<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
FORM 10-K/A
(AMENDMENT NO. 1)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
OR
[_]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 001-13831
QUANTA SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 74-2851603
(STATE OF INCORPORATION) (I.R.S. EMPLOYER IDENTIFICATION NO.)
3555 TIMMONS LANE, SUITE 610, 77027
HOUSTON, TEXAS (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE
OFFICES)
Registrant's telephone number, including area code (713) 629-7600
Securities registered pursuant to Section 12 (b) of the Act:
COMMON STOCK, $.00001 PAR VALUE
Securities registered pursuant to Section 12 (g) of the Act:
NONE
(TITLE OF CLASS)
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 [_] No [X]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the common stock held by non-affiliates of the
Registrant, computed by reference to the closing sale price of such stock as
of March 27, 1998 was $174,636,496.
13,277,000 shares of Common Stock were outstanding as of March 27, 1998.
3,345,333 shares of Limited Vote Common Stock were outstanding as of March 27,
1998.
- -------------------------------------------------------------------------------
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<PAGE>
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock ("Common Stock") is traded under the symbol PWR
on the New York Stock Exchange ("NYSE"). The Company completed its initial
public offering on February 12, 1998. Accordingly, there was no public market
for the Company's Common Stock until February 1998. The following table sets
forth the high and low per share closing sale price for the Company's Common
Stock by quarter as reported by the NYSE.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
Fiscal year ended December 31, 1998
1st Quarter (from February 12, 1998 through March 27,
1998)................................................... $16.00 $11.00
</TABLE>
The Company had approximately 34 holders of record of its Common Stock as of
March 27, 1998. The Company has not declared any dividends and no dividends
are anticipated in the foreseeable future. The Company has determined that it
will utilize any earnings in the expansion of its business and to pay down
outstanding debt.
2
<PAGE>
ITEM 6.
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Quanta acquired the Founding Companies simultaneously with the Offering. For
financial statement presentation purposes, however, PAR has been identified as
the "accounting acquiror," as its former stockholders represent the largest
voting interest within the Company. The following selected historical
financial data for PAR as of December 31, 1996 and December 31, 1997 and for
each of the three years in the period ended December 31, 1997, have been
derived from the audited financial statements of PAR included elsewhere in
this Annual Report. The following selected historical financial data for PAR
as of December 31, 1993, 1994 and 1995 and for each of the two years in the
period ended December 31, 1994, have been derived from the unaudited financial
statements of PAR, which have been prepared on the same basis as the audited
financial statements and, in the opinion of PAR's management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. The following selected historical financial
data for Quanta has been derived from the audited financial statements of
Quanta included elsewhere herein.
The selected unaudited pro forma combined financial data below present
certain data for the Company, adjusted for (i) the Acquisitions, (ii) the
effects of certain other pro forma adjustments to the historical financial
statements and (iii) the consummation of the Offering and the application of
the net proceeds therefrom. The unaudited pro forma combined income statement
data assume that the Acquisitions, the Offering and related transactions were
closed on January 1, 1997, and are not necessarily indicative of the results
the Company would have obtained had these events actually then occurred or of
the Company's future results. During the periods presented below, the Founding
Companies were not under common control or management and, therefore, the data
presented may not be comparable to or indicative of post-combination results
to be achieved by the Company. The unaudited pro forma financial data should
be read in conjunction with the other financial information included elsewhere
in this Annual Report.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF
OPERATIONS DATA:
PAR
Revenues............... $ 26,553 $ 43,909 $ 38,915 $ 42,684 $ 49,132
Costs of services
(including
depreciation)......... 22,834 36,525 33,193 35,789 37,691
--------- --------- --------- --------- ---------
Gross profit........... 3,719 7,384 5,722 6,895 11,441
Selling, general and
administrative
expenses.............. 2,895 4,836 4,342 5,012 6,891
--------- --------- --------- --------- ---------
Income from operations. 824 2,548 1,380 1,883 4,550
Other income (expense),
net................... (251) (412) (512) (646) (716)
--------- --------- --------- --------- ---------
Income before provision
for income taxes...... 573 2,136 868 1,237 3,834
Provision for income
taxes................. 152 867 353 487 1,540
--------- --------- --------- --------- ---------
Net income............. $ 421 $ 1,269 $ 515 $ 750 $ 2,294
========= ========= ========= ========= =========
Earnings per share..... $ 0.14 $ 0.42 $ 0.17 $ 0.25 $ 0.76
========= ========= ========= ========= =========
Shares used in the
computation of basic
and diluted earnings
per share(1).......... 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000
========= ========= ========= ========= =========
</TABLE>
- --------
(1)For financial statement presentation purposes, as required by the rules and
regulations of the Securities Act, PAR has been identified as the accounting
acquiror in the transaction with Quanta and its Offering, as its shareholders
represent the largest shareholding interest of Quanta. As such, the shares of
Quanta Common Stock beneficially owned by the former shareholders of PAR have
been used in the calculation of basic and diluted earnings per share for all
periods presented herein.
3
<PAGE>
HISTORICAL STATEMENT OF OPERATIONS DATA:
QUANTA
<TABLE>
<CAPTION>
1997(1)
--------
<S> <C>
Revenues....................................................... $ --
Selling, general and administrative expenses................... 13,003(2)
--------
Loss before provision for income taxes......................... (13,003)
Provision for income taxes..................................... --
Net loss....................................................... $(13,003)
========
Basic and diluted earnings per share........................... $ (18.92)
========
Weighted average shares used in the computation of basic
diluted earnings per share.................................... 687,336
========
</TABLE>
- --------
(1) Represents operations from the period from inception (August 19, 1997)
through December 31, 1997.
(2) As a result of the issuance of shares to Main Street Merchant Partners II,
L.P. and management for nominal consideration, the Company recorded a non-
recurring, non-cash charge of $13.0 million. See Note 2 to the Quanta
Services, Inc. financial statements included elsewhere herein.
(3) Shares used in the computation of basic and diluted earnings per share
include the weighted average portion of the 3,345,333 shares issued from
the period from inception through December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
PRO FORMA COMBINED:
Revenues.................................................... $ 152,303
Cost of services (including depreciation)................... 123,270
----------
Gross profit................................................ 29,033
Selling, general and administrative expenses (1)............ 10,166
Goodwill amortization(2).................................... 1,640
----------
Income from operations...................................... 17,227
Other income (expense), net (3)............................. (456)
----------
Income before income tax expense............................ 16,771
Provision for income taxes (4).............................. 7,181
----------
Net income.................................................. 9,590
==========
Basic and diluted net income per share...................... $ 0.60
==========
Shares used in computing basic and diluted pro forma
earnings per share (5)..................................... 16,043,111
==========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL--PAR HISTORICAL--QUANTA PRO FORMA
--------------------------------------- ------------------ -----------------------------
DECEMBER 31, DECEMBER 31, 1997
--------------------------------------- DECEMBER 31, -----------------------------
1993 1994 1995 1996 1997 1997 COMBINED(6) AS ADJUSTED(7)
------- ------- ------- ------- ------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data(8)
Working capital
(deficit)............ $ 1,162 $ 1,959 $ 1,344 $ 653 $ 1,409 $ -- $(10,999)(9) $ 27,175
Total assets.......... 11,786 18,365 18,595 20,699 25,147 1,306 136,072 139,977
Long-term debt, net of
current maturities... 1,225 3,532 2,932 2,000 3,213 -- 13,763 6,723
Total stockholders'
equity............... 5,174 6,443 6,958 7,708 10,002 -- 63,893 109,107
</TABLE>
- --------
(1) The unaudited pro forma combined statement of operations data reflect an
aggregate of approximately $2.5 million for the year ended December 31,
1997 in pro forma reductions in salary, bonus and benefits of the owners
and management of the Founding Companies to which they have agreed
prospectively. Additionally, it excludes the $13.0 million non-recurring,
non-cash charge recognized by Quanta related to the issuance of stock to
an initial stockholder and management, as a result of the issuance of such
shares for nominal consideration. See Note 2 of Notes to Financial
Statements of Quanta.
(2) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions over a 40 year period.
(3) Reflects the reduction for interest expense of $1.4 million for the year
ended December 31, 1997 attributable to the repayment of $19.0 million of
historical debt of the Founding Companies with proceeds from the Offering,
net of additional interest expense discussed in Note 8 below.
Additionally, reflects reductions in expenses associated with certain non-
operating assets transferred to the Founding Companies prior to the
Acquisitions.
(4) Assumes all pretax income before non-deductible goodwill and other
permanent items is subject to an estimated 39.0% combined tax rate.
(5) Includes (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 consideration for the Acquisitions (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.
(6) Reflects the Acquisitions and related transactions as if they had occurred
on December 31, 1997. The unaudited pro forma combined balance sheet data
should be read in conjunction with the other financial information and
historical financial statements and notes thereto included elsewhere in
this Annual Report.
(7) Reflects the closing of the Offering and the Company's application of the
net proceeds therefrom to fund the cash portion of the Acquisition
Consideration and to repay certain indebtedness of the Founding Companies.
(8) Two of the Founding Companies have historically elected S corporation
status for tax purposes. Prior to the Acquisitions, these Founding
Companies made S corporation distributions to their stockholders totaling
approximately $8.7 million (the "S Corporation Distributions"). In order
to fund the S Corporation Distributions, the companies borrowed
approximately $5.1 million prior to December 31, 1997, and approximately
$3.6 million subsequent to year end. Accordingly, pro forma interest
expense has been increased by $0.6 million for the year ended December 31,
1997 and pro forma stockholders' equity has been reduced by approximately
$3.6 million.
(9) Includes approximately $21.0 million payable to owners of the Founding
Companies, representing the actual cash portion of the Acquisition
Consideration paid from a portion of the net proceeds of the Offering.
5
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Quanta Services, Inc.
Report of Independent Public Accountants................................. 7
Balance Sheet............................................................ 8
Statement of Operations.................................................. 9
Statement of Stockholders' Equity........................................ 10
Notes to Financial Statements............................................ 11
Par Electrical Contractors, Inc.
Report of Independent Public Accountants................................. 16
Balance Sheets........................................................... 17
Statements of Operations................................................. 18
Statements of Cash Flows................................................. 19
Statements of Shareholders' Equity....................................... 20
Notes to Financial Statements............................................ 21
</TABLE>
6
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quanta Services, Inc.:
We have audited the accompanying balance sheet of Quanta Services, Inc. (a
Delaware corporation), as of December 31, 1997, and the related statement of
operations, and stockholders' equity for the period from inception (August 19,
1997) through December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Quanta Services, Inc., as of
December 31, 1997, and the results of its operations for the period from
inception (August 19, 1997) through December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 18, 1998
7
<PAGE>
QUANTA SERVICES, INC.
BALANCE SHEET--DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CASH AND CASH EQUIVALENTS............................................ $ --
DEFERRED OFFERING COSTS.............................................. 1,306
--------
Total assets..................................................... $ 1,306
========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
ACCRUED LIABILITIES AND AMOUNTS DUE TO STOCKHOLDER................... $ 1,306
STOCKHOLDERS' EQUITY:
Preferred stock, $.00001 par value, 10,000,000 authorized, none
issued and outstanding............................................ --
Common stock, $.00001 par value, 40,000,000 shares authorized, none
issued and outstanding............................................ --
Limited Vote Common Stock, $.00001 par value, 3,345,333 shares
authorized, issued and outstanding................................ --
Additional paid-in capital......................................... 13,003
Retained deficit................................................... (13,003)
--------
Total stockholders' equity....................................... --
--------
Total liabilities and stockholders' equity....................... $ 1,306
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
8
<PAGE>
QUANTA SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 19, 1997)
THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<S> <C>
REVENUES............................................................. $ --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......................... 13,003
--------
LOSS BEFORE INCOME TAXES............................................. (13,003)
PROVISION FOR INCOME TAXES........................................... --
--------
NET LOSS............................................................. $(13,003)
========
BASIC AND DILUTED EARNINGS PER SHARE................................. $ (18.92)
========
WEIGHTED AVERAGE SHARES USED IN THE COMPUTATION OF BASIC AND DILUTED
EARNINGS PER SHARE.................................................. 687,336
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
9
<PAGE>
QUANTA SERVICES, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION (AUGUST 19, 1997)
THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
---------------- PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT EQUITY
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
INITIAL CAPITALIZATION,
August 19, 1997........... 1,693,779 $ -- $ -- $ -- $ --
ISSUANCE OF SHARES TO AN
INITIAL STOCKHOLDER AND
MANAGEMENT................ 1,651,554 -- 13,003 -- 13,003
NET LOSS................... -- -- -- (13,003) (13,003)
--------- ----- ------- -------- --------
BALANCE, December 31, 1997. 3,345,333 $ -- $13,003 $(13,003) $ --
========= ===== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
10
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
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
$38.9 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.
Quanta has not conducted any operations, and all activities through December
31, 1997 were related to the Offering and the Acquisitions. All expenditures
of the Company through December 31, 1997 have been funded by the primary
stockholders, on behalf of the Company. The primary stockholders have also
committed to fund future organization expenses and offering costs. As of March
18, 1998, costs of approximately $2.9 million have been incurred in connection
with the Offering, and such costs will be treated as a reduction of the
proceeds from the Offering. Quanta has treated costs incurred through December
31, 1997, as deferred offering costs in the accompanying balance sheet.
In the course of its operations, the Company is subject to certain risk
factors, including but not limited to: absence of combined operating history,
risks related to acquisition strategy, risks related to acquisition financing,
risks related to operating and internal growth strategies, management of
growth, availability of qualified employees, unionized workforce, competition,
contract bidding risks, seasonality, exposure to environmental liabilities and
dependence on key personnel.
2. STOCKHOLDERS' EQUITY:
Common Stock and Preferred Stock
In connection with the organization and initial capitalization of Quanta,
the Company issued 1,693,779 shares (as restated for the 1,613.6016 for-one
stock split discussed below) of Common Stock at $.00001 par value ("Common
Stock") for $10.48. In November, 1997 Quanta issued approximately 1.5 million
shares and 0.2 million shares, respectively (as restated for the 1,613.6016
for-one stock split discussed below) of Common Stock at $.00001 par value to
an initial stockholder and management of Quanta. As a result of the issuance
of shares to Main Street Merchant Partners II, L.P. ("Main Street") and
management for nominal consideration, the Company recorded in November 1997,
for financial statement presentation purposes, a non-recurring, non-cash
charge of $13.0 million, which has been based on a fair value of such shares
which has been determined to be $7.65 per share (a discount of 15% from the
initial public offering price). The shares issued to Main Street and members
of management were issued to engage such parties in providing services related
primarily to the Company's public offering activities, including financial
advisory and other consulting services. The fair value of such shares was
based on specific factors related to the Company and the transactions
including restrictions on transferability and sale of the shares issued and
the limited vote provisions of such shares.
11
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Quanta effected a 1,613.6016 for-one stock split in December 1997 for each
share of Common Stock of the Company then outstanding. In addition, the
Company increased the number of authorized shares of Common Stock to
40,000,000 and increased the number of authorized shares of $.00001 par value
preferred stock to 10,000,000.
In December 1997, the 3.3 million shares of Common Stock held by certain
primary stockholders of Quanta were converted into 3.3 million shares of
Limited Vote Common Stock. The shares of Limited Vote Common Stock have rights
similar to shares of Common Stock, except that such shares are entitled to
elect one member of the board of directors and are entitled to one-tenth of
one vote for each share held on all other matters. Each share of Limited Vote
Common Stock will convert into Common Stock upon disposition by the holder of
such shares in accordance with the transfer restrictions applicable to such
shares.
Shares used in the Calculation of Basic and Diluted Earnings Per Share
Shares used in the calculation of basic and diluted earnings per share
include the weighted average portion of the 3,345,333 shares issued from the
period from inception through December 31, 1997.
Stock Plan
In December 1997, the Company's board of directors and stockholders approved
the Company's 1997 Stock Option Plan (the "Plan"), which provides for the
granting or awarding of incentive or nonqualified stock options to directors,
officers, key employees and consultants of the Company. The aggregate amount
of Common Stock of the Company with respect to which options may be granted
may not exceed the greater of 2.38 million shares or 15 percent of the
aggregate number of shares of Common Stock outstanding. The Plan will be
administered by the compensation committee (the "Committee") of the Company's
board of directors. The Company has filed a registration statement on Form S-8
under the Securities Act of 1933 registering the issuance of shares upon
exercise of options granted under this Plan. In February 1998, concurrent with
the Offering, the Company granted approximately 627,500 options to management
and various key employees of the Founding Companies. Options will be
exercisable during the period specified in each option agreement and will
generally become exercisable in installments over four years beginning on the
first year anniversary of the grant date. No options will remain exercisable
later than ten years after the date of grant. The exercise price of options
may be no less than the fair market value of the Common Stock on the date of
grant (or 110 percent in the case of options granted to employees owning more
than 10 percent of the voting capital stock).
The Plan also provides for automatic option grants to directors who are not
otherwise employed by the Company or its subsidiaries. Upon commencement of
service, a nonemployee director will receive a nonqualified option to purchase
10,000 shares of Common Stock and continuing or re-elected nonemployee
directors annually will receive options to purchase 5,000 shares of Common
Stock. Options granted to nonemployee directors are fully exercisable
following the expiration of six months from the date of grant.
S-4 Registration Statement
In February 1998, the Company filed a Form S-4 Registration Statement in
order to register an additional 5,000,000 shares of Common Stock which the
Company may issue from time to time in connection with future acquisitions of
other businesses, properties or securities in business combination
transactions. The Company expects that the terms upon which it may issue the
shares will be determined through negotiations with the shareholders or
principal owners of the businesses whose securities or assets are to be
acquired.
3. STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, under which compensation expense is recorded to the
extent that the fair market value of the related stock is in excess of the
options' exercise price at date of grant. Entities electing to remain
12
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
with the accounting in APB Opinion No. 25 must make pro forma disclosures of
net income and earnings per share as if the fair value method of accounting
prescribed in SFAS No. 123 had been applied. The Company will measure
compensation expense attributable to stock options based on the method
prescribed in APB Opinion No. 25 and will provide the required pro forma
disclosure of net income and earnings per share, as applicable, in the notes
to future consolidated annual financial statements.
4. NEW ACCOUNTING PRONOUNCEMENTS:
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises
rather than primary and fully diluted earnings per share as previously
required. Under the provisions of this statement, basic earnings per share are
computed based on weighted average shares outstanding and excludes dilutive
securities such as options and warrants. Diluted earnings per share are
computed including the impact of all potentially dilutive securities.
Supplementally, basic and diluted earnings per share are presented in Note 5
below for 1997 on a pro forma basis.
5. BUSINESS COMBINATIONS:
As discussed in Note 1, Quanta acquired the Founding Companies in February
1998. 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, will be included in the Company's
historical financial statements beginning February 19, 1998.
The following summary unaudited pro forma combined balance sheet information
presented below, gives effect to the Acquisitions, the Offering and related
transactions, including the repayment of historical debt of the Founding
Companies, as if they had occurred on December 31, 1997 (in thousands).
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
COMBINED
DECEMBER 31,
1997
------------
<S> <C>
Current Assets............................................... $ 47,021
Property and Equipment, Net.................................. 26,965
Goodwill..................................................... 65,747
Other Assets................................................. 244
--------
Total Assets............................................... $139,977
========
Current Liabilities.......................................... $ 19,846
Long-term debt, net of current maturities.................... 6,723
Deferred income taxes........................................ 4,301
Stockholders' Equity......................................... 109,107
--------
Total Liabilities and Stockholders' Equity................. $139,977
========
</TABLE>
The unaudited pro forma combined statement of operations for the year ended
December 31, 1997 presented below assumes 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.
13
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 do 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>
UNAUDITED
PRO FORMA
COMBINED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS,
EXCEPT PER SHARE
INFORMATION)
<S> <C>
Revenues.................................................... $ 152,303
Cost of services (including depreciation)................... 123,270
-----------
Gross profit................................................ 29,033
Selling, general and administrative expenses................ 10,166
Goodwill amortization....................................... 1,640
-----------
Income from operations...................................... 17,227
-----------
Other income (expense):
Interest expense.......................................... (767)
Other, net................................................ 311
-----------
Other income (expense), net............................... (456)
-----------
Income before income tax expense............................ 16,771
Provision for income taxes.................................. 7,181
-----------
Net income.................................................. $ 9,590
===========
Basic earnings per share.................................... $ 0.60
===========
Diluted earnings per share.................................. $ 0.60
===========
Shares used in the pro forma computation of earnings per
share--
Basic..................................................... 16,043,111
===========
Diluted................................................... 16,043,111
===========
</TABLE>
Shares Used in Calculation of Pro Forma Combined Earnings Per Share
Shares used in the calculation of the unaudited pro forma combined basic and
diluted earnings per share 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, as discussed in Note 1. The
579,222 shares excluded reflect net cash to Quanta.
The Company has entered into employment agreements with certain key
executives of the Founding Companies and the executive officers of Quanta.
These employment agreements generally prohibit such
14
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
individuals from disclosing confidential information and trade secrets, and
restrict such individuals from competing with the Company for a period of five
years from the date of the employment agreement. The initial term of these
employment agreements is three years with provisions for annual extensions at
the end of the initial term.
6. SUBSEQUENT EVENTS TO THE DATE OF AUDITORS' REPORT (UNAUDITED):
The Company has entered into a preliminary agreement with a commercial bank
under which it expects to enter into a credit facility in the near future. The
terms and conditions of the agreement provide for an unsecured five year
$50,000,000 revolving credit facility to provide funds to be used for working
capital, to finance acquisitions and for other general corporate purposes.
Amounts borrowed under the proposed credit facility will 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 Company expects that the credit facility will require
usual and customary covenants for a credit facility of this nature including
prohibition of dividends and the consent of the lenders for acquisitions
exceeding a certain level of cash consideration.
15
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PAR Electrical Contractors, Inc.:
We have audited the accompanying balance sheets of PAR Electrical Contractors,
Inc. (a Missouri corporation), as of December 31, 1996 and 1997, and the
related statements of operations, cash flows and shareholders' equity for the
three years ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PAR Electrical Contractors,
Inc., as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for the three years ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 18, 1998
16
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
ASSETS ------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 479 $ 400
Accounts receivable--
Trade, net of allowance of $100........................ 7,390 8,527
Retainage.............................................. 374 135
Other receivables...................................... 78 36
Costs and estimated earnings in excess of billings on un-
completed contracts..................................... 663 1,025
Deferred income taxes.................................... 160 303
Prepaid expenses and other current assets................ 360 358
------- -------
Total current assets................................... 9,504 10,784
PROPERTY AND EQUIPMENT, net................................ 10,977 14,122
OTHER ASSETS............................................... 218 241
------- -------
Total assets........................................... $20,699 $25,147
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt..................... $ 2,555 $ 2,429
Current portion of capital lease obligations............. 25 199
Bank line of credit...................................... 2,378 2,510
Accounts payable and accrued expenses.................... 2,725 3,812
Billings in excess of costs and estimated earnings on un-
completed contracts..................................... 1,168 425
------- -------
Total current liabilities.............................. 8,851 9,375
LONG-TERM DEBT, net of current maturities.................. 2,000 3,213
LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current maturi-
ties...................................................... 74 356
DEFERRED INCOME TAXES...................................... 2,066 2,201
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $100 par value, 500 shares authorized, 200
shares issued and outstanding........................... 50 50
Retained earnings........................................ 9,170 11,464
Treasury stock, 300 shares, at cost...................... (1,512) (1,512)
------- -------
Total shareholders' equity............................. 7,708 10,002
------- -------
Total liabilities and shareholders' equity............. $20,699 $25,147
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES................................... $ 38,915 $ 42,684 $ 49,132
COST OF SERVICES (including depreciation).. 33,193 35,789 37,691
---------- ---------- ----------
Gross profit............................. 5,722 6,895 11,441
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................. 4,342 5,012 6,891
---------- ---------- ----------
Income from operations................. 1,380 1,883 4,550
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense....................... (568) (576) (627)
Other, net............................. 56 (70) (89)
---------- ---------- ----------
Other income (expense), net.......... (512) (646) (716)
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES... 868 1,237 3,834
PROVISION FOR INCOME TAXES................. 353 487 1,540
---------- ---------- ----------
NET INCOME................................. $ 515 $ 750 $ 2,294
========== ========== ==========
EARNINGS PER SHARE......................... $ 0.17 $ 0.25 $ 0.76
========== ========== ==========
SHARES USED IN THE COMPUTATION OF BASIC AND
DILUTED EARNINGS PER SHARE................ 3,000,000 3,000,000 3,000,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 515 $ 750 $ 2,294
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization..................... 1,805 1,935 2,350
Loss (gain) on sale of property and equipment..... 5 (57) --
Deferred income taxes............................. 166 204 (8)
Changes in operating assets and liabilities--
(Increase) decrease in--
Accounts receivable............................. 64 (892) (856)
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. 154 (531) (362)
Prepaid expenses and other current assets....... 169 (54) 2
Increase (decrease) in--
Accounts payable and accrued expenses........... (308) 363 1,087
Billings in excess of costs and estimated
earnings on uncompleted contracts.............. (362) 983 (743)
Other, net...................................... (14) (10) (23)
------- ------- -------
Net cash provided by operating activities....... 2,194 2,691 3,741
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment....... 100 57 154
Additions of property and equipment................ (2,427) (2,663) (4,957)
------- ------- -------
Net cash used in investing activities........... (2,327) (2,606) (4,803)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt....................... 1,501 1,787 3,950
Payments of long-term debt......................... (1,935) (2,395) (3,099)
Net borrowings under bank lines of credit.......... 655 238 132
------- ------- -------
Net cash provided by (used in) financing activi-
ties........................................... 221 (370) 983
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS.............................................. 88 (285) (79)
CASH AND CASH EQUIVALENTS, beginning of period...... 676 764 479
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period............ $ 764 $ 479 $ 400
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for--
Interest.......................................... $ 575 $ 572 $ 618
Income taxes, net of refunds...................... 553 279 1,264
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT EARNINGS STOCK EQUITY
------ ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........ 200 $50 $ 7,905 $(1,512) $ 6,443
Net income...................... -- -- 515 -- 515
--- --- ------- ------- -------
BALANCE, December 31, 1995........ 200 50 8,420 (1,512) 6,958
Net income...................... -- -- 750 -- 750
--- --- ------- ------- -------
BALANCE, December 31, 1996........ 200 50 9,170 (1,512) 7,708
Net income...................... -- -- 2,294 -- 2,294
--- --- ------- ------- -------
BALANCE, December 31, 1997........ 200 $50 $11,464 $(1,512) $10,002
=== === ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
20
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
PAR Electrical Contractors, Inc., a Missouri corporation (the "Company"),
focuses on providing electrical contractor services primarily for utility
companies, municipal and commercial companies. The Company performs the
majority of its contract work under cost-plus-fee and fixed price contracts
with contract terms generally ranging from four to 36 months. The Company
performs the majority of its work in the Midwest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental Cash Flow Information
The Company had non-cash investing and financing activities related to
capital leases of approximately $111,000 and $692,000 during the years ended
December 31, 1996 and 1997, respectively. There were no significant non-cash
investing activities for the year ended December 31, 1995.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts when collection is
considered doubtful.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
life of the lease or the estimated useful life of the asset. Depreciation and
amortization expense was approximately $1,805,000, $1,935,000 and $2,350,000
for the years ended December 31, 1995, 1996 and 1997, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a fixed price or cost-plus-fee contract. Such
contracts generally provide that the customer accept completion of progress to
date and compensate the Company for services which have been rendered,
measured typically in terms of units installed, hours expended or some other
measure of progress. Revenues from fixed price or cost-plus-fee contracts are
recognized on the percentage-of-completion method measured by the percentage
of costs incurred to date to total estimated costs for each contract. Contract
costs include all direct material, labor and subcontract costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and their effects are recognized in the period in which the
revisions are determined.
21
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provisions in fixed price or cost-plus-fee contracts will be due upon
completion of the contracts and acceptance by the customer. Based on the
Company's experience with similar contracts in recent years, the retention
balance at each balance sheet date will be collected within the subsequent
fiscal year.
The current asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The current liability "Billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company generally warrants labor for the first
year after installation of new electrical systems. The Company generally
warrants labor for 30 days after servicing of existing electrical systems. An
accrual for warranty costs is recorded based upon the historical level of
warranty claims and management's estimate of future costs.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under this method, deferred assets and
liabilities are recorded for future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that will be in effect when
the underlying assets or liabilities are recovered or settled.
Collective Bargaining Agreements
The Company is a party to various collective bargaining agreements with
certain of its employees. The agreements require the Company to pay specified
wages and provide certain benefits to its union employees. These agreements
expire at various times through the year 2000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
by management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 11 for discussion of
certain estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. Adoption of this standard did not have a material effect on the
financial position or results of operations of the Company.
22
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------
IN YEARS 1996 1997
------------ -------- --------
<S> <C> <C> <C>
Land.......................................... -- $ 1,105 $ 1,221
Buildings and leasehold improvements.......... 5-31 1,255 1,255
Operating equipment and vehicles.............. 5-10 21,980 26,495
Office equipment, furniture and fixtures...... 5 386 543
-------- --------
24,726 29,514
Less--Accumulated depreciation and amortiza-
tion......................................... (13,749) (15,392)
-------- --------
Property and equipment, net................. $ 10,977 $ 14,122
======== ========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Accounts payable, trade.................................... $ 1,068 $ 1,093
Accrued compensation and other expenses.................... 1,657 2,719
-------- --------
$ 2,725 $ 3,812
======== ========
Contracts in progress are as follows (in thousands):
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Costs incurred on contracts in progress.................... $ 9,926 $ 8,971
Estimated earnings, net of losses.......................... 2,322 2,517
-------- --------
12,248 11,488
Less-Billings to date...................................... (12,753) (10,888)
-------- --------
$ (505) $ 600
======== ========
Costs and estimated earnings in excess of billings on un-
completed contracts....................................... $ 663 $ 1,025
Less--Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (1,168) (425)
-------- --------
$ (505) $ 600
======== ========
</TABLE>
5. DEBT:
The Company has an $8,000,000 bank revolving line of credit bearing interest
at the bank's prime rate (8.5 percent at December 31, 1997), of which
$2,378,000 and $2,510,000 was outstanding as of December 31, 1996 and 1997,
respectively. With regard to the line of credit, the Company has outstanding a
$1,000,000 letter of credit outstanding related to its workman's compensation
insurance program (see Note 11 for discussion related to the Company self-
insuring for certain workers' compensation insurance). The Company also has a
$4,000,000 equipment fixed line of credit bearing interest at the bank's prime
rate (8.5 percent at December 31, 1997). These lines of credit expire in May
1998.
23
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company's long-term debt obligations consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Note payable to bank, prime plus 1%, interest rate, due
$79,359 monthly including interest with final payment October
1997......................................................... $ 797 $ --
Note payable to bank, prime plus .75%, interest rate, due
$47,968 monthly including interest with final payment Decem-
ber 1997..................................................... 551 --
Note payable to bank, prime plus .50% interest rate, due
$47,795 monthly including interest with final maturity Decem-
ber 1998..................................................... 1,042 542
Note payable to bank, prime plus .50% interest rate, due
$31,747 monthly including interest with final maturity May
1999......................................................... 825 506
Note payable to bank, prime plus .50% interest rate, due
$25,391 monthly including interest with final maturity Decem-
ber 1999..................................................... 800 558
Note payable to bank, prime interest rate, due $42,695 monthly
including interest with final maturity April 2000............ -- 1,080
Note payable to bank, prime interest rate, due $82,076 monthly
including interest with final maturity December 2000......... -- 2,600
Installment note payable to bank, fixed 9.75% interest rate,
due $3,631 monthly including interest with balance due Decem-
ber 1999; collateralized by real estate...................... 318 305
Installment note payable, fixed 9% interest rate, with final
payment December 1997........................................ 145 --
Installment note payable, fixed 6.5% interest rate, with final
payment made in January 1998................................. 77 51
------ ------
4,555 5,642
Less--Current maturities...................................... (2,555) (2,429)
------ ------
Total long-term debt.......................................... $2,000 $3,213
====== ======
</TABLE>
The loan agreement covering the notes payable to bank and the bank lines of
credit contains various covenants, including a minimum net worth requirement
and a compensating balance requirement.
The notes payable to bank and the bank lines of credit are collateralized by
all equipment, receivables and other assets. The Company's two shareholders
have pledged their stock as security to the bank on this indebtedness.
The maturities of long-term debt as of December 31, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998................................................................... $2,429
1999................................................................... 2,106
2000................................................................... 1,107
------
$5,642
======
</TABLE>
24
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LEASES:
Obligations Under Capital Leases
The Company leases various equipment under noncancelable capital leases and
the leased assets are included as part of "Property and Equipment." Details of
the capital leased assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- ------
<S> <C> <C>
Automobiles...................................................... $ 44 $ 44
Operating equipment and vehicles................................. 540 1,233
----- ------
584 1,277
Less--Accumulated depreciation................................... (479) (575)
----- ------
Net capitalized leased assets.................................... $ 105 $ 702
===== ======
</TABLE>
The following is a schedule showing the future minimum lease payments under
capital leases by years and the present value of the minimum lease payments as
of December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998................................................................... $ 233
1999................................................................... 233
2000................................................................... 134
2001................................................................... 12
-----
Total minimum lease payments......................................... 612
Less--Amounts representing interest...................................... (57)
-----
Present value of minimum lease payments.............................. 555
Less--Current portion.................................................... (199)
-----
Long-term obligation................................................. $ 356
=====
</TABLE>
Operating Leases
The Company rents certain office equipment and warehouse space under several
operating lease agreements which vary in length and terms. The rent paid under
these lease agreements was approximately $21,000, $205,000 and $462,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum lease payments under these noncancelable operating leases are
as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998..................................................................... $424
1999..................................................................... 134
2000..................................................................... 24
2001..................................................................... 24
2002..................................................................... 3
----
$609
====
</TABLE>
25
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Federal--
Current..................................................... $154 $234 $1,278
Deferred.................................................... 138 169 (6)
State--
Current..................................................... 33 49 270
Deferred.................................................... 28 35 (2)
---- ---- ------
$353 $487 $1,540
==== ==== ======
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
(loss) before provision for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Provision at the statutory rate............................... $304 $433 $1,341
Increase resulting from--
State income tax, net of related tax effect................. 40 54 170
Nondeductible expenses...................................... 9 -- 29
---- ---- ------
$353 $487 $1,540
==== ==== ======
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for
tax purposes. The tax effects of these temporary differences, representing
deferred tax assets and liabilities, result principally from the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Deferred income tax liabilities--
Property and equipment..................................... $(2,066) $(2,222)
State taxes................................................ 9 10
Other...................................................... (156) (172)
------- -------
Total deferred income tax liabilities.................... (2,213) (2,384)
------- -------
Deferred income tax assets--
Bad debt reserves.......................................... 42 42
State taxes................................................ (18) (29)
Other accruals not currently deductible.................... 283 473
------- -------
Total deferred income tax assets......................... 307 486
Valuation allowance........................................ -- --
------- -------
Total deferred income tax liabilities.................... $(1,906) $(1,898)
======= =======
</TABLE>
26
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets--
Current.................................................... $ 307 $ 475
Long-term.................................................. -- --
------- -------
Total.................................................... 307 475
------- -------
Deferred tax liabilities--
Current.................................................... (147) (172)
Long-term.................................................. (2,066) (2,201)
------- -------
Total.................................................... (2,213) (2,373)
------- -------
Net deferred income tax liabilities...................... $(1,906) $(1,898)
======= =======
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
As of December 31, 1996, the Company had a $45,000 note receivable due from
one of its shareholders. The note receivable included in "Accounts
receivable--other receivables" in the accompanying balance sheet as of
December 31, 1996, was paid in full by the shareholder in October 1997.
9. EMPLOYEE BENEFIT PLAN:
In connection with its collective bargaining agreements with various
electrical unions, the Company participates with other companies in the
unions' multi-employer pension plans. These plans cover all of the Company's
employees who are members of such unions. The Employee Retirement Income
Security Act of 1974, as amended by the Multi-Employer Pension Plan Amendments
Act of 1980, imposes certain liabilities upon employers who are contributors
to a multi-employer plan in the event of the employer's withdrawal from, or
upon termination of such plan. The Company has no plans to withdraw from these
plans. The plans do not maintain information on net assets and actuarial
present value of the accumulated share of the plans' unfunded vested benefits
allocable to the Company, and amounts, if any, for which the Company may be
contingently liable is not ascertainable at this time.
The Company has a 401(k) plan and profit sharing plan covering substantially
all nonbargaining employees. Participant contributions to be in the 401(k)
plan are limited to 6.6 percent of total compensation paid to participants
during the plan year. The Company may also make discretionary contributions.
Contributions to the plan were approximately $230,000, $182,000 and $168,000
for the years ended December 31, 1995, 1996 and 1997, respectively, and the
Company had accrued approximately $182,000 and $168,000 at December 31, 1996
and 1997, respectively.
In addition to the 401(k) plan and profit sharing plan, the financial
statements include discretionary bonuses to employees of $564,000, $1,087,000
and $2,300,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, lines of credit, accounts payable, notes payable and
debt. The Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
27
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial
position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, business property liability, workers' compensation, general
liability and an umbrella policy.
Effective January 1, 1996, the Company began self-insuring for certain
workers' compensation risks up to $1,000,000 per occurrence. In October 1997,
the Company reduced the deductible to $500,000 per occurrence. The Company has
accrued for the estimated probable claims costs in satisfying the deductible
provisions of the insurance policies for claims occurring through December 31,
1997. The accrual is based on known facts and historical trends, and
management believes such accrual to be adequate.
Product Rights
In May 1997, the Company entered into an agreement with a third party which
gives the Company exclusive rights for 30 months to the use of a patented
product used in the construction, maintenance, repair and improvement of
energized transmission and distribution lines in all states west of the
Mississippi River.
The product is a telescoping robotic arm for temporarily supporting
energized power lines to enable repair or replacement of transmission poles,
cross-arms, insulators and the like while maintaining an energized connection.
In exchange for the exclusive rights, the Company agreed to pay the third
party a fixed fee and a percentage of gross profits generated from the use of
the product. As of December 31, 1997, the Company had made payments totaling
$225,000 related to fees for the use of such product.
Performance Bonds
In certain circumstances, the Company is required to provide performance
bonds in connection with its contract commitments which are personally
guaranteed by certain stockholders of the Company.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10 percent of total sales to three major
customers (comprising approximately 16 percent, 15 percent and 11 percent of
total sales), three major customers (comprising approximately 23 percent, 12
percent and 10 percent of total sales) and three major customers (comprising
approximately 21 percent, 11 percent and 10 percent of total sales) during the
years ended December 1995, 1996 and 1997, respectively.
The Company grants credit, generally without collateral, to its customers,
which include utility companies, municipalities and commercial companies
located primarily in the Midwestern region of the United States. Consequently,
the Company is subject to potential credit risk related to changes in business
and economic factors within the Midwestern region of the United States.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
28
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. SUBSEQUENT EVENTS:
In December 1997, the Company and its shareholders entered into a definitive
agreement with Quanta Services, Inc. ("Quanta"), providing for all outstanding
shares of the Company's common stock to be exchanged for cash and shares of
Quanta common stock, concurrent with an initial public offering of additional
common stock by Quanta which closed in February 1998. In addition, the two
executives of the Company entered into employment agreements with the Company
and Quanta which have an initial term of three years and generally restrict
the disclosure of confidential information as well as restrict competition
with the Company and Quanta for a period of five years from the date of the
employment agreement. Reference is made to Note 1 of Quanta Services, Inc.
financial statements included elsewhere herein.
In connection with the acquisition, the shareholders of the Company
purchased a portion of land and equipment from the Company. The net book value
of the land and the equipment purchased was approximately $759,000 and
$731,000 at December 31, 1996 and 1997, respectively.
Earnings per share
For financial statement presentation purposes, as required by the rules and
regulations of the Securities Act, the Company has been identified as the
accounting acquiror in the transaction with Quanta and its initial public
offering, as its shareholders represent the largest shareholding interest in
Quanta. As such, the shares of Quanta common stock beneficially owned by the
shareholders have been used in the calculation of basic and diluted earnings
per share of the Company for the periods as presented herein.
29
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<C> <S>
(a)(1) Financial Statements: See Index to Financial Statements and Financial
Statement Schedule on page 6.
(a)(2) Financial Statement Schedule: See Index to Financial Statements and
Financial Statement Schedule on page 6.
(a)(3) Exhibits: See Exhibit Index on page 32.
</TABLE>
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or Section 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused this 10-K/A to
be signed on its behalf by the undersigned, thereunto duly authorized, on June
25, 1998.
Quanta Services, Inc.
(Registrant)
/s/ John R. Colson
By:__________________________________
Chief Executive Officer
(Principal Executive Officer)
31
<PAGE>
QUANTA SERVICES, INC.
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NO. TITLE
------- -----
<C> <S>
2.1 Amended and Restated Agreement and Plan of Organization dated as of
December 11, 1997 by and among Quanta Services, Inc. and PAR
Electrical Contractors, Inc. and its stockholders**
2.2 Amended and Restated Agreement and Plan of Organization dated as of
December 11, 1997 by and among Quanta Services, Inc. and Union Power
Construction Company and its stockholders**
2.3 Amended and Restated Agreement and Plan of Organization dated as of
December 11, 1997 by and among Quanta Services, Inc. and TRANS TECH
Electric, Inc. and its stockholders**
2.4 Amended and Restated Agreement and Plan of Organization dated as of
December 11, 1997 by and among Quanta Services, Inc. and Potelco, Inc.
and its stockholders**
3.1 Amended and Restated Certificate of Incorporation**
3.2 Amended and Restated Bylaws**
4.1 Form of Common Stock Certificate**
10.1 Form of Employment Agreement**
10.2 1997 Stock Option Plan**
21.1 Subsidiaries**
23.1 Consent of Arthur Andersen LLP
24.1 Power of Attorney*** (attached to the signature page)
27 Financial Data Schedule***
</TABLE>
- --------
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-42957) and incorporated herein by reference.
*** Previously filed as an exhibit to the Company's Form 10-K as filed March
31, 1998 and incorporated herein by reference.
32
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation by
reference of our report included in this Form 10-K/A, into Quanta Services,
Inc.'s previously filed Registration Statements on Form S-8 Nos. 333-47069,
333-56849.
ARTHUR ANDERSEN LLP
Houston, Texas
June 19, 1998
