EXHIBIT 10.1 UNDERWRITING, CONTINUING INDEMNITY, AND SECURITY AGREEMENT

 

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                                                                    EXHIBIT 10.1

 

           UNDERWRITING, CONTINUING INDEMNITY, AND SECURITY AGREEMENT

 

      THIS UNDERWRITING, CONTINUING INDEMNITY, AND SECURITY AGREEMENT ("this

Agreement") entered into as of the 14th day of January, 2005, INTEGRATED

ELECTRICAL SERVICES, INC., a Delaware corporation, and certain of its Affiliates

and Subsidiaries identified on Exhibit A, in their capacity as named Principal

under any Bond (individually and collectively "Principal"); and INTEGRATED

ELECTRICAL SERVICES, INC., a Delaware corporation, and certain of its Affiliates

and Subsidiaries identified on Exhibit B (along with Principal, individually and

collectively "Indemnitors") in favor of FEDERAL INSURANCE COMPANY, an Indiana

corporation, its Affiliates and Subsidiaries and their respective co-sureties

and reinsurers, and their respective successors and permitted assigns

(individually and collectively "Surety"). All capitalized terms will have the

meaning set out in Section 1.

 

                              W I T N E S S E T H:

 

      WHEREAS, Principal, operating through certain of its Affiliates and

Subsidiaries, is engaged in the business, among other things, of providing

electrical and communication services to the commercial, industrial,

residential, and service markets;

 

      WHEREAS, Indemnitors recognize that bonds may be a necessary and desirable

adjunct to the business done and to be done by Principal that will directly

benefit Indemnitors and desire to accommodate the financial, security,

indemnity, exoneration, and other requirements of Surety as an inducement to

Surety to become surety upon obligations of Principal, and have therefore agreed

to be bound by this Agreement and have agreed to exercise their best efforts to

permit and require any Indemnitor to honor and perform all of the applicable

terms of this Agreement and the other Surety Credit Documents;

 

      WHEREAS, each of Indemnitors has determined that execution, delivery, and

performance of this Agreement by Indemnitors will inure directly to the benefit

of Indemnitors and is in the best interest of Indemnitors;

 

      WHEREAS, upon the express condition that this Agreement be executed,

Surety has executed or procured or will execute or procure the execution of the

Bonds, and Surety may continue previously executed Bonds and may forbear

cancellation of such Bonds in Surety's sole and absolute discretion but only to

the extent provided for in such Bonds or permitted by law; and

 

      WHEREAS, Surety has agreed to act as surety or procure surety bonds for

Principal, subject to the understanding of the parties that Surety is under no

obligation to act as surety for every bond of Principal, and that Principal is

under no obligation to obtain bonds from Surety.

 

      NOW, THEREFORE, in consideration of the mutual agreements set forth

herein, the parties agree and bind ourselves, and our respective successors and

assigns, jointly and severally, as follows:

 

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      1. Definitions. For the purposes of this Agreement, the following terms

will have the meanings listed below:

 

      "Accounts" means and includes all of Indemnitors' now owned or hereafter

acquired accounts (as defined in the UCC) and (whether included in such

definition) accounts receivable; and proceeds, including without limitation, all

insurance proceeds, proceeds of any letter of credit on which any Indemnitor is

a beneficiary, in each case solely to the extent such accounts, accounts

receivable, and proceeds arise out of a Bonded Contract, including, but not

limited to, Retainage, and all forms of obligations whatsoever owing to any

Indemnitor under instruments and documents of title constituting the foregoing

or proceeds thereof; and all rights, securities, and guarantees with respect to

each of the foregoing.

 

      "Affiliate" means, with respect to any Person, any other Person or group

acting in concert with respect of such Person that, directly or indirectly,

through one or more intermediaries, controls, or is controlled by, or is under

the common control with such Person. For purposes of this definition, "control"

(including, with correlative meanings, the terms "controlled by" and "under

common control with"), as used with respect to any Person or group of Persons,

means the possession, directly or indirectly, of the power to direct or cause

the direction of management and policies of such Person, whether through the

ownership of voting securities or by contract or otherwise. Each of Indemnitors

is an Affiliate of each other of Indemnitors. None of Indemnitors is an

Affiliate of Surety.

 

      "Agreement" or "this Agreement" means this Underwriting, Continuing

Indemnity, and Security Agreement as it may be amended, modified or supplemented

from time to time.

 

      "Bankruptcy Code" means Title 11 of the United States Code entitled

"Bankruptcy," as now and hereafter in effect, or successor statute.

 

      "Bonded Contract" means any existing or future contract in respect of

which any Bond is issued on behalf of any Principal.

 

      "Bonded Contract Balances" means all payments made, or to be made, to or

on behalf of any Principal pursuant to, arising out of, or relating to any

Bonded Contract, including, without limitation, whether earned and unpaid or to

be earned, Retainage, increases in contract amounts and payments made, or to be

made, as a result of affirmative claims.

 

      "Bonded Job Site" means the site where a Principal is to perform the Work

related to a Bonded Contract.

 

      "Bonds" means any surety agreements, undertakings, or instruments of

guarantee signed by Surety on behalf of any Principal, whether executed before

or after the execution of this Agreement.

 

      "Collateral" means the Bonded Contracts and other collateral described in

Section 6.

 

      "Debt" means, as of any applicable date of determination and as to any

Person, without duplication, all items of indebtedness, obligation, or liability

of such Person, whether matured or

 

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unmatured, liquidated or unliquidated, direct or indirect, absolute or

contingent, joint or several, that would be classified and presented as a

liability on a balance sheet prepared in accordance with GAAP.

 

      "Default Rate" means on each day of its determination the prime rate

reflected in the Money Rates section of The Wall Street Journal plus two percent

(2%).

 

      "Equipment" means all of Indemnitor's now owned or hereafter acquired

right, title, and interest with respect to equipment (as defined in the UCC) and

(whether or not included in such definition) all other personal property in each

case which is delivered to, prefabricated for, or specifically ordered for a

Bonded Job site, whether or not the same will be deemed to be affixed to, arise

out of, or relate to any real property, together with all accessions thereto.

 

      "Event of Default" means any one or more of the following:

 

      (a) Principal, Indemnitors, or any of them have failed or refused in a

material respect to perform any obligation to Surety; provided, however, the

foregoing will not be deemed an Event of Default hereunder if such failure or

refusal is curable and such cure is effected within ten (10) days following the

earlier of (i) receipt by Indemnitors of notice from Surety of any such failure

or refusal, or (ii) knowledge by Indemnitors of the occurrence of any such

failure or refusal; or

 

      (b) any representation or warranty made or deemed made by any Indemnitor

in this Agreement or any other Surety Credit Document, or which is contained in

any certificate, document, opinion, or financial or other statement furnished

under or in connection with any Surety Credit Document, proves to have been

incorrect in a material respect on or as of the date made or deemed made;

provided, however, Principal will have the right to cure an Event of Default

under this item (b) by delivering to Surety cash in an amount designated by

Surety, in its sole and absolute discretion, within ten (10) days of written

demand having been made by Surety for such delivery. In the event that Surety

determines it is obligated to discharge any performance bond claim before making

such demand (or the expiration of such ten (10) day period), said action will

not operate as a defense to Surety's rights under this Agreement; provided,

however, that such action by Surety will not be an Event of Default under this

Agreement if Indemnitors fully indemnify Surety within ten (10) days of receipt

of any demand by Surety for indemnification; or

 

      (c) an Obligee under a Bonded Contract has declared any Principal to be in

default under such Bonded Contract and such Principal has failed to cure such

default within any cure period provided in such Bonded Contract and as a result

of such default Obligee has made a claim under a Bond, or any Principal has

acknowledged its default under any Bonded Contract irrespective of whether such

Principal is actually in default of the Bonded Contract. It will be no defense

to the enforcement of this Agreement by Surety that any Principal asserts that

it is not in default under the Bonded Contract; or

 

      (d) Surety incurs any Surety Loss (excluding items payable pursuant to

paragraph (b) of the definition of Surety Loss and other attorneys fees and

similar fees and professional fees incurred in the ordinary course of business

that are promptly reimbursed to Surety by

 

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Indemnitors); provided, however, Principal will have the right to cure an Event

of Default under this item (d) by delivering to Surety cash in an amount

designated by Surety, in its sole and absolute discretion, within ten (10) days

of written demand having been made by Surety for such delivery; or

 

      (e) if Surety is required or deems it necessary to establish a Reserve in

any amount to cover any anticipated or actual loss on any Bond; provided,

however, Principal and Indemnitors will have the right to cure any such Event of

Default under this item (e) by delivering to Surety cash in an amount equal to

such Reserve so established within ten (10) days of such written notice having

been made by Surety; or

 

      (f) any Principal has failed or refused to pay when due or is unable to

pay when due claims, bills, or other Debt incurred in, or in connection with,

the performance of any Bonded Contract, and Principal has failed to deliver to

Surety an amount sufficient to discharge any claim or demand made against Surety

with respect to such Bond within ten (10) days of written demand having been

made on Indemnitors by Surety in respect of such claim or demand. In the event

that Surety determines it is obligated to discharge any Bond claim resulting

from such failure or refusal to pay prior to any cure by Principal or Indemnitor

before the foregoing demand by Surety is made on Indemnitors, said action will

not operate as a defense against any of Surety's rights under this Agreement;

provided, however, that such action by Surety will not result in an Event of

Default under this Agreement if Indemnitors fully indemnify Surety within ten

(10) days of receipt of any demand by Surety for indemnification in respect of

all amounts incurred in respect of such action; or

 

      (g) Principal defaults under any banking facility or other credit

agreement to which Principal is a party in respect of any Debt having an

aggregate principal amount of more than Fifteen Million Dollars ($15,000,000)

which results in (i) acceleration of the Debt thereunder, or (ii) the

foreclosure or notice of foreclosure by the lenders thereunder or applicable

agent on behalf of such lenders of the collateral that secures such Debt

thereunder; or

 

      (h) Principal defaults under any banking facility or other credit

agreement to which Principal is a party in respect of any Debt having an

aggregate principal amount of more than Fifteen Million Dollars ($15,000,000)

which results in such lenders materially limiting the availability of the credit

facility for the business operations of Principal; provided, however, the

foregoing will not be deemed an Event of Default hereunder if such event is

cured within thirty (30) days of the occurrence of said event; or

 

      (i) the commencement of proceedings in bankruptcy, or for reorganization

of any Principal or Indemnitors, or for the readjustment of Debt of any

Principal or Indemnitors, in each case under the Bankruptcy Code, or any part

thereof, or under any other laws, whether state or federal, for the relief of

debtors, now or hereafter existing, by or against any Principal or Indemnitors

and any such proceedings commenced against any Principal or Indemnitors are not

dismissed, discharged, or stayed within sixty (60) days of filing; or

 

      (j) the appointment of a receiver or trustee for any Principal or

Indemnitors or for any substantial part of their assets, or the institution by a

Person other than any Principal or any Indemnitor or any Person acting on their

behalf of any proceedings for the dissolution or the full or

 

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partial liquidation of any Principal or Indemnitors and such proceedings are not

dismissed, discharged, or stayed within sixty (60) days of filing, or any of

Principal or Indemnitors will discontinue their business or materially change

the nature of their business; or

 

      (k) any of Principal or Indemnitors allow a judgment creditor to obtain

possession of any of the Collateral by any means, including, but without

limitation, levy, distraint, replevin, or self-help, and (i) such possession

continues for five (5) days after written notice thereof to Principal and

Indemnitors from Surety, or (ii) Principal will have failed to cure an Event of

Default under this item (d) by delivering to Surety cash in an amount designated

by Surety, in its sole and absolute discretion, within ten (10) days of written

demand having been made by Surety for such delivery; or

 

      (l) failure to pay any Bond premiums due and payable to Surety.

 

      "Existing Pledged Collateral" means that certain cash collateral in the

aggregate original principal amount of Seventeen Million Five Hundred Thousand

Dollars ($17,500,000) (and all interest, proceeds, and substitutions therefore)

delivered to Surety pursuant to that certain Interim Pledge Agreement dated

September 9, 2004, Integrated Electrical Services, Inc., as Pledgor, in favor of

Surety, as modified by First Amendment to Interim Pledge Agreement dated October

6 , 2004, as further amended by Second Amendment to Interim Pledge Agreement

dated October 12, 2004, as further amended by Third Amendment to Interim Pledge

Agreement dated November 3, 2004, and as restated by that certain Restated

Pledge Agreement of even date by Integrated Electrical Services, Inc. in favor

of Surety.

 

      "GAAP" means generally accepted accounting principles in the United States

of America, as set forth in the opinions and pronouncements of the Accounting

Principles Board and the American Institute of Certified Public Accountants and

statements and pronouncements of the Financial Accounting Standards Board,

consistently applied.

 

      "Indebtedness" means, without duplication, any and all Surety Loss, and

the payment and performance of all other obligations and undertakings now or

hereafter owing to Surety with respect to the Bonds and/or under the Surety

Credit Documents, as same may now or hereafter be modified, replaced, extended,

or renewed, in accordance with their terms.

 

      "Indemnitors" means Integrated Electrical Services, Inc., a Delaware

corporation, certain of its Affiliates and Subsidiaries listed on Exhibit B, any

Affiliate or Subsidiary that is a named Principal on any Bond, and any new

Indemnitor added to this Agreement by rider as provided in Section 52, and all

of their successors and assigns.

 

      "Indemnity Agreement" means and includes that certain General Agreement of

Indemnity dated January 9, 1998, executed by Integrated Electrical Services,

Inc. on its behalf and on behalf of any of its subsidiaries or on behalf of any

subsidiary of a subsidiary or successive subsidiaries, direct or indirect, now

existing or hereafter created, in favor of Surety, and that certain General

Agreement of Indemnity dated September 9, 2004, executed by Integrated

Electrical Services, Inc., Anderson & Wood Construction Co., Inc., Kayton

Electric, Inc., Bryant Electric Company, Inc., Pan American Electric, Inc., DKD

Electric Company, Inc., Mills Electric LP d/b/a Mills Electrical Contractors,

H.R. Allen, Inc., and T&H Electrical Corporation in favor of Surety.

 

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"Inventory" means and includes all of Indemnitors' now owned and hereafter

acquired inventory, including, without limitation, goods, merchandise, and other

personal property furnished under any contract of service, Bonded Contract, or

intended for sale or lease, all raw materials, work in process, finished goods

and materials, and supplies of any kind, nature, or description which is

delivered to, prefabricated for, or specifically ordered for a Bonded Job Site.

 

      "Licensed Property" means all proprietary systems, software, or any other

assets of a similar nature which are employed by Principal in connection with

any and all contractual work referred to in the Bonded Contracts and/or the

Bonds; any and all inventions, designs, patents, patent applications,

trademarks, trademark applications, trade names, trade secrets, registrations,

copyrights, licenses, franchises, customer lists, and any associated goodwill

that is associated with or required for the completion of any Bonded Contract

and/or the fulfillment of any of Surety's obligations under the Bonds.

 

       "Lien" means any mortgage, deed of trust, pledge, security interest,

hypothecation, assignment, deposit arrangement to assure payment of any debt,

encumbrance, lien (statutory or other), or preference, priority, or other

security agreement, or preferential arrangement to assure payment of any debt,

charge, or encumbrance of any kind or nature whatsoever (including, without

limitation, any conditional sale or other title retention agreement, any

financing lease having substantially the same economic effect as any of the

foregoing, and the filing of any financing statement under the UCC or comparable

law of any jurisdiction to evidencing any of the foregoing).

 

      "Material Adverse Effect" means, relative to any occurrence of whatever

nature (including the adverse determination in any litigation, arbitration, or

governmental investigation or proceeding), (a) a material adverse effect on the

financial condition, business, or business operations of Principal and

Indemnitors taken as a whole, or (b) a material impairment of the collective

ability of Principal and Indemnitors taken as a whole to satisfy their

respective obligations to Surety under the Surety Credit Documents, or (c) a

material adverse effect upon the enforceability against Principal and

Indemnitors of Surety's security interest in the Collateral.

 

      "Obligee" means any named party or parties appearing on any Bond(s) in

whose favor the Bond(s) are issued, or such parties' successors and permitted

assigns.

 

      "Overhead" means the general operating and administrative expenses of any

Indemnitor, including, but not limited to, the cost of rent, utilities, taxes,

governmental charges, and all other expenses of any Indemnitor not allocated to

a specific Bonded Contract.

 

      "Permitted Liens" means:

 

      (a) Liens for taxes, assessments, or governmental charges not yet past due

or that are being contested in good faith by appropriate proceedings and for

which adequate reserves have been established in accordance with GAAP;

 

      (b) mechanics', workmen's, materialmen's and repairmen's Liens or other

Liens arising by operation of law in the ordinary course of business, or

pursuant to customary reservations or retentions of title arising in the

ordinary course of business, of any Indemnitor

 

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securing obligations that are not past due, or if past due contested in good

faith by appropriate proceedings and that are unfiled and no other action has

been taken to enforce the same;

 

      (c) any Lien granted on their assets by Indemnitors to Surety to secure

the payment of Surety Loss;

 

      (d) Liens in connection with workers' compensation, unemployment insurance

or other social security, old age pension or public liability obligations not

yet due or which are being contested in good faith by appropriate proceedings

and for which adequate reserves are maintained in accordance with GAAP;

 

      (e) statutory Liens of landlords, and Liens of carriers, warehousemen or

suppliers, or other similar possessory Liens arising in the ordinary course of

business; provided, that, the holder of such possessory Lien does not exercise

any foreclosure right to enforce its Lien;

 

      (f) deposits securing, or in lieu of, any surety, appeal, or custom bonds

in proceedings to which any Indemnitor is a party, bids, trade contracts and

leases, statutory obligations, performance bonds and other obligations of a like

nature, and Liens securing judgments for the payment of money (or appeal or

other surety bonds relating to such judgments);

 

      (g) Liens existing on the date hereof and any renewals and extensions

thereof which Liens are described on the attached Exhibit C and any replacement,

refinancing, renewal, or extension of any such Lien in the same property

theretofore subject arising out of the extension, renewal, replacement, or

refinancing of the Debt secured thereby;

 

      (h) common law rights of offset and contractual rights of offset arising

in the ordinary course of business;

 

      (i) any common law or contractual security interest of a surety in the

actual proceeds of a project subject to the underlying bond provided by such

surety;

 

      (j) any other Liens pursuant to any Surety Credit Document;

 

      (k) normal and customary rights of setoff upon deposits of cash in favor

of banks or other depository institutions;

 

      (l) Liens of a collection bank arising under Section 4-210 of the UCC on

items in the course of collection;

 

      (m) Liens of sellers of goods to Principal or any Indemnitor arising under

Article 2 of the UCC or similar provisions of applicable law in the ordinary

course of business, covering only the goods sold and securing only the unpaid

purchase price for such goods and related expenses.

 

      (n) purchase money security interest Liens arising under Article 9 of the

UCC or similar provisions of applicable law in the ordinary course of business,

covering only the goods purchased and securing only the unpaid purchase price

for such goods and related expenses, which are not past due;

 

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      (o) any interest of title of a lessor under, and Liens arising from UCC

financing statements (or equivalent filings, registrations or agreements in

foreign jurisdictions) relating to, leases or short term rentals not prohibited

by this Agreement; and

 

      (p) leases or subleases granted to others not interfering in any material

respect with the business of Principal or any Indemnitor.

 

      "Person" means any individual or entity, whether a trustee, corporation,

partnership, limited liability company, joint stock company, unincorporated

organization, business association or firm, joint venture, a government or any

agent or instrumentality or political subdivision thereof.

 

      "Principal" means Integrated Electrical Services, Inc., a Delaware

corporation, certain of its Affiliates and Subsidiaries listed on Exhibit A and

any other Affiliates and Subsidiaries of Integrated Electrical Services, Inc.

for whom Surety executes Bonds, in each case in their respective capacity as a

named principal under any Bond, and any new Principal added to this Agreement by

rider as provided in Section 52, and any joint ventures in which one or more of

them are involved for which any Bond is issued.

 

      "Records" means correspondence, memoranda, tapes, books, discs, papers,

magnetic storage, and other documents or information of any type, whether

expressed in ordinary or machine language relating to any Bonded Contract or

Collateral.

 

      "Reserve" means a sum of money that may be set aside by Surety to pay its

present and future liabilities under Bonds.

 

      "Retainage" means contract proceeds periodically withheld by an Obligee to

provide further security for Principal's performance of a Bonded Contract, and

as such are payable to Principal only upon a clear demonstration of compliance

with the terms of the Bonded Contract.

 

      "Subsidiaries" means, with respect to any Person, any corporation, limited

liability company, partnership, or other entity wherein such Person owns or

acquires, directly or indirectly, more than fifty percent (50%) of the issued

and outstanding voting stock, voting securities, or other equity interest of

such corporation, partnership, or other entity, or any other corporation,

partnership or other entity the management of which is otherwise controlled,

directly or indirectly, through one or more intermediaries, or both, by any such

Person.

 

      "Surety" means Federal Insurance Company, an Indiana corporation, its

Affiliates and Subsidiaries and any other companies writing Bonds for which this

Agreement is consideration (and other companies from whom Surety procures Bonds

for Principal), and their co-sureties and reinsurors, and their respective

successors and permitted assigns.

 

         "Surety Credit Documents" means the following: (i) the Bonds; (ii) the

Indemnity Agreement; (iii) this Agreement; (iv) UCC Financing Statements listing

any of Indemnitors as debtor and Surety as secured party; (v) any intercreditor

agreement by and between Surety and any banking institution; (vi) Interim Pledge

Agreement dated September 9, 2004, Integrated

 

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Electrical Services, Inc., as Pledgor, in favor of Surety, as modified by First

Amendment to Interim Pledge Agreement dated October 6, 2004, as further modified

by Second Amendment to Interim Pledge Agreement dated October 12, 2004, as

further modified by Third Amendment to Interim Pledge Agreement dated November

3, 2004, as restated by that certain Restated Pledge Agreement of even date by

Integrated Electrical Services, Inc. in favor of Surety; and (vii) all

amendments, modifications, extensions, additions, substitutions, or other

documents hereafter executed or delivered by any of Indemnitors, which relate to

any of the foregoing documents.

 

      "Surety Loss" means:

 

      (a) all damages, costs, reasonable attorney fees, and liabilities

(including all expenses incurred in connection therewith) which Surety may

sustain or incur by reason of executing or procuring the execution of any Bonds,

or any other bonds, which may be already or hereafter executed on behalf of any

Principal, or renewal or continuation thereof; or which may be sustained or

incurred by reason of making any investigation on account thereof, prosecuting

or defending any action in connection therewith, obtaining a release,

recovering, or attempting to recover any salvage in connection therewith or

enforcing by litigation or otherwise any of the provisions of this Agreement,

including, but not limited to:

 

            (1) money judgments, amounts paid in settlement or compromise, the

full amount of reasonable attorney and other professional fees incurred or paid

by Surety, including without limitation allocated costs of in-house counsel,

accountants, and engineers, court costs and fees, and interest at the Default

Rate on all sums due it from the date of Surety's demand for said sums, whether

interest has been awarded by a court;

 

            (2) any loss which Surety may sustain or incur as a result of any

Bonded Contract or any Bonds, whether that loss results from any activity of any

Principal individually or as part of a joint venture, partnership, or other

entity which has been or may be formed;

 

            (3) any loss which Surety may sustain or incur as a result of any

actions taken by Surety upon information provided by any Indemnitor with respect

to the issuance of any Bonds;

 

            (4) any Bond premiums due Surety;

 

            (5) any amounts that have been paid to Surety to be applied to

Surety Loss that a court of competent jurisdiction determines constitute

"preferences," within the meaning of Section 547 of the Bankruptcy Code, and by

reason thereof Surety is required to disgorge said amounts paid; and

 

      (b) legal, accounting, consulting, and related fees and expenses

reasonably incurred after January 31, 2005, in connection with the Bonds, the

Surety Credit Documents, and/or any application or submission by any of

Indemnitors for the issuance of any Bond or renewal of any existing Bond,

whether or not Surety decides to issue said Bond. Notwithstanding the foregoing,

Indemnitors will be required to reimburse Surety for one hundred percent (100%)

of any filing fees and recording taxes incurred to perfect and continue Surety's

security interest in the Collateral regardless of when those fees are incurred.

 

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      "UCC" means the Uniform Commercial Code as in effect on the date hereof in

Texas, as it may be amended from time-to-time provided that if by reason of

mandatory provisions of law, the perfection or the effect of perfection or

non-perfection of a security interest in any Collateral is governed by any state

other than Texas, "UCC" means the Uniform Commercial Code as in effect in such

other jurisdiction for purposes of the provisions hereof relating to such

perfection or effect of perfection or non-perfection.

 

      "Work" means the specialized electrical and communication services

required of any Principal by any Bonded Contract, whether completed or partially

completed, of such Principal, and includes all other labor, materials,

equipment, and services provided or to be provided by Principal to fulfill such

Principal or Indemnitor's obligations pursuant to such Bonded Contract.

 

      Any collective defined term and any defined term used in the plural will

be taken to encompass individually and collectively all members of the relevant

class. Any defined term used in the singular preceded by "any" will be taken to

indicate any number of the members of the relevant class. Any defined term used

in the singular and preceded by the word "each" will indicate all members of the

relevant class, individually.

 

      2. Due Diligence Items Required to be Delivered by Indemnitors.

Indemnitors will deliver to Surety each of the following, in form and substance

satisfactory to Surety and its counsel:

 

            (a) Favorable opinion of counsel to Principal and Indemnitors in

form acceptable to Surety and its counsel, opining as to the validity and

enforceability of the documents entered into between and among Surety and

Indemnitors and opining to the perfection of the security interests of Surety in

the Collateral. Said enforceability opinion will include an opinion that

Integrated Electrical Services, Inc. is duly formed and that Indemnitors are

validly existing, the execution and delivery of the documents, the fulfillment

of the respective terms and conditions thereof, and the consummation of the

respective transactions contemplated thereby will not violate any provisions of

applicable law or any applicable order or regulation of any court or public

governmental agency, and will not conflict with or constitute a breach a default

under the charter of incorporation, bylaws, or other governing documents of any

of Indemnitors, as amended, or any material agreement, indenture, or other Debt

instrument to which any of Indemnitors are a party or by which any of

Indemnitors are bound, or any law, ordinance, administrative regulation, or

decree of court, that is applicable to any of Indemnitors;

 

            (b) an officer's certificate of each of Indemnitors certifying

appropriate resolutions authorizing the execution, delivery, and performance of

the applicable Surety Credit Documents, certifying that such resolutions have

been approved in accordance with each of Indemnitors' governing documents, and

certifying incumbencies and true signatures of the officers so authorized;

 

            (c) evidence of the good standing of each of Indemnitors in the

jurisdiction in which such Indemnitor is formed; and

 

            (d) such other information and documents as may reasonably be

required by Surety.

 

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      Contemporaneously with the execution of this Agreement, Principal will pay

Surety a facility fee in the amount of Four Hundred Thousand Dollars ($400,000).

Surety hereby acknowledges receipt of Three Hundred Thousand Dollars ($300,000)

of this Four Hundred Thousand Dollars ($400,000) facility fee in conjunction

with the execution of that certain First Amendment to Interim Pledge Agreement

dated October 6, 2004, and that certain Third Amendment to Interim Pledge

Agreement dated November 3, 2004. The delivery of said facility fee will not

reduce Surety Loss, or otherwise affect Surety's rights under the Indemnity

Agreement or any other of the Surety Credit Documents.

 

      3. Bonds; Conditions Precedent to all Bonds. Subject to the terms of this

Agreement, and so long as no Event of Default has occurred and is continuing,

Surety is willing to consider the extension of additional surety credit for the

purposes set out in this Agreement. Surety reserves the right to decline to

execute any and all bonds, in Surety's sole and absolute discretion, and if

Surety executes any Bond, Surety will not be obligated to expand or renew any

such Bond. No claim will be made, nor any cause of action asserted against

Surety as a consequence of its failure to execute any bond(s). Whether to

approve or disapprove any application of any Principal for surety credit and

issue bonds in response thereto will be determined on a case by case basis and

is within Surety's sole and absolute discretion. Without limiting the generality

of the foregoing, Indemnitors specifically acknowledge and confirm Surety's

right to decline execution of any bond, or all bonds, as set forth in this

Agreement.

 

      Without limiting the generality of the foregoing, the determination of

Surety in its sole and absolute discretion, to issue any Bond will be subject to

the further conditions precedent that on the date of such issuance each of the

following conditions will be satisfied, in the sole and absolute discretion of

Surety:

 

            (a) The following statements will be true and, by its request for

the issuance of such Bond, Indemnitors will be deemed to have certified to

Surety that as of the date of such issuance:

 

                  (1) the representations and warranties contained in this

Agreement and the Surety Credit Documents are correct in all material respects

on and as of the date of such issuance as though made on and as of such date,

except to the extent that such representations and warranties specifically refer

to an earlier date, in which case they are true and correct as of such earlier

date; and

 

                  (2) no Event of Default has occurred and is continuing, or

would result from the issuance of such Bond.

 

            (b) Surety will have received such other approvals, opinions, or

documents as Surety may reasonably request.

 

            (c) Any banking or other financial institutions that have any

interest in the Collateral will have entered into an intercreditor agreement

with Surety which will address: (i) the release of the security interest of any

bank or other financial institution in the Collateral and Surety's first

priority security interest in the Collateral; and (ii) provisions addressing the

release of Indemnitors as described in Section 4.

 

                                       11

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            (d) Any request for a Bond will contemplate any of Indemnitors being

named as the principal.

 

            (e) Surety will be the holder of a first priority security interest

in the Collateral subject only to Permitted Liens.

 

      4. Indemnity; Exoneration; Release of Indemnitor. Integrated Electrical

Services, Inc. has full right and authority to execute any and all current or

future documents and/or amendments on behalf of any Principals and Indemnitors

without requiring the separate signature of any such Principal and Indemnitors.

Although execution will not be necessary to bind any such Affiliate or

Subsidiary or other such Person as an Indemnitor hereunder, at the request of

Surety, Indemnitors will cause any such Affiliate or Subsidiary or other such

Person to execute this Agreement. Said Affiliates and Subsidiaries and such

other Person will be deemed to be an Indemnitor hereunder as though they were

original signatories hereto. Indemnitors agree to indemnify, and keep

indemnified, and hold and save harmless Surety against all Surety Loss. The duty

of Indemnitors to indemnify Surety is a continuing duty, separate from the duty

to exonerate, and survives any payments made in exoneration of Surety. Amounts

due Surety (together with interest at the Default Rate) will be payable upon

written demand.

 

      Indemnitors recognize and acknowledge the common law right of Surety to be

exonerated by Indemnitors. Upon a Surety Loss, in the event Indemnitors fail or

refuse to exonerate Surety upon written demand, all Indemnitors agree, upon

demand by Surety, to exonerate Surety from Surety Loss, by satisfying

Indemnitors' obligations under the Bonded Contracts and obtaining either a

withdrawal of all claims against Surety under the Bonds or a general release.

 

      Principal will pay Surety's reasonable legal, accounting, consulting and

related fees and expenses reasonably incurred after October 31, 2004, in

connection with the Bonds, the Surety Credit Documents, and/or any application

or submission by any of Indemnitors for the issuance of any Bond or renewal of

any existing Bond, whether or not Surety decides to issue said Bond.

Notwithstanding the foregoing, Indemnitors will be required to reimburse Surety

for one hundred percent (100%) of any filing fees and recording taxes incurred

and required to perfect and continue Surety's security interest in the

Collateral regardless of when those fees are incurred.

 

      In order to facilitate the sale of the equity of any Principal or the

Collateral (other than the transfer of Inventory or Equipment that is required

pursuant to the terms of any Bonded Contract to be transferred to any Obligee on

any Bond (or any assignee of such Obligee or any other owner, or assignee of any

owner, of the Work) upon completion or termination of the Work in the ordinary

course of business, as to which no release is necessary) of any Principal and

Indemnitor (exclusive of Integrated Electrical Services, Inc.: (i) in the event

the sale is of the equity or of any such Collateral of any Indemnitor that is

not also a Principal under any outstanding Bonds and provided, that, the sales

proceeds are remitted to and used in the ordinary course of business of the

continuing Indemnitors, then Surety will upon request of any such Indemnitor (y)

in the event the sale is of the equity interest, release such Indemnitor from

its guaranty and other obligations (including the pledge of its assets as

collateral)of any such Surety; and (z) in the event the sale is of Collateral,

release such Collateral as collateral; and (ii) in the event the sale is of the

equity or of any Collateral (other than the transfer of Inventory or

 

                                       12

<PAGE>

 

Equipment that is required pursuant to the terms of any Bonded Contract to be

transferred to any Obligee on any Bond (or any assignee of such Obligee of any

other owner, or assignee of any owner, of the Work) upon completion or

termination of the Work in the ordinary course of business, as to which no

release is necessary) of any Principal under any outstanding Bonds and provided,

that, the sales proceeds are remitted to and used in the ordinary course of

business of the continuing Indemnitors, then Surety will upon request of any

such Principal (y) in the event the sale is of equity interest, release such

Principal from its guaranty and other obligations (including the pledge of its

assets as collateral) with respect to the Bonds issued by Surety for the other

Principals and Indemnitors; and (z) in the event the sale is of any such

Collateral release such Collateral as collateral with respect to Bonds issued by

Surety for the other Principals and Indemnitors; provided, that, in each of (y)

and (z) (a) such Principal continues as an Indemnitor with respect to all Bonds

issued on behalf of such Principal and Surety will retain all Collateral of such

Principal to secure all Surety Loss and other obligations on such Bonds; (b)

Surety is provided with the indemnity of a Person(s), acceptable to Surety in

its sole and absolute discretion, with respect to all Bonds issued on behalf of

such Principal and such new indemnitor(s) executes an indemnity agreement in

favor of Surety, in a form that is acceptable to Surety, in its sole and

absolute discretion; and (c) all Bonds other than payment and performance Bonds

are replaced within ninety (90) days of the sale. Notwithstanding the foregoing,

the provisions of this paragraph will not require Surety to release: (x) the

Existing Pledged Collateral; (y) any Proceeds of Collateral that are required to

be delivered to Surety or to any separate account following an Event of Default;

and (z) any cash delivered to Surety pursuant to the terms of this Agreement.

 

      5. Security Interest; Obligation Secured. To secure payment or other

performance of any and all Surety Loss, and the payment and performance of all

other obligations and undertakings now or hereafter owing to Surety with respect

to the Bonds and/or under the Surety Credit Documents, as same may now or

hereafter be modified, replaced, extended, or renewed, Indemnitors hereby grant

to Surety a perfected first priority (subject to Permitted Liens) security

interest in the Collateral. The security interest created herein will attach

without the execution or delivery to Surety of any instruments, documents,

assignments, or other agreements of transfer, and in the event any such

instruments, documents, or other agreements of transfer are or will be delivered

to Surety, the same are and will be in furtherance of and in addition to the

security interest created by virtue of this Agreement. As additional security

for any and all Surety Loss, Indemnitors have caused to be delivered to Surety

and named Surety as the beneficiary of that certain Irrevocable Letter of Credit

No. CLS420168 dated April 26, 2004, issued by Bank One, N.A. in the face amount

of Five Million Dollars ($5,000,000), and have pledged to Surety the Existing

Pledged Collateral.

 

      Indemnitors will at all times keep Surety's security interest properly

perfected and hereby designate Surety as their attorney in fact to do any acts

or deeds or execute such documents reasonably appropriate to accomplish said

perfection. Said designation will be irrevocable as long as any obligation of

any of Indemnitors to Surety under this Agreement and/or any of the Surety

Credit Documents is outstanding. The right is expressly granted to Surety, at

Surety's discretion, to file in those jurisdictions where the same is permitted,

one or more financing statements under the UCC and indicating therein the types

or describing the items of the Collateral. Without the prior written consent of

Surety, none of Indemnitors will, after the date hereof, file or authorize or

permit to be filed in any jurisdiction any financing or like statement

 

                                       13

<PAGE>

 

relating to the Collateral other than filings of Permitted Liens. Surety's

security interest will be first and prior to any other Liens on the Collateral

except for Permitted Liens. Surety reserves all rights to contest the validity

or priority of any Lien.

 

      If any Accounts constituting Collateral should be evidenced by promissory

notes, trade acceptances, or other instruments for the payment of money,

Indemnitors promptly will deliver the same to Surety appropriately endorsed to

the order of Surety. Regardless of the form of each endorsement, Indemnitors

hereby waive presentment, demand, notice of dishonor, protest, and notice of

protest, and all other notices with respect thereto, except as required by this

Agreement.

 

      At any time, and at reasonable intervals, upon the request of Surety,

Indemnitors will: (a) give, execute, deliver, file, and/or record any notice,

statement, instrument, document, agreement, or other papers that may be

necessary or desirable, or that Surety may reasonably request in order to

create, preserve, perfect, or validate any security interest granted herein or

to enable Surety to exercise and enforce its rights hereunder or with respect to

such security interest; and (b) permit Surety or Surety's representatives, at

reasonable intervals during normal business hours, to inspect and make abstracts

from any of Indemnitors' books and records pertaining to the Collateral.

 

      Upon the Indebtedness being paid and satisfied in full, Surety will, with

reasonable promptness, execute all necessary documents and file same in every

jurisdiction in which the security agreement or any Surety Credit Document was

filed to effectuate a termination of said security agreement and all Liens

evidenced thereby.

 

      6. Set Off Rights; Description of Collateral. Indemnitors confirm and

acknowledge that Surety has the right to set off against Surety Loss any and all

amounts that may be owing from time to time by Surety to any Indemnitor in any

capacity, including, but without limitation, any balance or share belonging to

any Indemnitor of any deposit or other account with Surety. The Collateral

includes all of any Principal's or Indemnitor's right, title, and interest in

and to all existing and future Bonded Contracts and associated contract rights;

Accounts; all claims, rights, and choses in action against any Obligee on any

Bond or against any other Person with respect to any Bond or Bonded Contract;

Bonded Contracts Balances; to the extent assignable (provided, that, any such

prohibition on assignment would not be rendered ineffective pursuant to Article

9 of the UCC, including, without limitation Section 9-406 and 9-408 of the UCC,

or any successor provisions and further, provided, that, any such prohibition on

assignment has not otherwise been rendered ineffective, lapsed, or terminated)

all rights and actions that any Indemnitor may have or acquire in any

subcontract, purchase order, or other agreement in connection with any Bonded

Contract, and against any subcontract, purchase order, or other agreement with

any Person furnishing or agreeing to furnish or supply vehicles, labor,

supplies, machinery, or other inventory or equipment in connection with or on

account of any Bonded Contract, and against any surety or sureties of any such

subcontractor, laborer, or other Person; any and all Equipment; any and all

Inventory; any and all books, accounts, computer software, and other computer

stored information, and any and all drawings, plans, specifications, shop and as

built drawings, utilized in or necessary to fully perform all obligations and

services required of Principal under the Bonded Contracts; all progress

schedules, work in process schedules (including, but not limited to, estimates

of completion costs), accounts receivable ledgers, accounts payable ledgers, and

 

                                       14

<PAGE>

 

estimates of completion costs relating to any and all Bonded Contracts; and any

and all proceeds and products arising with respect thereto.

 

      Anything herein to the contrary notwithstanding, (i) Indemnitors will

remain liable under any contracts and agreements included in the Collateral,

solely to the extent set forth therein, to perform all of their duties and

obligations thereunder to the same extent as if this Agreement had not been

executed, (ii) the exercise by Surety of any of the rights hereunder will not

release any Indemnitor from any of its duties or obligations under the contracts

and agreements included in the Collateral, and (iii) Surety will not have any

obligation or liability under any contracts and agreements included in the

Collateral by reason of this Agreement, nor will Surety be obligated to perform

any of the obligations or duties of Indemnitor thereunder or take any action to

collect or enforce any claim for payment assigned hereunder.

 

      7. Representations and Warranties. Indemnitors hereby warrant, covenant,

and represent that:

 

            (a) Indemnitors are the exclusive owners of the Collateral and have

good and marketable title to the Collateral and that on the date of this

Agreement the Collateral is free of any and all Liens (excluding Permitted

Liens).

 

            (b) Until such time as all of the Indebtedness has been paid and

satisfied in full, none of Indemnitors will sell, transfer, convey, or assign

any of the Collateral without prior written consent of Surety or permit any Lien

on the Collateral (other than Permitted Liens).

 

            (c) If, at any time, the Collateral will be deemed unsatisfactory to

and by Surety or in the event Surety will otherwise deem itself, its security

interests, its Collateral, or its recovery of Surety Loss unsafe or insecure,

then and on demand of Surety, Indemnitors will immediately furnish such further

collateral or make such payment on said account as will be reasonably

satisfactory to Surety to be held by Surety as if originally pledged hereunder.

 

            (d) The current jurisdiction of formation as of the date of this

Agreement, of each of Principal and Indemnitors is correctly reflected on page

one and/or the attached Exhibits A and B, respectively. Indemnitors will notify

Surety of any change in any Indemnitor's name, identity, corporate structure, or

change in jurisdiction in which it is formed or exists thirty (30) days prior to

such change. Indemnitors will not be required to give any additional advance

notice to Surety of the name changes that are contemplated on the attached

Exhibit A, but will give Surety notice of any such name change within ten (10)

days of the effective date of the change.

 

            (e) Indemnitors are not in default with respect to any of their

existing Debt except for such defaults that would not, individually or in the

aggregate, have a Material Adverse Effect, and the making and performance of

this Agreement and the Surety Credit Documents by Principal and Indemnitors will

not (immediately or with the passage of time, the giving of notice, or both):

 

                  (i) Violate the charter, bylaws, or other governing document

provisions of any Indemnitor, or violate any applicable laws or result in a

default under any contract, agreement, or instrument to which any of Indemnitors

is a party or by which any of

 

                                       15

<PAGE>

Indemnitors or their property is bound, except for such violations or defaults

that would not, individually or in the aggregate, have a Material Adverse

Effect; or

 

                  (ii) result in the creation or imposition of any Lien (other

than Permitted Liens) upon any assets of any Indemnitor other than Liens in

favor of Surety.

 

            (f) Indemnitors have the corporate or other power and authority to

enter into and perform this Agreement and the Surety Credit Documents to which

they are a party, and to incur the Indebtedness herein and therein provided for,

and have taken all corporate or other action necessary to authorize the

execution, delivery, and performance of this Agreement and such other Surety

Credit Documents.

 

            (g) This Agreement and each other Surety Credit Document to which

Principal and Indemnitors are a party constitute valid and binding obligations

of such Principal and Indemnitors, and are enforceable against such Principal

and such Indemnitors in accordance with their respective terms.

 

            (h) Each consent, approval, or authorization of, or filing,

registration, or qualification with, any Person required to be obtained by

Indemnitors in connection with the execution and delivery of this Agreement or

the undertaking or performance of any obligation hereunder or thereunder has

been duly obtained, other than any filings to perfect the Liens on the

Collateral.

 

            (i) Indemnitors will promptly pay all of their taxes, assessments,

and other governmental charges prior to the date on which any penalties are

attached thereto, establish adequate reserves for the payment of taxes and

assessments and make all required withholding and other tax deposits; provided,

however, that nothing contained in this Agreement will be interpreted to require

the payment of any tax, assessment, or charge so long as its validity is being

contested in good faith (and for which adequate reserves have been established)

by appropriate proceedings and as to which foreclosure and other enforcement

proceedings will not have been commenced (unless fully bonded or otherwise

effectively stayed).

 

            (j) With regard to the rights with respect to the Bonded Contracts

in which Indemnitors have hereby granted Surety a security interest, Indemnitors

represent and warrant to Surety:

 

                   (i) Such rights arise under one or more existing binding

written contracts between a Principal and the other party or parties thereto, or

will be evidenced by a binding written contract before performance thereunder,

and do or will represent a bona fide transaction, enforceable in accordance with

its terms;

 

                  (ii) The title of such Principal to the Bonded Contracts is

absolute;

 

                  (iii) No rights of any Principal under any Bonded Contracts

have been transferred to any other Person except pursuant to Permitted Liens;

 

                                       16

<PAGE>

 

                  (iv) Indemnitors have not received any prepayment of amounts

due Surety under any Bonded Contracts;

 

                  (v) Indemnitors will not, without the prior written consent of

Surety, permit any material amendment, modification, settlement, compromise, or

extension to any of the Bonded Contracts if such modification, compromise,

settlement, or extension would adversely affect the interests of Surety or

extend the time of any payment required thereunder; and

 

                  (vi) To the best of Indemnitors' knowledge, information, and

belief, all parties to any Bonded Contracts, and other commitments that

constitute Collateral and to which any of Indemnitors are a party, have complied

in all material respects with the provisions of such Bonded Contracts and other

commitments; no party is in default in any material respect under any provision

thereof; and no event has occurred which, but for the giving of notice or the

passage of time, or both, would constitute a default.

 

            (k) Indemnitors have the insurance in force that is usual and

customary for those engaged in the same or similar business of Indemnitors, and

that they will maintain said insurance in force with good and substantial

carriers with insurance companies with an A- rating or better. Indemnitors

further agree to furnish Surety, upon request, with the insurance in force and

with copies of the policies of said insurance evidencing the existence of the

coverage called for by this Agreement. Indemnitors will obtain all necessary

insurance coverages, including, without limitation, workers' compensation,

liability, and other insurance coverages, in the amounts and as required by the

Bonded Contracts that are the subject of the Bonds, protecting itself, Obligees

(as applicable), and, if requested, Surety. Indemnitors will deliver to Surety

copies of Certificates of Insurance showing Surety as an additional insured for

all such insurance policies which Surety has specifically requested that it be

added as an additional insured, except as to professional liability coverages.

 

            (l) None of Indemnitors is insolvent within the meaning of the

Bankruptcy Code.

 

             (m) Principal or Indemnitors will give prompt notice to Surety of

their knowledge of any pending or threatened proceeding or claim before any

court or governmental agency or department which involves a reasonable material

risk of having a Material Adverse Effect.

 

            (n) Indemnitors are in material compliance with all laws, statutes

and governmental rules and regulations applicable to it or them, except for any

failure so to be in compliance which would not reasonably be expected to have a

Material Adverse Effect.

 

            (o) Indemnitors perform minimal work as a party contracting directly

with the Federal Government or any of its agencies and do not anticipate that

changing.

 

            (p) Bonds have been issued in the names of Riviera Electric, LLC,

Riviera Electric LP, Riviera Electric Inc., and Riviera Electric as the named

Principal. Indemnitors represent and warrant to Surety that the proper name of

the entity is Riviera Electric LLC. If

 

                                       17

<PAGE>

 

Surety requests that IES take the necessary steps to correct any Bonded

Contracts and Bonds that may have been issued with the names Riviera Electric,

Riviera Electric LP, or Riviera Electric Inc. to change the name to Riviera