<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended March 31, 1998
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____to____.
Commission File No. 001-13831
QUANTA SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2851603
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
3555 TIMMONS
SUITE 610
HOUSTON, TEXAS 77027
(Address of principal executive offices) (zip code)
Registrant's telephone number, including area code: (713) 629-7600
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [_]
14,560,707 shares of Common Stock were outstanding as of May 14, 1998. As of
the same date, 3,345,333 shares of Limited Vote Common Stock were outstanding.
<PAGE>
QUANTA SERVICES, INC.
INDEX
PART I. FINANCIAL INFORMATION
Page
----
Item 1. Financial Statements
QUANTA SERVICES, INC. PRO FORMA COMBINED
Pro Forma Combined Financial Information........................... 1
Pro Forma Combined Statements of Operations
for the three months ended March 31, 1997 and 1998............. 2
QUANTA SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets........................................ 4
Consolidated Statements of Operations.............................. 5
Consolidated Statements of Cash Flows.............................. 6
Notes to Condensed Consolidated Financial Statements............... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................... 16
Signature............................................................... 17
<PAGE>
QUANTA SERVICES, INC.
PART I, ITEM 1 - FINANCIAL INFORMATION
PRO FORMA COMBINED FINANCIAL INFORMATION
OVERVIEW AND BASIS OF PRESENTATION
Quanta Services, Inc., a Delaware corporation ("Quanta" or the "Company"),
was founded in August 1997 to create a leading provider of specialty electrical
contracting and maintenance services primarily related to electric and
telecommunications infrastructure in North America. In February 1998, Quanta
completed its initial public offering (the "Offering") which involved the
issuance of 5,000,000 shares of common stock (the "Common Stock"), providing
approximately $38.8 million in net proceeds to the Company, after deducting
underwriter discounts and commissions and expenses related to the Offering.
Concurrent with the closing of its initial public offering, Quanta acquired, in
separate transactions (the "Acquisitions"), for consideration including $21.0
million of cash and 7,527,000 shares of Common Stock, the following four
entities (the "Founding Companies"): PAR Electrical Contractors, Inc., Potelco
Inc., TRANS TECH Electric, Inc. and Union Power Construction Company. Also, in
March 1998, the Company's underwriters exercised their over-allotment option to
acquire an additional 750,000 shares of the Company's Common Stock at the
initial public offering price of $9 per share, providing the Company with
approximately $6.3 million (net of underwriting discounts and commissions) of
additional proceeds from the Offering. Quanta intends to continue to acquire
through merger or purchase similar companies to expand its national and regional
operations.
Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin No. 97 (SAB 97), the financial statements of Quanta for periods prior
to February 18,1998 (the effective closing date of the Acquisitions), are the
financial statements of PAR Electrical Contractors, Inc. ("PAR") (the
"Accounting Acquiror"). The operations of the other Founding Companies and
Quanta, acquired by the Accounting Acquiror, have been included in the Company's
historical financial statements beginning February 19, 1998.
The unaudited pro forma combined statements of operations for the three
months ended March 31, 1997 and 1998 assume that the Acquisitions, the Offering
and related transactions were closed on January 1, 1997 and present certain data
for the Company as adjusted for: 1) the acquisition of the Founding Companies,
2) the IPO completed on February 18, 1998 (including the exercise of the
underwriter's over-allotment option), 3) certain reductions in salaries,
bonuses and benefits to former owners of the Founding Companies, 4)
amortization of goodwill resulting from the Acquisitions, 5) reduction in
interest expense, net of interest expense on borrowings to fund S corporation
distributions by certain of the Founding Companies and 6) adjustments to the
federal and state income tax provision based on pro forma operating results.
The unaudited pro forma combined statements of operations are presented
herein as the Company believes certain investors find the information useful.
This statement should be read in conjunction with the Company's historical
unaudited financial statements and notes thereto included in this Form 10-Q. The
pro forma adjustments are based on estimates, available information and certain
assumptions which may be revised as additional information becomes available.
The pro forma financial data does not purport to represent what the Company's
combined financial position or results of operations would actually have been if
such transactions had in fact occurred on those dates and are not necessarily
representative of the Company's financial position or results of operations for
any future period. Since Quanta and the Founding Companies were not under
1
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common control or management, historical combined results may not be comparable
to, or indicative of, future performance.
Operating results for the interim periods are not necessarily indicative of
the results for full years. The results of the Company have historically been
subject to significant seasonal fluctuations. It is suggested that these pro
forma combined financial statements be read in conjunction with the pro forma
combined financial statements of the Company and the Founding Companies and the
notes thereto included in the Company's Registration Statement on Form S-4 as
amended (Reg. No. 333-47083), which was filed with the Securities and Exchange
Commission ("SEC") on May 13, 1998.
QUANTA SERVICES, INC. AND SUBSIDIARIES
PRO FORMA COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1998
----------- -----------
<S> <C> <C>
Revenues...................................................... $ 27,888 $ 38,680
Cost of services (including depreciation)..................... 23,984 32,905
----------- -----------
Gross profit............................................ 3,904 5,775
Selling, general & administrative expenses.................... 2,307 3,162
Goodwill amortization......................................... 410 400
----------- -----------
Income from operations.................................. 1,187 2,213
----------- -----------
Other income (expense):
Interest expense........................................ (192) (229)
Other income (expense), net............................. 83 96
----------- -----------
(109) (133)
----------- -----------
Income before income tax expense.............................. 1,078 2,080
Provision for income taxes.................................... 593 975
----------- -----------
Net income.................................................... $ 485 $ 1,105
=========== ===========
Basic earnings per share...................................... $ 0.03 $ 0.07
=========== ===========
Diluted earnings per share.................................... $ 0.03 $ 0.07
=========== ===========
Shares used in computing pro forma earnings per share (a)--
Basic.............................................. 16,043,111 16,265,159
=========== ===========
Diluted............................................ 16,043,111 16,326,976
=========== ===========
</TABLE>
The accompanying notes are an integral
part of these pro forma combined financial statements.
2
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(a) Shares Used in Computing Pro Forma Earnings Per Share
The 16,043,111 shares used in the calculation of unaudited pro forma
combined basic and diluted earnings per share for the three months ended March
31, 1997 include (i) 7,527,000 shares of Common Stock issued to the owners of
the Founding Companies, (ii) 3,345,333 shares of Limited Vote Common Stock
issued to the initial stockholders and certain management personnel of the
Company, (iii) 5,000,000 shares of Common Stock sold in the Offering to pay the
cash portion of the Acquisition consideration, to repay expenses incurred in
connection with the Offering and to retire debt, and (iv) 170,778 of the 750,000
shares of Common Stock issued as part of the exercise of the underwriter's over-
allotment option. The 579,222 shares excluded reflect net cash to Quanta.
The 16,265,159 shares used in the calculation of unaudited pro forma
combined basic earnings per share for the three months ended March 31, 1998
include (i) 7,527,000 shares of Common Stock issued to the owners of the
Founding Companies, (ii) 3,345,333 shares of Limited Vote Common Stock issued to
the initial stockholders and certain management personnel of the Company, (iii)
5,000,000 shares of Common Stock sold in the Offering to pay the cash portion of
the Acquisition consideration, to repay expenses incurred in connection with the
Offering and to retire debt, and (iv) 392,826 of the 750,000 shares of Common
Stock issued as part of the exercise of the underwriter's over-allotment option.
The 357,174 shares excluded reflect net cash to Quanta.
Shares used in the calculation of unaudited pro forma combined diluted
earnings per share for the three months ended March 31, 1998 include (i) the
16,265,159 shares described above, and (ii) the dilution attributable to
outstanding options to purchase Common Stock, using the treasury stock method.
3
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QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
December 31, March 31,
1997 1998
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................................ $ 400 $ 5,176
Accounts receivable, net of allowance of $100 and $498........... 8,662 30,274
Costs and profits recognized in excess of billings............... 1,025 10,222
Inventories...................................................... --- 810
Prepaid expenses and other....................................... 697 747
-------- --------
Total current assets.......................................... 10,784 47,229
PROPERTY AND EQUIPMENT, NET........................................ 14,122 29,406
OTHER ASSETS....................................................... 241 248
GOODWILL, NET...................................................... --- 64,696
-------- --------
Total assets.................................................. $ 25,147 $141,579
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............................. $ 5,138 $ 2,712
Accounts payable and accrued expenses............................ 3,812 17,001
Billings in excess of costs and profits recognized............... 425 1,358
-------- --------
Total current liabilities..................................... 9,375 21,071
LONG-TERM LIABILITIES:
Long-term debt, net of current maturities........................ 3,569 6,648
Deferred income taxes............................................ 2,201 4,444
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock.................................................. --- ---
Common Stock..................................................... --- ---
Limited Vote Common Stock........................................ --- ---
Additional paid-in capital....................................... --- 99,000
Retained earnings................................................ 10,002 10,416
-------- --------
Total stockholders' equity................................... 10,002 109,416
-------- --------
Total liabilities and stockholders' equity....................... $ 25,147 $141,579
======== ========
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
4
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1998
---------- ----------
<S> <C> <C>
Revenues........................................ $ 8,114 $ 24,144
Cost of services (including depreciation)....... 7,330 20,732
---------- ----------
Gross profit............................... 784 3,412
Selling, general & administrative expenses...... 1,127 2,206
Goodwill amortization........................... --- 182
---------- ----------
Income (loss) from operations.............. (343) 1,024
Other income (expense):
Interest expense........................... (124) (266)
Other income (expense), net................ (40) 50
---------- ----------
(164) (216)
---------- ----------
Income (loss) before income tax expense......... (507) 808
Provision (benefit) for income taxes............ (204) 394
---------- ----------
Net income (loss)............................... $ (303) $ 414
========== ==========
Basic earnings (loss) per share................. $ (0.10) $ 0.04
========== ==========
Diluted earnings (loss) per share............... $ (0.10) $ 0.04
========== ==========
Shares used in computing earnings per share--
Basic...................................... 3,000,000 9,355,729
========== ==========
Diluted.................................... 3,000,000 9,417,346
========== ==========
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
5
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1997 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)........................................ $ (303) $ 414
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization.......................... 562 953
Gain on sale of property and equipment................. (3) (25)
Deferred income taxes.................................. (3) 83
Changes in operating assets and liabilities--
(Increase) decrease in--
Accounts receivable................................ 2,376 (3,132)
Inventories........................................ --- (53)
Costs and estimated earnings in excess of
billings on uncompleted contacts.................. (309) (861)
Prepaid expenses and other current assets.......... 89 67
Increase(decrease) in--
Accounts payable and accrued expenses.............. (631) 3,950
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... (597) (1,258)
Other, net......................................... --- (4)
------- -------
Net cash provided by operating activities............. 1,181 134
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of properties and equipment........... 27 767
Additions of property and equipment...................... (976) (2,612)
Cash paid for acquisitions, net of cash acquired......... --- (12,057)
------- -------
Net cash used in investing activities................. (949) (13,902)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............................. 1,215 114
Payments of long-term debt............................... (1,802) (18,309)
Issuances of Common Stock, net of offering costs......... --- 45,109
Distributions to stockholders............................ --- (8,370)
------- -------
Net cash provided by (used in) financing activities... (587) 18,544
------- -------
NET (INCREASE) DECREASE IN CASH AND CASH EQUIVALENTS....... (355) 4,776
------- -------
CASH AND CASH EQUIVALENTS, beginning of period............. 479 400
------- -------
CASH AND CASH EQUIVALENTS, end of period................... $ 124 $ 5,176
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for--
Interest............................................ $ 122 $ 234
Income taxes........................................ 28 263
</TABLE>
The accompanying notes are an integral
part of these condensed consolidated financial statements.
6
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
Quanta Services, Inc., a Delaware corporation ("Quanta" or the "Company"),
was founded in August 1997 to create a leading provider of specialty electrical
contracting and maintenance services primarily related to electric and
telecommunications infrastructure in North America.
In February 1998, Quanta completed its initial public offering (the
"Offering") which involved the issuance of 5,000,000 shares of common stock,
providing approximately $38.8 million in net proceeds to the Company, after
deducting underwriter discounts and commissions and expenses related to the
Offering. Concurrent with the closing of its initial public offering, Quanta
acquired, in separate transactions (the "Acquisitions"), for consideration
including $21.0 million of cash and 7,527,000 shares of Common Stock, the
following four entities (the "Founding Companies"): PAR Electrical Contractors,
Inc., Potelco Inc., TRANS TECH Electric, Inc. and Union Power Construction
Company. Also, in March 1998, the Company's underwriters exercised their over-
allotment option to acquire an additional 750,000 shares of the Company's Common
Stock at the initial public offering price of $9 per share, providing the
Company with approximately $6.3 million (net of underwriting discounts and
commissions) of additional proceeds from the Offering. Quanta intends to acquire
additional businesses, through merger or purchase in order to expand its
national and regional operations.
Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin No. 97 (SAB 97), the financial statements of Quanta for periods prior
to February 18,1998 (the effective closing date of the Acquisitions), are the
financial statements of PAR Electrical Contractors, Inc. (PAR) (the "Accounting
Acquiror"). The operations of the other Founding Companies and Quanta, acquired
by the Accounting Acquiror, have been included in the Company's historical
financial statements beginning February 19, 1998.
Interim Condensed Consolidated Financial Information
The unaudited condensed consolidated financial statements have been
prepared pursuant to the rules of the SEC. Certain information and footnote
disclosures, normally included in annual financial statements prepared in
accordance with generally accepted accounting principles, have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to fairly present the financial
position, results of operations and cash flows with respect to the interim
consolidated financial statements, have been included. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the audited financial statements and notes thereto of
Quanta and the Founding
7
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Companies included in the Company's Registration Statement on Form S-4 as
amended (Reg. No. 333-47083) which was filed with the SEC on May 13, 1998.
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.
2. INCOME TAXES:
Certain of the Founding Companies were S corporations for income tax
purposes and, accordingly, any income tax liabilities for the periods prior to
the Acquisitions are the responsibility of the respective stockholders.
Effective with the Acquisitions, the S corporations converted to C corporations.
Accordingly, an estimated deferred tax liability has been recorded to provide
for the estimated future income tax liability as a result of the difference
between the book and tax bases of the net assets of these former S corporations.
For purposes of these consolidated financial statements, federal and state
income taxes have been provided for the post-acquisition periods.
3. PER SHARE INFORMATION:
For financial statement presentation purposes, as required by the rules and
regulations of the Securities Act, PAR has been identified as the accounting
acquiror as its shareholders represent the largest shareholding interest in
Quanta. The computation of basic and diluted earnings per share for the three
months ended March 31, 1997 is based upon 3,000,000 shares issued in connection
with PAR.
The 9,355,729 shares used in the calculation of basic earnings per share
for the three months ended March 31, 1998 include the weighted average shares
outstanding for (i) 7,527,000 shares of Common Stock issued to the owners of the
Founding Companies, (ii) 3,345,333 shares of Limited Vote Common Stock issued to
the initial stockholders and certain management personnel of the Company, (iii)
5,000,000 shares of Common Stock sold in the Offering to pay the cash portion of
the Acquisition consideration, to repay expenses incurred in connection with the
Offering and to retire debt, and (iv) 750,000 shares of Common Stock issued as
part of the exercise of the underwriter's over-allotment option.
Shares used in the calculation of the unaudited diluted earnings per share
for the three months ended March 31, 1998 include (i) the 9,355,729 shares
described above, and (ii) the dilution attributable to outstanding options to
purchase Common Stock, using the treasury stock method.
8
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4. STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, under which compensation expense is recorded to the extent
that the fair market value of the related stock is in excess of the options'
exercise price at date of grant. Entities electing to remain with the
accounting in APB Opinion No. 25 must make pro forma disclosures of net income
and earnings per share as if the fair value method of accounting prescribed in
SFAS No. 123 had been applied. The Company will measure compensation expense
attributable to stock options based on the method prescribed in APB Opinion No.
25 and will provide the required pro forma disclosure of net income and earnings
per share, as applicable, in notes to future consolidated annual financial
statements.
5. NEW ACCOUNTING PRONOUNCEMENTS:
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which requires the display of comprehensive income and
its components in the 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. For the
quarters ended March 31, 1998 and 1997, there is no material difference between
the Company's "traditional" and "comprehensive" net income.
In June 1997 the FASB also issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which establishes standards for the
way public enterprises are to report information about operating segments in
annual financial statements and requires the reporting of selected information
about operating segments in interim financial reports issued to shareholders.
SFAS No. 131 also establishes standards for related disclosures about products
and services, geographic areas, and major customers. SFAS No. 131 is effective
for the Company for its year ended December 31, 1998, at which time the Company
will adopt the provision. The Company is currently evaluating the impact on the
Company's financial disclosures.
In March 1998 the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". The SOP provides
guidance with respect to accounting for the various types of costs incurred for
computer software developed or obtained for the Company's use. The Company is
required to, and will adopt SOP 98-1 by the first quarter of fiscal 1999 and
believes that adoption will not have a material effect on its consolidated
financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of Start-
Up Activities", which requires costs of start-up activities to be expensed as
incurred and upon adoption, previously deferred costs should be charged as a
cumulative effect of a change in accounting principle. The statement is
effective for financial statements beginning after December 15, 1998, and the
Company expects to adopt the new standard in January 1999. The adoption of this
standard is not expected to have a material effect on the Company's financial
position or result of operations.
9
<PAGE>
6. SUBSEQUENT EVENTS
Business Combinations
As part of its growth strategy, the Company is pursuing an acquisition
program. Through May 5, 1998, the Company has acquired two companies in
addition to the Founding Companies for an aggregate consideration of 1,283,707
shares of Common Stock and $23.7 million in cash. The cash portion of such
consideration was provided by borrowings under the Company's credit facility.
The Company has also announced the signing of non-binding letters of intent to
acquire two additional companies having combined revenues of approximately $35
million. The consideration related to these companies is under negotiation.
Credit Facility
In April 1998, the Company obtained a $50,000,000 revolving credit facility
(the "Credit Facility") from two commercial banks. The facility is unsecured and
is to provide funds to be used for working capital, to finance acquisitions and
for other general corporate purposes. Amounts borrowed under the Credit Facility
bear interest at a rate equal to either (a) the London Interbank Offered Rate
("LIBOR") plus 0.75% to 1.75%, as determined by the ratio of the Company's total
funded debt to EBITDA (as defined in the Credit Facility) or (b) the bank's
prime rate plus up to 0.25%, as determined by the ratio of the Company's total
funded debt to EBITDA. Commitment fees of 0.175% to 0.30% (based on certain
financial ratios) are 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 restricts
pledges on all material assets. The Credit Facility contains usual and customary
covenants for a credit facility of this nature including the prohibition of the
payment of dividends and the consent of the lenders for acquisitions exceeding a
certain level of cash consideration.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions and the actual
events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, risks associated with acquisitions
and seasonality, national and regional industry and economic conditions,
competition and risks entailed in the operation and growth of existing and newly
acquired businesses. The historical results set forth in this discussion and
analysis are not indicative of trends with respect to any actual or projected
future financial performance of the Company.
The Company's revenues are derived from providing specialty electrical
contracting and maintenance services related to electric and telecommunications
infrastructure, providing electrical contracting services to the commercial and
industrial markets and installing transportation control and lighting systems.
Costs of services consist primarily of salaries and benefits to employees,
depreciation, fuel and other vehicle expenses, equipment rentals, subcontracted
services, materials, parts and supplies. The Company's gross margin, which is
gross profit expressed as a percentage of revenues, is typically higher on
projects where labor, rather than materials, constitutes a greater portion of
the cost of services. Labor costs can be predicted with relatively less accuracy
than materials costs. Therefore, to compensate for the potential variability of
labor costs, the Company seeks to maintain higher margins on its labor-intensive
projects. The Company is subject to a $500,000 deductible for workers
compensation insurance on certain of its operations. Fluctuations in insurance
accruals related to this deductible could have a significant impact on gross
margins in the period in which such adjustments are made. Selling, general and
administrative expenses consist primarily of compensation and related benefits
to owners, administrative salaries and benefits, marketing, office rent and
utilities, communication and professional fees.
11
<PAGE>
RESULTS OF OPERATIONS - PRO FORMA COMBINED
The unaudited pro forma combined statements of operations for the three
months ended March 31, 1997 and 1998 assume that the Acquisitions, the Offering
and related transactions were closed on January 1, 1997 and present certain data
for the Company as adjusted for: 1) the acquisition of the Founding Companies,
2) the IPO completed on February 18, 1998 (including the exercise of the
underwriter's over-allotment option), 3) certain reductions in salaries,
bonuses and benefits to former owners of the Founding Companies, 4)
amortization of goodwill resulting from the Acquisitions, 5) reduction in
interest expense, net of interest expense on borrowings to fund S corporation
distributions by certain of the Founding Companies and 6) adjustments to the
federal and state income tax provision based on pro forma operating results.
The pro forma adjustments are based on estimates, available information and
certain assumptions which may be revised as additional information becomes
available. The pro forma financial data does not purport to represent what the
Company's combined financial position or results of operations would actually
have been if such transactions had in fact occurred on those dates and are not
necessarily representative of the Company's financial position or results of
operations for any future period. Since Quanta and the Founding Companies were
not under common control or management, historical combined results may not be
comparable to, or indicative of, future performance.
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1997 1998
--------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues....................................... $27,888 100.0% $38,680 100.0%
Cost of services............................... 23,984 86.0 32,905 85.1
------- ----- ------- -----
Gross profit................................... 3,904 14.0 5,775 14.9
Selling, general and administrative expenses... 2,307 8.3 3,162 8.2
Goodwill amortization.......................... 410 1.5 400 1.0
------- ----- ------- -----
Income from operations......................... $ 1,187 4.2% $ 2,213 5.7%
------- ----- ------- -----
</TABLE>
Combined Results For The Three Months Ended March 31, 1997, Compared To The
Three Months Ended March 31, 1998
Revenues. Pro forma combined revenues increased $10.8 million, or 38.7%, from
$27.9 million for the three months ended March 31, 1997, to $38.7 million for
the three months ended March 31, 1998, primarily due to higher demand for the
Company's electrical infrastructure services in Nevada, California and the
Midwest as well as significant growth in telecommunication infrastructure
services in the Northwest.
Gross profit. Pro forma combined gross profit increased $1.9 million, or 48.7%,
from $3.9 million for the three months ended March 31, 1997, to $5.8 million for
the three months ended March 31, 1998. As a percentage of pro forma combined
revenues, pro forma combined gross profit increased from 14.0% to 14.9%. This
increase in pro forma combined gross profit was a result of improved asset
utilization partially offset by a higher proportion of subcontract work and low
margin material costs.
12
<PAGE>
Selling, general and administrative expenses. Pro forma combined selling general
and administrative expenses increased $0.9 million, or 39.1%, from $2.3 million
for the three months ended March 31, 1997, to $3.2 million for the three months
ended March 31, 1998, primarily due to increases in administrative salaries
required to support the higher level of revenues generated from an increased
volume of projects, as well as the establishment of a corporate office and
administrative infrastructure during the first quarter of 1998.
RESULTS OF OPERATIONS - HISTORICAL
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------
1997 1998
--------------- ---------------
(in thousands)
<S> <C> <C> <C> <C>
Revenues....................................... $ 8,114 100.0% $24,144 100.0%
Cost of services............................... 7,330 90.3 20,732 85.9
------- ----- ------- -----
Gross profit................................... 784 9.7 3,412 14.1
Selling, general and administrative expenses... 1,127 13.9 2,206 9.1
Goodwill amortization.......................... --- --- 182 .8
------- ----- ------- -----
Income (loss) from operations.................. $ (343) (4.2)% $ 1,024 4.2%
------- ----- ------- -----
</TABLE>
Combined Results For The Three Months Ended March 31, 1997, Compared To The
Three Months Ended March 31, 1998
Revenues. Historical revenues increased $16.0 million, or 197.5%, from $8.1
million for the three months ended March 31, 1997, to $24.1 million for the
three months ended March 31, 1998, due to the acquisition of the Founding
Companies on February 18, 1998.
Gross profit. Gross profit increased $2.6 million, or 325.0%, from $.8 million
for the three months ended March 31, 1997, to $3.4 million for the three months
ended March 31, 1998. As a percentage of revenues, gross profit increased from
9.7% to 14.1%. This increase in gross profit was a result of the acquisition of
the Founding Companies on February 18, 1998 and improved asset utilization
partially offset by a higher proportion of subcontract work and low margin
material costs.
Selling, general and administrative expenses. Selling general and administrative
expenses increased $1.1 million, or 100.0%, from $1.1 million for the three
months ended March 31, 1997, to $2.2 million for the three months ended March
31, 1998, due to the acquisition of the Founding Companies on February 18, 1998,
increases in administrative salaries required to support the higher level of
revenues generated from an increased volume of projects, as well as the
establishment of a corporate office and administrative infrastructure during the
first quarter of 1998.
13
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
In February 1998, Quanta completed its initial public offering which
involved the issuance of 5,000,000 shares of Common Stock, providing
approximately $38.8 million in net proceeds to the Company, after deducting
underwriter discounts and commissions and expenses related to the Offering.
Concurrent with the closing of its initial public offering, Quanta acquired the
Founding Companies in separate transactions for consideration including $21.0
million of cash and 7,527,000 shares of Common Stock. Also, in March 1998, the
Company's underwriters exercised their over-allotment option to acquire an
additional 750,000 shares of the Company's Common Stock at the initial public
offering price of $9 per share, providing the Company with approximately $6.3
million (net of underwriting discounts and commissions) of additional proceeds
from the Offering.
In April 1998, the Company obtained a $50,000,000 revolving Credit Facility
from two commercial banks. The facility is unsecured and is to provide funds to
be used for working capital, to finance acquisitions and for other general
corporate purposes. Amounts borrowed under the Credit Facility bear interest at
a rate equal to either (a) the London Interbank Offered Rate ("LIBOR") plus
0.75% to 1.75%, as determined by the ratio of the Company's total funded debt to
EBITDA (as defined in the Credit Facility) or (b) the bank's prime rate plus up
to 0.25%, as determined by the ratio of the Company's total funded debt to
EBITDA. Commitment fees of 0.175% to 0.30% (based on certain financial ratios)
are 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 restricts pledges on all
material assets. The Credit Facility contains usual and customary covenants for
a credit facility of this nature including the prohibition of the payment of
dividends and the consent of the lenders for acquisitions exceeding a certain
level of cash consideration. As of May 14, 1998 the Company had $27.3 million in
outstanding borrowings under its Credit Facility.
The Company expects to continue its aggressive acquisition program. The
Company intends to continue to use a combination of cash and Common Stock to
finance the principal part of the consideration payable in acquisitions. If the
Common Stock does not maintain a sufficient value, or potential acquisition
candidates are unwilling to accept Common Stock as part of the consideration for
the sale of their businesses, the Company could be required to utilize more cash
to complete acquisitions. If sufficient funds were not available from operating
cash flow or through borrowings under the Company's credit facility, the Company
may seek additional financing through the public or private sale of equity or
debt securities. There can be no assurance that the Company could secure such
financing if and when it is needed or on terms the Company deems acceptable. If
the Company is unable to secure acceptable financing, its acquisition program
could be negatively affected.
RECENT DEVELOPMENTS
As part of its growth strategy, the Company is pursuing an acquisition
program. Through May 5, 1998, the Company has acquired two companies in
addition to the Founding Companies for an aggregate consideration of 1,283,707
shares of Common Stock and $23.7 million in cash. The cash portion of such
consideration was provided by borrowings under the Company's credit facility.
The Company has also announced the signing of non-binding letters of intent to
acquire two additional companies having combined revenues of approximately $35
million. The consideration related to these companies is under negotiation.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
The Company's results of operations can be subject to seasonal variations.
Generally, during the winter months, demand for new projects and maintenance
services may be lower due to reduced construction activity during such weather,
while demand for electrical service and repairs may be higher due to damage
caused by inclement weather. Additionally, the industry can be highly cyclical.
As a result, the Company's volume of business may be adversely affected
14
<PAGE>
by declines in new projects in various geographic regions in the U.S. Quarterly
results may also be materially affected by the timing of acquisitions,
variations in the margins of projects performed during any particular quarter,
the timing and magnitude of acquisition assimilation costs and regional economic
conditions. Accordingly, the Company's operating results in any particular
quarter may not be indicative of the results that can be expected for any other
quarter or for the entire year.
15
<PAGE>
QUANTA SERVICES, INC.
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
Exhibit 27.1 Financial data schedule.
(b) Reports on Form 8-K:
None.
16
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Quanta Services, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUANTA SERVICES, INC.
Dated: May 15, 1998 By: /s/ James H. Haddox
--------------------------
James H. Haddox
Chief Financial Officer
17
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<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 5,176
<SECURITIES> 0
<RECEIVABLES> 30,772
<ALLOWANCES> 498
<INVENTORY> 810
<CURRENT-ASSETS> 47,229
<PP&E> 55,127
<DEPRECIATION> 25,721
<TOTAL-ASSETS> 141,579
<CURRENT-LIABILITIES> 21,071
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 109,416
<TOTAL-LIABILITY-AND-EQUITY> 141,579
<SALES> 24,144
<TOTAL-REVENUES> 24,144
<CGS> 20,732
<TOTAL-COSTS> 22,938
<OTHER-EXPENSES> 132
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 266
<INCOME-PRETAX> 808
<INCOME-TAX> 394
<INCOME-CONTINUING> 414
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 414
<EPS-PRIMARY> 0.04
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