constitute a default under, any note, indenture, credit agreement, security
agreement, credit support agreement, or other similar agreement to which such
Credit Party is a party or any other material contract or agreement to which
such Credit Party is a party, (b) do not violate any law or regulation binding
on or affecting such Credit Party, (c) do not require any authorization,
approval, or other action by, or any notice to or filing with, any governmental
authority, and (d) do not result in or require the creation or imposition of
any Lien prohibited by this Agreement.
4.5 Investment Companies. No Restricted Entity or Affiliate
thereof is an "investment company" or a company "controlled" by an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
4.6 Public Utilities. No Restricted Entity or Affiliate thereof
is a "holding company," or a "subsidiary company" of a "holding company," or an
"affiliate" of a "holding company" or of a "subsidiary company" of a "holding
company," within the meaning of the Public Utility Holding Company Act of 1935,
as amended. No Restricted Entity or Affiliate thereof is a regulated public
utility.
4.7 Financial Condition.
(a) The Borrower has delivered to the Agent the
Registration Statement, including therein the proforma combined balance sheet
of the Borrower following the public offering of securities contemplated
therein and proforma combined statement of income for the periods shown
therein, which accurately and completely, in all material respects, present
fairly the financial condition of Borrower as of such date.
(b) As of the date of the Registration Statement, there
were no material contingent obligations, liabilities for taxes, unusual forward
or long-term commitments, or unrealized or anticipated losses of the Borrower
or any of the Borrower's Subsidiaries, except as disclosed in the Registration
Statement and adequate reserves for such items have been made in accordance
with generally accepted accounting principles. No Material Adverse Change has
occurred since the date of the Registration Statement. No Default exists.
4.8 Condition of Assets. Each Restricted Entity has good and
indefeasible title to substantially all of its owned property and valid
leasehold rights in all of its leased property, as reflected in the financial
statements most recently provided to the Agent free and clear of all Liens
except Permitted Liens. Each Restricted Entity possesses and has properly
approved, recorded, and
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filed, where applicable, all permits, licenses, patents, patent rights or
licenses, trademarks, trademark rights, trade names rights, and copyrights
which are useful in the conduct of its business and which the failure to
possess could reasonably be expected to cause a Material Adverse Change. The
material properties used in the operations of each Restricted Entity are in
good repair, working order, and condition, normal wear and tear excepted. The
properties of each Restricted Entity have not been adversely affected as a
result of any fire, explosion, earthquake, flood, drought, windstorm, accident,
strike or other labor disturbance, embargo, requisition or taking of property
or cancellation of contracts, permits, or concessions by a governmental
authority, riot, activities of armed forces, or acts of God or of any public
enemy in any manner which (after giving effect to any insurance proceeds) could
reasonably be expected to cause a Material Adverse Change.
4.9 Litigation. There are no actions, suits, or proceedings
pending or, to the knowledge of the Borrower, threatened against any Restricted
Entity at law, in equity, or in admiralty, or by or before any governmental
department, commission, board, bureau, agency, instrumentality, domestic or
foreign, or any arbitrator which could reasonably be expected to cause a
Material Adverse Change.
4.10 Subsidiaries. As of the date of this Agreement, the Borrower
has no Subsidiaries except as disclosed in Schedule II. The Borrower has no
Subsidiaries which have not been disclosed in writing to the Agent.
4.11 Laws and Regulations. Each Restricted Entity is in compliance
with all federal, state, and local laws and regulations which are applicable to
the operations and property of such Person where the failure to comply with the
same could reasonably be expected to cause a Material Adverse Change.
4.12 Environmental Compliance. Each Restricted Entity has been and
is in compliance with all Environmental Laws and has obtained and is in
compliance with all related permits necessary for the ownership and operation
of any such Person's properties, in each case, where the failure to be in
compliance with the same could reasonably be expected to cause a Material
Adverse Change. Each Restricted Entity has not received notice of and has not
been investigated for any violation or alleged violation of any Environmental
Law in connection with any such Person's presently or previously owned
properties which currently threaten action or suggest liabilities which could
reasonably be expected to cause a Material Adverse Change. Each Restricted
Entity does not and has not created, handled, transported, used, or disposed of
any Hazardous Materials on or about any such Person's properties (nor has any
such Person's properties been used for those purposes); has never been
responsible for the release of any Hazardous Materials into the environment in
connection with any such Person's operations and has not contaminated any
properties with Hazardous Materials; and does not and has not owned any
properties contaminated by any Hazardous Materials, in each case in any manner
which could reasonably be expected to cause a Material Adverse Change.
4.13 ERISA. Each Restricted Entity and each of their respective
Commonly Controlled
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Entities are in compliance with all provisions of ERISA to the extent that the
failure to be in compliance could reasonably be expected to cause a Material
Adverse Change. No Restricted Entity nor any of their respective Commonly
Controlled Entities participates in or during the past five years has
participated in any employee pension benefit plan covered by Title IV of ERISA
or any multiemployer plan under Section 4001(a)(3) of ERISA. With respect to
the Plans of the Restricted Entities, no Material Reportable Event or
Prohibited Transaction has occurred and exists that could reasonably be
expected to cause a Material Adverse Change.
4.14 Taxes. Each Restricted Entity has filed all United States
federal, state, and local income tax returns and all other domestic and foreign
tax returns which are required to be filed by such Person and has paid, or
provided for the payment before the same became delinquent of, all taxes due
pursuant to such returns or pursuant to any assessment received by such Person
except for tax payments being contested in good faith, for which adequate
reserves have been established and reported in accordance with general accepted
accounting principals, and which could not reasonably be expected to cause a
Material Adverse Change. The charges, accruals, and reserves on the books of
the Restricted Entities in respect of taxes are adequate in accordance with
generally accepted accounting principles.
4.15 True and Complete Disclosure. All factual information
furnished by or on behalf of any Credit Party in writing to the Agent or any
Bank in connection with the Credit Documents and the transactions contemplated
thereby is true and accurate in all material respects on the date as of which
such information was dated or certified and does not contain any untrue
statement of material fact or omit to state any material fact necessary to make
the statements contained therein not misleading. All projections, estimates,
and pro forma financial information furnished by any Credit Party were prepared
on the basis of assumptions, data, information, tests, or conditions believed
to be reasonable at the time such projections, estimates, and pro forma
financial information were furnished.
ARTICLE 5. COVENANTS. Until the Agent and the Banks receive irrevocable
payment of the Credit Obligations and have terminated this Agreement and each
other Credit Document, the Borrower shall comply with and cause compliance with
the following covenants:
5.1 Organization. The Borrower shall cause each Restricted Entity
to (a) maintain itself as an entity duly organized, validly existing, and in
good standing under the laws of such Person's respective jurisdiction of
organization and (b) be duly licensed, qualified to do business, and in good
standing in each jurisdiction in which such Person is organized, owns property,
or conducts operations and which requires such licensing or qualification where
failure to be so licensed, qualified, or in good standing as required by this
clause (b) could reasonably be expected to cause a Material Adverse Change;
provided, however, that nothing in this Section 5.1 shall be interpreted to be
violated as a result of a transaction permitted by Section 5.9.
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5.2 Reporting. The Borrower shall furnish to the Agent all of the
following:
(a) Annual Reports. As soon as available and in any
event not later than 90 days after the end of each fiscal year of the Borrower,
(i) a copy of the annual audit report for such fiscal year for the Borrower,
including therein the consolidated balance sheets of the Borrower as of the end
of such fiscal year and the consolidated statements of income, stockholders'
equity, and cash flows for the Borrower for such fiscal year, setting forth the
consolidated financial position and results of the Borrower for such fiscal
year and certified, without any qualification or limit of the scope of the
examination of matters relevant to the financial statements, by a nationally
recognized certified public accounting firm, (ii) a completed Compliance
Certificate duly certified by a Responsible Officer of the Borrower, and (iii)
a completed Contract Status Report duly certified by a Responsible Officer of
the Borrower;
(b) Quarterly Reports. As soon as available and in any
event not later than 45 days after the end of each of the first three fiscal
quarters of the Borrower of each year, and in each case in form and substance
acceptable to the Agent, (i) a copy of the internally prepared consolidated
financial statements of the Borrower for such fiscal quarter and for the fiscal
year to date period ending on the last day of such fiscal quarter, including
therein the consolidated balance sheets of the Borrower as of the end of such
fiscal quarter and the consolidated statements of income, and cash flows for
such fiscal quarter and for such fiscal year to date period, setting forth the
consolidated financial position and results of the Borrower for such fiscal
quarter and fiscal year to date period, all in reasonable detail and duly
certified by a Responsible Officer of the Borrower as having been prepared in
accordance with generally accepted accounting principles, including those
applicable to interim financial reports which permit normal year end
adjustments and do not require complete financial notes, (ii) for each such
fiscal quarter ending on or after March 31, 1998, a completed Compliance
Certificate duly certified by a Responsible Officer of the Borrower, and (iii)
for each such fiscal quarter ending on or after March 31, 1998, a completed
Contract Status Report duly certified by a Responsible Officer of the Borrower;
(c) Semi-annual Subsidiary Update. As soon as available
and in any event not later than 45 days after the end of the second fiscal
quarter of the Borrower of each year and 90 days after the end of the fourth
fiscal quarter of the Borrower of each year, an update of the information
included in Schedule II, including all Subsidiaries acquired by the Borrower
since the previous update of such scheduled information.
(d) Acquisition Information. As soon as available prior
to the closing of any Acquisition requiring approval of the Majority Banks, and
on or prior to the closing of any Acquisition not requiring such approval, a
completed Acquisition Certificate duly certified by a Responsible Officer of
the Borrower, which the Agent shall forward to the Banks for any Acquisition
requiring approval of the Majority Banks (and prior to the consummation of the
Acquisition, the Borrower shall, upon request by the Agent, make available to
the Agent at the Borrower's offices in Houston, Texas, the acquisition
documents regarding the acquired assets, including schedules
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reflecting litigation liabilities, environmental liabilities, and other assumed
liabilities, and any other information regarding the acquired assets as the
Agent may reasonably request);
(e) SEC Filings. As soon as available and in any event
not later than thirty days after the filing or delivery thereof, copies of all
financial statements, reports, and proxy statements which the Borrower shall
have sent to its stockholders generally and copies of all regular and periodic
reports, if any, which any Restricted Entity shall have filed with the
Securities and Exchange Commission;
(f) Defaults. Promptly, but in any event within five
Business Days after the discovery thereof, a notice of any facts known to a
Responsible Officer of any Restricted Entity which constitute a Default,
together with a statement of a Responsible Officer of the Borrower setting
forth the details of such facts and the actions which the Borrower has taken
and proposes to take with respect thereto (and the Agent shall, promptly upon
receipt from the Borrower of a notice pursuant to this Section 5.2(e), forward
a copy of such notice to each Bank);
(g) Litigation. Promptly, but in any event within 10
Business Days after the commencement thereof, notice of all actions, suits, and
proceedings before any court or governmental department, commission, board,
bureau, agency, or instrumentality, domestic or foreign, affecting any
Restricted Entity which, if determined adversely, could reasonably be expected
to cause a Material Adverse Change;
(h) Material Agreement Default. Promptly, but in any
event within 10 Business Days after a Responsible Officer obtains knowledge
thereof, notice of any breach by any Restricted Entity of any contract or
agreement which breach could reasonably be expected to cause a Material Adverse
Change;
(i) Material Changes. Prompt written notice of any other
condition or event of which a Responsible Officer of any Restricted Entity has
knowledge, which condition or event has resulted or could reasonably be
expected to cause a Material Adverse Change; and
(j) Other Information. Such other information respecting
the business operations or property of any Restricted Entity, financial or
otherwise, as the Agent or the Majority Banks may from time to time reasonably
request.
5.3 Inspection. The Borrower shall cause each Restricted Entity
to permit the Agent and the Banks to visit and inspect any of the properties of
such Restricted Entity, to examine all of such Person's books of account,
records, reports, and other papers, to make copies and extracts therefrom, and
to discuss their respective affairs, finances, and accounts with their
respective officers, employees, and independent public accountants all at such
reasonable times and as often as may be reasonably requested, provided that the
Borrower is given at least one Business Day advance notice thereof and
reasonable opportunity to be present when independent public accountants or
other third
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parties are contacted, and provided further that so long as no Default or Event
of Default exists, the Agent and the Banks shall not exercise the foregoing
inspection right more often than once in any calendar year.
5.4 Use of Proceeds. The proceeds of the Revolving Loan
Borrowings shall be used by the Borrower for Acquisitions, working capital
needs, Capital Expenditures, and for other lawful corporate purposes. The
Borrower shall not, directly or indirectly, use any part of such proceeds for
any purpose which violates, or is inconsistent with, Regulations G, T, U, or X
of the Board of Governors of the Federal Reserve System.
5.5 Financial Covenants. The Agent shall determine compliance
with the following financial covenants based upon the applicable Schedule of
the most recent Compliance Certificate delivered to the Agent pursuant to
Section 5.2(a) or 5.2(b).
(a) Net Worth. The Borrower shall not permit the
consolidated Net Worth of the Borrower as of the last day of each fiscal
quarter to be less than the sum of (i) 90% of the consolidated Net Worth of the
Borrower on the date of the closing of the initial public offering of the
Borrower as reflected in the opening balance sheet of the Borrower, plus (ii)
90% of the cumulative quarterly consolidated net income of the Borrower since
the initial public offering of the Borrower for each fiscal quarter ending
after the date of the initial public offering of the Borrower during which the
Borrower has positive consolidated net earnings; plus (iii) 100% of the net
proceeds received by Borrower from any sale or issuance of any equity
securities of, or any other additions to capital by, the Borrower or its
Subsidiaries since the date of the initial public offering of the Borrower;
plus (iv) to the extent that the required consolidated Net Worth under this
Section 5.5(a) was not increased in clauses (i) through (iii) above as a result
of any Acquisition, 100% of any increase in the consolidated Net Worth of the
Borrower resulting from any Acquisition. Compliance with this paragraph (a)
shall be determined based upon Schedule B of the applicable Compliance
Certificate.
(b) Maximum Debt to EBITDA Ratio. As of the last day of
each fiscal quarter of the Borrower, the Borrower shall not permit the ratio of
(i) the consolidated Debt of the Borrower as of end of such fiscal quarter to
(ii) the consolidated EBITDA of the Borrower for the preceding four fiscal
quarters then ended, to be greater than 2.50 to 1.00. Compliance with this
paragraph (b) shall be determined based upon Schedule B or D, at the Borrower's
option, of the applicable Compliance Certificate.
(c) Minimum Fixed Charge Coverage Ratio. As of the last
day of each fiscal quarter, the Borrower shall not permit the ratio of (i) the
consolidated EBITDA of the Borrower for the preceding four fiscal quarters then
ended less consolidated Cash Taxes paid by the Borrower during such period to
(ii) (A) the consolidated Interest Expense of the Borrower for the preceding
four fiscal quarters then ended plus (B) the aggregate amount of Restricted
Payments declared or paid by the Borrower during such period plus (C) the
consolidated Capital Expenditures (other than
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Capital Expenditures that are deemed to occur solely because of the making of
an Acquisition) of the Borrower during such period plus (D) the consolidated
current maturities of the Borrower (including Capital Leases) plus (E) the
greater of (1) 20% of the outstanding amount of the Revolving Loan as of the
last day of such fiscal quarter or (2) $4,000,000, to be less than 1.75 to
1.00. Compliance with this paragraph (c) shall be determined based upon
Schedule B or D, at the Borrower's option, of the applicable Compliance
Certificate.
(d) Capital Expenditures. The Borrower shall not permit
the consolidated Capital Expenditures (other than Capital Expenditures that are
deemed to occur because of the making of an Acquisition) of the Borrower during
any four quarter period to exceed an amount equal to 6% of the consolidated Net
Worth of the Borrower as of the end of the applicable four quarter period.
Compliance with this paragraph (d) shall be determined based upon Schedule B of
the applicable Compliance Certificate.
5.6 Debt.
(a) The Borrower shall not permit any Restricted Entity
to create, assume, incur, suffer to exist, or in any manner become liable,
directly, indirectly, or contingently in respect of, any Debt other than
Permitted Debt.
(b) The Borrower shall, as soon as available but in any
event not less than 10 Business Days prior to the issuance of any preferred
stock or subordinated indebtedness, deliver to the Agent a copy of the
certificate of designation or subordinated debt documents, as applicable,
together with a certificate, signed by a Responsible Officer of the Borrower,
certifying that such preferred stock or subordinated indebtedness constitutes
Qualified Preferred Stock or Subordinated Debt pursuant to the terms of this
Agreement.
5.7 Liens. The Borrower shall not permit any Restricted Entity to
create, assume, incur, or suffer to exist any Lien on any of its real or
personal property whether now owned or hereafter acquired, or assign any right
to receive its income, except for Permitted Liens.
5.8 Other Obligations.
(a) The Borrower shall not permit any Restricted Entity
to create, incur, assume, or suffer to exist any obligations in respect of
unfunded vested benefits under any pension Plan or deferred compensation
agreement in an aggregate outstanding amount in excess of $1,000,000.
(b) The Borrower shall not permit any Restricted Entity
to create, incur, assume, or suffer to exist any obligations in respect of
Derivatives, other than Derivatives used by any Restricted Entity in such
Restricted Entity's respective business operations in aggregate notional
quantities not to exceed the reasonably anticipated consumption of such
Restricted Entity of the underlying commodity for the relevant period, but no
Derivatives which are speculative in nature.
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5.9 Corporate Transactions. The Borrower shall not, without the
Agent's consent, permit any Restricted Entity to (a) merge, consolidate, or
amalgamate with another Person, or liquidate, wind up, or dissolve itself (or
take any action towards any of the foregoing), (b) convey, sell, lease, assign,
transfer, or otherwise dispose of any of its property, businesses, or other
assets outside of the ordinary course of business, or (c) make any Acquisition
except that:
(i) Any Subsidiary of the Borrower may merge,
consolidate, or amalgamate into the Borrower or any wholly owned
Subsidiary of the Borrower, or convey, sell, lease, assign, transfer,
or otherwise dispose of any of its assets to the Borrower or any
wholly-owned Subsidiary of the Borrower (and if such disposition
transfers all or substantially all of the assets of transferring
Subsidiary, such subsidiary may then liquidate, wind up, or dissolve
itself); provided that the Borrower or the wholly-owned Subsidiary, as
applicable, is the surviving or acquiring entity; and
(ii) The Borrower or any Subsidiary of the Borrower may
make any Acquisition (by purchase or merger) provided that (A) the
Borrower or such Subsidiary of the Borrower is the acquiring or
surviving entity, (B) the aggregate of all consideration (other than
common stock of the Borrower) paid by the Restricted Entities in
connection with any Acquisition made on or after the Acquisition
Advance Date does not exceed $10,000,000 without the prior consent of
the Majority Banks, (C) the aggregate of all consideration (other than
common stock of the Borrower) paid by the Restricted Entities in
connection with all Acquisitions during any calendar year (exclusive
of any such consideration paid prior to the Acquisition Advance Date)
does not exceed $30,000,000 without the prior consent of the Majority
Banks, (D) no Default or Event of Default exists and the Acquisition
would not reasonably be expected to cause a Default or Event of
Default (including any default under Section 5.5 with respect to
historical and future proforma financial status and results), and (E)
the acquired assets are in substantially the same business as the
Borrower; provided that to the extent that the Borrower obtains the
consent of the Majority Banks to an Acquisition pursuant to
subsections (B) or (C) above, the consideration paid by the Restricted
Entities in connection with such Acquisition shall not be included in
the calculations of the limitations contained in such subsections.
5.10 Distributions. The Borrower shall not (a) declare or pay any
dividends; (b) purchase, redeem, retire, or otherwise acquire for value any of
its capital stock now or hereafter outstanding; or make any distribution of
assets to its stockholders as such, whether in cash, assets, or in obligations
of it; (c) allocate or otherwise set apart any sum for the payment of any
dividend or distribution on, or for the purchase, redemption, or retirement of,
any shares of its capital stock; or (d) make any other distribution by
reduction of capital or otherwise in respect of any shares of its capital
stock, except that the Borrower may make payments of dividends on Qualified
Preferred Stock.
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5.11 Transactions with Affiliates. The Borrower shall not
permit any Restricted Entity to enter into any transaction directly or
indirectly with or for the benefit of an Affiliate except transactions
with an Affiliate for the leasing of property, the rendering or
receipt of services, or the purchase or sale of inventory or other
assets in the ordinary course of business if the monetary or business
consideration arising from such a transaction would be substantially
as advantageous to such Restricted Entity as the monetary or business
consideration which such Restricted Entity would obtain in a
comparable arm's length transaction.
5.12 Insurance.
(a) The Borrower shall cause each Restricted Entity to
maintain insurance with responsible and reputable insurance companies or
associations reasonably acceptable to the Agent in such amounts and covering
such risks as are usually carried by companies engaged in similar businesses
and owning similar properties in the same general areas in which such Persons
operate. Without limiting the foregoing, the Borrower shall maintain insurance
coverage for the Restricted Entities equal to or better than, on an item by
item basis for each item, the coverage for the Restricted Entities existing on
the date of this Agreement. The Borrower shall deliver to the Agent
certificates evidencing such policies or copies of such policies at the Agent's
request following a reasonable period to obtain such certificates taking into
account the jurisdiction where the insurance is maintained.
(b) All policies representing liability insurance of the
Restricted Entities shall name the Agent and the Banks as additional named
insureds in a form satisfactory to the Agent. All proceeds of such liability
insurance coverage for the Agent and the Banks shall be paid as directed by the
Agent to indemnify the Agent or the applicable Bank for the liability covered.
In the event that proceeds of property or liability insurance are paid to any
Restricted Entity in violation of the foregoing, the Restricted Entity shall
hold the proceeds in trust for the Agent, segregate the proceeds from the other
funds of such Restricted Entity, and promptly pay the proceeds to the Agent
with any necessary endorsement. The Agent shall have the right, but not the
obligation, during the existence of an Event of Default, to make proof of loss
under, settle and adjust any claim under, and receive the proceeds under the
insurance, and the reasonable expenses incurred by the Agent in the adjustment
and collection of such proceeds shall be paid by the Borrower. The Borrower
irrevocably appoints the Agent as its attorney in fact to take such actions in
its name. If the Agent does not take such actions, the Borrower may take such
actions subject to the approval of any final action by the Agent. The Agent
shall not be liable or responsible for failure to collect or exercise diligence
in the collection of any proceeds.
5.13 Investments. The Borrower shall not permit any Restricted
Entity to make or hold any direct or indirect investment in any Person,
including capital contributions to the Person, investments in the debt or
equity securities of the Person, and loans, guaranties, trade credit, or other
extensions of credit to the Person, except for Permitted Investments.
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5.14 Lines of Business. The Borrower shall not permit the
Restricted Entities to change the character of their business as conducted on
the date of this Agreement, or engage in any type of business not reasonably
related to such business as presently and normally conducted.
5.15 Compliance with Laws. The Borrower shall cause each
Restricted Entity to comply with all federal, state, and local laws and
regulations which are applicable to the operations and property of such
Persons, in each case, where the failure to comply could reasonably be expected
to cause a Material Adverse Change.
5.16 Environmental Compliance. The Borrower shall cause each
Restricted Entity to comply with all Environmental Laws and obtain and comply
with all related permits necessary for the ownership and operation of any such
Person's properties, in each case, where the failure to comply could reasonably
be expected to cause a Material Adverse Change. The Borrower shall cause each
Restricted Entity to promptly disclose to the Agent any notice to or
investigation of such Persons for any violation or alleged violation of any
Environmental Law in connection with any such Person's presently or previously
owned properties which represent liabilities which could reasonably be expected
to cause a Material Adverse Change. The Borrower shall not permit any
Restricted Entity to create, handle, transport, use, or dispose of any
Hazardous Materials on or about any such Person's properties; release any
Hazardous Materials into the environment in connection with any such Person's
operations or contaminate any properties with Hazardous Materials; or own
properties contaminated by any Hazardous Materials, in each case in any manner
that could reasonably be expected to cause a Material Adverse Change.
5.17 ERISA Compliance. The Borrower shall cause each Restricted
Entity to (i) comply in all material respects with all applicable provisions of
ERISA and prevent the occurrence of any Reportable Event or Prohibited
Transaction with respect to, or the termination of, any of their respective
Plans, in each case, where the failure to do so could reasonably be expected to
cause a Material Adverse Change and (ii) not create or participate in any
employee pension benefit plan covered by Title IV of ERISA or any multiemployer
plan under Section 4001(a)(3) of ERISA.
5.18 Payment of Certain Claims. The Borrower shall cause each
Restricted Entity to pay and discharge, before the same shall become
delinquent, (a) all taxes, assessments, levies, and like charges imposed upon
any such Person or upon any such Person's income, profits, or property by
authorities having competent jurisdiction prior to the date on which penalties
attach thereto except for tax payments being contested in good faith for which
adequate reserves have been established and reported in accordance with
generally accepted accounting principals which could not reasonably be expected
to cause a Material Adverse Change and (b) all trade payables and current
operating liabilities, unless the same are less than 90 days past due or are
being contested in good faith, have adequate reserves established and reported
in accordance with general accepted accounting principals, and could not
reasonably be expected to cause a Material Adverse Change.
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5.19 Subsidiaries. Upon the formation or acquisition of any new
Subsidiary, the Borrower shall and shall cause such Subsidiary to promptly, but
in any event within 30 days after the formation or acquisition of such new
Subsidiary, execute and deliver to the Agent such guaranties, security
agreements, pledge agreements, amendment agreements, and other documents and
agreements as the Agent requests so that such Subsidiary guarantees and secures
the Credit Obligations on the same terms as the existing Subsidiaries of the
Borrower (including the execution and delivery of a Joinder Agreement in
substantially the form of Exhibit G for the purpose of joining such Subsidiary
as a party to the Guaranty, the Security Agreement, and, if applicable, the
Pledge Agreement, or the execution of such new guaranties, pledge agreements,
and security agreements as the Agent determines are necessary to have the same
effect in different jurisdictions). In connection therewith and within 30 days
after the formation or acquisition of such new Subsidiary, the Borrower shall
provide corporate documentation and opinion letters reasonably satisfactory to
the Agent reflecting the corporate status of such new Subsidiary of the
Borrower and the enforceability of such agreements.
ARTICLE 6. DEFAULT AND REMEDIES.
6.1 Events of Default. Each of the following shall be an "Event
of Default" for the purposes of this Agreement and for each of the Credit
Documents:
(a) Payment Failure. The Borrower (i) fails to pay when
due any principal amounts due under this Agreement or any other Credit Document
or (ii) fails to pay when due any interest, fees, reimbursements,
indemnifications, or other amounts due under this Agreement or any other Credit
Document and such failure has not been cured within five Business Days;
(b) False Representation. Any written representation or
warranty made by any Credit Party or any Responsible Officer thereof in this
Agreement or in any other Credit Document proves to have been false or
erroneous in any material respect at the time it was made or deemed made;
(c) Breach of Covenant. (i) Any breach by the Borrower
of any of the covenants contained in Sections 5.1(a) (with respect to the
Borrower), 5.2, 5.3, 5.4, 5.6, 5.7, 5.8, 5.9, 5.10, 5.13 or 5.19 or (ii) any
breach by any Credit Party of any other covenants contained in this Agreement,
or any other Credit Document and such breach is not cured within 30 days
following the earlier of knowledge of such breach by a Responsible Officer of
such Credit Party or the receipt of written notice thereof from the Agent;
(d) Security and Support Documents. Any Security
Document shall at any time and for any reason (other than one within the
reasonable control of any Bank) cease to create the Lien on the property
purported to be subject to such agreement in accordance with the terms of such
agreement, or cease to be in full force and effect, or shall be contested by
any party thereto;
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(e) Guaranty. (i) the Guaranty shall at any time and for
any reason cease to be in full force and effect with respect to any Guarantor
(except as permitted under Section 5.9 hereof) or shall be contested by any
Guarantor, or any Guarantor shall deny it has any further liability or
obligation thereunder, or (ii) any breach by any Guarantor of any of the
covenants contained in Section 1 of the Guaranty;
(f) Material Debt Default. (i) Any principal, interest,
fees, or other amounts due on any Debt of any Restricted Entity (other than the
Credit Obligations) is not paid when due, whether by scheduled maturity,
required prepayment, acceleration, demand, or otherwise, and such failure is
not cured within the applicable grace period, if any, and the aggregate amount
of all Debt of such Persons so in default exceeds $250,000; (ii) any other
event shall occur or condition shall exist under any agreement or instrument
relating to any Debt of any such Person (other than the Credit Obligations) the
effect of which is to accelerate or to permit the acceleration of the maturity
of any such Debt, whether or not any such Debt is actually accelerated, and
such event or condition shall not be cured within the applicable grace period,
if any, and the aggregate amount of all Debt of such Persons so in default
exceeds $1,000,000; (iii) any Debt of any such Person shall be declared to be
due and payable, or required to be prepaid (other than by a regularly scheduled
prepayment) prior to the stated maturity thereof, and the aggregate amount of
all Debt of such Persons so accelerated exceeds $1,000,000; or (iv) any default
or event of default, however denominated, occurs under the Swing Line Note;
(g) Material Agreement Default. There shall occur any
breach by any Restricted Entity of any contract or agreement which breach could
reasonably be expected to cause a Material Adverse Change and such breach is
not cured within the applicable grace period, if any;
(h) Bankruptcy and Insolvency. (i) there shall have been
filed against any Restricted Entity or any such Person's properties, without
such Person's consent, any petition or other request for relief seeking an
arrangement, receivership, reorganization, liquidation, or similar relief under
bankruptcy or other laws for the relief of debtors and such request for relief
(A) remains in effect for 60 or more days, whether or not consecutive, or (B)
is approved by a final nonappealable order, or (ii) any such Person consents
to or files any petition or other request for relief of the type described in
clause (i) above seeking relief from creditors, makes any assignment for the
benefit of creditors or other arrangement with creditors, or admits in writing
such Person's inability to pay such Person's debts as they become due (the
occurrence of any Event of Default under clause (i) or (ii) of this paragraph
being a "Bankruptcy Event of Default");
(h) Adverse Judgment. The aggregate outstanding amount
of judgments against the Restricted Parties not discharged or stayed pending
appeal or other court action within 30 days following entry is greater than
$250,000; or
(i) Change of Control. There shall occur any Change of
Control.
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6.2 Termination of Revolving Loan Commitments. Upon the
occurrence of any Bankruptcy Event of Default, all of the commitments of the
Agent and the Banks hereunder shall terminate. During the existence of any
Event of Default other than a Bankruptcy Event of Default, the Agent shall at
the request of the Majority Banks declare by written notice to the Borrower all
of the commitments of the Agent and the Banks hereunder terminated, whereupon
the same shall immediately terminate.
6.3 Acceleration of Credit Obligations. Upon the occurrence of
any Bankruptcy Event of Default, the aggregate outstanding principal amount of
all loans made hereunder, all accrued interest thereon, and all other Credit
Obligations shall immediately and automatically become due and payable. During
the existence of any Event of Default other than a Bankruptcy Event of Default,
the Agent shall at the request of the Majority Banks declare by written notice
to the Borrower the aggregate outstanding principal amount of all loans made
hereunder, all accrued interest thereon, and all other Credit Obligations to be
immediately due and payable, whereupon the same shall immediately become due
and payable. In connection with the foregoing, except for the notice provided
for above in this Article VI, the Borrower waives notice of any Default or
Event of Default, grace, notice of intent to accelerate, notice of
acceleration, presentment, demand, notice of nonpayment, protest, and all other
notices.
6.4 Cash Collateralization of Letters of Credit. Upon the
occurrence of any Bankruptcy Event of Default, the Borrower shall pay to the
Agent an amount equal to the Letter of Credit Exposure to be held in the Letter
of Credit Collateral Account for disposition in accordance with Section 2.2(g).
During the existence of any Event of Default other than a Bankruptcy Event of
Default, the Agent shall at the request of the Majority Banks require by
written notice to the Borrower that the Borrower pay to the Agent an amount
equal to the Letter of Credit Exposure to be held in the Letter of Credit
Collateral Account for disposition in accordance with Section 2.2(g), whereupon
the Borrower shall pay to the Agent such amount for such purpose.
6.5 Default Interest. If any Event of Default exists based upon a
default in the payment of any amounts owing hereunder, the Agent shall at the
request of the Majority Banks declare by written notice to the Borrower that
the Credit Obligations specified in such notice shall bear interest beginning
on the date specified in such notice until paid in full at the applicable
Default Rate for such Credit Obligations, whereupon the Borrower shall pay such
interest to the Agent for the benefit of the Agent and the Banks, as
applicable, upon demand by the Agent. If any other Event of Default exists,
the Agent shall at the request of the Majority Banks declare by written notice
to the Borrower that, unless such Event of Default is cured to the satisfaction
of the Agent and the Majority Banks on or before the 30th day following the
occurrence of such Event of Default, the Credit Obligations specified in such
notice shall bear interest beginning on such 30th day until paid in full at the
applicable Default Rate for such Credit Obligations, whereupon the Borrower
shall, if such Event of Default is not cured by such date, pay such interest to
the Agent for the benefit of the Agent and the Banks, as applicable, upon
demand by the Agent after such date.
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6.6 Right of Setoff. During the existence of an Event of Default,
the Agent and each Bank is hereby authorized at any time, to the fullest extent
permitted by law, to set off and apply any indebtedness owed by the Agent or
such Bank to the Borrower against any and all of the obligations of the
Borrower under this Agreement and the Credit Documents, irrespective of whether
or not the Agent or such Bank shall have made any demand under this Agreement
or the Credit Documents and although such obligations may be contingent and
unmatured. The Agent and each Bank, as the case may be, agrees promptly to
notify the Borrower after any such setoff and application made by such party
provided that the failure to give such notice shall not affect the validity of
such setoff and application.
6.7 Actions Under Credit Documents. Following an Event of
Default, the Agent shall at the request of the Majority Banks take any and all
actions permitted under the other Credit Documents, including the Guaranty and
the Security Documents.
6.8 Remedies Cumulative. No right, power, or remedy conferred to
the Agent or the Banks in this Agreement and the Credit Documents, or now or
hereafter existing at law, in equity, by statute, or otherwise, shall be
exclusive, and each such right, power, or remedy shall to the full extent
permitted by law be cumulative and in addition to every other such right,
power, or remedy. No course of dealing and no delay in exercising any right,
power, or remedy conferred to the Agent or the Banks in this Agreement and the
Credit Documents, or now or hereafter existing at law, in equity, by statute,
or otherwise, shall operate as a waiver of or otherwise prejudice any such
right, power, or remedy.
6.9 Application of Payments. Prior to the Revolving Loan Maturity
Date or any acceleration of the Credit Obligations, all payments made hereunder
shall be applied to the Credit Obligations as directed by the Borrower, subject
to the rules regarding the application of payments to certain Credit
Obligations provided for hereunder and in the Credit Documents. Following the
Revolving Loan Maturity Date or any acceleration of the Credit Obligations, all
payments and collections shall be applied to the Credit Obligations in the
following order:
First, to the payment of the costs, expenses, reimbursements
(other than reimbursement obligations with respect to draws
under Letters of Credit), and indemnifications of the Agent
that are due and payable under the Credit Documents;
Then, ratably to the payment of the costs, expenses,
reimbursements (other than reimbursement obligations with
respect to draws under Letters of Credit), and
indemnifications of the Banks that are due and payable under
the Credit Documents;
Then, ratably to the payment of all accrued but unpaid
interest and fees and obligations under Interest Hedge
Agreements due and payable under the Credit Documents;
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Then, ratably to the payment of all outstanding principal and
reimbursement obligations for draws under Letters of Credit due
and payable under the Credit Documents;
Then, ratably to the payment of any other amounts due and
owing with respect to the Credit Obligations; and
Finally, any surplus held by the Agent and remaining after
payment in full of all the Credit Obligations and reserve for
Credit Obligations not yet due and payable shall be promptly
paid over to the Borrower or to whomever may be lawfully
entitled to receive such surplus. All applications shall be
distributed in accordance with Section 2.10(a).
ARTICLE 7. THE AGENT AND THE ISSUING BANK
7.1 Authorization and Action. Each Bank hereby appoints and
authorizes the Agent to take such action as agent on its behalf and to exercise
such powers under this Agreement as are delegated to the Agent by the terms
hereof and of the other Credit Documents, together with such powers as are
reasonably incidental thereto. Statements under the Credit Documents that the
Agent may take certain actions, without further qualification, means that the
Agent may take such actions with or without the consent of the Banks or the
Majority Banks, but where the Credit Documents expressly require the
determination of the Banks or the Majority Banks, the Agent shall not take any
such action without the prior written consent thereof. As to any matters not
expressly provided for by this Agreement or any other Credit Document
(including, without limitation, enforcement or collection of the Revolving Loan
Notes), the Agent shall not be required to exercise any discretion or take any
action, but shall be required to act or to refrain from acting (and shall be
fully protected in so acting or refraining from acting) upon the written
instructions of the Majority Banks, and such instructions shall be binding upon
all Banks and all holders of Revolving Loan Notes; provided, however, that the
Agent shall not be required to take any action which exposes the Agent to
personal liability or which is contrary to this Agreement, any other Credit
Document, or applicable law.
7.2 Reliance, Etc. Neither the Agent, the Issuing Bank, nor any
of their respective Related Parties (for the purposes of this Section 7.2,
collectively, the "Indemnified Parties") shall be liable for any action taken
or omitted to be taken by any Indemnified Party under or in connection with
this Agreement or the other Credit Documents, INCLUDING ANY INDEMNIFIED PARTY'S
OWN NEGLIGENCE, except for any Indemnified Party's gross negligence or willful
misconduct. Without limitation of the generality of the foregoing, the Agent
and the Issuing Bank: (a) may treat the payee of any Revolving Loan Note as
the holder thereof until the Agent receives written notice of the assignment or
transfer thereof signed by such payee and in form satisfactory to the Agent;
(b) may consult with legal counsel (including counsel for the Borrower),
independent public accountants, and other experts selected by it and shall not
be liable for any action taken or omitted to be taken in good faith by it in
accordance with the advice of such counsel, accountants,
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or experts; (c) makes no warranty or representation to any Bank and
shall not be responsible to any Bank for any statements, warranties,
or representations made in or in connection with this Agreement or the
other Credit Documents; (d) shall not have any duty to ascertain or to
inquire as to the performance or observance of any of the terms,
covenants, or conditions of this Agreement or any other Credit
Document on the part of the Credit Parties or to inspect the property
(including the books and records) of the Credit Parties; (e) shall not
be responsible to any Bank for the due execution, legality, validity,
enforceability, genuineness, sufficiency, or value of this Agreement
or any other Credit Document; and (f) shall incur no liability under
or in respect of this Agreement or any other Credit Document by acting
upon any notice, consent, certificate, or other instrument or writing
(which may be by telecopier or telex) reasonably believed by it to be
genuine and signed or sent by the proper party or parties.
7.3 Affiliates. With respect to its Revolving Loan Commitments,
the Revolving Loan Advances made by it, its interests in the Letters of Credit,
and the Revolving Loan Notes issued to it, the Agent and the Issuing Bank shall
have the same rights and powers under this Agreement as any other Bank and may
exercise the same as though it were not the Agent. The term "Bank" or "Banks"
shall, unless otherwise expressly indicated, include the Agent and the Issuing
Bank in their individual capacity. The Agent, the Issuing Bank, and their
respective Affiliates may accept deposits from, lend money to, act as trustee
under indentures of, and generally engage in any kind of business with, any
Credit Party, and any Person who may do business with or own securities of any
Credit Party, all as if the Agent were not an agent hereunder and the Issuing
Bank were not the issuer of Letters of Credit hereunder and without any duty to
account therefor to the Banks.
7.4 Bank Credit Decision. Each Bank acknowledges that it has,
independently and without reliance upon the Agent or any other Bank and based
on the Registration Statement and such other documents and information as it
has deemed appropriate, made its own credit analysis and decision to enter into
this Agreement. Each Bank also acknowledges that it shall, independently and
without reliance upon the Agent or any other Bank and based on such documents
and information as it shall deem appropriate at the time, continue to make its
own credit decisions in taking or not taking action under this Agreement.
7.5 Expenses. To the extent not paid by the Borrower, each Bank
severally agrees to pay to the Agent and the Issuing Bank on demand such Bank's
ratable share of the following: (a) all reasonable out-of-pocket costs and
expenses of the Agent and the Issuing Bank in connection with the preparation,
execution, delivery, administration, modification, and amendment of this
Agreement and the other Credit Documents, including the reasonable fees and
expenses of outside counsel for the Agent and the Issuing Bank with respect to
advising the Agent and the Issuing Bank as to their respective rights and
responsibilities under this Agreement and the Credit Documents, and (b) all
out-of-pocket costs and expenses of the Agent and the Issuing Bank in
connection with the preservation or enforcement of the rights of the Agent, the
Issuing Bank, and the Banks under this Agreement and the other Credit
Documents, whether through negotiations, legal proceedings, or otherwise,
including fees and expenses of counsel for the Agent and the Issuing Bank. The
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provisions of this paragraph shall survive the repayment and termination of the
credit provided for under this Agreement and any purported termination of this
Agreement which does not expressly refer to this paragraph.
7.6 Indemnification. To the extent not reimbursed by the
Borrower, each Bank severally agrees to protect, defend, indemnify, and hold
harmless the Agent, the Issuing Bank, and each of their respective Related
Parties (for the purposes of this Section 7.6, collectively, the "Indemnified
Parties"), from and against all demands, claims, actions, suits, damages,
judgments, fines, penalties, liabilities, and out-of-pocket costs and expenses,
including reasonable costs of attorneys and related costs of experts such as
accountants (collectively, the "Indemnified Liabilities"), actually incurred by
any Indemnified Party which are related to any litigation or proceeding
relating to this Agreement, the Credit Documents, or the transactions
contemplated thereunder, INCLUDING ANY INDEMNIFIED LIABILITIES CAUSED BY ANY
INDEMNIFIED PARTY'S OWN NEGLIGENCE, but not Indemnified Liabilities which are a
result of any Indemnified Party's gross negligence or willful misconduct. The
provisions of this paragraph shall survive the repayment and termination of the
credit provided for under this Agreement and any purported termination of this
Agreement which does not expressly refer to this paragraph.
7.7 Successor Agent and Issuing Bank. The Agent or the Issuing
Bank may resign at any time by giving written notice thereof to the Banks and
the Borrower and may be removed at any time with or without cause by the
Majority Banks upon receipt of written notice from the Majority Banks to such
effect. Upon receipt of notice of any such resignation or removal, the
Majority Banks shall have the right to appoint a successor Agent or Issuing
Bank with the consent of the Borrower, which consent shall not be unreasonably
withheld. If no successor Agent or Issuing Bank shall have been so appointed
by the Majority Banks with the consent of the Borrower, and shall have accepted
such appointment, within 30 days after the retiring Agent's or Issuing Bank's
giving of notice of resignation or the Majority Banks' removal of the retiring
Agent or Issuing Bank, then the retiring Agent or Issuing Bank may, on behalf
of the Banks and the Borrower, appoint a successor Agent or Issuing Bank, which
shall be, in the case of a successor agent, a commercial bank organized under
the laws of the United States of America or of any State thereof and having a
combined capital and surplus of at least $500,000,000 and, in the case of the
Issuing Bank, a Bank. Upon the acceptance of any appointment as Agent or
Issuing Bank by a successor Agent or Issuing Bank, such successor Agent or
Issuing Bank shall thereupon succeed to and become vested with all the rights,
powers, privileges, and duties of the retiring Agent or Issuing Bank, and the
retiring Agent or Issuing Bank shall be discharged from any duties and
obligations under this Agreement and the other Credit Documents after such
acceptance, except that the retiring Issuing Bank shall remain the Issuing Bank
with respect to any Letters of Credit outstanding on the effective date of its
resignation or removal and the provisions affecting the Issuing Bank with
respect to such Letters of Credit shall inure to the benefit of the retiring
Issuing Bank until the termination of all such Letters of Credit. After any
Agent's or Issuing Bank's resignation or removal hereunder as Agent or Issuing
Bank, the provisions of this Article 7 shall inure to such Person's benefit as
to any actions taken or omitted to be taken by
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such Person while such Person was Agent or Issuing Bank under this Agreement
and the other Credit Documents.
ARTICLE 8. MISCELLANEOUS.
8.1 Expenses. The Borrower shall pay on demand of the applicable
party specified herein (a) all reasonable out-of-pocket costs and expenses of
the Agent and the Issuing Bank in connection with the preparation, execution,
delivery, administration, modification, and amendment of this Agreement and the
other Credit Documents, including the reasonable fees and expenses of outside
counsel for the Agent and the Issuing Bank, and (b) all out-of-pocket costs and
expenses of the Agent, the Issuing Bank, and each Bank in connection with the
preservation or enforcement of their respective rights under this Agreement and
the other Credit Documents, whether through negotiations, legal proceedings, or
otherwise, including fees and expenses of counsel for the Agent, the Issuing
Bank, and each Bank. The provisions of this paragraph shall survive the
repayment and termination of the credit provided for under this Agreement and
any purported termination of this Agreement which does not expressly refer to
this paragraph.
8.2 Indemnification. The Borrower agrees to protect, defend,
indemnify, and hold harmless the Agent, the Issuing Bank, each Bank, and each
of their respective Related Parties (for the purposes of this Section 8.2,
collectively, the "Indemnified Parties"), from and against all demands, claims,
actions, suits, damages, judgments, fines, penalties, liabilities, and
out-of-pocket costs and expenses, including reasonable costs of attorneys and
related costs of experts such as accountants (collectively, the "Indemnified
Liabilities"), actually incurred by any Indemnified Party which are related to
any litigation or proceeding relating to this Agreement, the Credit Documents,
or the transactions contemplated thereunder, INCLUDING ANY INDEMNIFIED
LIABILITIES CAUSED BY ANY INDEMNIFIED PARTY'S OWN NEGLIGENCE, but not
Indemnified Liabilities which are a result of any Indemnified Party's gross
negligence or willful misconduct. The provisions of this paragraph shall
survive the repayment and termination of the credit provided for under this
Agreement and any purported termination of this Agreement which does not
expressly refer to this paragraph.
8.3 Modifications, Waivers, and Consents. No modification or
waiver of any provision of this Agreement or the Revolving Loan Notes, nor any
consent required under this Agreement or the Revolving Loan Notes, shall be
effective unless the same shall be in writing and signed by the Agent and
Majority Banks and the Borrower, and then such modification, waiver, or consent
shall be effective only in the specific instance and for the specific purpose
for which given; provided, however, that no modification, waiver, or consent
shall, unless in writing and signed by the Agent, all the Banks, and the
Borrower do any of the following: (a) waive any of the conditions specified in
Section 3.1 or 3.2, (b) increase the Revolving Loan Commitments of the Banks,
(c) forgive or reduce the amount or rate of any principal, interest, or fees
payable under the Credit Documents, or postpone or extend the time for payment
thereof, (d) release any Guaranty or any material collateral securing the
Credit Obligations (except as otherwise permitted or required herein), or (e)
change the
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percentage of Banks required to take any action under this Agreement, the
Revolving Loan Notes, or the Security Documents, including any amendment of the
definition of "Majority Banks" or this Section 8.3. No modification, waiver,
or consent shall, unless in writing and signed by the Agent or the Issuing Bank
affect the rights or obligations of the Agent or the Issuing Bank, as the case
may be, under the Credit Documents. The Agent shall not modify or waive or
grant any consent under any other Credit Document of such action would be
prohibited under this Section 8.3 with respect to the Credit Agreement or the
Revolving Loan Notes.
8.4 Survival of Agreements. All representations, warranties, and
covenants of the Borrower in this Agreement and the Credit Documents shall
survive the execution of this Agreement and the Credit Documents and any other
document or agreement.
8.5 Assignment and Participation. This Agreement and the Credit
Documents shall bind and inure to the benefit of the Borrower and their
respective successors and assigns and the Agent and the Banks and their
respective successors and assigns. The Borrower may not assign its rights or
delegate its duties under this Agreement or any Credit Document.
(a) Assignments. Any Bank may assign to one or more
banks or other entities all or any portion of its rights and obligations under
this Agreement (including, without limitation, all or a portion of its
Revolving Loan Commitments, the Revolving Loan Advances owing to it, the
Revolving Loan Notes held by it, and the participation interest in the Letters
of Credit owned by it); provided, however, that (i) each such assignment shall
be of a constant, and not a varying, percentage of all of such Bank's rights
and obligations under this Agreement, (ii) assignments of Revolving Loan
Commitments shall be made in minimum amounts of $5,000,000 and be made in
integral multiples of $1,000,000 and the assigning Bank, if it retains any
Revolving Loan Commitments, shall maintain at least $5,000,000 in Revolving
Loan Commitments, (iii) each such assignment shall be to an Eligible Assignee,
(iv) the parties to each such assignment shall execute and deliver to the
Agent, for its acceptance and recording in the Register, an Assignment and
Acceptance, together with the Revolving Loan Notes subject to such assignment,
and (v) each Eligible Assignee (other than the Eligible Assignee of the Agent)
shall pay to the Agent a $3,500 administrative fee. Upon such execution,
delivery, acceptance and recording, from and after the effective date specified
in each Assignment and Acceptance, which effective date shall be at least three
Business Days after the execution thereof, (A) the assignee thereunder shall be
a party hereto for all purposes and, to the extent that rights and obligations
hereunder have been assigned to it pursuant to such Assignment and Acceptance,
have the rights and obligations of a Bank hereunder and (B) such Bank
thereunder shall, to the extent that rights and obligations hereunder have been
assigned by it pursuant to such Assignment and Acceptance, relinquish its
rights and be released from its obligations under this Agreement (and, in the
case of an Assignment and Acceptance covering all or the remaining portion of
such Bank's rights and obligations under this Agreement, such Bank shall cease
to be a party hereto).
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(b) Term of Assignments. By executing and delivering an
Assignment and Acceptance, the Bank thereunder and the assignee thereunder
confirm to and agree with each other and the other parties hereto as follows:
(i) other than as provided in such Assignment and Acceptance, such Bank makes
no representation or warranty and assumes no responsibility with respect to any
statements, warranties or representations made in or in connection with this
Agreement or the execution, legality, validity, enforceability, genuineness,
sufficiency of value of this Agreement or any other instrument or document
furnished pursuant hereto; (ii) such Bank makes no representation or warranty
and assumes no responsibility with respect to the financial condition of any
Credit Party or the performance or observance by any Credit Party of any of its
obligations under this Agreement or any other instrument or document furnished
pursuant hereto; (iii) such assignee confirms that it has received a copy of
this Agreement, together with copies of the Registration Statement and such
other documents and information as it has deemed appropriate to make its own
credit analysis and decision to enter into such Assignment and Acceptance; (iv)
such assignee shall, independently and without reliance upon the Agent, such
Bank or any other Bank and based on such documents and information as it shall
deem appropriate at the time, continue to make its own credit decisions in
taking or not taking action under this Agreement; (v) such assignee appoints
and authorizes the Agent to take such action as agent on its behalf and to
exercise such powers under this Agreement as are delegated to the Agent by the
terms hereof, together with such powers as are reasonably incidental thereto;
and (vi) such assignee agrees that it shall perform in accordance with their
terms all of the obligations which by the terms of this Agreement are required
to be performed by it as a Bank.
(c) The Register. The Agent shall maintain at its
address referred to in Section 8.6 a copy of each Assignment and Acceptance
delivered to and accepted by it and a register for the recordation of the names
and addresses of the Banks and the Revolving Loan Commitments of each Bank from
time to time (the "Register"). The entries in the Register shall be conclusive
and binding for all purposes, absent manifest error, and the Borrower, the
Agent, the Issuing Bank, and the Banks may treat each Person whose name is
recorded in the Register as a Bank hereunder for all purposes of this
Agreement. The Register shall be available for inspection by the Borrower or
any Bank at any reasonable time and from time to time upon reasonable prior
notice.
(d) Procedures. Upon its receipt of an Assignment and
Acceptance executed by a Bank and an Eligible Assignee, together with the
Revolving Loan Notes subject to such assignment, the Agent shall, if such
Assignment and Acceptance has been completed in the appropriate form, (i)
accept such Assignment and Acceptance, (ii) record the information contained
therein in the Register, and (iii) give prompt notice thereof to the Borrower.
Within five Business Days after its receipt of such notice, the Borrower shall
execute and deliver to the Agent in exchange for the surrendered Revolving Loan
Notes a new Revolving Loan Note to the order of such Eligible Assignee in an
amount equal to the Revolving Loan Commitment assumed by it pursuant to such
Assignment and Acceptance and, if such Bank has retained any Revolving Loan
Commitment hereunder, a new Revolving Loan Note to the order of such Bank in an
amount equal to the
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Revolving Loan Commitment retained by it hereunder. Such new Revolving Loan
Notes shall be dated the effective date of such Assignment and Acceptance and
shall be in the appropriate form.
(e) Participation. Each Bank may sell participation to
one or more banks or other entities in or to all or a portion of its rights and
obligations under this Agreement (including, without limitation, all or a
portion of its Revolving Loan Commitments, the Revolving Loan Advances owing to
it, its participation interest in the Letters of Credit, and the Revolving Loan
Notes held by it); provided, however, that (i) such Bank's obligations under
this Agreement (including, without limitation, its Revolving Loan Commitments
to the Borrower hereunder) shall remain unchanged, (ii) such Bank shall remain
solely responsible to the other parties hereto for the performance of such
obligations, (iii) such Bank shall remain the holder of any such Revolving Loan
Notes for all purposes of this Agreement, (iv) the Borrower, the Agent, and the
Issuing Bank and the other Banks shall continue to deal solely and directly
with such Bank in connection with such Bank's rights and obligations under this
Agreement, and (v) such Bank shall not require the participant's consent to any
matter under this Agreement, except that upon 10 days' written notice of such
participation to the Agent and the Borrower, such Bank may permit the
participant to possess consent rights with respect to changes in the principal
amount of the Revolving Loan Notes, reductions in fees or interest, extensions
of the applicable maturity date, or releases of any collateral or guarantor
(except to the extent otherwise permitted herein or in any of the other Credit
Documents). The Borrower hereby agrees that participants shall have the same
rights under Sections 2.6, 2.7, 2.8, 2.9, 2.10, and 8.2 as a Bank to the extent
of their respective participation.
(f) Assignments or Pledges to Federal Reserve Banks. In addition
to the foregoing rights of assignment and participation, any Bank may assign or
pledge any portion of its rights under this Agreement (including the Revolving
Loan Advances owed to such Bank) to any Federal Reserve Bank in accordance with
applicable law without notice to or the consent of the Borrower or the Agent,
provided that (i) such Bank shall not be relieved of its obligations under this
Agreement as a result thereof and (ii) in no event shall the Federal Reserve
Bank be entitled to direct the actions of the pledging or assigning Bank under
this Agreement.
8.6 Notice. All notices and other communications under this
Agreement and the Revolving Loan Notes shall be in writing and mailed by
certified mail (return receipt requested), telecopied, telexed, hand delivered,
or delivered by a nationally recognized overnight courier, to the address for
the appropriate party specified in Schedule I or at such other address as shall
be designated by such party in a written notice to the other parties. Mailed
notices shall be effective when received. Telecopied or telexed notices shall
be effective when transmission is completed or confirmed by telex answerback.
Delivered notices shall be effective when delivered by messenger
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or courier. Notwithstanding the foregoing, notices and communications to the
Agent pursuant to Article 2 or 7 shall not be effective until received by the
Agent.
8.7 Choice of Law. This Agreement and the Revolving Loan Notes
have been prepared, are being executed and delivered, and are intended to be
performed in the State of Texas, and the substantive laws of the State of Texas
and the applicable federal laws of the United States shall govern the validity,
construction, enforcement, and interpretation of this Agreement and the
Revolving Loan Notes; provided however, Chapter 15 of the Texas Credit Code
does not apply to this Agreement or the Revolving Loan Notes. Each Letter of
Credit shall be governed by the Uniform Customs and Practice for Documentary
Credits, International Chamber of Commerce Publication No. 500 (1993 version).
8.8 Forum Selection. THE BORROWER IRREVOCABLY CONSENTS TO THE
JURISDICTION OF THE COURTS OF THE STATE OF TEXAS AND OF ANY FEDERAL COURT
LOCATED IN SUCH STATE IN CONNECTION WITH ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATED THERETO.
THE BORROWER AGREES AND SHALL NOT CONTEST THAT PROPER FORUM AND VENUE FOR ANY
ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THE CREDIT DOCUMENTS OR ANY
TRANSACTIONS RELATING THERETO ARE IN THE COURTS OF THE STATE OF TEXAS IN HARRIS
COUNTY, TEXAS, AND THE FEDERAL COURTS LOCATED IN HARRIS COUNTY, TEXAS. THE
BORROWER IRREVOCABLY WAIVES ANY OBJECTION WHICH IT MAY NOW OR HEREAFTER HAVE TO
THE FOREGOING BASED UPON CLAIMS THAT THE FOREGOING COURTS ARE AN INCONVENIENT
FORUM.
8.9 Service of Process. IN ANY ACTION OR PROCEEDING ARISING OUT
OF OR RELATING TO THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATING THERETO,
THE BORROWER WAIVES PERSONAL SERVICE OF ANY SUMMONS, COMPLAINT, OR OTHER
PROCESS OR NOTICE AND AGREES THAT SERVICE BY FIRST CLASS MAIL, RETURN RECEIPT
REQUESTED, TO THE BORROWER AT ITS ADDRESS FOR NOTICES HEREUNDER, OR ANY OTHER
FORM OF SERVICE PROVIDED FOR IN THE TEXAS CIVIL PRACTICE LAW AND RULES THEN IN
EFFECT SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE UPON THE BORROWER.
8.10 Waiver of Jury Trial. THE BORROWER IRREVOCABLY WAIVES ANY
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATING THERETO.
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8.11 Counterparts. This Agreement may be executed in multiple
counterparts which together shall constitute one and the same instrument.
8.12 No Further Agreements. THIS WRITTEN AGREEMENT AND THE CREDIT
DOCUMENTS REPRESENT THE FINAL AGREEMENT AMONG THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first above written.
BORROWER:
INTEGRATED ELECTRICAL SERVICES, INC.
By:
---------------------------------
J. Paul Withrow
Vice President and
Chief Accounting Officer
AGENT:
NATIONSBANK OF TEXAS, N.A., as Agent
By:
--------------------------------
Albert L. Welch
Vice President
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BANKS:
NATIONSBANK OF TEXAS, N.A.
By:
--------------------------------
Albert L. Welch
Vice President
Revolving Loan Commitment: $65,000,000
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[Execution Version]
GUARANTY
(Subsidiaries of Integrated Electrical Services, Inc.)
This Guaranty dated as of January 30, 1998 ("Agreement"), is made by
the undersigned subsidiaries of Integrated Electrical Services, Inc., a
Delaware corporation (each a "Guarantor"), in favor of NationsBank of Texas,
N.A., in its capacity as agent ("Agent") for certain financial institutions
which are or may become parties to the Credit Agreement described below.
INTRODUCTION
This Agreement is given in connection with the Credit Agreement dated
as of January 30, 1998 (as modified from time to time, the "Credit
Agreement"), among Integrated Electrical Services, Inc., a Delaware corporation
("Borrower"), certain financial institutions which are or may become parties
thereto, and the Agent, the defined terms of which are used herein unless
otherwise defined herein. It is a condition precedent to the obligation of the
Banks to make any extension of credit under the Credit Agreement that the
Guarantors execute and deliver this Agreement to the Agent. Each Guarantor is
a Subsidiary of the Borrower. Because each Guarantor receives and, as a result
of its ownership by the Borrower, expects to continue to receive financial and
management support from the Borrower, each Guarantor will obtain substantial
benefit from the extensions of credit expected to be made to the Borrower under
the Credit Agreement.
Therefore, to induce the Agent and such financial institutions to
enter into the Credit Agreement, the Guarantors jointly and severally agree
with the Agent as follows:
Section 1. Guaranty. The Guarantors irrevocably and jointly and
severally guarantee to the Agent the full payment when due of (a) all
principal, interest, fees, reimbursements, indemnifications, and other amounts
now or hereafter owed by the Borrower to the Agent and the Banks (and with
respect to the Interest Hedge Agreements, the Affiliates of the Banks) under
the terms of the Credit Agreement and the other Credit Documents, including
amounts owed under the terms of the Credit Agreement and the other Credit
Documents for which the Borrower has obtained relief under bankruptcy or other
laws providing for relief from creditors, and (b) any increases, extensions,
and rearrangements of the foregoing obligations under any amendments,
supplements, and other modifications of the documents and agreements creating
the foregoing obligations (collectively, the "Guaranteed
65
Obligations"). This is a guaranty of payment and not merely a guaranty of
collection, and each Guarantor is liable as a primary obligor. If any of the
Guaranteed Obligations are not punctually paid when due, whether by maturity,
acceleration, or otherwise, and the Agent shall notify any Guarantor of such
default and make demand for payment hereunder, such Guarantor shall immediately
pay to the Agent the full amount of the Guaranteed Obligations which are due
and payable. Each Guarantor shall make each payment to the Agent in U.S.
Dollars in immediately available funds as directed by the Agent. The Agent is
hereby authorized at any time following any demand for payment hereunder to set
off and apply any indebtedness owed by the Agent to any Guarantor against any
and all of the obligations of such Guarantor under this Agreement. The Agent
agrees to promptly notify such Guarantor after any such setoff and application,
but the failure to give such notice shall not affect the validity of such
setoff and application.
Section 2. Guaranty Absolute.
2.1 This Agreement shall be deemed accepted by the Agent upon
receipt, and the obligations of the Guarantors under this Agreement are
effective immediately and are continuing and cover all Guaranteed Obligations
arising prior to and after the date hereof. This Agreement may not be revoked
by any Guarantor and shall continue to be effective with respect to Guaranteed
Obligations arising or created after any attempted revocation by any Guarantor.
2.2 Each Guarantor guarantees that the Guaranteed Obligations will
be paid strictly in accordance with the terms of the Credit Agreement and the
other Credit Documents, regardless of any law, regulation, or order now or
hereafter in effect in any jurisdiction affecting any of such terms or the
rights of the Agent or the Banks with respect thereto. Each Guarantor agrees
that such Guarantor's obligations under this Agreement shall not be released,
diminished, or impaired by, and waives any rights which such Guarantor might
otherwise have which relate to:
(a) Any lack of validity or enforceability of the
Guaranteed Obligations, any Credit Document, or any other agreement or
instrument relating thereto; any increase, reduction, extension, or
rearrangement of the Guaranteed Obligations; any amendment, supplement, or
other modification of the Credit Documents; any waiver or consent granted under
the Credit Documents, including waivers of the payment and performance of the
Guaranteed Obligations; or any sale, assignment, delegation, or other transfer
of the Guaranteed Obligations or the Credit Documents;
(b) Any grant of any security or support for the
Guaranteed Obligations or any impairment of any security or support for the
Guaranteed Obligations, including any
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full or partial release, exchange, subordination, or waste of any collateral
for the Guaranteed Obligations or any full or partial release of the Borrower,
any Guarantor, or any other Person liable for the payment or performance of the
Guaranteed Obligations; any change in the organization or structure of the
Borrower, any Guarantor, or any other Person liable for the payment or
performance of the Guaranteed Obligations; or the insolvency, bankruptcy,
liquidation, or dissolution of the Borrower, any Guarantor, or any other Person
liable for the payment or performance of the Guaranteed Obligations;
(c) The manner of applying payments on the Guaranteed
Obligations or the proceeds of any security or support for the Guaranteed
Obligations against the Guaranteed Obligations;
(d) The failure to give notice of the occurrence of any
of the events or actions referred to in this Section 2.2, notice of any default
or event of default, however denominated, under the Credit Documents, notice of
intent to demand, notice of demand, notice of presentment for payment, notice
of nonpayment, notice of intent to protest, notice of protest, notice of grace,
notice of dishonor, notice of intent to accelerate, notice of acceleration,
notice of bringing of action to enforce the payment or performance of the
Guaranteed Obligations, notice of any sale or foreclosure of any collateral for
the Guaranteed Obligations, notice of any transfer of the Guaranteed
Obligations, notice of the financial condition of or other circumstances
regarding the Borrower, any Guarantor, or any other Person liable for the
Guaranteed Obligations, or any other notice of any kind relating to the
Guaranteed Obligations (and the parties intend that no Guarantor shall be
considered a "Debtor" as defined in Section 9.105 of the Texas Business and
Commerce Code for the purpose of notices required to be given to a Debtor
thereunder); or
(e) Any other action taken or omitted which affects the
Guaranteed Obligations, whether or not such action or omission prejudices any
Guarantor or increases the likelihood that any Guarantor will be required to
pay the Guaranteed Obligations pursuant to the terms hereof--it is the
unambiguous and unequivocal intention of each Guarantor that such Guarantor
shall be obligated to pay the Guaranteed Obligations when due, notwithstanding
any occurrence, circumstance, event, action, or omission whatsoever, whether
contemplated or uncontemplated, and whether or not particularly described
herein.
2.3 This Agreement shall continue to be effective or be
reinstated, as the case may be, if any payment on the Guaranteed Obligations
must be refunded for any reason including any bankruptcy proceeding. In the
event that the Agent or any Bank must refund any payment received against the
Guaranteed Obligations, any prior release from the terms of this Agreement
given to any Guarantor by the Agent shall be without effect, and this Agreement
shall be reinstated in full force and effect. It is the intention of each
Guarantor that such
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Guarantor's obligations hereunder shall not be discharged except by final
payment of the Guaranteed Obligations.
2.4 (a) Each Guarantor is a Subsidiary of the Borrower and
receives and, because of its ownership by the Borrower, expects to continue to
receive business opportunities, financial support, and management support from
the Borrower. Each Guarantor has agreed to enter into this Agreement so that
the Borrower can receive the benefits of the Guaranteed Obligations and
continue to provide these services to such Guarantor.
(b) In consummating the transactions contemplated by the
Credit Documents, no Guarantor intends to disturb, delay, hinder, or defraud
either present or future creditors of such Guarantor. Each Guarantor is
familiar with, and has independently reviewed books and records regarding, the
financial condition of the Borrower and is familiar with the value of the
security and support for the payment and performance of the Guaranteed
Obligations. Based upon such examination, and taking into account the fairly
discounted value of such Guarantor's contingent obligations under this
Agreement and the value of the subrogation and contribution claims such
Guarantor could make in connection with this Agreement, and assuming each of
the transactions contemplated by the Credit Documents is consummated and the
Borrower makes full use of the credit facilities thereunder, the present
realizable fair market value of the assets of such Guarantor exceeds the total
obligations of such Guarantor, and such Guarantor is able to realize upon its
assets and pay its obligations as such obligations mature in the normal course
of business.
(c) If notwithstanding the foregoing it is judicially
determined with respect to any Guarantor that entering into this Agreement
would violate Section 548 of the United States Bankruptcy Code or any
comparable provisions of any state law, then such Guarantor shall be liable
under this Guaranty only for amounts aggregating up to the largest amount that
would not render such Guarantor's obligations hereunder subject to avoidance
under Section 548 of the United States Bankruptcy Code or any comparable
provisions of any state law.
(d) Each Guarantor agrees that each Guarantor shall have
rights of contribution and subrogation against each other Guarantor with
respect to any payments made in connection with the Guaranteed Obligations.
Section 3. Unimpaired Collection.
3.1 There are no conditions precedent to the enforcement of this
Agreement, except as expressly contained herein. It shall not be necessary for
the Agent, in order to
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enforce payment by any Guarantor under this Agreement, to show any proof of the
Borrower's default, to exhaust the Agent's remedies against the Borrower, any
Guarantor, or any other Person liable for the payment or performance of the
Guaranteed Obligations, to enforce any security or support for the payment or
performance of the Guaranteed Obligations, or to enforce any other means of
obtaining payment or performance of the Guaranteed Obligations. Each Guarantor
waives any rights under Chapter 34 of the Texas Business and Commerce Code,
Section 17.001 of the Texas Civil Practice and Remedies Code, and Rule 31 of
the Texas Rules of Civil Procedure related to the foregoing. Neither the Agent
nor the Banks shall be required to mitigate damages or take any other action to
reduce, collect, or enforce the Guaranteed Obligations.
3.2 With respect to each Guarantor, all Subordinated Obligations
of such Guarantor (as defined below) shall be subordinate and junior in right
of payment and collection to the payment and collection in full of all
Guaranteed Obligations as described below:
(a) As used herein, the term "Subordinated Obligations" for
such Guarantor means: (i) all present and future indebtedness, liabilities, and
obligations of any kind owed by the Borrower, any Guarantor, or any other
Person liable for the payment or performance of the Guaranteed Obligations to
such Guarantor, including debt obligations, equity obligations, and other
contractual obligations requiring payments of any kind to be made to such
Guarantor and including any right of subrogation (including any statutory
rights of subrogation under Section 509 of the Bankruptcy Code, 11 U.S.C.
Section 509, or under Chapter 34 of the Texas Business and Commerce Code),
contribution, indemnification, reimbursement, exoneration, or any right to
participate in any claim or remedy of the Agent against the Borrower, any
Guarantor, or any Person liable for the payment or performance of the
Guaranteed Obligations, or any collateral which the Agent now has or may
acquire, and (ii) any increases, extensions, and rearrangements of the
foregoing obligations under any amendments, supplements, and other
modifications of the documents and agreements creating the foregoing
obligations.
(b) Until all Guaranteed Obligations have been
irrevocably paid in full (and therefore the payment thereof is no longer
subject to being set aside or returned under the law), such Guarantor agrees
not to take any action to enforce payment of such the Subordinated Obligations
of such Guarantor, but this standstill is not intended as a permanent waiver of
the subrogation, contribution, indemnification, reimbursement, exoneration,
participation, or other rights of such Guarantor.
(c) Upon any receivership, insolvency proceeding,
bankruptcy proceeding, assignment for the benefit of creditors, reorganization,
arrangement with creditors, sale of
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assets for creditors, dissolution, liquidation, or marshaling of the assets of
the Borrower, any Guarantor, or any other Person liable for the payment or
performance of the Guaranteed Obligations, all amounts due with respect to the
Guaranteed Obligations shall be paid in full before such Guarantor shall be
entitled to collect or receive any payment with respect to the Subordinated
Obligations of such Guarantor, and all payments to which such Guarantor would
be entitled to collect or receive on the Subordinated Obligations of such
Guarantor shall be paid over to the Agent for application to the Guaranteed
Obligations.
(d) Following notice from the Agent to the Borrower that
an Event of Default exists and that no further payments shall be made on the
Subordinated Obligations of such Guarantor until (i) all amounts due with
respect to the Guaranteed Obligations shall be paid in full or (ii) the Agent
revokes such notice, such Guarantor shall not be entitled to collect or receive
any payment with respect to the Subordinated Obligations of such Guarantor.
(e) Any lien, security interest, or assignment securing
the repayment of the Subordinated Obligations of such Guarantor shall be fully
subordinate to any lien, security interest, or assignment in favor of the Agent
which secures the Guaranteed Obligations. At the request of the Agent, such
Guarantor will take any and all steps necessary to fully evidence the
subordination granted hereunder, including amending or terminating financing
statements and executing and recording subordinations of liens.
(f) This is an absolute and irrevocable agreement of
subordination and the Agent may, without notice to such Guarantor, take any
action described in Section 2.2 without impairing or releasing the obligations
of such Guarantor hereunder.
(g) Such Guarantor shall not assign or otherwise transfer
to any other Person any interest in the Subordinated Obligations of such
Guarantor unless such Guarantor causes the assignee or other transferee to
execute and deliver to the Agent a subordination agreement in substantially the
form of the subordination provisions in this Agreement.
(h) If any amount shall be paid to such Guarantor in
violation of this Section 3.2, such amount shall be held in trust for the
benefit of the Agent and immediately turned over to the Agent, with any
necessary endorsement, to be applied to the Guaranteed Obligations.
Section 4. Miscellaneous.
4.1 Each Guarantor hereby affirms and shall comply with the
representations, warranties, and covenants made by the Borrower in the Credit
Agreement to the extent that
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such representations, warranties, and covenants are applicable to such
Guarantor, including all of the representations and warranties in Section 4 of
the Credit Agreement and all of the covenants in Section 5 of the Credit
Agreement.
4.2 Each Guarantor shall pay to the Agent on demand (a) all
reasonable out-of-pocket costs and expenses of the Agent in connection with the
preparation, execution, delivery, administration, modification, and amendment
of this Agreement and the other Credit Documents to which such Guarantor is a
party, including the reasonable fees and out-of-pocket expenses of outside
counsel for the Agent with respect to advising the Agent as to its rights and
responsibilities under this Agreement and the Credit Documents to which such
Guarantor is a party, and (b) all costs and expenses of the Agent in connection
with the enforcement of the Agent's rights under this Agreement and the other
Credit Documents to which such Guarantor is a party, whether through
negotiations, legal proceedings, or otherwise, including fees and expenses of
counsel for the Agent. The provisions of this paragraph shall survive any
purported termination of this Agreement and the Credit Documents that does not
expressly reference this paragraph.
4.3 Each Guarantor agrees to protect, defend, indemnify, and hold
harmless the Agent, each Bank, and each of their respective Related Parties
(collectively, the "Indemnified Parties"), from and against all demands,
claims, actions, suits, damages, judgments, fines, penalties, liabilities, and
costs and expenses, including reasonable costs of attorneys and related costs
of experts such as accountants (collectively, the "Indemnified Liabilities"),
actually incurred by the Indemnified Parties which are related to any
litigation or proceeding relating to this Agreement, the Credit Documents, or
the transactions contemplated thereunder, INCLUDING INDEMNIFIED LIABILITIES
CAUSED BY ANY INDEMNIFIED PARTIES' OWN NEGLIGENCE, but not Indemnified
Liabilities which are a result of any Indemnified Parties' gross negligence or
willful misconduct or negligence in the handling of money. The provisions of
this paragraph shall survive any purported termination of this Agreement and
the Credit Documents that does not expressly reference this paragraph.
4.4 Each Guarantor agrees that this Agreement shall be governed by
the laws of the State of Texas. If any provision in this Agreement is held to
be unenforceable, such provision shall be severed and the remaining provisions
shall remain in full force and effect. All representations, warranties, and
covenants of any Guarantor in this Agreement shall survive the execution of
this Agreement and any other contract or agreement. The Agent's remedies under
this Agreement and the Credit Documents to which any Guarantor is a party shall
be cumulative, and no delay in enforcing this Agreement and the Credit
Documents to which such Guarantor is a party shall act as a waiver of the
Agent's rights thereunder. The provisions of this Agreement may be waived or
amended only in a writing signed by the
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party against whom enforcement is sought. This Agreement shall bind and inure
to the benefit of each Guarantor and the Agent and their respective successors
and assigns. Each Guarantor may not assign its rights or delegate its duties
under this Agreement. The Agent may assign its rights and delegate its duties
under this Agreement in accordance with the terms of the Credit Agreement.
This Agreement may be executed in multiple counterparts each of which shall
constitute one and the same agreement. Unless otherwise specified, all notices
and other communications between such Guarantor and the Agent provided for in
this Agreement and the Credit Documents to which such Guarantor is a party
shall be in writing, including telecopy, and delivered or transmitted to the
addresses set forth below, or to such other address as shall be designated by
such Guarantor or the Agent in written notice to the other party. Notice sent
by telecopy shall be deemed to be given and received when receipt of such
transmission is acknowledged, and delivered notice shall be deemed to be given
and received when receipted for by, or actually received by, an authorized
officer of such Guarantor or the Agent, as the case may be.
If to any Guarantor:
[Guarantor]
c/o Integrated Electrical Services, Inc.
2301 Preston
Houston, Texas 77003
Attn: Jim P. Wise, Assistant Treasurer
telephone: 713-222-1875
telecopier: 713-222-1214
If to the Agent:
NationsBank of Texas, N.A.,
as Agent under the Credit Agreement
dated as of January 30, 1998, among
Integrated Electrical Services, Inc., the financial
institutions parties thereto, and the Agent
700 Louisiana, 7th Floor
Houston, Texas 77002
Attn: Mr. Albert L. Welch, Vice President
telephone: 713-247-6631
telecopier: 713-247-7748
4.5 Any present or future Subsidiary of the Borrower may become a
Guarantor under and a party to this Agreement by executing and delivering to
the Agent a Joinder
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Agreement in accordance with Section 5.19 of the Credit Agreement or by
otherwise assuming in writing in favor of the Agent the liabilities of a
Guarantor under this Agreement. Upon execution and delivery of a Joinder
Agreement or otherwise assuming the liabilities of a Guarantor under this
Agreement such Subsidiary shall be deemed to be a Guarantor under this
Agreement and a party to this Agreement for all purposes hereunder.
4.6 WAIVER OF JURY TRIAL. EACH GUARANTOR IRREVOCABLY WAIVES ANY
RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO
THE CREDIT DOCUMENTS OR ANY TRANSACTIONS RELATING THERETO.
[the remainder of this page is intentionally blank]
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THIS WRITTEN AGREEMENT AND THE CREDIT DOCUMENTS REPRESENT THE FINAL AGREEMENT
AMONG THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR,
CONTEMPORANEOUS, OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
EXECUTED as of the date first above written.
ACE ELECTRIC, INC.
AMBER ELECTRIC, INC.
BW CONSOLIDATED, INC.
B/W CEC, INC.
B/W BEC, INC.
B/W CEC, LLC
B/W BEC, LLC
DANIEL ELECTRICAL CONTRACTORS, INC.
DANIEL ELECTRICAL OF TREASURE COAST, INC.
HATFIELD ELECTRIC, INC.
HAYMAKER ELECTRIC, LTD.
HOUSTON-STAFFORD ELECTRIC, INC.
STARK INVESTMENTS, INC.
MILLS ELECTRICAL CONTRACTORS, INC.
FORT WORTH REGIONAL ELECTRICAL
SYSTEMS, L.L.C
MUTH ELECTRIC, INC.
POLLOCK ELECTRIC, INC.
REYNOLDS ELECTRIC CORP.
RODGERS ELECTRIC CO., INC.
SUMMIT ELECTRIC OF TEXAS, INC.
THOMAS POPP & CO., INC.
THURMANN & O'CONNELL CORP.
INTEGRATED ELECTRICAL FINANCE, INC.
By:
---------------------------------------
Jim P. Wise
Assistant Treasurer
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[Execution Version]
PLEDGE AGREEMENT
(Integrated Electrical Services, Inc., and certain Subsidiaries)
This Pledge Agreement dated as of January 30, 1998 ("Agreement"), is
made by Integrated Electrical Services, Inc., a Delaware corporation
("Borrower") and the undersigned subsidiaries of the Borrower (the Borrower and
each such undersigned subsidiary, individually, a "Pledgor," and collectively,
the "Pledgors"), in favor of NationsBank of Texas, N.A., as agent under the
Credit Agreement described below ("Secured Party").
INTRODUCTION
Reference is made to the Credit Agreement dated as of January 30, 1998
(as modified from time to time, the "Credit Agreement"), among the Borrower,
certain financial institutions which are or may become parties thereto (the
"Banks"), and the Secured Party. It is a condition precedent to the obligation
of the Banks to make any extension of credit under the Credit Agreement that
the Pledgors shall have entered into this Agreement. Therefore, in
consideration of the credit expected to be received in connection with the
Credit Agreement, the Pledgors jointly and severally agree with the Secured
Party as follows:
Section 1. Definitions. The terms "deposit account," "account," "general
intangible," "security," "instrument," "document," "chattel paper,"
"equipment," "fixture," "inventory," "goods," and "proceeds" shall have the
meanings specified by Article 9 of the Uniform Commercial Code ("UCC").
Capitalized terms used but not defined herein shall have the meanings set forth
in the Credit Agreement. As used herein, the following terms shall have the
following meanings:
"Collateral" means the Pledged Securities, Records, and Proceeds.
"Pledged Securities" means all of the issued and outstanding shares of
stock of each Subsidiary of the Borrower (including those indirect Subsidiaries
of the Borrower which are direct Subsidiaries of the other Pledgors), including
in each case the shares described on the attached Schedule I, together with all
dividends, cash, instruments, and other proceeds from time to time received or
otherwise distributed in respect of the foregoing, including stock rights,
options, rights to subscribe, dividends, liquidating dividends, stock
dividends, new securities, or other properties or benefits to which any Pledgor
may become entitled to receive on account of such property.
75
"Proceeds" means all present and future proceeds of the Pledged
Securities, whether arising from the collection, sale, exchange, assignment, or
other disposition of any Pledged Securities, the realization upon any Pledged
Securities, or any other transaction or occurrence, including all claims of
such Pledgor against third parties for impairment, loss, or damage to any
Pledged Securities, all proceeds payable under any put, call, hedge, or other
protection for the value of any Pledged Securities, and all rights under any
indemnity, warranty, or guaranty of or for any of the foregoing, whether such
proceeds are represented as money, deposit accounts, accounts, general
intangibles, securities, instruments, documents, chattel paper, inventory,
equipment, fixtures, or goods.
"Records" means all present and future contracts, accounting records,
files, computer files, computer programs, and other records relating to the
Pledged Securities and Proceeds.
"Secured Obligations" means (a) all principal, interest, premium,
fees, reimbursements, indemnifications, and other amounts now or hereafter owed
by the Borrower to the Secured Party and the Banks (and with respect to the
Interest Hedge Agreements, any Affiliates of the Banks) under the Credit
Agreement and the other Credit Documents, (b) all amounts now or hereafter
owed by any other Pledgor to the Secured Party and the Banks (and with respect
to the Interest Hedge Agreements, any Affiliates of the Banks) under the
Guaranty, this Agreement, and the other Credit Documents, and (c) any
increases, extensions, renewals, replacements, and rearrangements of the
foregoing obligations under any amendments, supplements, and other
modifications of the agreements creating the foregoing obligations or any
increases, extensions, renewals, replacements, and rearrangements of the
foregoing obligations.
"UCC" means the Uniform Commercial Code as in effect on the date
hereof in the State of Texas, as amended from time to time, and any successor
statute.
Section 2. Security Interest.
2.1 Grant of Security Interest. Each Pledgor hereby grants to the
Secured Party a security interest in all of such Pledgor's right, title, and
interest in and to the Collateral to secure the payment and performance of the
Secured Obligations.
2.2 Pledgors Remain Liable. Anything herein to the contrary
notwithstanding: (a) each Pledgor shall remain liable under the contracts and
agreements included in the Collateral to the extent set forth therein to
perform its obligations thereunder to the same extent as if this Agreement had
not been executed; (b) the exercise by Secured Party of any rights hereunder
shall not release any Pledgor from any obligations under the contracts and
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agreements included in the Collateral; and (c) Secured Party shall not have any
obligation under the contracts and agreements included in the Collateral by
reason of this Agreement, nor shall Secured Party be obligated to perform or
fulfill any of the obligations of any Pledgor thereunder, including any
obligation to make any inquiry as to the nature or sufficiency of any payment
such Pledgor may be entitled to receive thereunder, to present or file any
claim, or to take any action to collect or enforce any claim for payment
thereunder.
Section 3. General Provisions. Each Pledgor represents and warrants to
and agrees with the Secured Party as follows:
3.1 Ownership. Each Pledgor has good and indefeasible title to
the Collateral free from any liens, security interests, assignments, options,
adverse claims, restrictions, and other encumbrances whatsoever. The shares of
stock representing the Pledged Securities are duly authorized and validly
issued and are fully paid and nonassessable. The Pledged Securities constitute
100% of the issued and outstanding shares of capital stock of each Subsidiary
of the Borrower (including those indirect Subsidiaries of the Borrower which
are direct Subsidiaries of the other Pledgors). No effective pledge or other
transfer regarding the Pledged Securities of any Pledgor is in effect. No
recorded financing statement or similar recording or filing covering any part
of the Collateral is in effect or on file in any recording office, except those
filed in connection with this Agreement. No Pledgor shall, without the prior
written consent of the Secured Party, grant any lien, security interest,
assignment, option, restriction, claim, or other encumbrance on or against the
Collateral, or lease, sell, or otherwise transfer any of its rights in the
Collateral, except (a) as permitted under Section 5.9(i) of the Credit
Agreement, or (b) to the Secured Party pursuant to the terms of this Agreement.
3.2 Perfection. All certificates or instruments representing the
Pledged Securities of the applicable Pledgor have been delivered to the Secured
Party in a form suitable for transfer by delivery, or accompanied by duly
executed instruments of transfer or assignment in blank, all in form and
substance satisfactory to the Secured Party, and each Pledgor shall deliver to
the Secured Party in such manner all certificates and instruments representing
the Pledged Securities of such Pledgor acquired by such Pledgor after the date
of this Agreement. No other authorization, approval, or other action is
necessary to allow such Pledgor to perform its obligations hereunder, or to
permit the Secured Party to exercise its rights and remedies hereunder (except
as may be required in connection with such disposition by laws affecting the
offering and sale of securities generally).
3.3 Priority. The security interest created by this Agreement is
first priority, and each Pledgor shall preserve and maintain the status of such
security interest to the end that this Agreement shall remain a first priority
security interest in the Collateral.
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3.4 Use and Condition.
(a) So long as no Default or Event of Default shall exist
and until the Borrower has received notice from the Secured Party pursuant to
Section 4.1(c) of this Agreement (which notice the Borrower shall promptly
forward to the other Pledgors), each Pledgor shall be entitled to receive and
retain any cash dividends distributed in respect of the Pledged Securities of
such Pledgor, provided that any: (i) non-cash dividends, instruments, and other
property received or otherwise distributed in respect of or in substitution for
any such Pledged Securities; (ii) cash dividends and other distributions in
connection with a partial or total liquidation or dissolution of an issuer of
any such Pledged Securities or in connection with a reduction of capital,
capital surplus, or paid-in-surplus of an issuer of such Pledged Securities;
and (iii) cash distributed in respect of a redemption of principal of, or in
exchange for, any such Pledged Securities, shall be promptly delivered to the
Secured Party for disposition in accordance with Section 4.3 and shall, if
received by any Pledgor, be received in trust for the benefit of the Secured
Party, be segregated from the other property or funds of such Pledgor, and be
promptly delivered to the Secured Party as Collateral in the same form as so
received, with any necessary endorsement.
(b) With regard to the Pledged Securities of each
Pledgor, so long as no Default or Event of Default shall exist and until the
Borrower has received notice from the Secured Party pursuant to Section 4.1(d)
of this Agreement (which notice the Borrower shall promptly forward to the
other Pledgors), each Pledgor shall be entitled to exercise any voting and
other consensual rights pertaining to the Pledged Securities of such Pledgor
for any purpose not inconsistent with the terms of this Agreement. The Secured
Party shall execute and deliver (or cause to be executed and delivered) to such
Pledgor all proxies and other instruments that such Pledgor may reasonably
request to enable such Pledgor to exercise the voting and other rights which it
is entitled to exercise hereunder and to receive the dividends or interest
payments which it is authorized to receive and retain hereunder.
3.5 Further Assurances.
(a) Each Pledgor agrees that at any time such Pledgor
shall promptly execute and deliver all further agreements, and take all further
action, that may be necessary or that the Secured Party may reasonably request,
in order to further evidence the security interests granted or purported to be
granted hereunder and perfect and protect the same or to enable the Secured
Party to exercise and enforce its rights and remedies hereunder. Without
limiting the foregoing, each Pledgor shall at the Secured Party's reasonable
request: (i) mark conspicuously any tangible Collateral with a legend, in form
and substance satisfactory to the Secured Party, indicating that such
Collateral is subject to the security interest granted or purported to be
granted hereunder; and (ii) execute stock powers, pledge registration
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requests, financing statements, amendments and continuations of financing
statements, and such other documents and agreements as the Secured Party may
reasonably request in order to perfect and preserve the security interests
granted or purported to be granted hereunder. Each Pledgor shall furnish to
the Secured Party from time to time any statements and schedules further
identifying and describing any of the Collateral and such other reports in
connection with the Collateral as the Secured Party may reasonably request.
(b) During the existence of an Event of Default, each
Pledgor agrees that, if such Pledgor fails to perform under this Agreement, the
Secured Party may, but shall not be obligated to, after written request to such
Pledgor to perform, perform such Pledgor's obligations under this Agreement and
any expenses reasonably incurred by the Secured Party in performing such
Pledgor's obligations shall be paid by such Pledgor. Any such performance by
the Secured Party may be made by the Secured Party in reasonable reliance on
any statement, invoice, or claim, without inquiry into the validity or accuracy
thereof. The amount and nature of any expense of the Secured Party hereunder
shall be conclusively established, absent manifest error, by a certificate of
any officer of the Secured Party.
(c) Each Pledgor irrevocably appoints the Secured Party
as such Pledgor's attorney in fact, with full authority to act during the
existence of an Event of Default for such Pledgor and in the name of such
Pledgor, to take any action and execute any agreement which the Secured Party
deems necessary or advisable to accomplish the purposes of this Agreement,
including taking actions the Secured Party is expressly authorized to take
pursuant to this Agreement (such as the matters described in paragraph (b)
above), instituting proceedings the Secured Party deems necessary or desirable
to enforce the rights of the Secured Party with respect to this Agreement, and
taking actions with respect to receiving, endorsing, and collecting instruments
made payable to such Pledgor representing any dividend, interest payment, or
other distribution in respect of the Pledged Securities of such Pledgor and
giving full discharge for the same. Provided, that the Secured Party shall
first request in writing that such Pledgor take actions and such Pledgor shall,
after reasonable opportunity, have failed to do so.
(d) The powers conferred on the Secured Party under this
Agreement are solely to protect its rights under this Agreement and shall not
impose any duty upon it to exercise any such powers. Except as elsewhere
provided hereunder, the Secured Party shall have no duty as to any of the
Collateral or as to the taking of any necessary steps to preserve rights
against prior parties or any other rights pertaining to the Collateral. The
Secured Party shall have no responsibility for (i) ascertaining or taking
action with respect to calls, conversions, exchanges, maturities, tenders, or
other matters relative to any Pledged Securities, whether or not the Secured
Party has or is deemed to have knowledge of such
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matters, or (ii) taking any necessary steps to preserve rights against any
parties with respect to any Pledged Securities.
Section 4. Remedies. During the continuation of any Event of Default:
4.1 Interim Remedies.
(a) The Secured Party may exercise all the rights and
remedies of a secured party under the UCC.
(b) The Secured Party may prosecute actions in equity or
at law for the specific performance of any covenant or agreement herein
contained or in aid of the execution of any power herein granted or for the
enforcement of any other appropriate legal or equitable remedy.
(c) Following written notice to the Borrower (which
notice the Borrower shall promptly forward to the other Pledgors) and to the
extent specified in such written notice, all rights of the Pledgors to receive
cash dividends shall cease, and all such rights shall thereupon become vested
in the Secured Party who shall thereupon have the sole right to receive such
cash dividends. All cash dividends received by any Pledgor in violation of the
foregoing shall be received in trust for the benefit of the Secured Party,
shall be segregated from other funds of such Pledgor, and shall be promptly
paid over to the Secured Party to be held as Pledged Securities in the same
form as so received (with any necessary endorsement).
(d) Following written notice to the Borrower (which
notice the Borrower shall promptly forward to the other Pledgors) and to the
extent specified in such written notice, all rights of the Pledgors to exercise
the voting and other consensual rights which they would otherwise be entitled
to exercise pursuant to this Agreement shall cease, and all such rights shall
thereupon become vested in the Secured Party who shall thereupon have the sole
right to exercise such voting and other consensual rights.
(e) Following written notice to the Borrower (which
notice the Borrower shall promptly forward to the other Pledgors) and to the
extent specified in such written notice, the Secured Party shall have the
right, without further notice to any Pledgor, to transfer or to register, in
the name of the Secured Party or any of its nominees, any of the Pledged
Securities. In addition, the Secured Party shall have the right at any time to
exchange the certificates or instruments representing the Pledged Securities
for certificates or instruments of smaller or larger denominations.
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(f) The Secured Party may require any Pledgor to promptly
assemble any tangible Collateral of such Pledgor and make it available to the
Secured Party at a place to be designated by the Secured Party. The Secured
Party may occupy any premises owned or leased by any Pledgor where the
Collateral is assembled for a reasonable period in order to effectuate its
rights and remedies hereunder or under law, without obligation to such Pledgor
with respect to such occupation. The Secured Party shall have no obligation to
take any action to assemble or otherwise take control of the Collateral,
whether for the purposes of sale or otherwise.
(g) The Secured Party may take any action permitted under
the Credit Agreement or other Credit Documents, including declaring the unpaid
portion of the Secured Obligations to be immediately due and payable under the
terms of the Credit Agreement.
4.2 Foreclosure.
(a) The Secured Party may foreclose on the Collateral in
any manner permitted by the courts of or in the State of Texas. If the Secured
Party should institute a suit for the collection of the Secured Obligations and
for the foreclosure of this Agreement, the Secured Party may at any time before
the entry of a final judgment dismiss the same, and take any other action
permitted by this Agreement.
(b) The Secured Party may exercise all the rights and
remedies of a secured party under the UCC, including foreclosure.
(i) If, in the opinion of the Secured Party,
there is any question that a public or semipublic sale or distribution of any
Collateral will violate any state or federal securities law, the Secured Party
in its discretion (A) may offer and sell securities privately to purchasers who
will agree to take them for investment purposes and not with a view to
distribution and who will agree to imposition of restrictive legends on the
certificates representing the security, or (B) may, if lawful, sell such
securities in an intrastate offering under Section 3(a)(11) of the Securities
Act of 1933, as amended, and no sale so made in good faith by the Secured Party
shall be deemed to be not "commercially reasonable" because so made. Each
Pledgor shall cooperate fully with Secured Party in all respects in selling or
realizing upon all or any part of the Collateral. In addition, each Pledgor
shall fully comply with the securities laws of the United States, the State of
Texas, and other states and take such actions as may be necessary to permit the
Secured Party to sell or otherwise dispose of any securities pledged hereunder
in compliance with such laws.
(ii) The Secured Party may sell, after notice to
the Debtor, any Collateral at public or private sale, at the office of the
Secured Party or elsewhere, for cash
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or credit and upon such other terms as the Secured Party deems commercially
reasonable. The Secured Party may sell any Collateral at one or more sales,
and the security interest granted hereunder shall remain in effect as to the
unsold portion of the Collateral. Each Pledgor hereby deems ten days advance
notice of the time and place of any public or private sale reasonable
notification, recognizing that if the Collateral is perishable or threatens to
decline speedily in value or is of a type customarily sold on a recognized
market, shorter notice may be reasonable. The Secured Party shall not be
obligated to make any sale of Collateral regardless of notice of sale having
been given. The Secured Party may adjourn any sale by announcement at the time
and place fixed therefor, and such sale may, without further notice, be made at
the time and place to which it was adjourned. In the event that any sale
hereunder is not completed or is defective in the opinion of the Secured Party,
the Secured Party shall have the right to cause subsequent sales to be made
hereunder. Any statements of fact or other recitals made in any bill of sale,
assignment, or other document representing any sale hereunder, including
statements relating to the occurrence of an Event of Default, acceleration of
the Secured Obligations, notice of the sale, the time, place, and terms of the
sale, and other actions taken by the Secured Party in relation to the sale
shall be conclusive evidence of the truth of the matters so stated. The
Secured Party may delegate to any agent the performance of any acts in
connection with any sale hereunder, including the sending of notices and the
conduct of the sale.
4.3 Application of Proceeds. Unless otherwise specified herein,
any cash proceeds received by the Secured Party from the sale of, collection
of, or other realization upon any part of the Collateral shall be applied by
the Secured Party in accordance with and in the manner specified by Section 6.9
of the Credit Agreement.
4.4 Waiver of Certain Rights. To the full extent each Pledgor may
do so, no Pledgor shall insist upon, plead, claim, or take advantage of any law
providing for any appraisement, valuation, stay, extension, or redemption, and
each Pledgor hereby waives and releases the same, and all rights to a
marshaling of the assets of such Pledgor, including the Collateral, or to a
sale in inverse order of alienation in the event of foreclosure of the liens
and security interests hereby created. No Pledgor shall assert any right under
any law pertaining to the marshaling of assets, sale in inverse order of
alienation, the administration of estates of decedents or other matters
whatever to defeat, reduce, or affect the right of the Secured Party under the
terms of this Agreement.
Section 5. Miscellaneous.
5.1 Notices. All notices and other communications from the
Secured Party to any Pledgor provided for in this Agreement shall be delivered
or transmitted to the Borrower, and shall be deemed delivered to any such
Pledgor upon delivery to the Borrower. All notices and
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other communications between the parties provided for in this Agreement shall
be delivered or transmitted as provided in the Credit Agreement to the
applicable address set forth therein.
5.2 General. This miscellaneous provisions contained in Article 8
of the Credit Agreement are incorporated herein as if fully set forth herein.
This Agreement may be executed in multiple counterparts each of which shall
constitute one and the same agreement.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT AMONG THE PARTIES AND MAY
NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS AMONG THE PARTIES.
Executed as of the date first above written.
Pledgors:
INTEGRATED ELECTRICAL SERVICES, INC.
By:
----------------------------------
J. Paul Withrow
Vice President and
Chief Accounting Officer
BW CONSOLIDATED, INC.
By:
----------------------------------
Jim P. Wise
Assistant Treasurer
MILLS ELECTRICAL CONTRACTORS, INC.
By:
----------------------------------
Jim P. Wise
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Assistant Treasurer
Secured Party:
NATIONSBANK OF TEXAS, N.A., as Agent
By:
----------------------------------
Albert L. Welch
Vice President
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[Execution Version]
PROMISSORY NOTE
(NationsBank of Texas, N.A.)
$65,000,000 Houston, Texas January 30, 1998
For value received, the undersigned INTEGRATED ELECTRICAL SERVICES,
INC., a Delaware corporation ("Borrower"), hereby promises to pay to the order
of NATIONSBANK OF TEXAS, N.A. ("Bank"), the principal amount of Sixty-Five
Million and No/100 Dollars ($65,000,000) or, if less, the aggregate outstanding
principal amount of the Revolving Loan Advances (as defined in the Credit
Agreement referred to below) made by the Bank to the Borrower, together with
accrued but unpaid interest on the principal amount of each such Revolving Loan
Advance from the date of such Revolving Loan Advance until such principal
amount is paid in full, at such interest rates, and at such times, as are
specified in the Credit Agreement.
This Note is one of the Notes referred to in, and is entitled to the
benefits of, and is subject to the terms of, the Credit Agreement dated as of
January 30, 1998 (as the same may be modified from time to time, the "Credit
Agreement"), among the Borrower, the financial institutions parties thereto
("Banks"), and NationsBank of Texas, N.A., as agent for the Banks ("Agent").
Capitalized terms used herein but not defined herein shall have the meanings
specified by the Credit Agreement. The Credit Agreement, among other things,
(a) provides for the making of Revolving Loan Advances by the Bank to the
Borrower from time to time, the indebtedness of the Borrower resulting from
each such Revolving Loan Advance being evidenced by this Note, and (b) contains
provisions for acceleration of the maturity of this Note upon the happening of
certain events stated in the Credit Agreement and for prepayments of principal
prior to the maturity of this Note upon the terms and conditions specified in
the Credit Agreement.
Both principal and interest are payable to the Agent in the currency,
at the times, in the locations, and in the manner specified in the Credit
Agreement. The Bank shall record all Revolving Loan Advances and payments of
principal made under this Note, but no failure of the Bank to make such
recordings shall affect the Borrower's repayment obligations under this Note.
It is contemplated that because of prepayments there may be times when
no indebtedness is owed under this Note. Notwithstanding such prepayments,
this Note shall remain valid and shall
85
be in force as to Revolving Loan Advances made pursuant to the Credit Agreement
after such prepayments.
It is the intention of the Bank and the Borrower to conform strictly
to any applicable usury laws. Accordingly, the terms of the Credit Agreement
relating to the prevention of usury will be strictly followed.
EXECUTED as of the date first above written.
INTEGRATED ELECTRICAL SERVICES, INC.
By:
----------------------------------------------------------
J. Paul Withrow
Vice President and
Chief Accounting Officer
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[Execution Version]
PROMISSORY NOTE
(Swing Line)
$5,000,000.00 January 30, 1998
INTEGRATED ELECTRICAL SERVICES, INC., a Delaware corporation
("Borrower"), for value received, hereby promises to pay to the order of
NATIONSBANK OF TEXAS, N.A. ("Lender"), the principal sum of FIVE MILLION AND
NO/100 DOLLARS ($5,000,000.00) or, if less, the outstanding principal amount
advanced under this Promissory Note ("Note") and interest thereon, all as
required by this Note.
This Note is the Swing Line Note referred to in, and is entitled to
the benefits of, and is subject to the terms of, the Credit Agreement dated as
of January 30, 1998 (as modified from time to time, the "Credit Agreement"),
among the Borrower, the financial institutions parties thereto ("Banks"), and
NationsBank of Texas, N.A., as agent for the Banks ("Agent"). Capitalized
terms used herein but not defined herein shall have the meanings specified by
the Credit Agreement.
Subject to the terms of this Note, the Lender shall from time to time
prior to the Maturity Date (hereinafter defined) make advances ("Advances") to
the Borrower under this Note. The aggregate outstanding principal amount of
such advances shall not exceed the face amount of this Note. The Borrower
shall request Advances by providing the Lender with notice not later than 11:00
a.m., Houston, Texas, time on the date of the requested Advance. The request
must specify the amount of the requested Advance and the date of funding for
such Advance. The Lender shall, before 4:00 p.m., Houston, Texas, time on the
date of such Advance, make such Advance available to the Borrower in
immediately available funds at the Borrower's account with the Lender.
Subject to the terms hereof, the Borrower may prepay the Advances on
this Note by providing the Lender with notice of the intended prepayment not
later than 11:00 a.m., Houston, Texas, time on the date of prepayment,
specifying the amount and the date of such prepayment. Each partial prepayment
of the Advances shall be in a minimum amount of $100,000 or an integral
multiple thereof or, if the aggregate outstanding principal amount of the
Advances would be less than $100,000 following the prepayment, in the remaining
aggregate outstanding principal amount of the Advances, together with accrued
interest to the date of such prepayment on the principal amount prepaid.
Amounts prepaid shall be applied in the inverse order of maturity.
Notwithstanding anything herein to the contrary, the Borrower shall
pay to the Lender the outstanding principal balance of this Note on January 31,
2001 ("Maturity Date").
87
It is contemplated that because of prepayments there may be times when
no indebtedness is owed under this Note. Notwithstanding such prepayments,
this Note shall remain valid and shall be in force as to Advances made pursuant
to the Credit Agreement after such prepayments.
The Advances shall bear interest at a per annum rate equal to the
difference of (a) (i) the Adjusted Base Rate in effect from time to time plus
(ii) the Applicable Margin for the Prime Rate Tranche in effect from time to
time, calculated on the basis of a 365/366-day year for the actual number of
days elapsed, minus (b) the Applicable Margin for Commitment Fees in effect
from time to time, calculated on the basis of a 360-day year for the actual
number of days elapsed.
The Borrower shall pay to the Lender all accrued but unpaid interest
on the aggregate outstanding principal amount of the Advances on the last day
of each calendar quarter, when the Advances are prepaid in full, and on the
Maturity Date.
The Lender shall record in its records all Advances made under this
Note and all payments of principal and interest on the Advances. Any failure
of the Lender to make such recordings, however, shall not affect the Borrower's
repayment obligations. The Lender's records shall be presumptive evidence of
the principal and interest owed by the Borrower.
The Borrower shall make each payment required under this Note not
later than 12:00 noon, Houston, Texas, time on the date when due in Dollars to
the Lender at such location as is specified by the Lender in writing in
immediately available funds. During the existence of an Event of Default, the
Borrower hereby authorizes the Lender, if and to the extent payment is not made
when due under this Note, to charge from time to time against any account of
the Borrower with the Lender any amount so due. Whenever any payment to be
made under this Note shall be stated to be due on a day other than a day on
which the Lender is open for business in Houston, Texas ("Business Day"), such
payment shall be made on the next succeeding Business Day, and such extension
of time shall in such case be included in the computation of the payment of
interest. All payments shall be applied as directed by the Borrower or, if not
directed by the Borrower, as determined by the Lender.
Each of the following shall be an "Event of Default" for the purposes
of this Note: (a) the Borrower (i) fails to pay when due any principal amounts
due under this Note or (ii) fails to pay when due any interest or other amounts
due under this Note and such failure has not been cured within five Business
Days, (b) there shall occur any Event of Default under the Credit Agreement, or
(c) the Lender shall resign or be removed as Agent under the Credit Agreement.
During the continuation of any Event of Default, the Lender may
declare by written notice to the Borrower all of the commitments of the Lender
hereunder terminated (whereupon the same shall terminate) and the Lender may
declare by written notice to the Borrower the aggregate outstanding principal
amount of the Advances, all accrued interest thereon, and all other amounts
payable by the Borrower under this Note to be immediately due and payable
(whereupon the same
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shall immediately and automatically become due and payable). Upon the
occurrence of any Event of Default relating to bankruptcy or insolvency, all of
the commitments of the Lender hereunder shall terminate, and the aggregate
outstanding principal amount of all Advances made under this Note, all accrued
interest thereon, and all other amounts payable by the Borrower under this Note
shall immediately and automatically become due and payable.
Except for the notices provided for above and in the Credit Agreement,
the Borrower waives notice of intent to demand, demand, presentment for
payment, notice of nonpayment, protest, notice of setoff, notice of protest,
notice of dishonor, notice of intent to accelerate, notice of acceleration, and
all other notices in connection with the foregoing.
During the existence of an Event of Default, the Lender is authorized
at any time, to the fullest extent permitted by law, to setoff and apply any
indebtedness owed by the Lender to the Borrower against any and all of the
obligations of the Borrower under this Note, irrespective of whether or not the
Lender shall have made any demand under this Note and although such obligations
may be contingent and unmatured. Following an Event of Default, the Lender may
exercise (a) all of its rights under this Note and the Credit Agreement
(including Section 2.3(b) thereof) (such agreements being the "Loan Documents")
and (b) all other rights at law or in equity. During the existence of an Event
of Default, all payments and collections shall be applied in the order
determined by the Lender.
No right, power, or remedy conferred to the Lender in the Credit
Agreement or any Loan Document, or now or hereafter existing at law, in equity,
by statute, or otherwise shall be exclusive, and each such right, power, or
remedy shall to the full extent permitted by law be cumulative and in addition
to every other such right, power or remedy. No course of dealing and no delay
in exercising any right, power, or remedy conferred to the Lender in this Note,
or now or hereafter existing at law, in equity, by statute, or otherwise shall
operate as a waiver of or otherwise prejudice any such right, power, or remedy.
No notice to or demand upon the Borrower shall entitle the Borrower to similar
notices or demands in the future.
If the Borrower fails to pay when due any amount payable under this
Note, at the request of the Lender the amount not paid when due shall bear
interest beginning on the date due until paid in full at the rate otherwise set
for outstanding principal hereunder plus 2.00%.
It is the intention of the Lender and the Borrower to conform strictly
to any applicable usury laws. Accordingly, the terms of the Credit Agreement
relating to the prevention of usury will be strictly followed.
This Note shall be governed by the laws of the State of Texas without
regard to any principles of conflicts of laws. If any provision in this Note
is held to be unenforceable, such provision shall be severed and the remaining
provisions shall remain in full force and effect. All representations,
warranties, and covenants of the Borrower in this Note shall survive the
execution
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of this Note, the other Loan Documents, and any other contract or agreement.
The Lender's remedies under this Note and the Loan Documents shall be
cumulative, and no delay in enforcing this Note or the other Loan Documents
shall act as a waiver of the Lender's rights hereunder. The provisions of this
Note may be waived or amended only in a writing signed by the party against
whom enforcement of such waiver or amendment is sought. This Note shall bind
the Borrower and the Borrower's successors and assigns and shall inure to the
benefit of the Lender and the Lender's successors and assigns. The Borrower
may not assign the Borrower's rights or delegate the Borrower's duties under
this Note or the other Loan Documents. The Lender may assign and participate
the Lender's rights and delegate the Lender's duties under this Note. Unless
otherwise specified, all notices provided for in this Note shall be made in
accordance with the terms of the Credit Agreement.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES.
THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES.
EXECUTED as of the date first above written.
INTEGRATED ELECTRICAL SERVICES, INC.
By: ______________________________
J. Paul Withrow
Vice President and
Chief Accounting Officer
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EXHIBIT 10.6
AGREEMENT
For good and valuable consideration, receipt and sufficiency of which
is hereby acknowledged, the undersigned hereby agrees as follows:
1. TRANSFER RESTRICTIONS.
1.1 TRANSFER RESTRICTIONS. Unless otherwise agreed by Integrated
Electrical Services, Inc. (the "Company"), except for transfers to immediate
family members who agree to be bound by the restrictions set forth herein (or
trusts for the benefit of the undersigned or family members, or trusts in which
the undersigned is both the grantor and the beneficiary, the trustees of which
so agree), for a period of two years from the date of issuance, except pursuant
to Section 3 hereof, the undersigned shall not sell, assign, exchange,
transfer, appoint, or otherwise dispose of any shares of common stock of the
Company sold and issued by the Company or transferred to the undersigned prior
to the date of this Agreement (the "Restricted Stock"). The certificates
evidencing the Restricted Stock will bear a legend substantially in the form
set forth below and containing such other information as the Company may deem
necessary or appropriate.
THE SHARES REPRESENTED BY THIS CERTIFICATE MAY NOT BE SOLD, ASSIGNED,
EXCHANGED, TRANSFERRED, DISTRIBUTED, APPOINTED OR OTHERWISE DISPOSED OF WITHOUT
THE WRITTEN CONSENT OF THE COMPANY, AND THE ISSUER SHALL NOT BE REQUIRED TO
GIVE EFFECT TO ANY ATTEMPTED SALE, ASSIGNMENT, EXCHANGE, TRANSFER,
DISTRIBUTION, APPOINTMENT OR OTHER DISPOSITION PRIOR TO SEPTEMBER 4, 1999.
UPON THE WRITTEN REQUEST OF THE HOLDER OF THIS CERTIFICATE, THE ISSUER AGREES
TO REMOVE THIS RESTRICTIVE LEGEND (AND ANY STOP ORDER PLACED WITH THE TRANSFER
AGENT) AFTER THE DATE SPECIFIED ABOVE.
2. FEDERAL SECURITIES ACT REPRESENTATIONS
2.1 COMPLIANCE WITH LAW. The undersigned acknowledges that the
shares of Restricted Stock have not been and will not be registered under the
Securities Act of 1933, as amended (the "1933 Act") (except as provided in
Section 3 hereof) and therefore may not be resold without compliance with the
1933 Act. The Restricted Stock was acquired solely for the undersigned's own
respective account, for investment purposes only, and with no present intention
of distributing, selling or otherwise disposing of it in connection with a
distribution. The undersigned covenants, warrants and represents that none of
the Restricted Stock will be offered, sold, assigned, pledged, hypothecated,
transferred or otherwise disposed of except after full compliance with all of
the applicable provisions of the 1933 Act and the rules and regulations of the
SEC. All the Restricted Stock shall bear the following legend in addition to
the legend required under Section 1 of this Agreement:
2
THE SHARES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT
OF 1933 (THE "ACT") AND MAY ONLY BE SOLD OR OTHERWISE TRANSFERRED IF THE HOLDER
HEREOF COMPLIES WITH THE ACT AND APPLICABLE SECURITIES LAW.
3. REGISTRATION RIGHTS
3.1 PIGGYBACK REGISTRATION RIGHTS. At any time following the date
hereof, whenever the Company proposes to register any common stock of the
Company for its own or others account under the 1933 Act for a public offering,
other than (i) any shelf or other registration of shares to be used as
consideration for acquisitions of additional businesses by the Company and (ii)
registrations relating to employee benefit plans, the Company shall give the
undersigned prompt written notice of its intent to do so. Upon the written
request of the undersigned given within 10 days after receipt of such notice,
the Company shall cause to be included in such registration all of the
Restricted Stock (including any stock issued as or issuable upon the conversion
or exchange of any convertible security, warrant, right or other security which
is issued by the Company as a stock split, dividend or other distribution with
respect to, or in exchange for, or in replacement of such common stock) which
the undersigned requests, other than shares of common stock of the Company
which may be sold under Rule 144(k) (or any similar or successor provision)
promulgated under the 1933 Act, and other than shares of common stock of the
Company that have been theretofore sold by the undersigned in accordance with
the 1933 Act. If the Company is advised in writing in good faith by any
managing underwriter of an underwritten offering of the securities being
offered pursuant to any registration statement under this section that the
number of shares to be sold by persons other than the Company is greater than
the number of such shares which can be offered without adversely affecting the
success of the offering, the Company may reduce pro rata (among the undersigned
and all other selling security holders in the offering) the number of shares
offered for the accounts of such persons (based upon the number of shares held
by such person) to a number deemed satisfactory by such managing underwriter.
If the undersigned disapproves of the terms of the underwriting, he may elect
to withdraw therefrom by written notice to the Company and the managing
underwriter. The undersigned's shares of Restricted Stock so withdrawn shall
also be withdrawn from registration.
3.2 REGISTRATION PROCEDURES. Whenever the Company is required to
register shares of common stock pursuant to Section 3, the Company will, as
expeditiously as possible:
(i) Prepare and file with the SEC a registration
statement with respect to such shares and use its best efforts to
cause such registration statement to become effective (provided that
before filing a registration statement or prospectus or any amendments
or supplements or term sheets thereto, the Company will furnish a
representative of the undersigned with copies of all such documents
proposed to be filed) as promptly as practical;
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(ii) Notify the undersigned of any stop order issued or
threatened by the SEC and take all reasonable actions required to
prevent the entry of such stop order or to remove it if entered;
(iii) Prepare and file with the SEC such amendments and
supplements to such registration statement and the prospectus used in
connection therewith as may be necessary to keep such registration
statement effective for a period of not less than 120 days, cause the
prospectus to be supplemented by any required prospectus supplement,
and as so supplemented to be filed pursuant to Rule 474 under the 1933
Act; and comply with the provisions of the 1933 Act applicable to it
with respect to the disposition of all securities covered by such
registration statement during the applicable period in accordance with
the intended methods of disposition by the sellers thereof set forth
in such registration statement or supplement to the prospectus;
(iv) Furnish to the undersigned such number of copies of
such registration statement, each amendment and supplement thereto and
the prospectus included in such registration statement (including each
preliminary prospectus and any term sheet associated therewith), and
such other documents as the undersigned may reasonably request in
order to facilitate the disposition of the relevant shares;
(v) Make "generally available to its security holders"
(within the meaning of Rule 158) an earnings statement satisfying the
provisions of Section 11(a) of the 1933 Act and Rule 158 thereunder no
later than 90 days after the end of the 12-month period beginning with
the first day of the Company's first fiscal quarter commencing after
the effective date of the registration statement;
(vi) Make every reasonable effort to obtain the withdrawal
of any order suspending the effectiveness of the registration
statement at the earliest possible moment;
(vii) If requested by the managing underwriter or
underwriters, if any, or any participating selling stockholder,
promptly incorporate in a prospectus supplement or post-effective
amendment such information as the managing underwriter or underwriters
or any participating selling stockholder, as the case may be,
reasonably requests to be included therein, including, without
limitation, information with respect to the number of shares of common
stock of the Company being sold by participating selling stockholders
to any underwriter or underwriters, the purchase price being paid
therefor by such underwriter or underwriters and with respect to any
other terms of an underwritten offering of the shares of common stock
to be sold in such offering, and promptly make all required filings of
such prospectus by supplement or post-effective amendment;
(viii) Make available for inspection by participating
selling stockholders, any underwriter participating in any disposition
pursuant to such registration statement, and the counsel retained by
the participating selling stockholders, counsel for the underwriters
and
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any accountant or other agent retained by participating selling
stockholders or any such underwriter (collectively, the "Inspectors"),
all financial and other records, pertinent corporate documents and
properties of the Company (the "Records"), as shall be reasonably
necessary to enable them to exercise their due diligence
responsibility, and cause the Company's officers, directors and
employees to supply all information reasonably requested by any such
Inspectors in connection with such registration statement; provided,
that records which the Company determines, in good faith, to be
confidential and which the Company notifies the Inspectors are
confidential shall not be disclosed by the Inspectors unless (i) the
disclosure of such Records is necessary to avoid or correct a
misstatement or omission in the registration statement or (ii) the
release of such Records is ordered pursuant to a subpoena or other
order from a court of competent jurisdiction after delivery of
sufficient notice to the Company to enable the Company to contest such
subpoena or order;
(ix) Take all other steps reasonably necessary to effect
the registration of the shares of common stock of the Company
contemplated hereby;
(x) Use its best efforts to register or qualify the
securities covered by such registration statement under such other
securities or blue sky laws of such jurisdictions as shall be
reasonably requested by the undersigned, and to keep such registration
or qualification effective during the period such registration
statement is required to be kept effective, provided that the Company
shall not be required to become subject to taxation, to qualify
generally to do business or to file a general consent to service of
process in any such states or jurisdictions;
(xi) Cause all such shares of common stock of the Company
to be listed or included not later than the date of the first sale of
shares of common stock of the Company under such registration
statement on any securities exchanges or trading systems on which
similar securities issued by the Company are then listed or included;
and
(xii) Notify the undersigned at any time when a prospectus
relating thereto is required to be delivered under the 1933 Act within
the period that the Company is required to keep the registration
statement effective of the happening of any event as a result of which
the prospectus included in such registration statement (as then in
effect), together with any associated term sheet, contains an untrue
statement of a material fact or omits to state any fact required to be
stated therein or necessary to make the statements therein (in the
case of the prospectus or any preliminary prospectus, in light of the
circumstances under which they were made) not misleading, and, at the
request of the undersigned, the Company promptly will prepare a
supplement or amendment to such prospectus so that, as thereafter
delivered to the purchasers of the covered shares, such prospectus
will not contain an untrue statement of material fact or omit to state
any fact required to be stated therein or necessary to make the
statements therein (in the case of the prospectus or any preliminary
prospectus, in light of the circumstances under which they were made)
not misleading.
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All expenses incurred in connection with the registration under this
Article 3 and compliance with securities and blue sky laws (including all
registration, filing, listing, escrow agent, qualification, legal, printer and
accounting fees, but excluding underwriting commissions and discounts), shall
be borne by the Company.
3.3 INDEMNIFICATION.
(a) In connection with any registration under Section
3.1, the Company shall indemnify, to the extent permitted by law, the
undersigned (an "Indemnified Party") against all losses, claims, damages,
liabilities and expenses arising out of or resulting from any untrue or alleged
untrue statement of material fact contained in any registration statement,
prospectus or preliminary prospectus or associated term sheet or any omission
or alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not misleading except
insofar as the same are caused by or contained in or omitted from any
information furnished in writing to the Company by such Indemnified Party
expressly for use therein or by any Indemnified Parties' failure to deliver a
copy of the registration statement or prospectus or any amendment or
supplements thereto after the Company has furnished such Indemnified Party with
a sufficient number of copies of the same.
(b) In connection with any registration under Section
3.1, the undersigned shall furnish to the Company in writing such information
concerning the undersigned and his proposed offering of shares as is reasonably
requested by the Company for use in any such registration statement or
prospectus and will indemnify, to the extent permitted by law, the Company, its
directors and officers and each person who controls the Company (within the
meaning of the 1933 Act) against any losses, claims, damages, liabilities and
expenses resulting from any untrue or alleged untrue statement of a material
fact or any omission or alleged omission to state therein a material fact
required to be stated in the registration statement or prospectus or any
amendment thereof or supplement thereto or necessary to make the statements
therein not misleading, but only to the extent that such untrue or alleged
untrue statement or omission or alleged omission is contained in or omitted
from information so furnished in writing to the Company by the underwriter
expressly for use in the registration statement. Notwithstanding the
foregoing, the liability of the undersigned under this Section 3.3 shall be
limited to an amount equal to the net proceeds actually received by the
undersigned from the sale of the relevant shares covered by the registration
statement.
(c) Any person entitled to indemnification hereunder will
(i) give prompt notice to the indemnifying party of any claim with respect to
which it seeks indemnification and (ii) unless in such indemnified parties'
reasonable judgment, a conflict of interest between such indemnified and
indemnifying parties may exist with respect to such claim, permit such
indemnifying party to assume the defense of such claim with counsel reasonably
satisfactory to the indemnified party. Any failure to give prompt notice shall
deprive a party of its right to indemnification hereunder only to the extent
that such failure shall have adversely affected the indemnifying party. If the
defense of any claim is assumed, the indemnifying party will not be subject to
any liability for any settlement
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made without its consent (but such consent shall not be unreasonably withheld).
An indemnifying party that is not entitled or elects not, to assume the defense
of a claim, will not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party, a
conflict of interest may exist between such indemnified party and any other of
such indemnified parties with respect to such claim.
3.4 UNDERWRITING AGREEMENT. In connection with each registration
pursuant to Section 3.1 covering an underwritten registered offering, the
undersigned agrees to enter into a written agreement with the managing
underwriters in such form and containing such provisions as are customary in
the securities business for such an arrangement between such managing
underwriters and companies of the Company's size and investment stature,
including indemnification; provided, however, that the undersigned shall be
exempt and excluded from any indemnification of the managing underwriters other
than with respect to information provided by the undersigned to the Company or
the managing underwriters.
3.5 TRANSFER OF RIGHTS. The right to cause the Company to
register shares of common stock under this Agreement may be assigned to a
transferee or assignee of the undersigned to the extent that such transferee or
assignee is a member of the immediate family of the undersigned, or a trust or
partnership for the benefit of any such persons.
3.6 RULE 144 REPORTING. With a view to making available the
benefits of certain rules and regulations of the SEC that may permit the sale
of common stock of the Company to the public without registration, the Company
agrees to use its reasonable efforts to:
(i) make and keep public information regarding the
Company available as those terms are understood and defined in Rule
144 under the 1933 Act for a period of six years beginning 90 days
following the effective date of the Registration Statement on Form S-1
(No. 333-38715) of the Company (the "Registration Statement");
(ii) file with the SEC in a timely manner all reports and
other documents required of the Company under the 1933 Act and the
Securities and Exchange Act of 1934, as amended (the "1934 Act"), at
any time after it has become subject to such reporting requirements;
and
(iii) so long as the undersigned owns any restricted common
stock of the Company, furnish to the undersigned forthwith upon
written request a written statement by the Company as to its
compliance with the current public information requirements of Rule
144 (at any time from and after 90 days following the effective date
of the Registration Statement, and of the 1933 Act and the 1934 Act
(any time after it has become subject to such reporting requirements),
a copy of the most recent annual or quarterly report of the Company,
and such other reports and documents so filed as the undersigned may
reasonably
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request in availing himself of any rule or regulation of the SEC
allowing the undersigned to sell any such shares without registration.
4. GENERAL
4.1 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the
parties hereunder may not be assigned (except by operation of law) and shall be
binding upon and shall inure to the benefit of the parties hereto, the
successors of the Company, and the heirs and legal representatives of the
undersigned.
4.2 NOTICES. All notices or communication required or permitted
hereunder shall be in writing and may be given by depositing the same in United
States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, or by delivering the
same in person to an officer or agent of such party.
(a) If to the Company addressed to it at:
Integrated Electrical Services, Inc.
2301 Preston
Houston, Texas 77003
Attention: General Counsel
(b) If to the undersigned, addressed to him at:
___________________________________________
___________________________________________
___________________________________________
or to such other address or counsel as any party hereto shall specify pursuant
to this section from time to time.
4.3 GOVERNING LAW. This Agreement shall be construed in
accordance with the laws of the State of Texas, excluding any conflicts of
law, rule or principle that might refer same to the laws of another
jurisdiction.
4.4 REFORMATION AND SEVERABILITY. In case any provision of this
Agreement shall be invalid, illegal or unenforceable, it shall, to the extent
possible, be modified in such manner as to be valid, legal and enforceable but
so as to most nearly retain the intent of the parties, and if such modification
is not possible, such provision shall be severed from this Agreement, and in
either case the validity, legality and enforceability of the remaining
provisions of this Agreement shall not in any way be affected or impaired
thereby. No provision of this Agreement shall be interpreted or construed
against any party solely because that party or its legal representative drafted
such provision.
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The parties hereto have entered into and executed this Agreement as of
January 30, 1998.
By:
------------------------------------
Name: C. Byron Snyder
INTEGRATED ELECTRICAL SERVICES, INC.
By:
------------------------------------
Name:
----------------------------------
Title:
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SCHEDULE A
PARTIES TO FORM OF AGREEMENT
Party Expiration Date
- ----- ---------------
C. Byron Snyder September 4, 1999
Gregg Layton Snyder Trust September 4, 1999
Worth Byron Snyder Trust September 4, 1999
D. Merril Cummings September 4, 1999
Jon Pollock September 4, 1999
Jerry Mills September 4, 1999
Ben Mueller September 4, 1999
Jim P. Wise September 4, 1999
John F. Wombwell September 4, 1999
John S. Stanfield September 4, 1999
J. Paul Withrow October 16, 1999
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,
Co., Inc.; Summit Electric of Texas, Incorporated; and Rodgers Electric Company,
Inc.; and to all references to our firm included in this registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
January 23, 1998
