<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 18, 1998
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
QUANTA SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 1731 74-2851603
(PRIMARY STANDARD (I.R.S. EMPLOYER
(STATE OR OTHER INDUSTRIAL IDENTIFICATION NO.)
JURISDICTION CLASSIFICATION CODE
OF INCORPORATION OR NUMBER)
ORGANIZATION) ---------------
BRAD EASTMAN
VICE PRESIDENT AND GENERAL COUNSEL
1360 POST OAK BOULEVARD, SUITE 2100
HOUSTON, TEXAS 77056
(713) 629-7600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
---------------
Copies to:
J. PATRICK RYAN STEPHEN A. RIDDICK
AKIN, GUMP, STRAUSS, HAUER & FELD, PIPER & MARBURY L.L.P.
L.L.P. CHARLES CENTER SOUTH
1500 NATIONSBANK PLAZA 36 SOUTH CHARLES STREET
300 CONVENT ST. BALTIMORE, MARYLAND 21201
SAN ANTONIO, TEXAS 78205 (410) 539-2530
(210) 281-7000
---------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration Statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
---------------
CALCULATION OF REGISTRATION FEE
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROPOSED
PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT MAXIMUM AGGREGATE
SECURITIES TO BE OFFERING PRICE OFFERING AMOUNT OF
TO BE REGISTERED REGISTERED (1) PER SHARE (2) PRICE (1)(2) REGISTRATION FEE
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, par value
$.00001 per share...... 4,025,000 shares $21.4375 $83,015,625 $23,988
</TABLE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(1) Includes 525,000 shares that the Underwriters have the option to purchase
to cover over-allotments, if any.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based upon the average of the high and low prices
for the Common Stock as reported by the New York Stock Exchange for
December 17, 1998.
---------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
INSIDE FRONT COVER
Photographs depicting Quanta's operational activities and a U.S. map showing
Quanta's headquarters, branch offices and areas of operation.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE +
+CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT +
+FILED WITH THE SECURITIES AND EXCHANGE COMMISSION BECOMES EFFECTIVE. THIS +
+PRELIMINARY PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES NOR DOES IT +
+SEEK OFFERS TO BUY THESE SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR +
+SALE IS NOT PERMITTED. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
DECEMBER 18, 1998
3,500,000 SHARES
[Logo of Quanta appears here]
COMMON STOCK
We are a leading provider of specialty contracting and maintenance services
primarily for electric and telecommunications infrastructure in North America.
Quanta is offering all of the 3,500,000 shares to be sold in this offering.
Quanta's common stock is traded on the New York Stock Exchange under the symbol
"PWR." On December 16, the last reported sale price for the common stock on the
New York Stock Exchange was $21.13 per share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING ON
PAGE 7.
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----------
<S> <C> <C>
Public offering price......................... $ $
Underwriting discount......................... $ $
Proceeds, before expenses, to Quanta.......... $ $
</TABLE>
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY BODY
HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
Quanta has granted the underwriters the right to purchase up to 525,000
additional shares at the public offering price less underwriting discounts and
commissions to cover any overallotments.
-----------
The underwriters are severally underwriting the shares being offered. The
underwriters expect to deliver the shares against payment in Baltimore,
Maryland on , 1999.
BT ALEX. BROWN
BANCBOSTON ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
SANDERS MORRIS MUNDY
SUNTRUST EQUITABLE SECURITIES
PROSPECTUS DATED , 1999
<PAGE>
PROSPECTUS SUMMARY
You should read the following summary together with the more detailed
information regarding Quanta and our financial statements and notes thereto
appearing elsewhere in this prospectus.
QUANTA SERVICES, INC.
We are a leading provider of specialty contracting and maintenance services
primarily for electric and telecommunications infrastructure in North America.
We also provide specialty contracting services to commercial and industrial
customers and install transportation control and lighting systems. Quanta had
pro forma combined revenues for the year ended December 31, 1997 of $338.0
million, of which 43.2% was attributable to electric utility infrastructure
services, 38.6% was attributable to telecommunications infrastructure services,
10.6% was attributable to transportation control and lighting systems services
and 7.6% was attributable to commercial and industrial services.
We provide services to electric utilities, telecommunication and cable
television operators, governmental entities, general contractors and builders,
and owners and managers of commercial and industrial properties. We currently
have offices in 18 states, and in 1998 have performed work in 32 states. We
have strategic alliance agreements or long-term maintenance agreements with
some of our customers including Enron Capital & Trade Resources Corp., Nevada
Power Company, Pacific Gas & Electric Company, Public Service Company of
Colorado and Western Resources.
The electrical and telecommunications contracting industry is highly
fragmented with more than 50,000 businesses, and we estimate that it generates
annual revenue in excess of $40 billion. We believe that deregulation of
utilities, upgrades and expansion of existing infrastructure and increased
outsourcing by utilities positively affects growth in our industry.
Quanta was formed through the combination of four separate businesses in
February 1998 when we completed our initial public offering. We intend to
continue to pursue an aggressive acquisition strategy to acquire operations in
new markets, as well as leverage current operations within existing markets.
Between our initial public offering and December 1, 1998, we have acquired 11
additional specialty contracting businesses. Internal growth is also an
important component of our growth strategy. The businesses we have acquired,
including those acquired concurrently with our initial public offering, have
achieved internal revenue growth on a combined basis at a compound annual rate
of 21.5% between 1995 and 1997.
2
<PAGE>
Effective October 5, 1998, we entered into a strategic investment agreement
with Enron Capital & Trade Resources Corp. ("Enron Capital"), a subsidiary of
Enron Corp., under which Enron Capital and an affiliate made an investment of
$49.4 million in Quanta in the form of convertible subordinated notes (the
"Convertible Subordinated Notes"). Additionally, Quanta and Enron Capital
entered into a strategic alliance under which Enron Capital and Quanta will
exchange information regarding the design, construction and maintenance of
electric power transmission and distribution systems and fiber optic
communications systems.
Quanta was incorporated in Delaware in August 1997 under the name Fabal
Construction, Inc. and changed its name to Quanta Services, Inc. in November
1997. Quanta's executive offices are located at 1360 Post Oak Blvd., Suite
2100, Houston, Texas 77056, and its telephone number at that address is (713)
629-7600.
THE OFFERING
The following information assumes that the underwriters do not exercise the
option granted by Quanta to purchase up to an additional 525,000 shares in the
offering.
<TABLE>
<S> <C>
Shares offered by Quanta....... 3,500,000 shares
Shares outstanding after this 25,192,655 shares(1)
offering......................
Use of proceeds................ Reduction of existing indebtedness and for
general corporate purposes, including possible
acquisitions.
New York Stock Exchange sym- PWR
bol...........................
</TABLE>
- --------
(1) Includes 3,345,333 shares of Limited Vote Common Stock issued to the
initial stockholders and management personnel of Quanta. Excludes options
to purchase 1,584,780 shares of common stock that have been granted, but
not exercised, pursuant to our 1997 Stock Option Plan and 3,589,091 shares
of common stock reserved for issuance upon conversion of the Convertible
Subordinated Notes. See "Management--1997 Stock Option Plan," "Certain
Transactions--Organization of Quanta," "--Transactions Involving Certain
Officers, Directors and Stockholders" and "Description of Capital Stock--
Common Stock and Limited Vote Common Stock."
3
<PAGE>
SUMMARY FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For periods prior to our February 1998 initial public offering, our
historical financial statements reflect the results of PAR Electrical
Contractors, Inc., the "accounting acquiror," restated for the results of NorAm
Telecommunications, Inc., which we acquired in June 1998 in a transaction
accounted for as a pooling-of-interests. Our historical financial statements
for periods after our initial public offering reflect the results of the other
businesses we acquired from the date we acquired such businesses.
The unaudited pro forma combined financial information presented below is
intended to give you a better understanding of what the results of operations
and financial position of all of our businesses might have looked like had they
always been combined. We prepared the pro forma statements of operations and
balance sheet data by adding or combining the historical results of each
acquired company as if it had been acquired on January 1, 1997 to our restated
historical financial statements. We then adjusted the combined amounts for the
effects of certain other pro forma adjustments to the historical financial
statements discussed in the footnotes below, the consummation of our initial
public offering, the issuance of the Convertible Subordinated Notes and the
consummation of this offering. The companies may have performed differently if
they had been combined as of January 1, 1997. You should not rely on the pro
forma information as being indicative of the historical results that we would
have had or the future results that we will experience.
You should read the summary financial data presented below along with our
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," the Unaudited Pro Forma Combined Financial Statements and the
Consolidated Financial Statements and the related notes all included elsewhere
in this prospectus.
<TABLE>
<CAPTION>
HISTORICAL PRO FORMA COMBINED
---------------------------------------- --------------------------
NINE MONTHS NINE MONTHS NINE MONTHS
YEAR ENDED ENDED ENDED YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
1997 1997 1998 1997(1) 1998(1)
------------ ------------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS
DATA:
Revenues.............. $76,204 $56,467 $194,356 $337,965 $307,675
Cost of services (in-
cluding deprecia-
tion)................ 58,896 44,055 157,218 268,939 249,180
------- ------- -------- -------- --------
Gross profit.......... 17,308 12,412 37,138 69,026 58,495
Selling, general and
administrative
expenses(2).......... 11,589 8,493 16,544 26,765 25,535
Merger expenses--pool-
ing.................. -- -- 231 -- 231
Goodwill amortiza-
tion(3).............. 56 42 1,535 3,786 2,880
------- ------- -------- -------- --------
Income from opera-
tions................ 5,663 3,877 18,828 38,475 29,849
Other income (ex-
pense), net(4)....... (1,350) (960) (2,017) (2,680) (1,802)
------- ------- -------- -------- --------
Income before income
tax expense.......... 4,313 2,917 16,811 35,795 28,047
Provision for income
taxes(5)............. 1,786 1,173 7,442 15,750 12,341
------- ------- -------- -------- --------
Net income............ $ 2,527 $ 1,744 $ 9,369 $ 20,045 $ 15,706
======= ======= ======== ======== ========
Basic earnings per
share................ $ 0.64 $ 0.44 $ 0.57 $ 0.83 $ 0.63
======= ======= ======== ======== ========
Diluted earnings per
share................ $ 0.64 $ 0.44 $ 0.57 $ 0.80 $ 0.60
======= ======= ======== ======== ========
Shares used in computing
earnings per share(6)
Basic................. 3,952 3,952 16,340 24,084 25,121
======= ======= ======== ======== ========
Diluted............... 3,952 3,952 16,456 27,673 28,826
======= ======= ======== ======== ========
</TABLE>
4
<PAGE>
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL COMBINED
SEPTEMBER 30, SEPTEMBER 30,
1998 1998(7)
------------- -------------
<S> <C> <C>
BALANCE SHEET DATA:
Working capital................................... $ 64,608 $ 66,908
Total assets...................................... 331,323 356,022
Long-term debt, net of current maturities......... 108,297 3,147
Total stockholders' equity........................ 156,949 232,988
</TABLE>
- --------
(1) Reflects the elimination of the revenues and related expenses for a
division of one of the companies acquired by us after our initial public
offering because we did not acquire that division.
(2) The unaudited pro forma combined statement of operations data reflect an
aggregate of approximately $8.4 million and $2.5 million for the year ended
December 31, 1997 and for the nine months ended September 30, 1998,
respectively, in pro forma reductions in salaries, bonuses and benefits of
the previous owners and management of the businesses acquired by us. These
amounts are intended to show you the difference between the historical
compensation costs for the owners and management and the amounts to which
they have agreed with us on a prospective basis. Additionally, the pro
forma information excludes a $13.0 million non-recurring non-cash charge
recognized by Quanta related to the issuance of stock in November 1997 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 Services, Inc.
(3) Reflects amortization of goodwill over a 40-year period as a result of our
acquisition of the businesses acquired using the purchase method of
accounting.
(4) Reflects interest expense related to borrowings required to fund the cash
portion of the consideration paid for businesses we acquired between our
initial public offering and December 1, 1998, net of interest savings due
to the assumed repayment of debt using the proceeds from our initial public
offering and this offering and a lower effective interest rate due to the
issuance of the Convertible Subordinated Notes. The additional interest
expense on the borrowings was calculated utilizing an annual effective
interest rate of approximately 7.0%.
(5) Assumes all pretax income before non-deductible goodwill and other
permanent items is subject to an estimated 39.0% combined tax rate.
(6) The shares used in computing earnings per share for the following periods
include:
(a) Year ended December 31, 1997 and nine months ended September 30, 1997
(historical)--the 3,000,000 shares issued to the stockholders of PAR
Electrical Contractors, Inc. and the 951,945 shares issued in
connection with the acquisition of NorAm Telecommunications, Inc.
(b) Year ended December 31, 1997 (pro forma)--shares used in the
calculation of basic earnings per share include (1) the shares
described above in (a), (2) 5,750,000 shares of common stock sold in
our initial public offering, (3) 8,573,392 shares issued to the owners
of the other businesses we have acquired through December 1, 1998, (4)
3,345,333 shares of Limited Vote Common Stock issued to the initial
stockholders and management personnel of Quanta and (5) the 3,500,000
shares of common stock to be sold in this offering, net of 1,036,601
shares representing net cash to Quanta.
Shares used in the calculation of the diluted earnings per share for the
year ended December 31, 1997 include (1) shares described above and (2)
the dilution attributable to the assumed conversion of the Convertible
Subordinated Notes.
(c) Nine months ended September 30, 1998 (historical)--shares used in the
calculation of basic earnings per share include the weighted average
portion of (1) 7,527,000 shares of common stock issued to the owners of
the companies we acquired concurrently with our initial public
offering, (2) 3,345,333 shares of Limited Vote Common Stock issued to
the initial stockholders and management personnel of Quanta, (3)
5,750,000 shares of common stock sold in our initial public offering to
pay the cash
5
<PAGE>
portion of the consideration for the companies acquired concurrently
with our initial public offering, (4) 951,945 shares issued for the
acquisition of NorAm Telecommunications, Inc. and (5) 3,386,288 shares
issued in acquisitions accounted for as purchases.
Shares used in the calculation of the diluted earnings per share for the
nine months ended September 30, 1998 include (1) the shares described
above and (2) the dilution attributable to outstanding options to
purchase common stock using the treasury stock method.
(d) Nine months ended September 30, 1998 (pro forma)--shares used in the
calculation of basic earnings per share information include (1) the
shares used in the calculation of historical basic earnings per share
described in (c) above computed as if those shares had been issued as
of January 1, 1998, (2) 660,104 shares issued in the acquisition
accounted for as a purchase between September 30, 1998 and December 1,
1998, as if the shares had been issued as of January 1, 1998 and (3)
the 3,500,000 shares of common stock to be sold in this offering.
Shares used in the calculation of pro forma diluted earnings per share
for the nine months ended September 30, 1998 include (1) the shares
described above, (2) the dilution attributable to the assumed conversion
of the Convertible Subordinated Notes and (3) the dilution attributable
to outstanding options to purchase common stock using the treasury stock
method.
(7) Reflects the acquisition of the one business acquired between September
30, 1998 and December 1, 1998 as if it had occurred on September 30, 1998
as described in the notes to the Unaudited Pro Forma Combined Financial
Statements, including approximately $11.3 million borrowed under our
credit facility. In addition, reflects the effects of the issuance and
sale of the Convertible Subordinated Notes and the sale of the 3,500,000
shares offered by us by this prospectus at an assumed public offering
price of $21.13 per share and the application of the net proceeds
therefrom as described in "Use of Proceeds." 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 prospectus.
6
<PAGE>
RISK FACTORS
You should carefully consider the risks described below before making an
investment decision. The risks and uncertainties described below are not the
only ones facing our company. Additional risks and uncertainties not presently
known to us or that we currently deem immaterial may also impair our business
operations.
If any of the following risks actually occur, our business, financial
condition or results of operations could be materially and adversely affected.
In such case, the trading price of our common stock could decline, and you may
lose all or part of your investment.
This prospectus also contains forward-looking statements that involve risks
and uncertainties. Discussions containing such forward-looking statements are
found in the material set forth under "Prospectus Summary," "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business," as well as in the prospectus generally. Our actual
results could differ materially from those anticipated in the forward-looking
statements as a result of certain factors, including the risks described below
and elsewhere in this prospectus.
Limited Combined Operating History. Quanta was founded in August 1997 but
conducted no operations and generated no revenues prior to acquiring four
businesses in February 1998. These four businesses and the other businesses we
have acquired since February 1998 have been operating as separate entities and
we expect that these businesses and any others we acquire will continue to
operate as separate entities with a large degree of operating autonomy. To
manage the combined enterprise on a profitable basis, we must institute certain
necessary common systems and procedures. We intend to integrate the computer,
accounting and financial reporting systems, and certain of the operational,
administrative, banking and insurance procedures of the businesses we acquire.
However, we cannot be certain that we will successfully institute these common
systems and procedures. In addition, we cannot be certain that our recently
assembled management group will be able to successfully manage the businesses
we acquire as a combined entity and effectively implement our operating or
growth strategies. If we are unable to integrate or successfully manage the
companies we have acquired or may acquire in the future, our business,
financial condition and results of operations could be materially and adversely
affected.
Risks Related to Acquisition Strategy. One of our principal growth strategies
is to increase our revenues and the markets we serve through the acquisition of
additional electric and telecommunications infrastructure contracting
companies. We expect to face competition for acquisition candidates, which may
limit the number of acquisition opportunities and may lead to higher
acquisition prices. We cannot be sure that we will be able to identify, acquire
or profitably manage additional businesses. We also cannot be sure that we can
integrate successfully any acquired businesses with our other operations
without substantial costs, delays or other operational or financial problems.
Further, acquisitions involve a number of special risks which could materially
and adversely affect our business, financial condition and results of
operations. These special risks include:
. failure of the acquired businesses to achieve the results we expect;
. diversion of our management's attention from operational matters;
7
<PAGE>
. our inability to retain key personnel of the acquired businesses; and
. risks associated with unanticipated events or liabilities.
If one of our acquired businesses suffers customer dissatisfaction or
performance problems, then the reputation of our entire company could be
materially and adversely affected.
Risks Related to Acquisition Financing. We cannot readily predict the timing,
size and success of our acquisition efforts or the capital we will need for
these efforts. We intend to continue to use our common stock for all or a
portion of the consideration for future acquisitions. These issuances could
have a dilutive effect on our then existing stockholders. If our common stock
does not maintain a sufficient market value or potential acquisition candidates
are unwilling to accept our common stock as part of the consideration for the
sale of their businesses, we may be required to utilize more of our cash
resources to pursue our acquisition program. Using cash for acquisitions limits
our financial flexibility and makes us more likely to seek additional capital
through future debt or equity financings. If we seek more debt, we may have to
agree to financial covenants that limit our operational and financial
flexibility. If we seek more equity, we may dilute the ownership interests of
our then existing stockholders. When we seek additional debt or equity
financings, we cannot be certain that additional debt or equity will be
available to us at all or on terms acceptable to us. If we cannot secure
additional financing on acceptable terms, we may be unable to pursue our
acquisition strategy successfully and we may be unable to support our growth
strategy.
Risks Related to Operating and Internal Growth Strategies. A key element of
our strategy is to increase the profitability and revenues of the businesses we
acquire. Although we have begun to implement this strategy by various means, we
cannot be certain that we will be able to continue to do so successfully.
Another key component of our strategy is to operate the businesses we acquire
on a decentralized basis, with local management retaining responsibility for
day-to-day operations, profitability and the internal growth of the individual
business. If we do not implement proper overall business controls, this
decentralized operating strategy could result in inconsistent operating and
financial practices at the businesses we acquire, and our overall profitability
could be adversely affected. Our ability to generate internal growth will be
affected by, among other factors, our ability to:
. expand the range of services we offer to customers;
. attract new customers;
. increase the number of projects performed for existing customers;
. hire and retain employees;
. open additional facilities; and
. reduce operating and overhead expenses.
Many of the factors affecting our ability to generate internal growth may be
beyond our control, and we cannot be certain that our strategies will be
successful or that we will be able to generate cash flow sufficient to fund our
operations and to support internal growth. Our inability to achieve internal
growth could materially and adversely affect our business, financial condition
and results of operations.
Management of Growth. We expect to grow both internally and through
acquisitions. We expect to expend significant time and effort in evaluating,
completing and integrating acquisitions and
8
<PAGE>
opening new facilities. We cannot be certain that our systems, procedures and
controls will be adequate to support our operations as they expand. Any future
growth also will impose significant additional responsibilities on members of
our senior management, including the need to recruit and integrate new senior
level managers and executives. We cannot be certain that we can recruit and
retain such additional managers and executives. To the extent that we are
unable to manage our growth effectively, or are unable to attract and retain
additional qualified management, our financial condition and results of
operations could be materially and adversely affected.
Availability of Qualified Employees. Our ability to provide high-quality
services on a timely basis requires that we employ an adequate number of
skilled electricians, journeymen linemen and project managers. Accordingly, our
ability to increase our productivity and profitability will be limited by our
ability to employ, train and retain skilled personnel necessary to meet our
requirements. We, like many of our competitors, are currently experiencing
shortages of qualified personnel. We cannot be certain that we will be able to
maintain an adequate skilled labor force necessary to operate efficiently and
to support our growth strategy or that our labor expenses will not increase as
a result of a shortage in the supply of skilled personnel.
Unionized Workforce. As of September 30, 1998, approximately 45% of our
employees were covered by collective bargaining agreements. Although the
majority of these agreements prohibit strikes and work stoppages, we cannot be
certain that strikes or work stoppages will not occur in the future. Strikes or
work stoppages would adversely impact our relationship with our customers and
could materially and adversely affect our business, financial condition and
results of operations. In addition, our acquisition strategy could be adversely
affected because of our union status for a variety of reasons. For instance,
our union agreements may be incompatible with the union agreements of a
business we want to acquire and some businesses may not want to become
affiliated with a union based company.
Competition. The electric and telecommunications infrastructure contracting
industry is highly competitive and is served by numerous small, owner-operated
private companies, public companies and several large regional companies. In
addition, relatively few barriers prevent entry into our industry. As a result,
any organization that has adequate financial resources and access to technical
expertise may become one of our competitors. Competition in the industry
depends on a number of factors, including price. Certain of our competitors may
have lower overhead cost structures and may, therefore, be able to provide
their services at lower rates than we can provide such services. In addition,
some of our competitors are larger and have greater resources than us. We
cannot be certain that our competitors will not develop the expertise,
experience and resources to provide services that are superior in both price
and quality to our services. Similarly, we cannot be certain that we will be
able to maintain or enhance our competitive position.
We may also face competition from the in-house service organizations of our
existing or prospective customers. Electric utility and telecommunications
service providers usually employ personnel who perform some of the same types
of services as we do. We cannot be certain that our existing or prospective
customers will continue to outsource services in the future.
9
<PAGE>
Risks Associated with Contracts. We currently generate, and expect to
continue to generate, a significant portion of our revenues under fixed price
contracts. We must estimate the costs of completing a particular project to bid
for such fixed price contracts. The cost of labor and materials, however, may
vary from the costs we originally estimated. These variations, along with other
risks inherent in performing fixed price contracts, may result in actual
revenue and gross profits for a project differing from those we originally
estimated and could result in reduced profitability and losses on projects.
Depending upon the size of a particular project, variations from estimated
contract costs can have a significant impact on our operating results for any
fiscal quarter or year.
Certain of our customers assign work to us on a project by project basis
under master service agreements. Under master service agreements, our customer
generally has no obligation to assign work to us. We cannot be certain that
customers with whom we have master service agreements will continue to assign
work to us. A significant decline in work assigned to us under these contracts
could materially and adversely affect our results of operations.
Seasonality; Fluctuations of Quarterly Results. The electric and
telecommunications infrastructure contracting business can be subject to
seasonal variations. During the winter months, demand for new projects and
maintenance services may be lower due to inclement weather. Additionally, the
industry can be highly cyclical. As a result, our volume of business may be
adversely affected by declines in new projects in various geographic regions of
the U.S. Our 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, our operating results in any particular quarter may not be
indicative of the results that you can expect for any other quarter or for the
entire year.
Potential Exposure to Environmental Liabilities. Our operations are subject
to various environmental laws and regulations, including those dealing with the
handling and disposal of waste products, PCBs, fuel storage and air quality. As
a result of past and future operations at our facilities, we may be required to
incur environmental remediation costs and other cleanup expenses. In addition,
we cannot be certain that we will be able to identify or be indemnified for all
potential environmental liabilities relating to any acquired business.
Control by Existing Management and Stockholders. Our executive officers and
directors and their affiliates beneficially own approximately 5.8 million
shares of common stock and Limited Vote Common Stock, representing
approximately 26.8% of the aggregate outstanding shares of common stock and
Limited Vote Common Stock. The initial stockholders of Quanta, certain members
of management and others own 3,345,333 shares of Limited Vote Common Stock.
Holders of shares of Limited Vote Common Stock are entitled to elect one member
of our Board of Directors and are entitled to one-tenth of one vote for each
share held on all other matters on which holders of common stock are entitled
to vote. Holders of Limited Vote Common Stock are not entitled to vote
10
<PAGE>
on the election of any other directors. Our executive officers and directors
control in the aggregate approximately 28.7% of all shares of common stock
(which percentage excludes shares of Limited Vote Common Stock) and, if acting
in concert, are able to exert significant control over our affairs and the
outcome of any matter submitted to a vote of stockholders.
Dependence on Key Personnel. We depend on the continued efforts of our
executive officers and on senior management of the businesses we acquire.
Although we intend to enter into an employment agreement with each of our
executive officers and other key employees, we cannot be certain that any
individual will continue in such capacity for any particular period of time.
The loss of key personnel, or the inability to hire and retain qualified
employees, could adversely effect our business, financial condition and results
of operations. We do not intend to carry key-person life insurance on any of
our employees.
Shares Eligible for Future Sale. If our stockholders sell substantial amounts
of our common stock (including shares issued upon the exercise of outstanding
options) in the public market following this offering, the market price of our
common stock could fall. Such sales might make it more difficult for us to sell
equity or equity-related securities in the future at a time and price that we
deem appropriate. Upon completion of this offering, we will have outstanding
25,192,655 shares of common stock (based upon shares outstanding as of December
15, 1998), assuming no exercise of the underwriters' overallotment option, no
exercise of outstanding options after December 15, 1998 and no conversion of
the Convertible Subordinated Notes. Of these shares, the 3,500,000 shares
offered by this prospectus, together with the 5,750,000 shares sold in our
initial public offering in February 1998 and 1,520,381 shares issued in
connection with acquisitions of businesses and stock option exercises, are
freely tradable. Certain of our directors, executive officers and stockholders
who beneficially own in the aggregate 10,920,433 shares of common stock and
Limited Vote Common Stock have agreed not to sell or otherwise dispose of their
shares until February 18, 2000 without the prior written consent of BT Alex.
Brown Incorporated. The remaining 3,501,841 shares are eligible for sale in the
public market from time to time in accordance with the rules of the Securities
and Exchange Commission.
Certain Anti-Takeover Provisions. The following provisions of our Certificate
of Incorporation and Bylaws, as currently in effect, as well as Delaware law,
could discourage potential acquisition proposals, delay or prevent a change in
control of Quanta or limit the price that investors may be willing to pay in
the future for shares of our common stock. Our Certificate of Incorporation
permits our Board of Directors to issue "blank check" preferred stock and to
adopt amendments to our Bylaws. Our Bylaws contain restrictions regarding the
right of stockholders to nominate directors and to submit proposals to be
considered at stockholder meetings. Also, our Certificate of Incorporation and
Bylaws restrict the right of stockholders to call a special meeting of
stockholders and to act by written consent. We are also subject to provisions
of Delaware law which prohibit us from engaging in any of a broad range of
business transactions with an "interested stockholder" for a period of three
years following the date such stockholder became classified as an interested
stockholder.
Absence of Dividends; Immediate and Substantial Dilution. We have never paid
any cash dividends and do not anticipate paying cash dividends on our common
stock in the immediate future. You will experience immediate and substantial
dilution of $17.79 per share from the offering price if you purchase shares in
this offering. In the event that we issue additional common stock in the
11
<PAGE>
future, including shares that may be issued in connection with future
acquisitions or other public or private financings, purchasers of common stock
in this offering may experience further dilution.
Year 2000. Many currently installed computer systems and software products
are coded to accept only two-digit entries in the date code field. Beginning in
the year 2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
system and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. We cannot be certain that unexpected Year
2000 compliance problems of our systems or of our vendors, customers and
service providers will not materially and adversely affect our business,
financial condition or operating results. The unanticipated failure of one of
these systems to properly recognize date information beyond the year 1999 could
have a significant adverse impact on our ability to deliver services to
customers and to manage our continuing operations.
Forward-Looking Statements. A number of statements in this prospectus address
activities, events or developments which we anticipate may occur in the future,
including our strategy for internal growth and improved profitability, the
nature and amount of additional capital expenditures, acquisitions of assets
and businesses and industry trends. These statements are based on certain
assumptions and analyses we make in light of our perception of historical
trends, current business and economic conditions and expected future
developments, as well as other factors we believe are reasonable or
appropriate. However, whether actual results and developments will conform with
our expectations is subject to a number of risks and uncertainties, including:
. the risk factors discussed in this prospectus;
. general economic, market or business conditions;
. the business opportunities (or lack thereof) that may be presented to and
pursued by us; and
. changes in laws or regulations and other factors.
Many of these risks and uncertainties are beyond our control. Consequently,
we cannot be certain that the actual results or developments that we anticipate
will be realized or, even if substantially realized, that they will have the
expected effects on our business or operations.
12
<PAGE>
USE OF PROCEEDS
Quanta estimates that it will receive net proceeds from the sale of the
3,500,000 shares offered by this prospectus (after deducting underwriting
discounts and commissions and estimated offering expenses payable by us) of
$69.8 million ($80.3 million if the underwriters exercise their overallotment
option in full), assuming an offering price of $21.13 per share.
We intend to use the net proceeds to repay outstanding indebtedness under our
$175,000,000 revolving credit facility (the "Credit Facility"). Approximately
$61.8 million was outstanding under that facility as of December 15, 1998. The
Credit Facility presently bears interest at a variable rate (the weighted
average effective rate was 7.0% at December 15, 1998) and will mature in 2003.
We obtained the Credit Facility primarily to fund acquisitions and refinance
debt. The terms of the Credit Facility permit us to redraw on the Credit
Facility as needed for future acquisitions and capital expenditures (subject to
certain restrictions) and for general corporate purposes.
We will use the balance of the net proceeds, if any, for acquisitions,
capital expenditures and working capital. We intend to invest unused net
proceeds in short-term, interest-bearing securities until we apply them to
these specific purposes. Quanta continually evaluates potential acquisition
candidates and intends to continue to pursue our aggressive acquisition
strategy.
13
<PAGE>
PRICE RANGE OF COMMON STOCK
We initially offered our common stock to the public on February 12, 1998 at a
price of $9.00 per share (the "IPO"). Our common stock is listed on the NYSE
under the symbol "PWR." The following table sets forth the high and low sales
prices 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)..................... $16.75 $11.00
2nd Quarter.............................................. $17.75 $12.25
3rd Quarter.............................................. $15.38 $12.00
4th Quarter (through December 16, 1998).................. $23.00 $11.25
</TABLE>
On December 16, 1998, the last sale price for the common stock as reported by
the NYSE was $21.13 per share. On December 16, 1998, there were 96 holders of
record of common stock and 46 holders of record of Limited Vote Common Stock.
There is no established trading market for the Limited Vote Common Stock.
DIVIDEND POLICY
Quanta currently intends to retain our future earnings, if any, to finance
the growth, development and expansion of our business. Accordingly, we do not
currently intend to declare or pay any cash dividends on our common stock in
the immediate future. The declaration, payment and amount of future cash
dividends, if any, will be at the discretion of our Board of Directors after
taking into account various factors. These factors include: our financial
condition, results of operations, cash flows from operations, current and
anticipated capital requirements and expansion plans, the income tax laws then
in effect and the requirements of Delaware law. In addition, the terms of our
Credit Facility and Convertible Subordinated Notes include restrictions on
payment of cash dividends without the consent of the respective lenders.
14
<PAGE>
CAPITALIZATION
The following table sets forth the current maturities of long-term
obligations and the capitalization of Quanta as of September 30, 1998 on a
historical basis and as adjusted to give effect to (1) the acquisition of a
business acquired between September 30, 1998 and December 1, 1998, (2) the
issuance and sale of the Convertible Subordinated Notes and of the 3,500,000
shares of common stock offered hereby and (3) application of the estimated net
proceeds from this offering as described in "Use of Proceeds." This table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Unaudited Pro Forma
Combined Financial Statements of the Company and the related notes thereto
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998
-------------------
PRO
FORMA AS
HISTORICAL ADJUSTED
---------- --------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long-term debt(1)................... $ 2,610 $ 2,855
======== ========
Long-term debt, less current maturities(1)................ $108,297 $ 3,147
-------- --------
Convertible Subordinated Notes............................ -- 49,350
-------- --------
Stockholders' equity:
Preferred stock, $.00001 par value, 10,000,000 shares
authorized; none issued or outstanding................. -- --
Common stock, $.00001 par value, 36,654,667 shares
authorized; 20,960,566 issued and outstanding; and
25,120,670 shares issued and outstanding, as adjusted.. -- --
Limited Vote Common Stock, $.00001 par value, 3,345,333
shares authorized, issued and outstanding.............. -- --
Unearned ESOP shares.................................... (1,831) (1,831)
Additional paid-in capital.............................. 137,608 213,647
Retained earnings....................................... 21,172 21,172
-------- --------
Total stockholders' equity............................ 156,949 232,988
-------- --------
Total capitalization................................ $265,246 $285,485
======== ========
</TABLE>
- --------
(1) For a description of Quanta's debt, see Note 7 of Notes to Consolidated
Financial Statements included elsewhere in this prospectus.
15
<PAGE>
DILUTION
The pro forma net tangible book value of our common stock as of September 30,
1998 was $14.2 million, or $0.66 per share. Pro forma net tangible book value
per share represents the amount of Quanta's total tangible assets, less its
total liabilities, after giving pro forma effect to the acquisition of one
business which occurred between September 30, 1998 and December 1, 1998 and the
issuance and sale of the Convertible Subordinated Notes (but assuming no
conversion into common stock of such Convertible Subordinated Notes) as if they
had occurred on September 30, 1998, divided by the total number of shares of
common stock and Limited Vote Common Stock outstanding immediately prior to
this offering.
After giving effect to the sale by Quanta of 3,500,000 shares of common stock
in this offering at an assumed offering price of $21.13 per share (and after
deduction of the underwriting discounts and commissions and estimated offering
expenses), Quanta's pro forma net tangible book value as of September 30, 1998
would have been approximately $84.0 million, or $3.34 per share of common
stock. This represents an immediate increase in pro forma net tangible book
value of approximately $2.68 per share to existing stockholders and an
immediate dilution of $17.79 per share to new investors purchasing common stock
in this offering, as illustrated in the following table:
<TABLE>
<S> <C> <C>
Assumed offering price per share........................... $21.13
Pro forma net tangible book value per share prior to this
offering................................................ $0.66
Increase in pro forma net tangible book value per share
to existing stockholders................................ 2.68
-----
Pro forma net tangible book value per share after this
offering.................................................. 3.34
------
Dilution to new investors.................................. $17.79
======
</TABLE>
Quanta may also issue additional shares to effect future business
acquisitions or upon exercise of stock options granted in the future or other
equity awards, which could result in additional dilution to then existing
stockholders.
16
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
For financial statement presentation purposes, PAR Electrical Contractors,
Inc. ("PAR") has been identified as the "accounting acquiror." Between our IPO
in February 1998 and December 1, 1998, we acquired 11 specialty contracting
businesses. Of these 11 acquired businesses, 10 were accounted for using the
purchase method of accounting (the "Purchased Companies") and one was accounted
for using the pooling-of-interests method of accounting (the "Pooled Company").
As such, Quanta's consolidated historical financial statements as of December
31, 1996 and 1997, and for each of the three years in the period ended December
31, 1997, included elsewhere in this prospectus, and the related selected
historical financial data have been derived from the audited financial
statements and represent the financial position and results of operations of
PAR as restated to include the financial position and results of operations of
the Pooled Company. The following selected historical financial data for Quanta
as of December 31, 1993, 1994, 1995 and September 30, 1998 and for each of the
two years in the period ended December 31, 1994 and for the nine months ended
September 30, 1997 and 1998, have been derived from the unaudited financial
statements of Quanta, which have been prepared on the same basis as the audited
financial statements and, in our opinion, reflect all adjustments, consisting
only of normal recurring adjustments, necessary for a fair presentation of such
data and reflect the remaining three companies we purchased concurrently with
our IPO (together with PAR, the "Founding Companies") and the Purchased
Companies beginning on their respective dates of acquisition. The Founding
Companies, the Purchased Companies and the Pooled Company are collectively
referred to as the "Acquired Businesses."
The following selected unaudited pro forma combined financial data present
certain data for Quanta, adjusted for (1) the Acquired Businesses, (2) the
effects of certain other pro forma adjustments to the historical financial
statements, (3) the consummation of our IPO in February 1998 and the
application of the net proceeds therefrom, (4) the issuance of the Convertible
Subordinated Notes and (5) the consummation of this offering at an assumed
public offering price of $21.13 per share and the application of the net
proceeds therefrom. The unaudited pro forma combined statements of operations
data assume that the acquisition of the Acquired Businesses, the IPO and
related transactions, the issuance of the Convertible Subordinated Notes and
this offering were closed on January l, 1997 and are not necessarily indicative
of the results that we would have obtained had these events actually then
occurred or of our future results. During the periods presented below, the
Acquired Businesses were not under common control or management. Therefore, the
data presented may not be comparable to or indicative of post combination
results to be achieved by us. The unaudited pro forma combined financial
statements should be read in conjunction with the other financial information
included elsewhere in this prospectus. See the Unaudited Pro Forma Combined
Financial Statements and notes thereto and the historical financial statements
and the notes thereto of Quanta, the Founding Companies, and certain other
acquired company financial statements included elsewhere in this prospectus.
17
<PAGE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------- -----------------
1993 1994 1995 1996 1997 1997 1998
------- ------- ------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF
OPERATIONS DATA:
Quanta Services, Inc.
and Subsidiaries
Revenues.............. $35,319 $57,020 $53,224 $71,294 $76,204 $56,467 $194,356
Costs of services
(including
depreciation)........ 29,000 47,216 44,608 57,164 58,896 44,055 157,218
------- ------- ------- ------- ------- ------- --------
Gross profit.......... 6,319 9,804 8,616 14,130 17,308 12,412 37,138
Selling, general and
administrative
expenses............. 5,055 6,686 6,438 9,876 11,589 8,493 16,544
Merger expenses--
pooling.............. -- -- -- -- -- -- 231
Goodwill
amortization......... -- 184 50 55 56 42 1,535
------- ------- ------- ------- ------- ------- --------
Income from
operations........... 1,264 2,934 2,128 4,199 5,663 3,877 18,828
Other income
(expense), net....... (399) (598) (712) (1,020) (1,350) (960) (2,017)
------- ------- ------- ------- ------- ------- --------
Income before
provision for income
taxes................ 865 2,336 1,416 3,179 4,313 2,917 16,811
Provision for income
taxes................ 152 867 353 1,389 1,786 1,173 7,442
------- ------- ------- ------- ------- ------- --------
Net income............ $ 713 $ 1,469 $ 1,063 $ 1,790 $ 2,527 $ 1,744 $ 9,369
======= ======= ======= ======= ======= ======= ========
Basic and diluted
earnings per share... $ 0.18 $ 0.37 $ 0.27 $ 0.45 $ 0.64 $ 0.44 $ 0.57
======= ======= ======= ======= ======= ======= ========
Shares used in
computing earnings
per share(6)
Basic................ 3,952 3,952 3,952 3,952 3,952 3,952 16,340
======= ======= ======= ======= ======= ======= ========
Diluted.............. 3,952 3,952 3,952 3,952 3,952 3,952 16,456
======= ======= ======= ======= ======= ======= ========
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1997(1) 1998(1)
------------ -------------
<S> <C> <C>
PRO FORMA COMBINED:
Revenues.......................................... $337,965 $307,675
Cost of services (including depreciation)......... 268,939 249,180
-------- --------
Gross profit...................................... 69,026 58,495
Selling, general and administrative expenses(2)... 26,765 25,535
Merger expenses--pooling.......................... -- 231
Goodwill amortization(3).......................... 3,786 2,880
-------- --------
Income from operations............................ 38,475 29,849
Other income (expense), net(4).................... (2,680) (1,802)
-------- --------
Income before income tax expense.................. 35,795 28,047
Provision for income taxes(5)..................... 15,750 12,341
-------- --------
Net income........................................ $ 20,045 $ 15,706
======== ========
Basic earnings per share.......................... $ 0.83 $ 0.63
======== ========
Diluted earnings per share........................ $ 0.80 $ 0.60
======== ========
Shares used in computing pro forma earnings per
share(6)
Basic........................................... 24,084 25,121
======== ========
Diluted......................................... 27,673 28,826
======== ========
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------------------------------
PRO FORMA
DECEMBER 31, COMBINED
--------------------------------------- SEPTEMBER 30, SEPTEMBER 30,
1993 1994 1995 1996 1997 1998 1998(7)
------- ------- ------- ------- ------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital....... $ 1,151 $ 1,794 $ 871 $ 1,792 $ 2,186 $ 64,608 $ 66,908
Total assets.......... 15,806 22,713 24,761 29,734 35,747 331,323 356,022
Long-term debt, net of
current maturities... 2,350 4,512 4,291 6,478 7,542 108,297 3,147
Total stockholders'
equity............... 6,264 7,921 8,709 8,460 11,210 156,949 232,988
</TABLE>
- --------
(1) Reflects the elimination of the revenues and related expenses for a
division of one of the companies acquired by us after our IPO because we
did not acquire that division.
(2) The unaudited pro forma combined statement of operations data reflect an
aggregate of approximately $8.4 million and $2.5 million for the year ended
December 31, 1997 and for the nine months ended September 30, 1998,
respectively, in pro forma reductions in salaries, bonuses and benefits of
the previous owners and management of the businesses acquired by us. These
amounts are intended to show you the difference between the historical
compensation costs for the owners and management and the amounts to which
they have agreed with us on a prospective basis. Additionally, the pro
forma information excludes a $13.0 million non-recurring non-cash charge
recognized by Quanta related to the issuance of stock in November 1997 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 Services, Inc.
(3) Reflects amortization of goodwill over a 40-year period as a result of our
acquisition of the businesses acquired using the purchase method of
accounting.
(4) Reflects interest expense related to borrowings required to fund the cash
portion of the consideration paid for the Purchased Companies, net of
interest savings due to the assumed repayment of debt using the proceeds
from our IPO and this offering and a lower effective interest rate due to
the issuance of the Convertible Subordinated Notes. The additional interest
expense on the borrowings was calculated utilizing an annual effective
interest rate of approximately 7.0%.
(5) Assumes all pretax income before non-deductible goodwill and other
permanent items is subject to an estimated 39.0% combined tax rate.
(6) The shares used in computing earnings per share for the following periods
include:
(a) Five years ended December 31, 1997 and nine months ended September 30,
1997 (historical)--the 3,000,000 shares issued to the stockholders of
PAR and the 951,945 shares issued in connection with the acquisition of
the Pooled Company.
(b) Year ended December 31, 1997 (pro forma)--shares used in the
calculation of basic earnings per share information include (1) the
shares described above in (a), (2) 5,750,000 shares of common stock
sold in our IPO, (3) 8,573,392 shares issued to the owners of the other
Founding Companies and to the Purchased Companies, (4) 3,345,333 shares
of Limited Vote Common Stock issued to the initial stockholders and
certain management personnel of Quanta and (5) the 3,500,000 shares of
common stock to be sold in this offering, net of 1,036,601 shares
representing net cash to Quanta.
Shares used in the calculation of the diluted earnings per share for
the year ended December 31, 1997 include (1) the shares described above
and (2) the dilution attributable to the assumed conversion of the
Convertible Subordinated Notes.
(c) Nine months ended September 30, 1998 (historical)--shares used in the
calculation of basic earnings per share information include the
weighted average portion of (1) 7,527,000 shares of common stock issued
to the owners of the Founding Companies, (2) 3,345,333 shares of
Limited Vote Common Stock issued to the initial stockholders and
certain management personnel of Quanta, (3) 5,750,000 shares of common
stock sold in our IPO to pay the cash portion of the consideration for
the Founding
19
<PAGE>
Companies, (4) 951,945 shares issued for the acquisition of the Pooled
Company and (5) 3,386,288 shares issued in acquisitions accounted for as
purchases.
Shares used in the calculation of the diluted earnings per share for the
nine months ended September 30, 1998 include (1) the shares described
above and (2) the dilution attributable to outstanding options to
purchase shares of common stock using the treasury stock method.
(d) Nine months ended September 30, 1998 (pro forma)--shares used in the
calculation of basic earnings per share information include (1) the
shares used in the calculation of historical basic earnings per share
described in (c) above computed as if those shares had been issued as
of January 1, 1998, (2) 660,104 shares issued in the acquisition
accounted for as a purchase between September 30, 1998 and December 1,
1998, as if the shares had been issued as of January 1, 1998 and (3)
the 3,500,000 shares of common stock to be sold in this offering.
Shares used in the calculation of pro forma diluted earnings per share
for the nine months ended September 30, 1998 include (1) the shares
described above, (2) the dilution attributable to the assumed conversion
of the Convertible Subordinated Notes and (3) the dilution attributable
to outstanding options to purchase common stock using the treasury stock
method.
(7) Reflects the acquisition of the one business acquired between September
30, 1998 and December 1, 1998 as if it had occurred on September 30, 1998
as described in the Notes to the Unaudited Pro Forma Combined Financial
Statements, including approximately $11.3 million borrowed under our
Credit Facility. In addition, reflects the effects of the issuance and
sale of the Convertible Subordinated Notes and the sale of the 3,500,000
shares offered by this prospectus at an assumed public offering price of
$21.13 per share and the application of the net proceeds therefrom as
described in "Use of Proceeds." 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 prospectus.
20
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with our Consolidated
Financial Statements and related notes thereto included elsewhere in this
prospectus. Except for the historical financial information contained herein,
the matters discussed in this prospectus may be considered "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933, as
amended, and Section 21E of the Securities Exchange Act of 1934, as amended.
Such statements include declarations regarding our intent, belief or current
expectations, statements regarding the future results of acquired companies,
our gross margins and our expectations regarding Year 2000 issues. We caution
prospective investors that any such forward-looking statements are not
guarantees of future performance and involve a number of risks and
uncertainties. Actual results could differ materially from those indicated by
such forward-looking statements. Among the important factors that could cause
actual results to differ materially from those indicated by such forward-
looking statements are the risk factors identified elsewhere in this
prospectus.
INTRODUCTION
Quanta derives its revenues from providing specialty contracting and
maintenance services related to electric and telecommunications infrastructure,
providing specialty contracting services to the commercial and industrial
markets and installing transportation control and lighting systems. Our
services include the installation, repair and maintenance of electric power
transmission and distribution lines, telecommunication lines and cable
television lines, the construction of electric substations, the erection of
cellular telephone, PCS(R) and microwave towers, the installation of highway
lighting and traffic control systems, specialized underground construction
including underground fueling systems, design and engineering services, as well
as the provision of specialty contracting services for electric, video,
security, fire, voice and data systems. Our customers include electric
utilities, telecommunication and cable television system operators,
governmental entities, general contractors and owners and managers of
commercial and industrial properties. We had pro forma combined revenues for
the year ended December 31, 1997 of $338.0 million, of which 43.2% was
attributable to electric utility infrastructure services, 38.6% was
attributable to tele- communications infrastructure services, 10.6% was
attributable to transportation control and lighting systems services and 7.6%
was attributable to commercial and industrial services.
Quanta enters into contracts principally on the basis of competitive bids,
the final terms and prices of which we frequently negotiate with the customer.
Although the terms of our contracts vary considerably, the contracts are
usually on either a lump sum or unit price basis in which we agree to do the
work for a fixed amount for the entire project (lump sum) or for units of work
performed (unit price). We complete most installation projects within one year,
while we frequently provide maintenance and repair work under open-ended, unit
price master service agreements which are renewable annually. We generally
record revenues from lump sum contracts on a percentage-of-completion basis,
using the cost-to-cost method based on the percentage of total costs incurred
to date in proportion to total estimated costs to complete the contract. Quanta
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 us for services rendered, measured typically in terms of units
installed, hours
21
<PAGE>
expended or some other measure of progress. Some of our customers require us to
post performance and payment bonds upon execution of the contract, depending
upon the nature of the work to be performed. Our fixed price contracts often
include payment provisions pursuant to which the customer withholds a 5% to 10%
retainage from each progress payment and forwards the retainage to us upon
completion and approval of the work.
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. Quanta'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, we seek to maintain higher margins on labor-intensive projects.
Certain of our subsidiaries were previously subject to deductibles ranging from
$250,000 to $500,000 for workers' compensation insurance. 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 management, administrative salaries and benefits,
marketing, office rent and utilities, communications and professional fees.
The Acquired Businesses have operated throughout the pre-acquisition periods
presented as independent, privately-owned entities, and their results of
operations reflect varying tax structures (S corporations or C corporations)
which have influenced the historical level of owners' compensation. Gross
profits and selling, general and administrative expenses as a percentage of
revenues may not be comparable among the individual Acquired Businesses. In
connection with Quanta's acquisitions, certain owners of the Acquired
Businesses have agreed to reductions in their compensation and related benefits
totaling $8.4 million lower than 1997 levels. Such reductions have been
reflected as a pro forma adjustment in the Unaudited Pro Forma Combined
Statement of Operations and in the terms of the employment agreements entered
into between us and these persons.
Quanta believes that it will realize savings from:
. consolidation of insurance and bonding programs,
. reduction in other general and administrative expenses such as training,
marketing, communications and professional fees,
. our ability to borrow at lower interest rates than most, if not all, of
the Acquired Businesses,
. consolidation of operations in certain locations and
. greater volume discounts from suppliers of materials, parts and supplies.
We anticipate that costs related to our new corporate infrastructure,
operating as a public company and integrating the Acquired Businesses will
partially offset these savings. We believe that neither these savings nor the
costs associated therewith can be quantified as there have been limited
combined operating results upon which to base any assumptions. As a result,
these savings and associated costs have not been included in the pro forma
financial information included herein.
22
<PAGE>
In November 1997, Quanta sold 1.7 million shares of Limited Vote Common Stock
to management and an initial stockholder. As a result, we recorded a non-
recurring, non-cash compensation charge of $13.0 million, representing the
difference between the amount paid for the shares and the estimated fair value
of the shares on the date of sale (the "Compensation Charge"). We have
estimated the Compensation Charge based upon a fair value that we discounted
from the IPO price. This non-recurring, non-cash Compensation Charge is not
included in the Unaudited Pro Forma Combined Financial Statements.
The acquisition of the Founding Companies (excluding PAR) and the Purchased
Companies have been accounted for using the purchase method of accounting.
Accordingly, the excess of the fair value of the consideration paid for the
Acquired Businesses, excluding the Pooled Company, of $124.9 million over the
fair value of the net assets acquired from the Acquired Businesses has been
recorded as goodwill. In addition, goodwill of $25.6 million has been recorded
attributable to the 3,345,333 shares of Limited Vote Common Stock issued to
initial stockholders and management. Together, this goodwill, totaling $150.5
million, will be amortized over its estimated useful life of 40 years as a non-
cash charge to operating income. The pro forma effect of this amortization
expense, the majority of which is not deductible for tax purposes, is expected
to be approximately $3.7 million per year.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
Quanta's results of operations can be subject to seasonal variations. During
the winter months, demand for new projects and maintenance services may be
lower due to reduced construction activity. However, demand for repair and
maintenance services attributable to damage caused by inclement weather during
the winter months may partially offset the loss of revenues from lower demand
for new projects and maintenance services. Additionally, the industry can be
highly cyclical. As a result, our volume of business may be adversely affected
by declines in new projects in various geographic regions in the U.S.
Typically, we experience lower gross margins and operating margins during the
winter months. 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 may also
materially affect quarterly results. Accordingly, our 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.
LIQUIDITY AND CAPITAL RESOURCES
In February 1998, Quanta completed its IPO, which involved the issuance of
5,000,000 shares of common stock at a price of $9.00 per share (before
deducting underwriting discounts and commissions). In March 1998, Quanta sold
an additional 750,000 shares of common stock at a price of $9.00 per share
(before deducting underwriting discounts and commissions) pursuant to the
underwriters' overallotment option. We realized proceeds from these
transactions, net of the discounts and after deducting the expenses of the IPO,
of approximately $44.9 million. Of this amount, we used $21.0 million to fund
the cash portion of the purchase price relating to the acquisition of the
Founding Companies.
As of September 30, 1998, Quanta had cash and cash equivalents of $2.6
million, working capital of $64.6 million and long-term debt of $108.3 million,
net of current maturities, including
23
<PAGE>
borrowings of $104.7 million under the Credit Facility. In addition, the
Company had $1.5 million of letters of credit outstanding.
During the nine months ended September 30, 1998, Quanta used $11.4 million of
net cash in operating activities primarily related to increases in receivables
($23.8 million) and costs and profits recognized in excess of billings ($10.4
million) as a result of revenue growth and the timing of collections. Changes
in working capital accounts are driven predominantly by the acquisitions
throughout the year and as such are not comparable to prior periods. We used
net cash in investing activities of $93.2 million, including $79.3 million used
for the purchase of businesses, net of cash acquired. Financing activities
provided a net cash flow of $106.7 million, resulting primarily from $44.9
million of net proceeds from the IPO, $101.2 million from borrowings under our
Credit Facility reduced by payment of debt assumed in connection with
acquisitions, and cash payments of $8.4 million representing cash consideration
paid to the stockholders of PAR.
In August 1998, we amended our $50.0 million revolving credit facility to
increase it to $125.0 million. In November 1998, we expanded our bank group
from two banks to nine banks and amended the Credit Facility to increase it to
$175.0 million. We pledged all of the capital stock of our material operating
subsidiaries and the majority of our assets to secure the Credit Facility. The
purpose of the Credit Facility 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 1.00% to 2.00%, as
determined by the ratio of our 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 our total funded debt to EBITDA. We incur commitment fees of
0.175% to 0.30% (based on certain financial ratios) on any unused borrowing
capacity under the Credit Facility. Quanta's existing and future subsidiaries
will guarantee the repayment of all amounts due under the Credit Facility, and
the Credit Facility restricts pledges of 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, certain financial
ratios and indebtedness covenants and a requirement to obtain the consent of
the lenders for acquisitions exceeding a certain level of cash consideration.
As of December 15, 1998, we had approximately $61.8 million outstanding under
the Credit Facility.
Additionally, on October 5, 1998, we issued and sold $49.4 million of
Convertible Subordinated Notes bearing interest at 6 7/8% to Enron Capital and
one of its affiliates. We used the proceeds of the Convertible Subordinated
Notes to reduce outstanding borrowings under the Credit Facility. The
Convertible Subordinated Notes include restrictive covenants substantially
similar to those included in the Credit Facility. The Convertible Subordinated
Notes are convertible into common stock at any time at the option of the holder
at a conversion price of $13.75 per share, subject to adjustment. The
Convertible Subordinated Notes are nonredeemable for four years and are
redeemable thereafter at our option at a redemption price which is initially
$103.25 per $100.00 principal amount, with such premium declining ratably over
the succeeding four years. The Convertible Subordinated Notes are mandatorily
redeemable in nine quarterly installments beginning in June 2006. Upon a change
in control, the Convertible Subordinated Notes are mandatorily redeemable at a
redemption price which is initially $107.00 per $100.00 principal amount, with
such premium declining ratably over the succeeding nine years.
24
<PAGE>
Through December 1, 1998, we had acquired 11 companies in addition to the
Founding Companies for an aggregate consideration of 5.0 million shares of
common stock and $84.3 million in cash and notes. The cash portion of such
consideration was provided by borrowings under the Credit Facility. The timing,
size or success of any acquisition effort and the associated potential capital
commitments cannot be predicted.
We intend to continue our aggressive acquisition program, and to continue to
use a combination of cash and common stock to finance the principal part of the
consideration payable in acquisitions. We anticipate that our cash flow from
operations and the Credit Facility will provide sufficient cash to enable us to
meet our working capital needs, debt service requirements and planned capital
expenditures for property and equipment for at least the next 12 months.
INFLATION
Due to relatively low levels of inflation experienced during the years ended
December 31, 1995, 1996 and 1997, inflation did not have a significant effect
on the results of Quanta, the Founding Companies or any of the Acquired
Businesses.
YEAR 2000
Many currently installed computer systems and software products are coded to
accept only two-digit entries in the date code field. Beginning in the year
2000, these date code fields will need to accept four-digit entries to
distinguish 21st century dates from 20th century dates. As a result, computer
systems and software used by many companies may need to be upgraded to comply
with such "Year 2000" requirements. Significant uncertainty exists concerning
the potential effects associated with such compliance, but systems that do not
properly recognize such information could generate erroneous data or cause a
system to fail.
Quanta has made a preliminary review of both its information technology and
its non-information technology systems to determine whether they are Year 2000
compliant. Additionally, we review the systems of all of our potential
acquisitions for Year 2000 compliance. We have not identified any material
systems which are not Year 2000 compliant, although two of our Acquired
Businesses have systems which are not Year 2000 compliant. We plan to have
replacements for these systems operational by December 31, 1999, at an
estimated cost of $350,000, as part of our previously planned systems
integration program. Quanta is currently preparing a formal questionnaire for
all significant suppliers, customers and service providers to determine the
extent to which Quanta is vulnerable to those third parties' failure to
remediate the Year 2000 problem. Quanta has received oral assurances of Year
2000 compliance from many of the third parties with whom it has relationships.
We believe that our operations will not be significantly disrupted even if
third parties with whom we have relationships are not Year 2000 compliant.
We believe that we will not be required to make any material expenditures to
address the Year 2000 problem as it relates to our existing systems. While it
is not possible at present to quantify the cost of all corrective actions, we
do not expect that these actions will materially exceed the cost of previously
planned capital expenditures as we integrate the systems of the businesses we
acquire and of normal software upgrades and replacements expected to occur
through the Year 2000. However, uncertainty exists concerning the potential
costs and effects associated with any Year 2000
25
<PAGE>
compliance, and we intend to continue to make efforts to ensure that third
parties with whom we have relationships are Year 2000 compliant. Therefore, we
cannot be certain that unexpected Year 2000 compliance problems of either
Quanta or our vendors, customers and service providers would not materially and
adversely affect our business, financial condition or operating results. We
will continue to consider the likelihood of a material business interruption
due to the Year 2000 issue, and, if necessary, implement appropriate
contingency plans.
INDIVIDUAL FOUNDING COMPANIES
The selected historical financial information presented in the tables below
is derived from the respective audited financial statements of the Founding
Companies included elsewhere herein. The following discussion should be read in
conjunction with the financial statements of the Founding Companies and the
notes thereto appearing elsewhere in this prospectus.
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 such, the financial statements of Quanta for periods prior to
February 18, 1998 are the financial statements of PAR as restated for the
acquisition of the Pooled Company.
QUANTA SERVICES, INC. AND SUBSIDIARIES RESULTS OF OPERATIONS
The unaudited historical combined statements of operations for the nine
months ended September 30, 1998 reflect the historical operations of PAR and
the Pooled Company. The operations of the other Founding Companies have been
included in our historical Financial Statements beginning February 19, 1998 and
the operations of the Purchased Companies have been included from their
respective acquisition dates.
The following table sets forth selected statement of operations data and such
data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER
YEAR ENDED DECEMBER 31, 30,
------------------------------------------- -----------------------------
1995 1996 1997 1997 1998
------------- ------------- ------------- ------------- --------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $53,224 100.0% $71,294 100.0% $76,204 100.0% $56,467 100.0% $194,356 100.0%
Cost of services........ 44,608 83.8 57,164 80.2 58,896 77.3 44,055 78.0 157,218 80.9
------- ----- ------- ----- ------- ----- ------- ----- -------- -----
Gross profit............ 8,616 16.2 14,130 19.8 17,308 22.7 12,412 22.0 37,138 19.1
Selling, general and
administrative
expenses............... 6,438 12.1 9,876 13.8 11,589 15.2 8,493 15.0 16,544 8.5
Merger expenses-
pooling................ -- -- -- -- -- -- -- -- 231 0.1
Goodwill amortization... 50 0.1 55 0.1 56 0.1 42 0.1 1,535 0.8
------- ----- ------- ----- ------- ----- ------- ----- -------- -----
Income from operations.. $ 2,128 4.0% $ 4,199 5.9% $ 5,663 7.4% $ 3,877 6.9% $ 18,828 9.7%
======= ===== ======= ===== ======= ===== ======= ===== ======== =====
</TABLE>
Quanta results for the nine months ended September 30, 1998 compared to the
nine months ended September 30, 1997
Revenues. Historical revenues increased $137.9 million, or 244.2%, to $194.4
million for the nine months ended September 30, 1998, primarily due to the
acquisition of the Founding Companies on February 18, 1998 and subsequent
acquisitions of the Purchased Companies.
Gross profit. Gross profit increased $24.7 million, or 199.2%, to $37.1
million for the nine months ended September 30, 1998. Gross margins decreased
from 22.0% for the nine months ended
26
<PAGE>
September 30, 1997 to 19.1% for the nine months ended September 30, 1998. This
decrease in gross margin was primarily due to a larger amount of high margin
storm and emergency work performed by PAR in 1997 compared to 1998, and the
acquisition of the Founding and Purchased Companies which earned lower margins
than those experienced by PAR and the Pooled Company in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $8.1 million, or 94.8%, to $16.5 million for
the nine months ended September 30, 1998, due to the acquisition of the
Founding Companies on February 18, 1998, the acquisition of the Purchased
Companies, increases in selling and administrative salaries required to support
the higher level of revenues generated from an increased volume of projects,
and the establishment of a corporate office and administrative infrastructure
during 1998.
Quanta results for the year ended December 31, 1997 compared to the year
ended December 31, 1996
Revenues. Revenues increased $4.9 million, or 6.9%, from $71.3 million for
the year ended December 31, 1996 to $76.2 million for the year ended December
31, 1997, primarily as a result of an increased demand for our services in
Missouri, California and Colorado, partially offset by a decrease in activity
in Oregon.
Gross profit. Gross profit increased $3.2 million, or 22.7%, from $14.1
million for the year ended December 31, 1996 to $17.3 million for the year
ended December 31, 1997. As a percentage of revenues, gross profit increased
from 19.8% to 22.7%. The increase in gross profit and gross margin is primarily
due to increased labor productivity, renegotiated unit pricing on certain long-
term contracts and lower equipment rental expense as PAR replaced rental
equipment on certain projects with company-owned equipment, partially offset by
lower gross profit from operations in Oregon due to the completion of a
significant telecommunications contract.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.7 million, or 17.2%, from $9.9 million for
the year ended December 31, 1996 to $11.6 million for the year ended December
31, 1997, primarily due to increased administrative support required by the
higher level of revenues and increases in owner compensation, partially offset
by decreased commissions paid to salesmen. As a percentage of revenues,
selling, general and administrative expenses increased from 13.9% to 15.3%.
Quanta results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues. Revenues increased $18.1 million, or 34.0%, from $53.2 million for
the year ended December 31, 1995 to $71.3 million for the year ended December
31, 1996, primarily as a result of the acquisition of a company by the Pooled
Company and increased demand for our services in Colorado, Oregon and, to a
lesser extent, in California, partially offset by decreased activity in
Missouri.
Gross profit. Gross profit increased $5.5 million, or 64.0%, from $8.6
million for the year ended December 31, 1995 to $14.1 million for the year
ended December 31, 1996. As a percentage of revenues, gross profit increased
from 16.2% to 19.8%. This increase in gross profit was a result of
27
<PAGE>
the acquisition of a company by the Pooled Company, the awarding of a
significant telecommunications contract, improved labor productivity and asset
utilization, partially offset by increases in insurance costs and higher costs
than anticipated on certain contracts.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $3.4 million, or 52.3%, from $6.5 million for
the year ended December 31, 1995 to $9.9 million for the year ended December
31, 1996, primarily due to the acquisition of a company by the Pooled Company,
increased commissions paid to salesmen responsible for the awarding of the
telecommunications contract and increases in administrative salaries required
to support the higher level of revenues generated from an increased volume of
projects and increases in owner compensation. As a percentage of revenues,
selling, general, and administrative expenses increased from 12.2% to 13.9%.
UNION POWER RESULTS OF OPERATIONS
Union Power was founded in 1946, and is headquartered in Englewood, Colorado.
It operates primarily west of the Mississippi River and in 1997 provided
services to customers in Colorado, Nevada, California and Oregon. Union Power
is primarily involved in providing electric infrastructure contracting
services, including installation of electrical transmission lines, both
underground and above ground, and distribution lines and construction of
electric substations. In addition, Union Power provides electrical repair and
maintenance services.
The following table sets forth selected statement of operations data and such
data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEARS ENDED AUGUST 31, NOVEMBER 30,
------------------------------------------- ---------------------------
1995 1996 1997 1996 1997
------------- ------------- ------------- ------------ -------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $12,614 100.0% $25,636 100.0% $42,792 100.0% $7,211 100.0% $15,357 100.0%
Cost of services........ 10,240 81.2 22,319 87.1 37,766 88.3 6,037 83.7 13,474 87.7
------- ----- ------- ----- ------- ----- ------ ----- ------- -----
Gross profit............ 2,374 18.8 3,317 12.9 5,026 11.7 1,174 16.3 1,883 12.3
Selling, general and
administrative
expenses............... 1,896 15.0 1,563 6.1 1,966 4.6 491 6.8 677 4.4
------- ----- ------- ----- ------- ----- ------ ----- ------- -----
Income from operations.. $ 478 3.8% $ 1,754 6.8% $ 3,060 7.1% $ 683 9.5% $ 1,206 7.9%
======= ===== ======= ===== ======= ===== ====== ===== ======= =====
</TABLE>
Union Power results for the three months ended November 30, 1997 compared to
the three months ended November 30, 1996
Revenues. Revenues increased $8.2 million, or 113.0%, from $7.2 million for
the three months ended November 30, 1996 to $15.4 million for the three months
ended November 30, 1997, primarily due to increased demand for Union Power's
services in Nevada, a higher volume of work in California and increased
outsourcing of required services by utility customers, which resulted in a
higher component of subcontracted work.
Gross profit. Gross profit increased $700,000, or 60.4%, from $1.2 million
for the three months ended November 30, 1996 to $1.9 million for the three
months ended November 30, 1997, primarily as a result of the increase in sales.
As a percentage of revenues, gross profit decreased to 12.3% from 16.3%,
primarily as a result of a higher proportion of subcontract work and lower
margin materials components.
28
<PAGE>
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $200,000, or 37.9%, from $500,000 for the
three months ended November 30, 1996 to $700,000 for the three months ended
November 30, 1997, due primarily to growth in Union Power's office staff needed
to support the increased sales. As a percentage of revenues, selling, general
and administrative expenses decreased from 6.8% to 4.4%, primarily due to
economies of scale.
Union Power results for the year ended August 31, 1997 compared to the year
ended August 31, 1996
Revenues. Revenues increased $17.2 million, or 67.2%, from $25.6 million for
the year ended August 31, 1996 to $42.8 million for the year ended August
31,1997, primarily due to increased demand for Union Power's services in
Nevada, a higher volume of work in California and increased outsourcing of
required services by utility customers, which resulted in a higher component of
subcontracted work.
Gross profit. Gross profit increased $1.7 million, or 51.5%, from $3.3
million for the year ended August 31, 1996 to $5.0 million for the year ended
August 31, 1997. As a percentage of revenues, gross profit decreased to 11.7%
from 12.9% primarily as a result of a higher percentage of work being
subcontracted at lower margins and higher costs than anticipated on certain
projects.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $400,000, or 25.0%, from $1.6 million for the
year ended August 31, 1996 to $2.0 million for the year ended August 31, 1997
due to the continued expansion into the California and Nevada markets. As a
percentage of revenues, selling, general and administrative expenses decreased
from 6.1% to 4.6%, primarily due to economies of scale.
Union Power results for the year ended August 31, 1996 compared to the year
ended August 31, 1995
Revenues. Revenues increased $13.0 million, or 103.2%, from $12.6 million for
the year ended August 31, 1995 to $25.6 million for the year ended August 31,
1996, primarily as a result of an increase in the overall demand for Union
Power's services in Nevada and California.
Gross profit. Gross profit increased $900,000, or 37.5%, from $2.4 million
for the year ended August 31, 1995 to $3.3 million for the year ended August
31, 1996. As a percentage of revenues, gross profit decreased to 12.9% from
18.8%, primarily as a result of higher costs than anticipated on a specific
contract in 1996.
Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $300,000, or 15.8%, from $1.9 million for the
year ended August 31, 1995 to $1.6 million for the year ended December 31, 1996
due to lower owner compensation and employee bonuses in 1996. As a percentage
of revenues, selling, general and administrative expenses decreased from 15.0%
to 6.1%.
UNION POWER LIQUIDITY AND CAPITAL RESOURCES
Union Power generated $200,000 of net cash from operating activities for the
three months ended November 30, 1997. Net cash used in investing activities was
approximately $1.3 million, primarily for the purchase of operating equipment.
Net cash provided by financing activities of $1.7 million resulted from
advances under Union Power's line of credit and additional borrowings.
29
<PAGE>
At November 30, 1997, Union Power had $3.0 million of working capital and
$1.5 million of total long-term debt outstanding.
Union Power generated $1.0 million of net cash from operating activities for
the year ended August 31, 1997. Net cash used in investing activities was
approximately $1.5 million, primarily for the purchase of operating equipment.
Net cash provided by financing activities of $200,000 resulted from advances on
Union Power's line of credit.
At August 31, 1997, Union Power had working capital of $2.8 million and $1.0
million of total long-term debt outstanding.
TRANS TECH RESULTS OF OPERATIONS
TRANS TECH was founded in 1983, is headquartered in South Bend, Indiana and
in 1997 provided services to customers in Indiana, Kentucky, Michigan and Ohio.
TRANS TECH installs, maintains and repairs traffic signals, signage, highway
control systems components, highway and airport lighting and fiber optics for
states and other governmental entities, and also performs traditional
electrical contracting services for private and public entities in the
commercial and industrial markets.
The following table sets forth selected statements of operations data and
such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $21,397 100.0% $24,414 100.0% $32,817 100.0%
Cost of services................. 18,934 88.5 20,426 83.7 26,519 80.8
------- ----- ------- ----- ------- -----
Gross profit................... 2,463 11.5 3,988 16.3 6,298 19.2
Selling, general and
administrative expenses......... 1,639 7.7 1,848 7.6 2,015 6.1
------- ----- ------- ----- ------- -----
Income from operations........... $ 824 3.8% $ 2,140 8.7% $ 4,283 13.1%
======= ===== ======= ===== ======= =====
</TABLE>
TRANS TECH results for the year ended December 31, 1997 compared to the year
ended December 31, 1996.
Revenues. Revenues increased $8.4 million, or 34.4%, from $24.4 million for
the year ended December 31, 1996 to $32.8 million for the year ended December
31, 1997, primarily as a result of an increase in demand for services by
commercial and industrial customers and, to a lesser extent, by transportation
control and lighting systems customers.
Gross profit. Gross profit increased $2.3 million, or 57.5%, from $4.0
million for the year ended December 31, 1996 to $6.3 million for the year ended
December 31, 1997. As a percentage of total revenue, gross margin increased
from 16.3% for the year ended December 31, 1996 to 19.2% for the year ended
December 31, 1997, primarily as a result of improved labor productivity and
asset utilization.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $200,000, or 11.1%, from $1.8 million for the
year ended December 31, 1996 to $2.0
30
<PAGE>
million for the year ended December 31, 1997, primarily due to increased
administrative salaries required by the higher level of revenues and increases
in owner compensation. As a percentage of revenues, selling, general and
administrative expenses decreased from 7.6% to 6.1% due to economies of scale.
TRANS TECH results for the year ended December 31, 1996 compared to the year
ended December 31, 1995
Revenues. Revenues increased $3.0 million, or 14.0%, from $21.4 million for
the year ended December 31, 1995 to $24.4 million for the year ended December
31, 1996, primarily as a result of increased volume of work for commercial and
industrial customers offset partially by a decrease in activity in the
transportation control and lighting systems market.
Gross profit. Gross profit increased $1.5 million, or 60.0%, from $2.5
million for the year ended December 31, 1995 to $4.0 million for the year ended
December 31, 1996. As a percentage of total revenue, gross margin increased
from 11.5% for the year ended December 31, 1995 to 16.3% for the year ended
December 31, 1996 as a result of increased labor productivity and a decrease in
materials cost as a percentage of revenues.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $200,000, or 12.5%, from $1.6 million for the
year ended December 31, 1995 to $1.8 million for the year ended December 31,
1996, primarily due to the addition of administrative positions and increased
marketing expenses. As a percentage of revenues, selling, general and
administrative expenses remained relatively constant.
TRANS TECH LIQUIDITY AND CAPITAL RESOURCES
TRANS TECH generated $1.1 million of net cash from operating activities for
the year ended December 31, 1997. Net cash used in investing activities was
approximately $900,000, primarily for the purchase of operating equipment. Net
cash used in financing activities of $400,000 resulted primarily from
distributions to shareholders of $6.7 million, which were mostly offset by
borrowings to fund the distributions.
At December 31, 1997, TRANS TECH had working capital of $4.8 million and $5.6
million of total long-term debt outstanding.
TRANS TECH generated $2.9 million in net cash from operating activities for
the year ended December 31, 1996. Net cash used in investing activities was
approximately $900,000, principally for purchases of operating equipment. Net
cash used in financing activities of $2.1 million resulted from repayments of
debt and distributions to shareholders.
At December 31, 1996, TRANS TECH had working capital of $2.8 million and
$600,000 of total long-term debt outstanding.
POTELCO RESULTS OF OPERATIONS
Potelco, founded in 1965, is headquartered near Seattle, Washington and
operates primarily in Washington, Oregon and Idaho. Potelco provides electric
and telecommunications infrastructure
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contracting services, including installation of overhead and underground lines
and facilities for the power, telecommunications and cable television
industries. In addition, Potelco provides electrical and telecommunications
installation, maintenance and repair services to the commercial and industrial
markets.
The following table sets forth selected statement of operations data and such
data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997
------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Revenues......................................... $14,549 100.0% $19,220 100.0%
Cost of services................................. 12,946 89.0 15,563 81.0
------- ----- ------- -----
Gross profit................................... 1,603 11.0 3,657 19.0
Selling, general and administrative expenses..... 971 6.7 1,478 7.7
------- ----- ------- -----
Income from operations........................... $ 632 4.3% $ 2,179 11.3%
======= ===== ======= =====
</TABLE>
Potelco results for the year ended December 31, 1997 compared to the year
ended December 31, 1996
Revenues. Revenues increased $4.7 million, or 32.4%, from $14.5 million for
the year ended December 31, 1996 to $19.2 million for the year ended December
31, 1997, primarily as a result of an increase in the demand for services by
telecommunications infrastructure and commercial and industrial customers to
either upgrade their telecommunication systems from cable to fiber optic or to
install new systems.
Gross profit. Gross profit increased $2.1 million, or 131.3%, from $1.6
million for the year ended December 31, 1996 to $3.7 million for the year ended
December 31, 1997. As a percentage of revenues, Potelco's gross margins
improved from 11.0% to 19.0% due to the projects performed during 1997 having a
relatively higher labor component and therefore resulting in higher gross
margins, as compared to the projects performed during 1996 which had a
relatively higher proportion of low margin materials costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $500,000, or 50.0%, from $1.0 million for the
year ended December 31, 1996 to $1.5 million for the year ended December 31,
1997, primarily due to increases in office salaries and profit sharing
contributions. As a percentage of revenues, these selling, general and
administrative expenses increased from 6.7% to 7.7%.
POTELCO LIQUIDITY AND CAPITAL RESOURCES
Potelco generated $800,000 of net cash from operating activities for the year
ended December 31, 1997. Net cash used in investing activities was
approximately $1.6 million, primarily for the purchase of property and
equipment. Net cash provided by financing activities of $900,000 resulted
primarily from additional proceeds received from a note payable to a bank and
borrowing of other long-term debt.
At December 31, 1997, Potelco had working capital of $1.2 million and
$900,000 of total long-term debt outstanding.
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BUSINESS
INDUSTRY OVERVIEW
Quanta estimates that the electrical and telecommunications contracting
industry generates annual revenues in excess of $40 billion. We believe that
growth in this industry is being positively affected by the following trends:
Deregulation. The wholesale electricity market, including sales of
electricity between utilities and other generators, is regulated by the Federal
Energy Regulatory Commission ("FERC"). In 1996, FERC accelerated the
deregulation of the electric power industry by issuing Order nos. 888 and 889,
which require shareholder-owned utilities (of which there were approximately
223 in 1997) to provide non-utility electricity suppliers with access to
transmission services. We expect the deregulation of the electric power
industry to increase competition among suppliers of electricity, which will
lead utilities to lower their costs by outsourcing non-core functions such as
the installation, construction, maintenance and repair of electric transmission
and distribution systems and electric substations, services that have
traditionally been performed by the utilities themselves.
The Telecommunications Act of 1996 preempted state and local government
control over access to the telecommunications market, eliminating barriers to
entry and opening the markets to new entrants. Management expects the
elimination of such barriers to lead to increased construction of competing
telecommunications networks as competitive telecommunications providers,
existing as well as new, expand into new markets and offer services that once
were reserved for incumbents.
Upgrading and Expanding Existing Infrastructure. As access to electric
transmission services increases, we believe that financial penalties will be
imposed upon electric utilities in the event of transmission and distribution
system downtime attributable to the utilities. As a result, we expect that
utilities will modernize existing transmission systems, which will increase the
amount of upgrading and repair work available to outside contractors. Quanta
also expects commercial and industrial companies to continue to upgrade and
expand their existing electrical infrastructure as a result of (1) increasing
levels of modernization activity, (2) the effects of more stringent electric
codes, which establish minimum power and safety requirements, (3) revised
national energy standards, (4) increases in use of electric power and (5)
increased installation of electrical capacity in excess of minimum code
requirements in order to facilitate marketing of properties.
The amount of traditional voice and data traffic has increased steadily, and
growth in the use of personal computers and modems has created significant data
traffic from a wide variety of sources. Because of the physical limitations of
the existing communications network facilities, Quanta believes there is an
immediate need to upgrade and expand facilities with new and innovative
technology, expanding and in many cases replacing existing telecommunications
and cable television infrastructure to allow for increases in the volume of
traffic. The need to upgrade and expand telecommunications infrastructure as a
result of deregulation and the growth in consumer demand for enhanced
telecommunications services is expected to continue to prompt
telecommunications providers to increase the current level of outsourcing to
independent contractors who serve the industry.
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<PAGE>
Increased Outsourcing. The outsourcing trend has largely been driven by the
efforts of electric utilities and telecommunications providers to reduce costs
and focus on their core competencies. Quanta believes that electric utilities
and telecommunications providers will increasingly seek comprehensive solutions
to their infrastructure needs by utilizing fewer qualified contractors that can
provide a full range of new construction, installation, repair, maintenance and
emergency services.
Quanta believes that its industry is highly fragmented. According to the U.S.
Census Bureau, there are more than 50,000 electrical and telecommunications
contracting businesses, consisting of a small number of regional or national
providers and a large number of relatively small, owner-operated businesses
that have limited access to capital and that offer a limited range of services.
We believe that the fragmented nature of the industry presents substantial
consolidation and growth opportunities for companies with a disciplined
acquisition program, a decentralized operating strategy and access to financial
resources. We also believe that the prominence and operating strength of the
Acquired Businesses and the experience of our executive management will provide
us with significant competitive advantages to capitalize on these
opportunities.
STRATEGY
We plan to continue to maintain our position as a leading provider of
electric and telecommunications infrastructure contracting services by
emphasizing continued internal growth, expanding through acquisitions and
implementing our operating strategy.
INTERNAL GROWTH. Quanta is focused on continuing its strong internal growth
by (1) increasing the volume of services provided to existing customers, (2)
expanding the scope of services provided to existing customers, (3) broadening
its customer base and (4) geographically expanding our service area. We believe
we will be able to expand the services we offer in our markets by leveraging
the specialized strengths of individual Acquired Businesses. Such services
include design and engineering, where the contractor applies in-house
engineering expertise to design the most cost-effective system, and the
application of new technologies, such as the LineMaster robotic arm (for which
we acquired the United States patent in July 1998) that can be used to
facilitate the repair of high voltage power transmission lines without taking
them out of service. We also believe that strategic agreements with large
electric and telecommunications infrastructure owners will provide
opportunities for future internal growth. For instance, we consummated a
strategic investment with Enron Capital and an affiliate pursuant to which
Enron Capital and Quanta agreed to exchange information regarding the design,
installation and maintenance of electric power transmission and distribution
systems and fiber optic communications systems. In addition to the Enron
Capital investment and alliance, we have strategic alliances or long-term
maintenance agreements with Nevada Power Company, Pacific Gas & Electric
Company, Public Service Company of Colorado and Western Resources.
ACQUISITIONS. We believe that the increasing trend toward the outsourcing of
services to the electric and telecommunications infrastructure contracting
industry will result in a competitive disadvantage for small and mid-sized
companies that do not have access to capital and cannot provide a broad range
of specialty contracting services on a national basis. In addition, Quanta
expects that there will continue to be a large number of attractive acquisition
candidates due to the highly fragmented nature of the industry, the inability
of many companies to expand and modernize due to capital constraints and the
desire of owners for liquidity. We believe that our financial strength
34
<PAGE>
and experienced management will be attractive to acquisition candidates. The
key elements of our acquisition strategy are:
Enter New Geographic Markets. Quanta intends to expand into geographic
markets we do not currently serve by selectively acquiring well-established
specialty electrical and telecommunications contractors that, like the
Founding Companies, are leaders in their regional markets, are financially
stable, have a strong customer base, have senior management committed to
participating in the future growth of Quanta and can serve as "platforms"
for Quanta's future growth.
Expand Within Existing Markets. Quanta intends to explore acquisition
opportunities in the geographic markets we already serve as well as
geographic markets served by businesses we acquire in the future. Once we
have entered a specific geographic market, we will seek to acquire other
well-established companies in that particular market to deepen our market
penetration and expand the range of services offered to our customers.
Quanta will also pursue "tuck-in" acquisitions of smaller companies whose
operations can be integrated into and leveraged with an existing operation.
OPERATING STRATEGY. The key elements of our operating strategy are:
Operate on a Decentralized Basis. We manage our operations on a
decentralized basis while maintaining operating and financial controls.
Local management retains responsibility for the operations, profitability
and growth of its individual business. We believe that, while maintaining
operating and financial controls, our decentralized operating structure
retains the entrepreneurial spirit of each of the businesses we acquire and
permits us to capitalize on the acquired businesses' local and regional
market knowledge, specialized skills and customer relationships. In
addition, we believe that our operating efficiency, financial strength,
technical expertise, presence in key geographic areas and reputation for
quality and reliability provide competitive advantages in bidding for,
winning and executing new contracts for infrastructure projects. While
local management retains control of the operations of its individual
business, our executive management has responsibility for corporate
strategy and acquisitions, financing, insurance, investor relations and
employee benefit plans.
Achieve Operating Efficiencies. Certain administrative functions are
being centralized. In addition, by combining overlapping operations of
certain of the businesses we acquire, we expect to achieve more efficient
asset utilization and realize savings in overhead and other expenses. We
intend to use our increased purchasing power to gain volume discounts in
areas such as vehicles and equipment, electrical materials, marketing,
bonding, employee benefits and insurance. We will seek to realize cost
savings and other benefits by the sharing of purchasing, pricing, bidding
and other business practices and the sharing of licenses. Quanta intends to
further develop and expand the use of management information systems to
facilitate financial control, project costing and asset utilization. At
some locations, the larger combined workforce will provide additional
staffing flexibility.
ACQUISITION PROGRAM
Between our IPO and December 1, 1998, we acquired 11 other specialty
contracting businesses which when combined with the Founding Companies result
in pro forma combined revenues for the
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<PAGE>
year ended December 31, 1997 of $338.0 million for a combined consideration of
$84.3 million in cash and notes and 5.0 million shares of common stock. The
following table describes the businesses we have acquired between the IPO and
December 1, 1998:
<TABLE>
<CAPTION>
MONTH
BUSINESS ACQUIRED ACQUIRED PRINCIPAL SERVICE SECTORS HEADQUARTERS
----------------- -------- ------------------------- ----------------
<S> <C> <C> <C>
Manuel Bros., Inc....... 10/98 Telecommunications Grass Valley, CA
Smith Contracting....... 09/98 Telecommunications Fergus Falls, MN
Harker & Harker, Inc.... 09/98 Electric Reno, NV
Telecom Network
Services, Inc.......... 08/98 Telecommunications Kirkland, WA
Sumter Builders, Inc.... 08/98 Electric Sumter, SC
North Pacific
Construction Co........ 08/98 Telecommunications Woodland, CA
Underground Construction
Co., Inc............... 08/98 Telecommunications/Transportation/ Benicia, CA
Commercial and Industrial
Environmental Professional
Associates, Ltd........ 07/98 Electric Marysville, CA
NorAm Tele-
communications, Inc..... 06/98 Telecommunications Clackamas, OR
Spalj Construction
Company................ 05/98 Telecommunications Deerwood, MN
Golden State Utility
Co..................... 04/98 Telecommunications Turlock, CA
</TABLE>
We believe that we are regarded by acquisition candidates as an attractive
acquiror because of (1) our strategy for creating a national, comprehensive and
professionally managed specialty electric and telecommunications infrastructure
contracting business, (2) our decentralized operating strategy and
opportunities to participate in a larger organization, (3) our access to
financial resources as a public company, (4) our potential for increased
profitability due to centralizing certain administrative functions, enhanced
systems capabilities and economies of scale and (5) the potential for owners of
the businesses being acquired to participate in our planned growth while
realizing liquidity. We believe that the management of the acquired businesses
will be instrumental in identifying and assisting in the completion of future
acquisitions.
We have developed a set of financial, geographic and management criteria
designed to assist management in the evaluation of acquisition candidates.
These criteria evaluate a variety of factors, including, but not limited to (1)
historical and projected financial performance, (2) internal rate of return,
return on assets and return on revenue, (3) experience and reputation of the
candidate's management and operations, (4) composition and size of the
candidate's customer base, (5) whether the geographic location of the candidate
will enhance or expand our market area or ability to attract other acquisition
candidates, (6) whether the acquisition will augment or increase Quanta's
market share or services offered or help protect our existing customer base,
(7) potential synergies gained by combining the acquisition candidate with our
existing operations and (8) liabilities, contingent or otherwise, of the
candidate. We anticipate that acquisition candidates in the target markets and
industries will have annual revenues ranging from $10 million to $100 million.
All acquisitions are subject to initial evaluation and approval by our
management before being recommended to our Board of Directors.
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<PAGE>
As consideration for future acquisitions, we expect to utilize a combination
of cash, common stock and debt. The purchase price for each future acquisition
will vary. The major factors in establishing the purchase price will be
historical earnings, strength of management, future prospects of the acquiree
and the ability of the acquiree to complement or leverage the services already
offered by us.
SERVICES
We currently provide services in four broad sectors: electric utility
infrastructure; telecommunications infrastructure; transportation control and
lighting systems; and commercial and industrial.
Electric Utility Infrastructure Services. We perform specialty electrical
contracting services for electric utilities, which services generated 43.2% of
our pro forma combined revenues for the year ended December 31, 1997. These
services include installing, repairing and maintaining electric transmission
and distribution lines, maintaining street lights and other system components,
constructing electric substations and erecting transmission towers. The work
performed often involves the splicing of high voltage lines and, on occasion,
the installation of underground high voltage distribution systems. We also
repair and replace lines which have been damaged or destroyed as a result of
adverse weather conditions.
Telecommunications Infrastructure Services. We provide a variety of services
in connection with telecommunications, cable television and other data
transmission, which services generated 38.6% of our pro forma combined
revenues for the year ended December 31, 1997. We install fiber optic, coaxial
and copper cable both above and below ground on behalf of telecommunications
and cable service providers. The services provided by us include design/build
consulting, the placing and splicing of cable, excavation of trenches in which
to place the cable, placement of related structures such as poles, anchors,
conduits, manholes, cabinets and closures, placement of drop lines from the
main distribution lines to an individual residence or business and maintenance
and removal of these fiber optic, coaxial and copper lines and related
structures. We have the ability to directionally bore and place cables, a
highly specialized method of positioning buried cable which is often required
in congested urban and suburban markets where trenching may be impractical. In
addition, we are involved in the engineering, design and erection of
communications towers, including cellular telephone, PCS(R) and microwave
towers.
Transportation Control and Lighting Systems Services. We install, maintain
and repair traffic and highway control systems, such as signals, signage,
lighting and freeway management systems components. In addition, we install
overhead cable and control systems for light rail lines, "intelligent" highway
control systems and airport lighting and designs, and construct and maintain
airport fueling systems. These services generated 10.6% of our pro forma
combined revenues for the year ended December 31, 1997.
Commercial and Industrial Services. We design, install, maintain and repair
electrical wiring, telephone and data copper wiring, fiber optic cabling and
building control and automation systems for commercial and industrial
customers, which services generated 7.6% of our pro forma combined revenues
for the year ended December 31, 1997.
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<PAGE>
CUSTOMERS
Our customers include electric utilities, telecommunications and cable
television system operators, governmental entities, general contractors,
builders and owners and managers of commercial and industrial properties.
Electric utilities, in the aggregate, represent our largest customer base.
General contractors, as a group, account for a significant portion of our
customers for commercial and industrial work.
Management at each of the Acquired Businesses has been responsible for
developing and maintaining successful long-term relationships with customers.
We rely heavily on repeat customers and use both the written and verbal
referrals of our satisfied customers to help generate new business. Many of our
customers or prospective customers have a qualification procedure for becoming
an approved bidder or vendor based upon the satisfaction of particular
performance and safety standards set by the customer. These customers often
maintain a list of vendors meeting such standards and award contracts for
individual jobs only to such vendors. We strive to maintain our status as a
preferred or qualified vendor to such customers.
EMPLOYEES
As of September 30, 1998, Quanta had 318 salaried employees, including
executive officers, project managers or engineers, job superintendents, staff
and clerical personnel and approximately 2,775 hourly employees, the number of
which fluctuates depending upon the number and size of the projects undertaken
by us at any particular time. Approximately 45% of our employees at September
30, 1998 were covered by collective bargaining agreements. We do not anticipate
any overall reductions in staff as a result of the consolidation of the
Acquired Businesses, although there may be some job realignments and new
assignments in an effort to eliminate overlapping and redundant positions.
Six of the Acquired Businesses are parties to master collective bargaining
agreements with the International Brotherhood of Electrical Workers. Two of
these businesses are also parties to local agreements with the Laborers
International Union and the Operating Engineers Union. Furthermore, one of the
Acquired Businesses is a party to local agreements with the Operative Plasters
and Cement Masons International Association and the United Brotherhood of
Carpenters and Joiners of America. Under these agreements, these companies
agree to pay specified wages to their union employees, observe certain
workplace rules and make employee benefit payments to multi-employer pension
plans and employee benefit trusts rather than administering the funds on behalf
of their employees. IBEW covered employees are represented by numerous local
unions under various agreements with varying terms and expiration dates. Such
local agreements are entered into by and between the IBEW local and the
National Electrical Contractors Association ("NECA"), of which we are a member.
The majority of the collective bargaining agreements contain provisions that
prohibit work stoppages or strikes, even during specified negotiation periods
relating to agreement renewal, and provide for binding arbitration dispute
resolution in the event of prolonged disagreement; however, there can be no
assurance that work stoppages or strikes will not occur from time to time.
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Each of the Acquired Businesses provides a variety of health, welfare and
benefit plans for their employees who are not covered by collective bargaining
agreements. It is anticipated that these various employee benefit plans will be
replaced by a single plan covering all of our non-bargaining employees.
The electric and telecommunications infrastructure contracting industry is
experiencing a shortage of skilled craftsmen. In response to the shortage,
Quanta seeks to take advantage of various IBEW and NECA referral programs and
hire graduates of the joint IBEW/NECA apprenticeship program for training
qualified electricians. None of the Acquired Businesses has experienced any
strikes or work stoppages in the past 20 years. Quanta believes its
relationships with its employees and union representatives are satisfactory.
TRAINING, QUALITY ASSURANCE AND SAFETY
Performance of Quanta's services requires the use of equipment and exposure
to conditions that can be dangerous. Although Quanta is committed to a policy
of operating safely and prudently, it has been and is subject to claims by
employees, customers and third parties for property damage and personal
injuries resulting from performance of its services. We perform on-site
services using employees who have completed our applicable safety and training
programs. Quanta's policies require that employees complete the prescribed
training and service program of the Acquired Business for which they work in
addition to those required by NECA and the IBEW prior to performing more
sophisticated and technical jobs. For example, all journeymen linemen are
required by the IBEW and NECA to complete a minimum of 8,000 hours of on-the-
job training, approximately 200 hours of classroom education and extensive
testing and certification. The Acquired Businesses require additional training,
depending upon the sophistication and technical requirements of each particular
job. Quanta intends to establish company-wide training and educational
programs, as well as comprehensive safety policies and regulations, by sharing
"best practices" throughout its operations.
EQUIPMENT AND FACILITIES
We operate a fleet of owned and leased trucks and trailers, support vehicles
and specialty construction equipment, such as backhoes, excavators, trenchers,
generators, boring machines, cranes and wire pullers and tensioners. The total
size of the rolling-stock fleet approximates 4,700 units. Most of this fleet is
serviced by our own mechanics who work at various maintenance sites and
facilities. We believe that these vehicles generally are well-maintained and
adequate for our present operations. We believe that in the future, we will be
able to lease or purchase this equipment at lower prices due to our larger size
and the volume of our leasing and purchasing activity.
We lease our corporate headquarters in Houston, Texas. We maintain offices in
Anchorage, Alaska; Chino Valley and Kingman, Arizona; Benicia, Chico, El Cajon,
Escondido, Fontana, Grass Valley, Marysville, Redwood City, Sacramento, San
Francisco, Selma, Turlock, Vacaville and Woodland, California; Aurora and
Englewood, Colorado; Honolulu, Hawaii; Rathrum, Idaho; South Bend, Indiana; Des
Moines, Iowa; Topeka and Wichita, Kansas; Deerwood, Minnesota; Clinton and
North Kansas City, Missouri; Las Vegas and Reno, Nevada; Clackamas, Gresham and
Portland, Oregon; Florence and Sumter, South Carolina; Austin, Texas; Salt Lake
City, Utah; and Everett, Kirkland, Seattle, Spokane and Sumner, Washington.
This space is used for offices, equipment yards,
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<PAGE>
warehousing, storage and vehicle shops. We own some of the facilities we occupy
and lease the rest. We believe that our facilities are sufficient for our
current needs. See "Certain Transactions."
REGULATION
Our operations are subject to various federal, state and local laws and
regulations including (1) licensing requirements applicable to electricians and
engineers, (2) building and electrical codes, (3) permitting and inspection
requirements applicable to construction projects, (4) regulations relating to
worker safety and environmental protection and (5) special bidding and
procurement requirements on government projects.
We believe that we have all the required licenses to conduct our operations
and that we are in substantial compliance with applicable regulatory
requirements. Our failure to comply with applicable regulations could result in
substantial fines and/or revocation of our operating licenses. Many state and
local regulations governing electrical construction require permits and
licenses to be held by individuals who typically have passed an examination or
met other requirements. Quanta intends to implement a policy to ensure that,
where possible, any such permits or licenses that may be material to Quanta's
operations are held by at least two of our employees.
COMPETITION
The markets in which we operate are highly competitive, requiring substantial
resources and skilled and experienced personnel. Quanta competes with other
independent contractors in most of the markets in which it operates, several of
which are large domestic companies that have greater financial, technical and
marketing resources. In addition, there are relatively few barriers to entry
into the industry in which we operate and, as a result, any organization that
has adequate financial resources and access to technical expertise may become a
competitor. A significant portion of our revenues are currently derived from
fixed price agreements and price is often an important factor in the award of
such agreements. Accordingly, we could be underbid by our competitors in an
effort to procure such business. There can be no assurance that Quanta's
competitors will not develop the expertise, experience and resources to provide
services that are superior in both price and quality to Quanta's services, or
that Quanta will be able to maintain or enhance its competitive position. We
may also face competition from the in-house service organizations of our
existing or prospective customers, including electric utility and
telecommunications providers, which employ personnel who perform some of the
same types of services as those provided by us. Although a significant portion
of these services is currently outsourced, there can be no assurance that
existing or prospective customers of Quanta will continue to outsource services
in the future.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
The primary risks in Quanta's operations are bodily injury, property damage
and injured workers' compensation. We maintain automobile and general liability
insurance for third party bodily injury and property damage and workers'
compensation coverage which we consider sufficient to insure against these
risks, subject to self-insured amounts. Accruals for outstanding claims are
estimated based on known facts and Quanta's prior experience. Actual experience
and claims could differ from Quanta's estimates. We consolidated the purchase
of insurance, which resulted in savings from the amounts paid by the Acquired
Businesses.
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Contracts in the electrical contracting industry may require performance
bonds or other means of financial assurance to secure contractual performance.
If we were unable to obtain surety bonds or letters of credit in sufficient
amounts or at acceptable rates, we might be precluded from entering into
additional contracts with certain of our customers.
LEGAL PROCEEDINGS
Quanta is, from time to time, a party to litigation or administrative
proceedings that arise in the normal course of its business. Quanta does not
have pending any litigation that, separately or in the aggregate, would, in the
opinion of management, have a material adverse effect on our results of
operations or financial condition.
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MANAGEMENT
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES
The following table sets forth certain information concerning our directors,
executive officers and key employees:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John R. Colson.......... 51 Chief Executive Officer, Director
James H. Haddox......... 50 Chief Financial Officer, Secretary
Gary A. Tucci........... 42 Vice President Western Region, President of Potelco, Director
Brad Eastman............ 31 Vice President and General Counsel
Derrick A. Jensen....... 28 Vice President and Controller
John R. Wilson.......... 48 President of PAR, Director
Timothy A. Soule........ 51 Vice President of Union Power, Director
John A. Martell......... 43 Vice President of TRANS TECH, Director
James R. Ball........... 55 Director
Vincent D. Foster....... 42 Chairman of the Board of Directors
Rodney R. Proto......... 50 Director
Michael T. Willis....... 54 Director
</TABLE>
John R. Colson was elected Chief Executive Officer of Quanta in December 1997
and became a director of Quanta effective upon the consummation of our IPO in
February 1998. He joined PAR in 1971 and became its President in 1991. He is
currently a member of the Council of Industrial Relations, governor of the
Missouri Valley chapter of NECA and a director of the Missouri Valley Line
Apprenticeship Program.
James H. Haddox has been Chief Financial Officer of Quanta since November
1997 and Secretary since December 1997. From March 1996 until joining Quanta,
Mr. Haddox was Senior Vice President--Finance of Corporate Express Delivery
Systems, Inc., a national provider of same day delivery services. From January
1994 to March 1996, Mr. Haddox held various positions, including Chief
Accounting Officer and Vice President--Finance, with U.S. Delivery Systems,
Inc., a NYSE listed company which was the largest provider of same day delivery
services in the U.S. prior to its merger in March 1996 with Corporate Express,
Inc. From 1991 to 1994 Mr. Haddox was an independent business consultant
providing management services. From 1987 to 1991, Mr. Haddox held various
financial positions, including Chief Financial Officer and Chief Accounting
Officer, at Allwaste, Inc., a NYSE listed national environmental services
company. Mr. Haddox is a Certified Public Accountant.
Gary A. Tucci has been Vice President Western Region of Quanta since August
1998. Mr. Tucci joined Potelco in 1975 and became its President in 1988. He is
a member of the Joint
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NECA/IBEW Apprenticeship and Training Committee as well as the labor relations
board. Mr. Tucci became a director of Quanta effective upon the consummation of
our IPO.
Brad Eastman has been Vice President and General Counsel of Quanta since July
1998. From March 1996 until joining Quanta, Mr. Eastman was an associate in the
law firm of Brobeck, Phleger & Harrison LLP focusing on clients in high growth
industries. From October 1994 until March 1996, Mr. Eastman was an associate in
the law firm of Sullivan & Cromwell focusing on clients in the financial
services industry. Mr. Eastman holds a J.D. degree.
Derrick A. Jensen has been Vice President and Controller of Quanta since
December 1997. Prior to joining Quanta, he was employed by Arthur Andersen LLP
("Arthur Andersen"), serving most recently as audit manager focusing on clients
in consolidating industries. Mr. Jensen is a Certified Public Accountant.
John R. Wilson became President of PAR in 1997. He joined PAR in 1977 and
became an Executive Vice President in 1991. Mr. Wilson became a director of
Quanta effective upon the consummation of our IPO.
Timothy A. Soule joined Union Power in 1972 and became Vice President in
1975. He is also a member of the Board of Trustees for the joint NECA/IBEW Line
Construction Benefit Fund, Union Power's representative to the Rocky Mountain
Electrical League and a member of the Board of Directors of Power and
Communication Contractors Association. Mr. Soule became a director of Quanta
effective upon the consummation of our IPO.
John A. Martell founded TRANS TECH in 1983 and serves as its Vice President.
He is currently a member of the National Fire Protection Association and the
Illuminating Engineering Society. Mr. Martell is a Registered Professional
Engineer. Mr. Martell became a director of Quanta effective upon the
consummation of our IPO.
James R. Ball is a private investor, a consultant to Koch Industries, Inc.
and a member of the board of directors of Carbide/Graphite Group, Inc., a
producer of graphite electrode specialties products. From 1969 to 1994, he held
several positions with Vista Chemical Company ("Vista") and its predecessor,
Conoco, Inc. Vista was sold in 1991 to RWE-DEA, a unit of RWE AG, a German
energy and chemicals concern, and Mr. Ball served on the board of directors of
Vista and was its President and Chief Executive Officer from 1992 through 1994.
Mr. Ball became a director of Quanta effective upon the consummation of our
IPO.
Vincent D. Foster has been a director of Quanta since November 1997 and
became non-executive Chairman of the Board upon consummation of our IPO. Mr.
Foster is a Managing Director of Main Street Merchant Partners II, L.P., a
merchant banking firm ("Main Street"). From September 1988 through October
1997, Mr. Foster was a partner of Andersen Worldwide and Arthur Andersen. Mr.
Foster was the Director of the Corporate Finance and Mergers and Acquisitions
practices of Arthur Andersen for the southwestern U.S., specializing in
structuring and executing "roll-up" transactions and in providing merger and
acquisition and corporate finance advisory services to clients in consolidating
industries. Mr. Foster holds a J.D. degree and is a Certified Public
Accountant.
43
<PAGE>
Rodney R. Proto has been President, Chief Operating Officer and a director of
Waste Management, Inc. (formerly known as USA Waste Services, Inc.) ("WMI"), a
solid waste services company, since August 1996. Prior thereto, he was
President, Chief Operating Officer and a director of Sanifill, Inc.
("Sanifill"), a solid waste management company acquired by WMI in August 1996.
Mr. Proto joined Sanifill in February 1992. Before joining Sanifill, he was
employed by Browning-Ferris Industries, Inc. for 12 years where he served,
among other positions, as Chairman of BFI Overseas from 1985 to 1987 and
President of Browning-Ferris Industries Europe, Inc. from 1987 through 1991.
Mr. Proto became a director of Quanta effective upon the consummation of our
IPO.
Michael T. Willis is Chairman of the Board, Chief Executive Officer and
President of Metamor Worldwide, formerly CoreStaff, Inc. ("Metamor"), one of
the largest information technology and staffing companies in the U.S. Prior to
founding Metamor in 1993, Mr. Willis served as Chief Executive Officer and
President of The Talent Tree Corporation ("Talent Tree"), which he founded in
1976 and built into one of the largest temporary services companies in the U.S.
Mr. Willis sold Talent Tree to Hestair plc in 1987 and then continued as
President and Chief Executive Officer until April 1993. Mr. Willis is also a
director of the Southwest Bank of Texas, a publicly-traded financial
institution. Mr. Willis became a director of Quanta effective upon the
consummation of our IPO.
Our Bylaws permit the Board of Directors to increase the size of the Board.
Each director serves a one-year term. At each annual meeting of stockholders,
all except one of the directors will be elected by the holders of the common
stock and one director will be elected by the holders of the Limited Vote
Common Stock. Mr. Foster has been designated as the director elected by holders
of Limited Vote Common Stock. In addition, the holders of the Convertible
Subordinated Notes have the right to designate one director.
BOARD COMMITTEES
The Board of Directors has established an Audit Committee, an Acquisitions
Committee and a Compensation Committee.
The Audit Committee consists of Messrs. Foster, Proto and Willis. The Audit
Committee makes recommendations to the Board of Directors regarding the
selection of independent public accountants, reviews the results and scope of
the audit and other services provided by Quanta's independent public
accountants and evaluates Quanta's financial and accounting control functions.
The Compensation Committee consists of Messrs. Ball, Proto and Willis. The
Compensation Committee administers Quanta's incentive compensation plans and
the issuance of stock under Quanta's 1997 Stock Option Plan and determines
salaries for executive officers and incentive compensation for senior employees
and other key management personnel. There are no Compensation Committee
interlocks which are required to be disclosed by the rules promulgated by the
SEC under the Securities Act of 1933.
The Acquisitions Committee consists of Messrs. Colson, Foster, Proto, Soule
and Tucci. The Acquisitions Committee reviews and monitors the strategic
direction of Quanta's acquisition program and has the authority to approve
acquisitions of companies within certain financial parameters.
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<PAGE>
DIRECTORS' COMPENSATION
Directors who also are employees of Quanta or any of its subsidiaries will
not receive additional compensation for serving as directors. Each director who
is not an employee of Quanta or any of its subsidiaries will receive a fee of
$1,000 for attendance at each meeting of the Board of Directors or any
committee thereof (unless held on the same day as a Board of Directors
meeting). Directors of Quanta will be reimbursed for reasonable out-of-pocket
expenses incurred in attending meetings of the Board of Directors or the
committees thereof, and for other expenses reasonably incurred in their
capacity as directors of Quanta. Each non-employee director will receive an
option to purchase 10,000 shares of common stock upon such person's initial
election to the Board of Directors and an annual grant of an option to purchase
5,000 shares of common stock at each annual meeting of our stockholders
thereafter at which such director is re-elected or remains a director. See "--
1997 Stock Option Plan." In addition, each of Messrs. Ball, Proto and Willis
purchased 20,000 shares of Limited Vote Common Stock from Quanta for nominal
consideration.
EXECUTIVE COMPENSATION
The following table sets forth the compensation paid by Quanta during the
fiscal year ended December 31, 1998 to Quanta's Chief Executive Officer and all
other executive officers receiving compensation in excess of $100,000 in 1998
(the "Named Executive Officers"):
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
------------
SECURITIES
UNDERLYING
NAME AND PRINCIPAL POSITION SALARY($)(1) OPTIONS (#)
--------------------------- ------------ ------------
<S> <C> <C>
John R. Colson ....................................... $150,000 --
Chief Executive Officer
James H. Haddox....................................... 150,000 125,000
Chief Financial Officer
Gary A. Tucci......................................... 131,250 50,000
Vice President Western Region
</TABLE>
- --------
(1) Each of Messrs. Colson, Haddox and Tucci have entered into employment
agreements providing for annualized base compensation of $150,000.
OPTION GRANTS IN LAST FISCAL YEAR
The following table sets forth information regarding stock options granted by
Quanta during the fiscal year ended December 31, 1998 to each of the Named
Executive Officers:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE VALUE AT
ASSUMED ANNUAL
RATES OF STOCK
PRICE
APPRECIATION FOR
INDIVIDUAL GRANTS OPTION TERM ($)(4)
-------------------------------------------------------- -------------------
PERCENTAGE OF
NUMBER OF TOTAL OPTIONS
SECURITIES UNDERLYING GRANTED IN EXERCISE
OPTIONS GRANTED FISCAL 1998 PRICE EXPIRATION
NAME (#)(1) (%)(2) ($/SH)(3) DATE 5% 10%
---- --------------------- ------------- --------- ---------- -------- ----------
<S> <C> <C> <C> <C> <C> <C>
John R. Colson.......... -- -- -- -- -- --
James H. Haddox......... 125,000 7.52% $ 9.00 2/18/07 $707,494 $1,792,944
Gary A. Tucci........... 50,000 3.01 14.56 8/18/08 457,822 1,160,229
</TABLE>
45
<PAGE>
- --------
(1) The options become exercisable at a rate of 25% on the first anniversary of
the vesting commencement date and 25% annually thereafter and expire ten
years from the date of grant, or earlier upon termination of employment.
(2) Based on an aggregate of 1,662,000 shares subject to options granted to
employees, directors of and consultants to Quanta in the fiscal year ended
December 31, 1998, including the Named Executive Officers.
(3) Options were granted at an exercise price equal to the fair market value of
our common stock on the date of grant.
(4) The 5% and 10% assumed annual rates of compounded stock price appreciation
are mandated by the rules of the Securities and Exchange Commission. There
can be no assurance provided to any executive officer or any other holder
of Quanta's securities that the actual stock price appreciation over the
option term will be at the assumed 5% and 10% levels or at any other
defined level. Unless the common stock appreciates over the option term, no
value will be realized from the option grants made to the executive
officers. The potential realizable value is calculated using the fair
market value per share at the time of the grant appreciating at the
indicated rate for the entire term of the option and assuming that the
option is exercised at the exercise price and sold on the last day of its
term at the appreciated price. The potential realizable value computation
is net of the applicable exercise price, but does not take into account
applicable federal or state income tax consequences and other expenses of
option exercises or sales of appreciated stock.
1998 YEAR-END OPTION VALUES
The following table sets forth for each of the Named Executive Officers the
number and value of securities underlying unexercised options held by the Named
Executive Officer at December 31, 1998:
<TABLE>
<CAPTION>
NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE-MONEY
UNEXERCISED OPTIONS AT OPTIONS AT
DECEMBER 31, 1998 DECEMBER 31, 1998(1)
--------------------------------- ---------------------------------
NAME EXERCISABLE (#) UNEXERCISABLE (#) EXERCISABLE ($) UNEXERCISABLE ($)
- ---- --------------- ----------------- --------------- -----------------
<S> <C> <C> <C> <C>
John R. Colson.......... -- -- -- --
James H. Haddox......... -- 125,000 -- $1,516,250
Gary A. Tucci........... -- 50,000 -- 328,500
</TABLE>
- --------
(1) Value of unexercised in-the-money options are based on a value of $21.13
per share, the assumed public offering price minus the per share exercise
price, multiplied by the number of shares underlying the option.
EMPLOYMENT AGREEMENTS
We have entered into employment agreements with each of Messrs. Colson,
Haddox and Tucci and certain other key employees that prohibit such individual
from disclosing our confidential information and trade secrets and generally
restrict these individuals from competing with us for a period of five years
after the termination of the individual's employment agreement. Each of these
agreements has an initial term of two to three years, provides for an automatic
annual extension at the end of its initial term and is terminable by Quanta for
"good cause" upon 10 days' written notice and without "good cause" by either
party upon 30 days' written notice. All employment agreements provide that if
the officer's employment is terminated by Quanta without "good cause," such
officer will be entitled to receive a lump-sum severance payment at the
effective time of termination equal to the officer's base salary at the rate
then in effect for the greater of (1) the time
46
<PAGE>
period remaining under the initial term of the agreement or (2) one year. In
addition, all employment agreements provide that in the event of termination
without "good cause," the non-competition provision will not apply for any time
period in which the employee is not receiving or has not received severance
compensation.
Some of the employment agreements contain certain provisions concerning a
change-in-control of Quanta, including the following: (1) in the event that
five days' advance notice of the transaction giving rise to the change-in-
control is not received by Quanta and such officer, the change-in-control will
be deemed a termination of the employment agreement by Quanta without "good
cause," and the provisions of the employment agreement governing the same will
apply, except that the severance amount otherwise payable (discussed in the
preceding paragraph) shall be tripled and the provisions which restrict
competition with us shall not apply and (2) the officer must be given
sufficient time and opportunity to elect whether to exercise all or any of his
or her options to purchase common stock, including any options with accelerated
vesting under the provisions of the 1997 Stock Option Plan, such that the
officer may acquire the common stock at or prior to the closing of the
transaction giving rise to the change-in-control, if he or she so desires.
1997 STOCK OPTION PLAN
In December 1997, the Board of Directors adopted, and the stockholders of
Quanta approved, the 1997 Stock Option Plan. The purpose of the 1997 Stock
Option Plan is to provide directors, key employees, officers and certain
advisors with additional incentives by increasing their proprietary interest in
Quanta. The aggregate amount of common stock of Quanta with respect to which
options may be granted may not exceed the greater of 2,380,850 shares or 15% of
the outstanding shares of common stock. On February 27, 1998, we filed a
Registration Statement on Form S-8 with respect to 2,380,850 shares of common
stock issuable in connection with the 1997 Stock Option Plan.
The 1997 Stock Option Plan provides for the grant of incentive stock options
("ISOs") as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and nonqualified stock options (collectively, the
"Awards"). The amount of ISOs that may be granted under the 1997 Stock Option
Plan is limited to 2,380,850 shares. The 1997 Stock Option Plan is administered
by the Compensation Committee of the Board of Directors. The Compensation
Committee has, subject to the terms of the 1997 Stock Option Plan, the sole
authority to grant Awards under the 1997 Stock Option Plan, to construe and
interpret the 1997 Stock Option Plan and to make all other determinations and
take any and all actions necessary or advisable for the administration of the
1997 Stock Option Plan.
All of our employees, non-employee directors, officers and advisors are
eligible to receive Awards under the 1997 Stock Option Plan, but only employees
are eligible to receive ISOs. Options will be exercisable during the period
specified in each option agreement and will generally become exercisable in
installments pursuant to a vesting schedule designated by the Compensation
Committee. In the discretion of the Compensation Committee, option agreements
may provide that options will become immediately exercisable in the event of a
"change in control" (as defined in the 1997 Stock Option Plan) of Quanta. No
ISO will remain exercisable later than ten years after the date of grant (or
five years in the case of ISOs granted to employees owning more than 10% of the
voting capital stock).
47
<PAGE>
Options to purchase 1,584,780 shares of common stock issued pursuant to the
1997 Stock Option Plan are outstanding.
The 1997 Stock Option Plan also provides for automatic option grants to
directors who are not otherwise employed by Quanta or its subsidiaries. Upon
commencement of service, a non-employee director will receive a non-qualified
option to purchase 10,000 shares of common stock, and each continuing or re-
elected non-employee director annually will receive an option to purchase 5,000
shares of common stock. Options granted to non-employee directors are fully
exercisable following the expiration of six months from the date of grant.
The exercise price for ISOs granted under the 1997 Stock Option Plan may be
no less than the fair market value of a share of the common stock on the date
of grant (or 110% in the case of ISOs granted to employees owning more than 10%
of the voting capital stock).
48
<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF QUANTA
Quanta was initially capitalized in August 1997 by several independent
investors, including Midwest Acquisition Support, LLC (an entity controlled by
Bernard J. Gram), Kevin D. Miller, Steven P. Colmar and William G. Parkhouse,
who acted as co-founders of Quanta and paid nominal cash consideration for
1,620,625 shares of Limited Vote Common Stock. In September 1997, Fabal Funding
Corp., a corporation affiliated with this group, agreed to advance up to
$125,000 to Quanta in consideration for receiving, at the closing of the IPO,
41,665 shares of Limited Vote Common Stock. These shares were distributed to
five individuals who each individually advanced $25,000 to Fabal Funding Corp.
In addition, in November 1997, Main Street purchased 1,484,543 shares of
Limited Vote Common Stock for nominal cash consideration (both Main Street and
the group of investors described above, the "Initial Stockholders"). Main
Street advanced funds to Quanta to enable Quanta to pay various expenses
incurred in connection with its efforts to complete the acquisitions of the
Founding Companies and consummate the IPO, which advances were repaid from the
net proceeds of the IPO. Vincent D. Foster, a director of Quanta, is a Managing
Director of Main Street.
Quanta acquired all of the issued and outstanding capital stock and other
equity interests of the Founding Companies for consideration of (1)
approximately $21.0 million in cash and (2) 7,527,000 shares of common stock.
The following table sets forth for each Founding Company the consideration
paid by Quanta to the stockholders of the Founding Companies (1) in cash and
(2) in shares of common stock.
<TABLE>
<CAPTION>
SHARES OF
CASH COMMON STOCK
----------- ------------
<S> <C> <C>
PAR.............................................. $ 8,370,000 3,000,000
Union Power...................................... 5,348,430 1,917,000
TRANS TECH....................................... 4,362,862 1,563,750
Potelco.......................................... 2,919,038 1,046,250
----------- ---------
Total.......................................... $21,000,330 7,527,000
=========== =========
</TABLE>
Messrs. Colson, Martell, Soule, Tucci and Wilson, directors of Quanta, were
stockholders of the Founding Companies prior to their acquisition by Quanta.
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
Certain stockholders of certain of the Founding Companies who are directors,
executive officers or key employees of Quanta had guaranteed indebtedness,
performance bonds and other obligations of each of their respective Founding
Companies. These guarantees were terminated following the completion of the
IPO.
Prior to consummation of the IPO, the stockholders of Union Power purchased
certain non-operating assets from that company at a price equal to the book
value of such assets, estimated to be $126,000 in the aggregate.
Prior to consummation of the IPO, the stockholders of PAR purchased certain
non-operating assets from that company at a price equal to the book value of
such assets, estimated to be $731,000 in the aggregate.
49
<PAGE>
Union Power leases its main office facilities located in Englewood, Colorado
from Soule Trusts Partnership, which is controlled by affiliates of Ronald W.
and Timothy A. Soule, and a branch facility located in North Las Vegas, Nevada
from RTS Partnership, which is owned by Ronald W. and Timothy A. Soule. Ronald
W. and Timothy A. Soule are President and Vice President of Union Power,
respectively, and Timothy Soule is a director of Quanta. The Englewood office
lease provides for a five-year term that will terminate in the year 2002 with
an option to renew the lease for an additional five-year term, and covers
approximately 3,500 square feet of office space on 4.8 acres, at a monthly
rental rate of $3,500. The North Las Vegas office lease will terminate on May
31, 2006, with a provision for automatic one-year renewal periods. Such lease
covers 2.69 acres and the leasehold improvements located on such land for a
monthly rental rate of $4,700. In addition, Union Power leased two directional
drilling rigs from Mountain Drilling Equipment Co., which is owned by Ronald W.
and Timothy A. Soule. The equipment lease with Mountain Drilling Equipment Co.
provided for a one-year term which ended on August 1, 1998, and a monthly
rental rate of $8,000. Title to these rigs was transferred to Union Power at
the end of the lease term for no additional consideration. We believe that the
economic terms of these leases do not exceed fair market value.
Potelco leases its main office from the father of Gary A. Tucci and another
office in Washington from Gary A. Tucci, who is President of Potelco and Vice
President Western Region and a director of Quanta. Currently, both leases are
oral and on a month to month basis. The main office lease is for a 15,000
square foot building on five acres, at a rent of $2,000 per month. The other
lease is for a 2,200 square foot office with a 6,000 square foot maintenance
facility on 1.5 acres, at a rent of $2,800 per month. We believe that the
economic terms of these leases do not exceed fair market value.
TRANS TECH leases its main office from TRANS TECH Properties, which is
partially owned by Robert J. Urbanski and John A. Martell, who are President
and Vice President of TRANS TECH, respectively. Additionally, Mr. Martell is a
director of Quanta. The main office of TRANS TECH is located in South Bend,
Indiana, and the facilities consist of approximately 7.5 acres of real
property, a 4,350 square foot office attached to a 10,560 square foot heated
warehouse, a 3,480 square foot detached unheated warehouse and a 3,000 square
foot detached vehicle maintenance facility. The initial lease term is for five
years at a rent of $5,900 per month, plus the payment of all taxes, insurance
and maintenance on the property. TRANS TECH has the option to renew the lease
for an additional five year term at a rental rate equal to the then current
market rate. We believe that the economic terms of this lease do not exceed
fair market value.
Union Power had notes outstanding to various affiliates in the aggregate
amount of approximately $460,000, and we used a portion of the proceeds of the
IPO to repay these notes.
Potelco owed approximately $1.1 million to Gary A. Tucci and his father
pursuant to a promissory note and other arrangements. We used a portion of the
proceeds of the IPO to repay this indebtedness.
Enron Capital and an affiliate invested $49.4 million in Convertible
Subordinated Notes of Quanta. These notes are convertible at the holders'
option into an aggregate of 3,589,091 shares of common stock subject to
adjustment, including adjustment for issuances of equity securities at less
than the current market value of such equity securities, other than issuances
pursuant to incentive
50
<PAGE>
compensation plans, acquisitions and underwritten public offerings. The holders
of these notes have demand and "piggy-back" registration rights with respect to
the shares of common stock issuable upon conversion of the notes and pre-
emptive rights to acquire shares of common stock sufficient to maintain the
holders' percentage ownership of Quanta's common stock when Quanta issues
equity securities, except for issuances related to incentive compensation plans
or acquisitions. The holders of the notes have agreed to waive these
registration rights and pre-emptive rights in connection with this offering. As
part of the investment, Enron Capital and Quanta agreed to exchange information
regarding the design, installation and maintenance of electric power
transmission and distribution systems and fiber optic communications systems.
Quanta has agreed, at the option of the holders of the Convertible Subordinated
Notes, to appoint a director selected by such holders to its board of directors
or to allow a designee of such holders to attend all meetings of Quanta's Board
of Directors or any committee thereof.
At various times in 1998, employees of Main Street have served as Quanta's
General Counsel and Manager of Corporate Development on a contract basis.
Quanta has reimbursed Main Street $114,750 in 1998 for the salaries of these
employees and for rent for their office space. We believe that the amount we
paid to Main Street for salaries and rent was reasonable under the
circumstances.
COMPANY POLICY
In the future, any transactions with our directors, officers, employees or
affiliates are anticipated to be minimal and will, in any case, be approved by
a majority of the Board of Directors or a committee thereof, including a
majority of disinterested members of the Board of Directors.
51
<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of Quanta's voting capital stock by (1) each person known
by us to be a beneficial owner of more than 5% of any class of our voting
capital stock, (2) each director and Named Executive Officer of Quanta and
(3) all directors and executive officers of Quanta as a group. Except as
otherwise indicated below, the persons named in the table have advised us that
they have sole voting and investment power with respect to the shares of
capital stock shown as beneficially owned by them. Unless otherwise indicated,
each person or group has sole voting and investment power with respect to all
such shares. Unless otherwise indicated, the number of shares and percentage of
ownership of common stock for each of the named stockholders, directors and
executive officers assumes that shares of common stock that the stockholders,
directors and executive officers may acquire within 60 days are outstanding.
<TABLE>
<CAPTION>
PERCENTAGE
SHARES OF SHARES
BENEFICIALLY BENEFICIALLY
NAME OWNED OWNED
---- ------------ ------------
<S> <C> <C>
Enron Capital Trade & Resources Corp.(1).......... 3,589,091 14.2%
Joint Energy Development Investments II, Limited
Partnership(1)................................... 2,691,818 11.0
John R. Colson(2)................................. 2,100,000 9.7
Gary A. Tucci(3).................................. 1,046,250 4.8
John R. Wilson(4)................................. 900,000 4.1
John A. Martell(5)................................ 781,875 3.6
Timothy A. Soule(6)............................... 337,392 1.6
Vincent D. Foster(7)(a)........................... 274,499 1.3
Michael T. Willis(2)(8)........................... 123,573 *
James H. Haddox(2)(9)............................. 131,250 *
James R. Ball(2)(10).............................. 45,000 *
Rodney R. Proto(2)(10)............................ 45,000 *
Sam W. Humphreys(a)(11)........................... 264,398 1.2
Kevin D. Miller(a)(12)............................ 334,022(b) 1.5
Midwest Acquisition Support, LLC(a)(13)........... 334,022(b) 1.5
Robert Alpert(a)(14).............................. 233,866(b) 1.1
Stephen P. Colmar(a)(15).......................... 208,764(b) 1.0
William G. Parkhouse(a)(16)....................... 179,382(b) *
All directors and executive officers as a group
(10 persons)(17)................................. 5,837,964 26.8
</TABLE>
- --------
* Less than 1%.
(a) Owns more than 5% of the outstanding shares of Limited Vote Common Stock.
(b) Consists entirely of Limited Vote Common Stock. See "Description of
Capital Stock" for a description of the Limited Vote Common Stock.
(1) Enron Capital beneficially owns directly 897,273 shares of common stock
issuable upon conversion of the Convertible Subordinated Note made by
Quanta in favor of Enron Capital. A subsidiary of Enron Capital is the
general partner of Enron Capital Management II Limited Partnership which
is the general
52
<PAGE>
partner of Joint Energy Development Investments II Limited Partnership
("JEDI-II"), which may result in Enron Capital being deemed to be the
beneficial owner of the 2,691,818 shares beneficially owned by JEDI-II; but
Enron Capital disclaims such beneficial ownership interest of the shares
issuable upon conversion of the Convertible Subordinated Note issued to
JEDI-II. Enron Capital is a wholly-owned subsidiary of Enron Corp. which
may be deemed to be the beneficial owner of all shares beneficially owned
by Enron Capital; Enron Corp. disclaims any beneficial ownership of any
shares issuable to either Enron Capital or JEDI-II. The address for Enron
Capital and for JEDI-II is 1400 Smith Street, Houston, Texas 77002.
(2) The address for Messrs. Ball, Colson, Haddox, Proto and Willis is 1360
Post Oak Boulevard, Suite 2100, Houston, Texas 77056.
(3) The address for Mr. Tucci is 14103 Eight Street East, Sumner, Washington
98390.
(4) The address for Mr. Wilson is 1440 Iron Street, P.O. Box 12520, North
Kansas City, Missouri 64116.
(5) The address for Mr. Martell is 4601 Cleveland Road, P.O. Box 3915, South
Bend, Indiana 46619. Includes 174,310 shares owned by trusts for the
benefit of minor children of Mr. Martell, of which he disclaims
beneficial ownership.
(6) The address for Mr. Soule is 2045 W. Union Avenue, Englewood, Colorado
80110.
(7) The address for Mr. Foster is 1360 Post Oak Boulevard, Suite 800,
Houston, Texas 77056. Includes 100 shares of common stock, options to
purchase 10,000 shares of common stock and 261,399 shares of Limited Vote
Common Stock as well as 3,000 shares of common stock owned by Main
Street, of which Mr. Foster disclaims beneficial ownership.
(8) Includes 98,573 shares of Limited Vote Common Stock, 15,000 shares of
common stock and options to purchase 10,000 shares of common stock.
(9) Consists of 100,000 shares of Limited Vote Common Stock and options to
purchase 31,250 shares of common stock.
(10) Consists of 20,000 shares of Limited Vote Common Stock, 15,000 shares of
common stock and options to purchase 10,000 shares of common stock.
(11) The address for Mr. Humphreys is 1360 Post Oak Boulevard, Suite 800,
Houston, Texas 77056. Includes 3,000 shares of common stock owned by Main
Street, of which Mr. Humphreys disclaims beneficial ownership.
(12) The address for Mr. Miller is 109 E. 5th Street, Suite E, Auburn, Indiana
46706.
(13) The address for Midwest Acquisition Support, LLC is 4040 San Felipe,
Suite 155, Houston, Texas 77027. Midwest Acquisition Support, LLC is a
limited liability company controlled by Bernard J. Gram.
(14) The address of Mr. Alpert is 1360 Post Oak Boulevard, Suite 800,
Houston, Texas 77056.
(15) The address for Mr. Colmar is 603 W. 13th, Suite 1A-247, Austin, Texas
78701. Does not include 117,526 shares of Limited Vote Common Stock owned
by members of Mr. Colmar's family, for which he disclaims beneficial
ownership.
(16) The address for Mr. Parkhouse is 5901 Fox Chapel Road, Austin, Texas
78746. Does not include 154,640 shares of Limited Vote Common Stock held
in trust for members of Mr. Parkhouse's family, for which he disclaims
beneficial ownership.
(17) Includes 537,472 shares of Limited Vote Common Stock and options to
purchase 86,875 shares of common stock.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
Quanta's authorized capital stock consists of 36,654,667 shares of common
stock, par value $.00001 per share, and 3,345,333 shares of Limited Vote Common
Stock, par value $.00001 per share. We also have been authorized to issue
10,000,000 shares of preferred stock, par value $.00001 per share.
COMMON STOCK AND LIMITED VOTE COMMON STOCK
The holders of common stock are entitled to one vote for each share on all
matters voted upon by stockholders, including the election of directors. Such
holders are not entitled to vote cumulatively for the election of directors.
Holders of a majority of the shares of common stock entitled to vote in any
election of directors may elect all of the directors standing for election
other than the director elected by the holders of Limited Vote Common Stock. In
addition, the holders of the Convertible Subordinated Notes are entitled to
designate one member to our Board of Directors.
Holders of Limited Vote Common Stock, voting together as a single class, are
entitled to elect one director. Holders of Limited Vote Common Stock are not
entitled to vote on the election of any other directors. Only the holders of
the Limited Vote Common Stock may remove the director such holders are entitled
to elect. Holders of Limited Vote Common Stock are entitled to 0.10 of one vote
for each share held on all other matters on which they are entitled to vote.
Subject to the rights of any then outstanding shares of preferred stock,
holders of common stock and Limited Vote Common Stock are together entitled to
participate pro rata in such dividends as may be declared in the discretion of
the Board of Directors out of funds legally available therefor. Holders of
common stock and Limited Vote Common Stock together are entitled to share
ratably in the net assets of Quanta upon liquidation after payment or provision
for all liabilities and any preferential liquidation rights of any preferred
stock then outstanding. Holders of common stock and holders of Limited Vote
Common Stock have no preemptive rights to purchase shares of stock of Quanta.
Shares of common stock are not subject to any redemption provisions and are not
convertible into any other securities of Quanta. Shares of Limited Vote Common
Stock are not subject to any redemption provisions and are convertible into
common stock as described below.
Each share of Limited Vote Common Stock will automatically convert to common
stock on a share-for-share basis in the event of a permitted disposition of
such share of Limited Vote Common Stock by the holder thereof (other than a
distribution by a holder to its partners or beneficial owners or a transfer to
a related party of such holder or to another holder of Limited Vote Common
Stock or a related party thereto (whether a party is a "related party" shall be
determined in accordance with Sections 267, 707, 318 and/or 4946 of the
Internal Revenue Code)). The holders of Limited Vote Common Stock have no
rights to convert Limited Vote Common Stock into common stock and the only
conversion feature of the Limited Vote Common Stock is the automatic conversion
upon a permitted disposition.
Our common stock is listed on the NYSE.
PREFERRED STOCK
The preferred stock may be issued from time to time by the Board of Directors
in one or more series. Subject to the provisions of the Certificate of
Incorporation and limitations prescribed by law,
54
<PAGE>
the Board of Directors is expressly authorized to adopt resolutions to issue
the shares, to fix the number of shares and to change the number of shares
constituting any series and to provide for or change the voting powers,
designations, preferences and relative, participating, optional, exchange or
other special rights, qualifications, limitations or restrictions thereof,
including dividend rights (including whether dividends are cumulative),
dividend rates, terms of redemption (including sinking fund provisions),
redemption prices, conversion rights and liquidation preferences of the shares
constituting any class or series of the preferred stock, in each case without
any further action or vote by the holders of common stock.
Although we have no present intention to issue shares of preferred stock, the
issuance of shares of preferred stock, or the issuance of rights to purchase
such shares, could be used to discourage an unsolicited acquisition proposal.
For example, the issuance of a series of preferred stock might impede a
business combination by including class voting rights that would enable the
holders to block such a transaction; or such issuance might facilitate a
business combination by including voting rights that would provide a required
percentage vote of the stockholders. In addition, under certain circumstances,
the issuance of preferred stock could adversely affect the voting power of the
holders of the common stock. Although the Board of Directors is required to
make any determination to issue such stock based on its judgment as to the best
interests of Quanta's stockholders, the Board of Directors could act in a
manner that would discourage an acquisition attempt or other transaction that
some or a majority of the stockholders might believe to be in their best
interests or in which stockholders might receive a premium for their stock over
the then-market price of such stock. The Board of Directors does not at present
intend to seek stockholder approval prior to any issuance of currently
authorized stock, unless otherwise required by law or the rules of any market
on which our securities are traded.
STATUTORY BUSINESS COMBINATION PROVISION
We are a Delaware corporation and are subject to Section 203 of the Delaware
General Corporations Law ("DGCL"). In general, Section 203 prevents a Delaware
corporation from engaging in a "business combination" (as defined) with an
"interested stockholder" (defined generally as a person owning 15% or more of a
corporation's outstanding voting stock or affiliate or associate) for three
years following the time such stockholder became an interested stockholder
unless (1) before such person became an interested stockholder, the board of
directors of the corporation approved the business combination or the
transaction in which the interested stockholder became an interested
stockholder, (2) upon consummation of the transaction which resulted in the
interested stockholder's becoming an interested stockholder, the interested
stockholder owned at least 85% of the voting stock of the corporation
outstanding at the time the transaction commenced (excluding stock held by
directors who are also officers of the corporation and by employee stock plans
that do not provide employees with the rights to determine confidentially
whether shares held subject to the plan will be tendered in a tender or
exchange offer) or (3) at or subsequent to the time such person became an
interested stockholder, the business combination was approved by the board of
directors of the corporation and authorized at a meeting of stockholders by the
affirmative vote of the holders of 66 2/3% of the outstanding voting stock of
the corporation not owned by the interested stockholder. Under Section 203, the
restrictions described above also do not apply to certain business combinations
proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the
corporation and a person who had not been an
55
<PAGE>
interested stockholder during the previous three years or who became an
interested stockholder with the approval of a majority of the corporation's
directors, if such extraordinary transaction is approved or not opposed by a
majority of the directors who were directors prior to any person becoming an
interested stockholder during the previous three years or were recommended for
election or elected to succeed such directors by a majority of such directors.
LIMITATION ON DIRECTORS' LIABILITY
Delaware law authorizes corporations to limit or eliminate the personal
liability of directors to corporations and their stockholders for monetary
damages for breach of a director's fiduciary duty of care. The duty of care
requires that, when acting on behalf of the corporation, directors must
exercise an informed business judgment based on all material information
reasonably available to them. Absent the limitations authorized by Delaware
law, directors are accountable to corporations and their stockholders for
monetary damages for conduct constituting gross negligence in the exercise of
their duty of care. Delaware law enables corporations to limit available relief
to equitable remedies such as injunction or rescission. The Certificate of
Incorporation limits the liability of Quanta's directors to Quanta or its
stockholders to the fullest extent permitted by Delaware law. Specifically,
Quanta's directors will not be personally liable to Quanta or its stockholders
for monetary damages for breach of a director's fiduciary duty as a director,
except for liability for breach of the duty of loyalty, for acts or omissions
not in good faith or that involve intentional misconduct or a knowing violation
of law, for unlawful payments of dividends or unlawful stock repurchases or
redemptions as provided in Section 174 of the DGCL or for any transaction in
which a director has derived an improper personal benefit.
The Certificate of Incorporation provides that each officer and director of
Quanta will be indemnified and held harmless, to the fullest extent permitted
by Delaware law (as amended from time to time), against all expenses,
liabilities and losses reasonably suffered in connection with any action, suit
or proceeding by reason of the fact that he or she is or was a director or
officer of Quanta or, while being at the time a director or officer of Quanta,
is or was serving at the request of Quanta as a director, trustee, officer,
employee or agent of another entity. Quanta is not, however, permitted to
indemnify any person in connection with a proceeding initiated by that person
unless such proceeding was authorized by the Board of Directors. The Bylaws
also provide for mandatory advancement of expenses of officers and directors
incurred in defending any covered proceeding in advance of its final
disposition. We also carry directors' and officers' liability insurance.
The inclusion of these provisions in the Certificate of Incorporation may
have the effect of reducing the likelihood of derivative litigation against
directors and may discourage or deter stockholders or management from bringing
a lawsuit against directors for breach of their duty of care, even though such
an action, if successful, might otherwise have benefited Quanta and its
stockholders. Our Bylaws provide indemnification to Quanta's officers and
directors and certain other persons with respect to certain matters.
OTHER MATTERS
The Certificate of Incorporation provides that the number of directors shall
be as determined by the Board of Directors from time to time, but shall be at
least one and not more than nineteen. It also
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<PAGE>
provides that directors may be removed only for cause, and then only by the
affirmative vote of the holders of at least a majority of all outstanding
voting stock entitled to vote. This provision, in conjunction with the
provision of the Bylaws authorizing the Board of Directors to fill vacant
directorships, will prevent stockholders from removing incumbent directors
without cause and filling the resulting vacancies with their own nominees.
The Certificate of Incorporation provides that stockholders may act only at
an annual or special meeting of stockholders and may not act by written
consent. The Certificate of Incorporation provides that special meetings of the
stockholders can be called only by the Chairman of the Board pursuant to a
resolution approved by a majority of the whole Board of Directors.
STOCKHOLDER PROPOSALS
Our Bylaws contain provisions (1) requiring that advance notice be delivered
to Quanta of any business to be brought by a stockholder before an annual
meeting of stockholders and (2) establishing certain procedures to be followed
by stockholders in nominating persons for election to the Board of Directors.
Generally, such advance notice provisions provide that written notice must be
given to the Secretary of Quanta by a stockholder (a) in the event of business
to be brought by a stockholder before, (1) an annual meeting, not less than 90
nor more than 180 days prior to the earlier of the date of the meeting or the
anniversary date of the immediately preceding annual meeting of stockholders
and (2) a special meeting, not less than 40 nor more than 60 days prior to the
date of such meeting of stockholders (with certain exceptions if less than 50
days notice or prior public disclosure of the date of the special meeting is
given to stockholders) and (b) in the event of nominations of persons for
election to the Board of Directors by any stockholder, (1) with respect to an
election to be held at the annual meeting of stockholders, not less than 90
days prior to the anniversary date of the immediately preceding annual meeting
of stockholders and (2) with respect to an election to be held at a special
meeting of stockholders for the election of directors, not later than the close
of business on the 10th day following the day on which notice of the date of
the special meeting was mailed to stockholders or public disclosure of the date
of the special meeting was made, whichever first occurs. Such notice must set
forth specific information regarding such stockholder and such business or
director nominee, as described in our Bylaws. The foregoing summary is
qualified in its entirety by reference to our Bylaws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for our common stock is American Stock
Transfer and Trust Company.
57
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
As of December 15, 1998, Quanta has outstanding 21,692,655 shares of common
stock, of which 7,270,381 shares are freely tradable without restriction or
further registration under the Securities Act, except for those held by
"affiliates" (as defined in the Securities Act) of Quanta, which shares will be
subject to the resale limitations of Rule 144 under the Securities Act. The
remaining 14,422,274 shares of common stock are deemed "restricted securities"
under Rule 144 in that they were originally issued and sold by Quanta in
private transactions in reliance upon exemptions under the Securities Act, and
may be publicly sold only if registered under the Securities Act or sold in
accordance with an applicable exemption from registration, such as those
provided by Rule 144 promulgated under the Securities Act as described below.
In general, under Rule 144 as currently in effect, if a minimum of one year
has elapsed since the later of the date of acquisition of restricted securities
from the issuer or from any affiliate of the issuer, the acquiror or subsequent
holder would be entitled to sell within any three-month period a number of
those shares that does not exceed the greater of one percent of the number of
shares of such class of stock then outstanding or the average weekly trading
volume of the shares of such class of stock during the four calendar weeks
preceding the filing of a Form 144 with respect to such sale. Sales under Rule
144 are also subject to certain manner of sale provisions and notice
requirements and to the availability of current public information about the
issuer. In addition, if a period of at least two years has elapsed since the
later of the date of acquisition of restricted securities from the issuer or
from any affiliate of the issuer, and the acquiror or subsequent holder thereof
is deemed not to have been an affiliate of the issuer of such restricted
securities at any time during the 90 days preceding a sale, such person would
be entitled to sell such restricted securities under Rule 144(k) without regard
to the requirements described above. Rule 144 does not require the same person
to have held the securities for the applicable periods. The foregoing summary
of Rule 144 is not intended to be a complete description thereof. The SEC has
proposed certain amendments to Rule 144 that would, among other things,
eliminate the manner of sale requirements and revise the notice provisions of
that rule. The SEC has also solicited comments on other possible changes to
Rule 144, including possible revisions to the one- and two-year holding periods
and the volume limitations referred to above.
Options to purchase 1,584,780 shares of common stock are outstanding under
the 1997 Stock Option Plan. In general, pursuant to Rule 701 under the
Securities Act, any employee, officer or director of, or consultant to, Quanta
who purchased his or her shares pursuant to a written compensatory plan or
contract is entitled to rely on the resale provisions of Rule 701, which permit
non-affiliates to sell such shares without compliance with the public
information, holding period, volume limitation or notice provisions of Rule
144, and permit affiliates to sell such shares without compliance with the
holding period provisions of Rule 144. In addition, we have filed a
Registration Statement on Form S-8 covering the shares issuable upon exercise
of stock options that may be granted in the future under the 1997 Stock Option
Plan, in which case such shares of common stock generally will be freely
tradable by non-affiliates in the public market without restriction under the
Securities Act.
Quanta's executive officers, directors, stockholders at the time of the IPO
and persons who acquired shares of common stock in connection with the
acquisitions of the Founding Companies
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<PAGE>
have agreed not to offer, sell, contract to sell, grant any option or other
right for the sale of, or otherwise dispose of any shares of common stock or
any securities, indebtedness or other rights exercisable for or convertible or
exchangeable into common stock owned or acquired in the future in any manner
until February 18, 2000 (the "Lockup Period") without the prior written consent
of BT Alex. Brown Incorporated. These restrictions will be applicable to any
shares acquired by any of those persons during the Lockup Period. We have
granted registration rights to stockholders of the Founding Companies in
connection with registrations of sales of common stock by Quanta following the
Lockup Period (other than registrations in connection with acquisitions and
pursuant to employee benefit plans). We have also granted registration rights
to the former stockholders of Spalj Construction Company and the holders of the
Convertible Subordinated Notes, which do not apply or have been waived with
respect to this offering.
59
<PAGE>
PLAN OF DISTRIBUTION
We have entered into an underwriting agreement with the underwriters named
below in which they have severally agreed to purchase from us the number of
shares of common stock set forth beside their names below. BT Alex. Brown
Incorporated, BancBoston Robertson Stephens, Bear, Stearns & Co. Inc., Sanders
Morris Mundy Inc. and SunTrust Equitable Securities Corporation are the
representatives of the Underwriters.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
BT Alex. Brown Incorporated.....................................
BancBoston Robertson Stephens...................................
Bear, Stearns & Co. Inc.........................................
Sanders Morris Mundy Inc........................................
SunTrust Equitable Securities Corporation.......................
</TABLE>
<TABLE>
<S> <C>
---------
Total......................................................... 3,500,000
=========
</TABLE>
The obligation of the underwriters to purchase the common stock is subject to
the terms and conditions set forth in the underwriting agreement. The
underwriting agreement requires the underwriters to purchase all of the shares
of the common stock offered by this prospectus, if any are purchased. The
shares of common stock offered by the underwriters pursuant to this prospectus
are subject to prior sale, when, as and if delivered to and accepted by the
underwriters, and subject to the underwriters' right to reject any order in
whole or in part.
The underwriters have advised us that they propose to offer the shares of
common stock to the public at the public offering price of $ per share.
Any shares sold by the underwriters to securities dealers may be sold at a
discount of up to $ per share from the public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $0.10 per share from
the public offering price. The underwriters may change the public offering
price after the common stock is released for sale to the public. The following
table sets forth the public offering price and all discounts and commissions to
be allowed to the underwriters.
<TABLE>
<CAPTION>
PRICE UNDERWRITING PROCEEDS
TO PUBLIC DISCOUNT/COMMISSION TO QUANTA
--------- ------------------- ---------
<S> <C> <C> <C>
Per share.........................
Total.............................
</TABLE>
The underwriters may sell more shares than the total number set forth in the
table above. To cover these sales, the underwriters have an option to purchase
up to 525,000 additional shares of common stock from Quanta at the public
offering price less the underwriting discounts and commissions set forth in the
table above. The underwriters may exercise this option for 30 days after the
date of this prospectus only to cover these sales. To the extent that the
underwriters purchase shares pursuant to this option, each of the underwriters
will purchase shares in approximately the same proportion as the number of
shares of common stock to be purchased by it shown in the above table bears to
3,500,000 and we will be obligated, pursuant to the option, to sell such shares
to the underwriters. If purchased, the underwriters will offer such additional
shares on the same terms as those on which the 3,500,000 shares are being
offered.
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We have agreed to indemnify the underwriters with respect to certain
liabilities, including liabilities under the Securities Act of 1933, as
amended.
To facilitate the offering of the common stock, the underwriters may engage
in transactions that stabilize, maintain or otherwise affect the market price
of the common stock. Specifically, the underwriters may overallot shares of the
common stock in connection with this offering, thereby creating a short
position in the underwriters' account. A short position results when an
underwriter sells more shares of common stock than such underwriter is
committed to purchase. Additionally, to cover such overallotments or to
stabilize the market price of the common stock, the underwriters may bid for,
and purchase, shares of the common stock at a level above that which might
otherwise prevail in the open market. The underwriters are not required to
engage in these activities, and, if commenced, any such activities may be
discontinued at any time. The underwriters also may reclaim selling concessions
allowed to an underwriter or dealer, if the underwriters repurchase shares
distributed by that underwriter or dealer.
We have agreed not to sell or offer any shares of our common stock or
options, rights or warrants to acquire shares of our common stock for a period
of 90 days after the date of this prospectus without the prior written consent
of BT Alex. Brown Incorporated, except for shares issued (1) in connection with
acquisitions of businesses, (2) upon the exercise of options granted under the
1997 Stock Option Plan or (3) in connection with the conversion into common
stock of shares of Limited Vote Common Stock or the Convertible Subordinated
Notes.
The underwriters and their respective affiliates may be lenders to, engage in
transactions with, and perform services for us and our subsidiaries in the
ordinary course of business. BankBoston, N.A. is a participant in our Credit
Facility which will be repaid with the proceeds of this offering. BankBoston is
an affiliate of BancBoston Robertson Stephens, a member of the National
Association of Securities Dealers, Inc. and one of the managing underwriters of
this offering.
EXPERTS
The financial statements of Quanta, the Founding Companies, Spalj
Construction Company and Sumter Builders, Inc. included in this prospectus and
elsewhere in this registration statement have been audited by Arthur Andersen
LLP, independent public accountants, as indicated in their reports with respect
thereto, and are included herein in reliance upon the authority of said firm as
experts in accounting and auditing in giving said reports.
The financial statements of Underground Construction Co., Inc. and Manuel
Bros., Inc. included in this prospectus and elsewhere in this registration
statement have been audited by S.J. Gallina & Co., LLP, independent public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of said firm as experts in
accounting and auditing in giving said reports.
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be passed upon
for Quanta by Akin, Gump, Strauss, Hauer & Feld, L.L.P., San Antonio, Texas.
Certain legal matters related to the offering will be passed upon for the
underwriters by Piper & Marbury L.L.P., Baltimore, Maryland.
61
<PAGE>
ADDITIONAL INFORMATION
We have filed with the SEC a Registration Statement on Form S-1 (together
with all exhibits, schedules and amendments relating thereto, the "Registration
Statement") under the Securities Act with respect to the common stock offered
hereby. This prospectus, filed as part of the Registration Statement, does not
contain all the information contained in the Registration Statement, portions
of which have been omitted in accordance with the rules and regulations of the
SEC. For further information with respect to us and the common stock offered
hereby, reference is made to the Registration Statement. Statements contained
in this prospectus as to the contents of any contract or other document filed
as an exhibit to the Registration Statement are qualified in their entirety by
reference to such exhibits for complete statements of their provisions. All of
these documents may be inspected without charge at the Public Reference Section
of the SEC at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024, Washington,
D.C. 20549, and at the following regional offices of the SEC: Citicorp Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and 7 World Trade
Center, 13th Floor, New York, New York 10048. Copies can also be obtained from
the Public Reference Section of the SEC at prescribed rates. The SEC maintains
a Web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the SEC.
We are subject to the reporting requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, as amended, and in accordance therewith file
periodic reports, proxy statements and other information with the SEC. Such
periodic reports, proxy statements and other information will be available for
inspection and copying at the public reference facilities and other regional
offices referred to above. In addition, the shares of common stock are traded
on the NYSE, and such reports, proxy statements and other information may be
inspected at the offices of the New York Stock Exchange, Inc., 20 Broad Street,
New York, New York, 10005.
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<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Quanta Services, Inc. Unaudited Pro Forma Combined Financial Statements
Introduction to Unaudited Pro Forma Combined Financial Statements...... F-2
Unaudited Pro Forma Combined Balance Sheet............................. F-4
Unaudited Pro Forma Combined Statements of Operations.................. F-5
Notes to Unaudited Pro Forma Combined Financial Statements............. F-7
Quanta Services, Inc. and Subsidiaries
Report of Independent Public Accountants............................... F-12
Consolidated Balance Sheets............................................ F-13
Consolidated Statements of Operations.................................. F-14
Consolidated Statements of Cash Flows.................................. F-15
Consolidated Statements of Stockholders' Equity........................ F-16
Notes to Consolidated Financial Statements............................. F-17
Quanta Services, Inc.
Report of Independent Public Accountants............................... F-33
Balance Sheet.......................................................... F-34
Statement of Operations................................................ F-35
Statement of Stockholders' Equity...................................... F-36
Notes to Financial Statements.......................................... F-37
FOUNDING COMPANIES
Union Power Construction Company
Report of Independent Public Accountants............................... F-42
Balance Sheets......................................................... F-43
Statements of Operations............................................... F-44
Statements of Cash Flows............................................... F-45
Statements of Stockholders' Equity..................................... F-46
Notes to Financial Statements.......................................... F-47
TRANS TECH Electric, Inc.
Report of Independent Public Accountants............................... F-57
Balance Sheets......................................................... F-58
Statements of Operations............................................... F-59
Statements of Cash Flows............................................... F-60
Statements of Shareholders' Equity..................................... F-61
Notes to Financial Statements.......................................... F-62
Potelco, Inc.
Report of Independent Public Accountants............................... F-69
Balance Sheets......................................................... F-70
Statements of Operations............................................... F-71
Statements of Cash Flows............................................... F-72
Statements of Stockholder's Equity..................................... F-73
Notes to Financial Statements.......................................... F-74
SUBSEQUENT ACQUISITIONS
Spalj Construction Company
Report of Independent Public Accountants............................... F-82
Balance Sheet.......................................................... F-83
Statement of Operations................................................ F-84
Statement of Cash Flows................................................ F-85
Statement of Shareholders' Equity...................................... F-86
Notes to Financial Statements.......................................... F-87
Underground Construction Co., Inc.
Report of Independent Public Accountants............................... F-92
Balance Sheets......................................................... F-93
Statements of Operations............................................... F-94
Statements of Cash Flows............................................... F-95
Statements of Shareholders' Equity..................................... F-96
Notes to Financial Statements.......................................... F-97
Sumter Builders, Inc.
Report of Independent Public Accountants............................... F-104
Balance Sheets......................................................... F-105
Statements of Operations............................................... F-106
Statements of Cash Flows............................................... F-107
Statements of Stockholders' Equity..................................... F-108
Notes to Financial Statements.......................................... F-109
Manuel Bros., Inc.
Report of Independent Public Accountants............................... F-114
Balance Sheets......................................................... F-115
Statements of Operations............................................... F-116
Statements of Stockholders' Equity..................................... F-117
Statements of Cash Flows............................................... F-118
Notes to Financial Statements.......................................... F-119
</TABLE>
F-1
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to (i) the acquisitions by Quanta, of the outstanding capital stock of PAR,
TRANS TECH, Union Power and Potelco (together, the "Founding Companies"), and
related transactions, (ii) Quanta's initial public offering ("IPO"), (iii) the
subsequent acquisitions of eleven additional businesses from February 19, 1998
through December 1, 1998, (iv) the issuance of the Convertible Subordinated
Notes and (v) this offering. Of the eleven acquired businesses, ten were
accounted for using the purchase method of accounting (the "Purchased
Companies") and one was accounted for using the pooling-of-interests method of
accounting (the "Pooled Company"). The acquisitions of the Founding Companies
occurred simultaneously with the closing of Quanta's initial public offering
and were accounted for using the purchase method of accounting. The Founding
Companies, the Purchased Companies and the Pooled Company are collectively
referred to as the "Acquired Businesses". PAR has been identified as the
accounting acquiror for financial statement presentation purposes. As such,
Quanta's consolidated historical financial statements represent the financial
position and results of operations of (i) PAR as restated to include the
financial position and results of operations of the Pooled Company, and (ii)
the remaining Founding Companies and the Purchased Companies beginning on their
respective dates of acquisition.
The unaudited pro forma combined balance sheet gives effect to one of the
Purchased Companies (included as "Other Individually Insignificant
Acquisitions" in the Unaudited Pro Forma Combined Balance Sheet) which was
acquired subsequent to September 30, 1998 and prior to December 1, 1998 and
related transactions as if it had occurred on September 30, 1998. The unaudited
pro forma combined statements of operations give effect to this transaction as
if it had occurred on January 1, 1997. The unaudited pro forma combined
statements of operations also give effect to the pre-acquisition results of the
Other Founding Companies (which includes Quanta Services, Inc., TRANS TECH,
Union and Potelco from January 1, 1997 through February 18, 1998) and the
results of the nine Purchased Companies acquired prior to September 30, 1998 as
if they had been acquired on January 1, 1997.
Quanta has preliminarily analyzed the savings that it expects to realize from
reductions in salaries, bonuses and certain benefits to the owners. To the
extent the owners of the Companies have contractually agreed to prospective
reductions in salaries, bonuses, benefits and lease payments, these reductions
have been reflected in the unaudited pro forma combined statements of
operations. With respect to other potential cost savings, Quanta has not and
cannot quantify these savings until a period subsequent to the acquisitions. It
is anticipated that these savings will be partially offset by costs related to
Quanta's new corporate infrastructure and by the costs associated with being a
public company. However, because these costs cannot be accurately quantified at
this time, they have not been included in the pro forma financial information
of Quanta.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that Company management deems appropriate
and may be revised as additional information becomes available. The pro forma
financial data do not purport to represent what Quanta's financial position or
results of operations would actually have been if such transactions in
F-2
<PAGE>
fact had occurred on those dates and are not necessarily representative of
Quanta's financial position or results of operations for any future period.
Since the Acquired Businesses were not under common control or management
during the entire period covered by the pro forma financial statements,
historical combined results may not be comparable to, or indicative of, future
performance. The unaudited pro forma combined financial statements should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this prospectus. See also "Risk Factors" included
elsewhere herein.
F-3
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 1998
(IN THOUSANDS)
<TABLE>
<CAPTION>
QUANTA OTHER
SERVICES, INC. INDIVIDUALLY
AND INSIGNIFICANT PRO FORMA PRO FORMA
SUBSIDIARIES ACQUISITIONS ADJUSTMENTS TOTAL
-------------- ------------- ----------- ---------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents.............. $ 2,584 $ 1,450 $ -- $ 4,034
Accounts receivable, net.. 83,920 4,575 (116) 88,379
Cost and estimated
earnings in excess of
billings on uncompleted
contracts................ 30,111 666 -- 30,777
Inventories............... 1,913 2 -- 1,915
Prepaid expenses and other
current assets .......... 3,619 183 -- 3,802
-------- ------- -------- --------
Total current assets.... 122,147 6,876 (116) 128,907
PROPERTY AND EQUIPMENT,
net........................ 70,185 3,510 (1,717) 71,978
OTHER ASSETS................ 4,062 -- 2,100 6,162
GOODWILL, net............... 134,929 -- 14,046 148,975
-------- ------- -------- --------
Total assets............ $331,323 $10,386 $ 14,313 $356,022
======== ======= ======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of
long-term debt........... $ 2,610 $ 335 $ (90) $ 2,855
Accounts payable and
accrued expenses......... 48,571 3,815 125 52,511
Billings in excess of
costs and estimated
earnings on uncompleted
contracts................ 6,358 275 -- 6,633
-------- ------- -------- --------
Total current
liabilities............ 57,539 4,425 35 61,999
LONG-TERM DEBT, net of
current maturities......... 108,297 1,462 (106,612) 3,147
CONVERTIBLE SUBORDINATED
NOTES...................... -- -- 49,350 49,350
DEFERRED INCOME TAXES....... 8,538 -- -- 8,538
OTHER NON-CURRENT
LIABILITIES................ -- -- -- --
COMMITMENTS AND
CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock........... -- -- -- --
Common Stock.............. -- 58 (58) --
Limited Vote Common
Stock.................... -- -- -- --
Unearned ESOP shares...... (1,831) -- -- (1,831)
Additional paid-in
capital.................. 137,608 -- 76,039 213,647
Retained earnings......... 21,172 4,441 (4,441) 21,172
-------- ------- -------- --------
Total stockholders'
equity................. 156,949 4,499 71,540 232,988
-------- ------- -------- --------
Total liabilities and
stockholders' equity... $331,323 $10,386 $ 14,313 $356,022
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
QUANTA OTHER
SERVICES, INC. OTHER INDIVIDUALLY
AND FOUNDING INSIGNIFICANT PRO FORMA PRO FORMA
SUBSIDIARIES COMPANIES(3) ACQUISITIONS ADJUSTMENTS TOTAL
-------------- ------------ ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES................ $194,356 $14,849 $100,286 $(1,816) $307,675
COST OF SERVICES
(including
depreciation).......... 157,218 12,486 80,971 (1,495) 249,180
-------- ------- -------- ------- --------
Gross Profit.......... 37,138 2,363 19,315 (321) 58,495
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 16,544 956 10,921 (2,886) 25,535
MERGER EXPENSES-
Pooling................ 231 -- -- -- 231
GOODWILL AMORTIZATION... 1,535 -- 2 1,343 2,880
-------- ------- -------- ------- --------
Income from
Operations........... 18,828 1,407 8,392 1,222 29,849
OTHER INCOME (EXPENSE)
Interest Expense...... (2,484) (192) (436) 121 (2,991)
Other, net............ 467 68 654 -- 1,189
-------- ------- -------- ------- --------
INCOME BEFORE INCOME TAX
EXPENSE................ 16,811 1,283 8,610 1,343 28,047
PROVISION FOR INCOME
TAXES.................. 7,442 65 429 4,405 12,341
-------- ------- -------- ------- --------
NET INCOME (LOSS)....... $ 9,369 $ 1,218 $ 8,181 $(3,062) $ 15,706
======== ======= ======== ======= ========
BASIC EARNINGS PER
SHARE.................. $ 0.63
========
DILUTED EARNINGS PER
SHARE.................. $ 0.60
========
DILUTED EARNINGS PER
SHARE BEFORE MERGER
EXPENSES-Pooling....... $ 0.60
========
SHARES USED IN COMPUTING
PRO FORMA COMBINED
EARNINGS PER SHARE--
BASIC (1)............. 25,121
========
DILUTED (2)........... 28,826
========
</TABLE>
- --------
(1) Includes (i) 7,527,000 shares of common stock issued to the owners of the
Founding Companies, (ii) the issuance of 4,998,337 shares related to the
Purchased Companies and the Pooled Company, (iii) 3,345,333 shares of
Limited Vote Common Stock issued to the initial stockholders and certain
management personnel of the Company, (iv) 5,750,000 shares of common stock
sold in the IPO and (v) 3,500,000 shares of common stock to be sold in this
offering.
(2) Includes (i) the shares described above, (ii) the dilution attributable to
the assumed conversion of the Convertible Subordinated Notes and (iii) the
dilution attributable to outstanding options to purchase common stock,
using the treasury stock method.
(3) Represents pre-acquisition results of Quanta Services, Inc., TRANS TECH,
Union and Potelco.
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
QUANTA OTHER
SERVICES, INC. OTHER INDIVIDUALLY
AND FOUNDING INSIGNIFICANT PRO FORMA PRO FORMA
SUBSIDIARIES COMPANIES ACQUISITIONS ADJUSTMENTS TOTAL
-------------- --------- ------------- ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES................ $76,204 $106,288 $160,892 $(5,419) $337,965
COST OF SERVICES
(including
depreciation).......... 58,896 88,696 126,523 (5,176) 268,939
------- -------- -------- ------- --------
Gross Profit.......... 17,308 17,592 34,369 (243) 69,026
SELLING, GENERAL AND
ADMINISTRATIVE
EXPENSES............... 11,589 18,997 18,041 (21,862) 26,765
GOODWILL AMORTIZATION... 56 -- -- 3,730 3,786
------- -------- -------- ------- --------
Income (loss) from
Operations........... 5,663 (1,405) 16,328 17,889 38,475
OTHER INCOME (EXPENSE)
Interest Expense...... (1,219) (702) (312) (1,945) (4,178)
Other, net............ (131) 270 1,229 130 1,498
------- -------- -------- ------- --------
INCOME (LOSS) BEFORE
INCOME TAX EXPENSE..... 4,313 (1,837) 17,245 16,074 35,795
PROVISION FOR INCOME
TAXES.................. 1,786 1,461 1,864 10,639 15,750
------- -------- -------- ------- --------
NET INCOME (LOSS)....... $ 2,527 $ (3,298) $ 15,381 $ 5,435 $ 20,045
======= ======== ======== ======= ========
BASIC EARNINGS PER SHARE................................................... $ 0.83
========
DILUTED EARNINGS PER SHARE................................................. $ 0.80
========
SHARES USED IN COMPUTING
PRO FORMA COMBINED
EARNINGS PER SHARE--
BASIC(1)................................................................. 24,084
========
DILUTED(2)............................................................... 27,673
========
</TABLE>
- --------
(1) Includes (i) 7,527,000 shares of common stock issued to the owners of the
Founding Companies, (ii) the issuance of 4,998,337 shares related to the
Purchased Companies and the Pooled Company, (iii) 3,345,333 shares of
Limited Vote Common Stock issued to the initial stockholders and certain
management personnel of the Company, (iv) 5,750,000 shares of common stock
sold in the IPO and (v) 3,500,000 shares of common stock to be sold in this
offering, net of 1,036,601 shares representing net cash to Quanta.
(2) Includes (i) the shares described above and (ii) the dilution attributable
to the assumed conversion of the Convertible Subordinated Notes.
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
Quanta was founded to create a leading provider of specialty contracting and
maintenance services primarily related to electric and telecommunications
infrastructure in North America. Quanta conducted no operations prior to its
IPO and acquired the Founding Companies concurrently with and as a condition of
the closing of the IPO.
The historical financial statements of the Other Founding Companies
(excluding PAR) included in the accompanying pro forma financial statements
reflect the results of operations of those Other Founding Companies for periods
prior to February 18, 1998, and were derived from the respective Founding
Companies' financial statements. The periods included in these financial
statements for the individual Founding Companies are for the year ended
December 31, 1997, and the period from January 1, 1998 to February 18, 1998.
The audited historical financial statements for the Founding Companies included
elsewhere herein have been included in accordance with Securities and Exchange
Commission (SEC) Staff Accounting Bulletin No. 80.
The historical financial information of the Other Individually Insignificant
Acquisitions reflect the financial position of a company which was acquired
subsequent to September 30, 1998 and prior to December 1, 1998, and the results
of its operations accounted for using the purchase method of accounting for the
year ended December 31, 1997 and for the nine months ended September 30, 1998
and the pre-acquisition results of the nine companies acquired in purchase
acquisitions prior to September 30, 1998 as though these acquisitions had
occurred on January 1, 1997.
2. ACQUISITION OF COMPANIES:
In February 1998, Quanta completed its IPO which involved the issuance of
5,000,000 shares of common stock, providing approximately $38.6 million in net
proceeds to the Company, after deducting underwriter discounts and commissions
and expenses related to the IPO. Concurrent with the closing of its initial
public offering, Quanta acquired in separate transactions, 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 IPO.
Subsequent to its IPO, and through September 30, 1998, the Company has
acquired ten additional businesses for approximately $73.0 million of cash and
4.3 million shares of common stock. Of these ten, nine were accounted for using
the purchase method of accounting and one was accounted for using the pooling-
of-interests method of accounting. Accordingly, the Company's historical
financial statements have been restated to include the historical financial
statements of the Pooled Company.
F-7
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Subsequent to September 30, 1998, and through December 1, 1998, the Company
has acquired one business for approximately $11.3 million of cash (funded
through borrowings under the Company's credit facility) and 660,104 shares of
common stock. This acquisition was accounted for using the purchase method of
accounting.
In connection with the acquisitions of the Founding Companies and the
Purchased Companies, the Company has recorded approximately $150.5 million of
excess total consideration paid over the net tangible assets acquired as
goodwill in the accompanying consolidated financial statements. The
accompanying balance sheets include allocations of the respective purchase
prices initially assigned to the assets acquired and liabilities assumed based
on preliminary estimates of fair value and may be revised as additional
information concerning the valuation of such assets and liabilities becomes
available.
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the effect of the purchase of one Purchased Company closed
subsequent to September 30, 1998 by Quanta consisting of cash consideration of
$11.3 million (funded through borrowings under the Company's Credit Facility
and recorded as long-term debt) and approximately 660,104 shares of common
stock, resulting in goodwill of $14.0 million.
(b) Records the elimination of the assets and related liabilities for a
division of one of the Purchased Companies which was not acquired by the
Company.
(c) Records the cash proceeds of $49.4 million from the issuance of the
Convertible Subordinated Notes net of transaction costs of approximately $2.1
million. Transaction costs primarily consist of fees paid to Enron Capital,
accounting fees and legal fees.
(d) Records the cash proceeds of $74.0 million from the issuance of shares of
Quanta common stock net of estimated offering costs of $4.2 million. Offering
costs primarily consist of underwriting discounts and commissions, accounting
fees, legal fees and printing expenses.
(e) Records payment of the cash proceeds from the issuance of the Convertible
Subordinated Notes and the Offering for the expected repayment of outstanding
long-term debt totaling $117.0 million.
F-8
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes unaudited pro forma combined balance sheet
adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) ADJUSTMENTS
ASSETS ------- ------- ------- ------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Current Assets--
Cash and cash
equivalents.......... $ -- $ -- $47,250 $69,768 $(117,018) $ --
Accounts receivable... -- (116) -- -- -- (116)
Prepaid expenses and
other................ -- -- -- -- -- --
------- ------- ------- ------- --------- --------
Total current
assets............. -- (116) 47,250 69,768 (117,018) (116)
Property and equipment,
net.................... -- (1,717) -- -- -- (1,717)
Other assets............ -- -- 2,100 -- -- 2,100
Goodwill................ 14,046 -- -- -- -- 14,046
------- ------- ------- ------- --------- --------
Total Assets............ $14,046 $(1,833) $49,350 $69,768 $(117,018) $ 14,313
======= ======= ======= ======= ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities--
Current maturities of
long-term debt....... $ -- $ (90) $ -- $ -- $ -- $ (90)
Accounts payable and
accrued expenses..... 125 -- -- -- -- 125
Billing in excess of
costs and profits
recognized........... -- -- -- -- -- --
------- ------- ------- ------- --------- --------
Total current
liabilities........ 125 (90) -- -- -- 35
Long-term debt, net of
current maturities..... 11,256 (850) -- -- (117,018) (106,612)
Convertible subordinated
notes.................. -- -- 49,350 -- -- 49,350
Deferred income taxes... -- -- -- -- -- --
------- ------- ------- ------- --------- --------
Total liabilities... 11,381 (940) 49,350 -- (117,018) (57,227)
Stockholders' equity--
Common Stock.......... (58) -- -- -- -- (58)
Unearned ESOP shares.. -- -- -- -- -- --
Limited Vote Common
Stock................ -- -- -- -- -- --
Additional paid-in
capital.............. 6,271 -- -- 69,768 -- 76,039
Retained earnings..... (3,548) (893) -- -- -- (4,441)
------- ------- ------- ------- --------- --------
Total stockholders'
equity............. 2,665 (893) -- 69,768 -- 71,540
------- ------- ------- ------- --------- --------
Total liabilities
and stockholders'
equity............. $14,046 $(1,833) $49,350 $69,768 $(117,018) $ 14,313
======= ======= ======= ======= ========= ========
</TABLE>
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
Nine Months Ended September 30, 1998
(a) Reflects $2.5 million reduction in salaries, bonuses and benefits to the
owners of the Acquired Businesses. These reductions in salaries, bonuses and
benefits have been agreed to prospectively in accordance with the terms of
employment agreements. Such employment agreements are primarily for three
years, contain restrictions related to competition and provide severance for
termination of employment in certain circumstances. Additionally, reflects
reductions in expenses associated with certain non-operating assets that were
transferred from the Acquired Businesses prior to their acquisition.
F-9
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(b) Reflects the amortization of goodwill recorded as a result of the
acquisition of the Founding Companies and the Purchased Companies over a 40-
year estimated life.
(c) Reflects interest expense on the borrowings to fund the cash portion of
the consideration paid for the Purchased Companies, net of interest savings due
to the assumed repayment of the historical debt using the proceeds from the IPO
and the offering and a lower effective interest rate due to the issuance of the
Convertible Subordinated Notes. The additional interest expense on the
borrowings was calculated utilizing an annual effective interest rate of
approximately 7.0%.
(d) Reflects the elimination of revenues between certain of the Acquired
Businesses prior to their acquisition by Quanta.
(e) Reflects the incremental provision for federal and state income taxes at
an approximate 39.0 percent overall tax rate before non-deductible goodwill and
other permanent items, relating to the above adjustments to the statements of
operations and for income taxes on S corporation income not provided for in the
historical financial statements.
(f) Reflects the elimination of the revenues and related expenses for a
division of one of the Purchased Companies because the Company did not purchase
that division.
(g) Reflects an increase in depreciation expense as a result of fixed assets
being adjusted to fair value at the date of acquisition for certain of the
Acquired Businesses.
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS
-------------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) (F) (G) ADJUSTMENTS
------- ------- ---- ----- ------- ----- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ -- $-- $(914) $ -- $(902) $-- $(1,816)
Cost of services........ -- -- -- (914) -- (583) 2 (1,495)
------- ------- ---- ----- ------- ----- ---- -------
Gross profit.......... -- -- -- -- -- (319) (2) (321)
Selling, general and
administrative
expenses............... (2,519) -- -- -- -- (367) -- (2,886)
Goodwill amortization... -- 1,343 -- -- -- -- -- 1,343
------- ------- ---- ----- ------- ----- ---- -------
Income (loss) from
operations........... 2,519 (1,343) -- -- -- 48 (2) 1,222
Other income (expense)--
Interest expense...... -- -- 121 -- -- -- -- 121
Other, net............ -- -- -- -- -- -- -- --
------- ------- ---- ----- ------- ----- ---- -------
Income (loss) before
income taxes......... 2,519 (1,343) 121 -- -- 48 (2) 1,343
Provision for income
taxes.................. -- -- -- -- 4,405 -- -- 4,405
------- ------- ---- ----- ------- ----- ---- -------
Net income (loss)..... $ 2,519 $(1,343) $121 $ -- $(4,405) $ 48 $ (2) $(3,062)
======= ======= ==== ===== ======= ===== ==== =======
</TABLE>
Year Ended December 31, 1997
(a) Reflects $8.4 million reduction in salaries, bonuses and benefits to the
owners of the Acquired Businesses. These reductions in salaries, bonuses and
benefits have been agreed to prospectively in accordance with the terms of
employment agreements. Such employment agreements are primarily for three
years, contain restrictions related to competition and provide severance for
F-10
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
termination of employment in certain circumstances. Additionally, reflects
reductions in expenses associated with certain non-operating assets that were
transferred from the Acquired Businesses prior to their acquisition.
(b) Reflects the amortization of goodwill recorded as a result of the
acquisition of the Companies over a 40-year estimated life.
(c) Reflects interest expense on the borrowings to fund the cash portion of
the consideration paid for the Purchased Companies, net of interest savings due
to the assumed repayment of the historical debt using the proceeds from the IPO
and the offering and a lower effective interest rate due to the issuance of the
Convertible Subordinated Notes. The additional interest expense on the
borrowings was calculated utilizing an annual effective interest rate of
approximately 7.0%.
(d) Reflects the elimination of revenues between certain of the Acquired
Businesses prior to their acquisition by Quanta.
(e) Reflects the elimination of the non-recurring non-cash charge of $13.0
million, which was based on the fair value of shares issued to an initial
stockholder and management in November 1997.
(f) Reflects the incremental provision for federal and state income taxes at
an approximate 39.0 percent overall tax rate before non-deductible goodwill and
other permanent items, relating to the above adjustments to the statements of
operations and for income taxes on S corporation income not provided for in the
historical financial statements.
(g) Reflects the elimination of the revenues and related expenses for a
division of one of the Purchased Companies because the Company did not purchase
that division.
(h) Reflects a reduction in depreciation expense as a result of fixed assets
being adjusted to fair value at the date of acquisition for certain of the
Acquired Businesses.
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENTS
------------------------------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) (F) (G) (H) ADJUSTMENTS
------- ------- ------- ------- -------- -------- ----- ---- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................ $ -- $ -- $ -- $(4,480) $ -- $ -- $(939) $-- $(5,419)
Cost of services........ -- -- -- (4,480) -- -- (554) (142) (5,176)
------- ------- ------- ------- -------- -------- ----- ---- -------
Gross profit............ -- -- -- -- -- -- (385) 142 (243)
Selling, general and
administrative
expenses............... (8,351) -- -- -- (13,003) -- (508) -- (21,862)
Goodwill amortization... -- 3,730 -- -- -- -- -- -- 3,730
------- ------- ------- ------- -------- -------- ----- ---- -------
Income (loss) from
operations............. 8,351 (3,730) -- -- 13,003 -- 123 142 17,889
Other income (expense)--
Interest expense........ -- -- (1,945) -- -- -- -- -- (1,945)
Other, net............. 130 -- -- -- -- -- -- -- 130
------- ------- ------- ------- -------- -------- ----- ---- -------
Income (loss) before
income taxes.......... 8,481 (3,730) (1,945) -- 13,003 -- 123 142 16,074
Provision for income
taxes.................. -- -- -- -- -- 10,639 -- -- 10,639
------- ------- ------- ------- -------- -------- ----- ---- -------
Net income (loss)....... $ 8,481 $(3,730) $(1,945) $ -- $ 13,003 $(10,639) $ 123 $142 $ 5,435
======= ======= ======= ======= ======== ======== ===== ==== =======
</TABLE>
F-11
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quanta Services, Inc.:
We have audited the accompanying consolidated balance sheets of Quanta
Services, Inc. (a Delaware corporation), and subsidiaries as of December 31,
1996 and 1997, and the related consolidated statements of operations, cash
flows and stockholders' 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 Quanta Services, Inc. and
subsidiaries as of December 31, 1996 and 1997, and the results of their
operations and their cash flows for the three years ended December 31, 1997, in
conformity with generally accepted accounting principles.
As discussed in Note 1, the accompanying consolidated financial statements
reflect the Company on a historical basis including PAR Electrical Contractors,
Inc., as the accounting acquiror restated for the effect of a pooling-of-
interests transaction.
ARTHUR ANDERSEN LLP
Houston, Texas
October 16, 1998
F-12
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................... $ 512 $ 489 $ 2,584
Accounts receivable, net of allowance of
$174, $193 and $1,214 (unaudited)........... 11,794 12,878 83,920
Costs and estimated earnings in excess of
billings on uncompleted contracts........... 799 1,746 30,111
Inventories.................................. 579 865 1,913
Prepaid expenses and other current assets.... 623 724 3,619
------- ------- --------
Total current assets....................... 14,307 16,702 122,147
PROPERTY AND EQUIPMENT, net.................... 14,752 18,286 70,185
OTHER ASSETS................................... 507 645 4,062
GOODWILL, net.................................. 168 114 134,929
------- ------- --------
Total assets............................... $29,734 $35,747 $331,323
======= ======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt......... $ 6,427 $ 7,200 $ 2,610
Accounts payable and accrued expenses........ 4,872 6,578 48,571
Billings in excess of costs and estimated
earnings on uncompleted contracts........... 1,216 738 6,358
------- ------- --------
Total current liabilities.................. 12,515 14,516 57,539
LONG TERM DEBT, net of current maturities...... 6,478 7,542 108,297
DEFERRED INCOME TAXES.......................... 2,281 2,479 8,538
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.00001 par value,
10,000,000 shares authorized, none issued
and outstanding............................. -- -- --
Common Stock, $.00001 par value, 36,654,667
shares authorized, 3,951,945, 3,951,945 and
17,615,233 (unaudited) shares issued and
outstanding................................. -- -- --
Limited Vote Common Stock, $.00001 par value,
3,345,333 shares authorized, 3,345,333
shares issued and outstanding at September
30, 1998.................................... -- -- --
Unearned ESOP shares......................... (2,085) (1,831) (1,831)
Additional paid-in capital................... 1,269 1,238 137,608
Retained earnings............................ 9,276 11,803 21,172
------- ------- --------
Total stockholders' equity................. 8,460 11,210 156,949
------- ------- --------
Total liabilities and stockholders'
equity.................................... $29,734 $35,747 $331,323
======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-13
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................ $53,224 $71,294 $76,204 $56,467 $194,356
COST OF SERVICES (including
depreciation).................. 44,608 57,164 58,896 44,055 157,218
------- ------- ------- ------- --------
Gross profit.................. 8,616 14,130 17,308 12,412 37,138
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES........ 6,438 9,876 11,589 8,493 16,544
MERGER EXPENSES--Pooling........ -- -- -- -- 231
GOODWILL AMORTIZATION........... 50 55 56 42 1,535
------- ------- ------- ------- --------
Income from operations........ 2,128 4,199 5,663 3,877 18,828
OTHER INCOME (EXPENSE):
Interest expense.............. (787) (989) (1,219) (882) (2,484)
Other, net.................... 75 (31) (131) (78) 467
------- ------- ------- ------- --------
Other income (expense),
net........................ (712) (1,020) (1,350) (960) (2,017)
------- ------- ------- ------- --------
INCOME BEFORE INCOME TAX
EXPENSE........................ 1,416 3,179 4,313 2,917 16,811
PROVISION FOR INCOME TAXES...... 353 1,389 1,786 1,173 7,442
------- ------- ------- ------- --------
NET INCOME...................... $ 1,063 $ 1,790 $ 2,527 $ 1,744 $ 9,369
======= ======= ======= ======= ========
BASIC EARNINGS PER SHARE........ $ 0.27 $ 0.45 $ 0.64 $ 0.44 $ 0.57
======= ======= ======= ======= ========
DILUTED EARNINGS PER SHARE...... $ 0.27 $ 0.45 $ 0.64 $ 0.44 $ 0.57
======= ======= ======= ======= ========
DILUTED EARNINGS PER SHARE
BEFORE MERGER EXPENSES......... $ 0.27 $ 0.45 $ 0.64 $ 0.44 $ 0.58
======= ======= ======= ======= ========
SHARES USED IN COMPUTING
EARNINGS PER SHARE:
Basic......................... 3,952 3,952 3,952 3,952 16,340
======= ======= ======= ======= ========
Diluted....................... 3,952 3,952 3,952 3,952 16,456
======= ======= ======= ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-14
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income...................... $ 1,063 $ 1,790 $ 2,527 $ 1,744 $ 9,369
Adjustments to reconcile net
income to net cash provided by
operating activities--
Depreciation and
amortization.................. 2,592 2,814 3,323 2,387 6,629
Loss (gain) on sale of
property and equipment........ 10 (96) 49 (30) (96)
Non-cash compensation charge
for issuance of Common Stock
(ESOP)........................ -- 720 254 -- --
Deferred income taxes.......... 166 364 5 (635) (330)
Changes in operating assets
and liabilities--
(Increase) decrease in--
Accounts receivable......... (767) (2,532) (1,084) (2,399) (23,756)
Inventories................. -- (579) (286) (319) (283)
Costs and profits recognized
in excess of billings...... 36 (233) (947) (1,019) (10,443)
Prepaid expenses and other
current assets............. 153 (63) 42 186 (2,311)
Increase (decrease) in--
Accounts payable and accrued
expenses.................... 210 1,150 1,706 4,706 8,565
Billings in excess of costs
and profits recognized...... (490) 1,026 (478) (1,131) 1,787
Other, net................... (23) (100) (88) (52) (538)
------- ------- ------- ------- --------
Net cash provided by (used
in) operating activities.... 2,950 4,261 5,023 3,438 (11,407)
------- ------- ------- ------- --------
CASH FLOWS FROM INVESTING
ACTIVITIES:
Proceeds from sale of property
and equipment.................. 100 172 268 229 1,015
Additions of property and
equipment...................... (4,184) (3,981) (6,429) (5,499) (13,516)
Purchase of other assets........ -- -- -- -- (1,400)
Cash paid for acquisitions, net
of cash acquired............... (128) -- -- -- (79,255)
------- ------- ------- ------- --------
Net cash used in investing
activities.................. (4,212) (3,809) (6,161) (5,270) (93,156)
------- ------- ------- ------- --------
CASH FLOWS FROM FINANCING
ACTIVITIES:
Proceeds from long-term debt.... 3,491 7,152 4,714 1,797 564
Payments of long-term debt...... (2,419) (5,400) (4,063) (2,630) (31,622)
Redemptions of Common Stock..... (97) (2,805) (31) -- --
Issuances of Common Stock, net
of offering costs.............. -- -- -- -- 44,914
Net borrowings under bank lines
of credit...................... 163 843 495 2,187 101,172
Distributions to stockholders... (80) (375) -- -- (8,370)
Other........................... 43 280 -- -- --
------- ------- ------- ------- --------
Net cash provided by (used
in) financing activities.... 1,101 (305) 1,115 1,354 106,658
------- ------- ------- ------- --------
NET INCREASE (DECREASE) IN CASH
AND CASH EQUIVALENTS............ (161) 147 (23) (478) 2,095
CASH AND CASH EQUIVALENTS,
beginning of period............. 526 365 512 512 489
------- ------- ------- ------- --------
CASH AND CASH EQUIVALENTS, end of
period.......................... $ 365 $ 512 $ 489 $ 34 $ 2,584
======= ======= ======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW INFORMATION:
Cash paid for--
Interest........................ $ 801 $ 637 $ 679 $ 854 $ 2,137
Income taxes, net of refunds.... 553 870 1,518 216 4,876
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-15
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
LIMITED VOTE
COMMON STOCK COMMON STOCK ADDITIONAL TOTAL
----------------- ---------------- UNEARNED PAID-IN RETAINED STOCKHOLDERS'
SHARES AMOUNT SHARES AMOUNT ESOP SHARES CAPITAL EARNINGS EQUITY
---------- ------ --------- ------ ----------- ---------- -------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31,
1994................... 3,951,945 $ -- -- $ -- $ -- $ 904 $ 7,017 $ 7,921
Distribution to
stockholders.......... -- -- -- -- -- -- (219) (219)
Other.................. -- -- -- -- -- (56) -- (56)
Net income............. -- -- -- -- -- -- 1,063 1,063
---------- ----- --------- ----- ------- -------- ------- --------
Balance, December 31,
1995................... 3,951,945 -- -- -- -- 848 7,861 8,709
Distribution to
stockholders.......... -- -- -- -- -- -- (375) (375)
Purchase of stock from
stockholders.......... -- -- -- -- (2,805) -- -- (2,805)
Distribution of stock
via ESOP.............. -- -- -- -- 720 -- -- 720
Other.................. -- -- -- -- -- 421 -- 421
Net income............. -- -- -- -- -- -- 1,790 1,790
---------- ----- --------- ----- ------- -------- ------- --------
Balance, December 31,
1996................... 3,951,945 -- -- -- (2,085) 1,269 9,276 8,460
Distribution of stock
via ESOP.............. -- -- -- -- 254 -- -- 254
Other.................. -- -- -- -- -- (31) -- (31)
Net income............. -- -- -- -- -- -- 2,527 2,527
---------- ----- --------- ----- ------- -------- ------- --------
Balance, December 31,
1997................... 3,951,945 -- -- -- (1,831) 1,238 11,803 11,210
Issuances of stock
(unaudited)........... -- -- 3,345,333 -- -- -- -- --
Initial public
offering, net of
offering costs
(unaudited)........... 5,750,000 -- -- -- -- 44,914 -- 44,914
Acquisition of Founding
Companies
(unaudited)........... 4,527,000 -- -- -- -- 53,890 -- 53,890
Acquisition of
Purchased Companies
(unaudited)........... 1,296,740 -- -- -- -- 37,566 -- 37,566
Net income
(unaudited)........... -- -- -- -- -- -- 9,369 9,369
---------- ----- --------- ----- ------- -------- ------- --------
Balance, September 30,
1998 (unaudited)....... 15,525,685 $ -- 3,345,333 $ -- $(1,831) $137,608 $21,172 $156,949
========== ===== ========= ===== ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
F-16
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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" or "IPO"), concurrent with which Quanta acquired, in separate
transactions, four entities (the "Founding Companies"). Subsequent to the date
of the Offering, and through September 30, 1998, the Company has acquired ten
additional businesses for approximately $73.0 million in cash and 4.3 million
shares of common stock. Of these additional acquired businesses, one was
accounted for as a pooling-of-interests and is referred to herein as the
"Pooled Company." The remaining acquired businesses were accounted for as
purchases and are referred to herein as the "Purchased Companies." Quanta
intends to continue to acquire through merger or purchase similar companies to
expand its national and regional operations.
The financial statements of Quanta for periods prior to February 18, 1998
(the effective closing date of the acquisitions of the Founding Companies), are
the financial statements of PAR Electrical Contractors, Inc. ("PAR" or the
"Accounting Acquiror") as restated for the acquisition of the Pooled Company in
September 1998. 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, and the Purchased
Companies beginning on their respective dates of acquisition.
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. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The accompanying consolidated financial statements after February 18, 1998,
include the accounts of Quanta and its wholly owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in
consolidation.
Interim Consolidated Financial Information
The unaudited interim consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission ("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,
F-17
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
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 $112,000, $111,000 and $692,000 during the
years ended December 31, 1995, 1996 and 1997, respectively.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts when collection is
considered doubtful.
Inventories
Inventories consist of parts and supplies held for use in the ordinary course
of business and are valued by the Company at the lower of cost or market using
the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
life of the lease or the estimated useful life of the asset. Depreciation and
amortization expense, excluding amortization of goodwill, was approximately
$2,542,000, $2,759,000 and $3,269,000 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.
Debt Issue Costs
Debt issue costs related to the Company's credit facility are included in
other assets and are amortized to interest expense over the scheduled maturity
of the debt.
F-18
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Goodwill
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years.
The Company applies Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of." Management continually evaluates whether events or
circumstances have occurred that indicate that the remaining estimated useful
lives of property and equipment, other identifiable intangible assets and
goodwill may warrant revision or that the remaining balances may not be
recoverable.
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 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.
The balances billed but not paid by customers pursuant to retainage
provisions in fixed price or cost-plus-fee contacts 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 "Cost 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
installation of new electrical systems and 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.
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
F-19
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 the notes to future consolidated annual financial statements.
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.
Prior to January 1, 1996, the Pooled Company had elected to be treated as an
S Corporation under provisions of the Internal Revenue Code. As such, federal
and state income tax regulations provided that the income or losses of the
Pooled Company were attributable to its stockholders in their individual tax
returns. Effective January 1, 1996, the Pooled Company terminated its S
Corporation status and simultaneously adopted SFAS No. 109.
Certain of the Acquired Businesses 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.
Earnings per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," which requires
restatement of all comparative per share amounts. Under the provisions of SFAS
No. 128, the presentation of primary earnings per share has been replaced with
earnings per share for potentially dilutive securities such as outstanding
options. All prior period earnings per share data have been restated.
For financial statement 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 initial public offering. As such, the shares of
Quanta common stock beneficially owned by the stockholders of PAR and the
shares issued in connection with the acquisition of the Pooled Company have
been
F-20
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
used in the calculation of basic and diluted earnings per share of the Company
for all periods prior to the IPO.
Collective Bargaining Agreements
Certain of the subsidiaries are 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.
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 12 for discussion of
certain estimates reflected in the Company's financial statements.
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 nine months ended September 30, 1998 and 1997, there are no material
differences between the Company's "traditional" and "comprehensive" net income.
In June 1997, the Financial Accounting Standards Board ("FASB") 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 stockholders. 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 February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits," which becomes effective for
financial statements for the year ended December 31, 1998. SFAS No. 132
requires revised disclosures about pension and other postretirement benefit
plans. The Company does not believe the adoption of this standard will have a
material effect on its annual financial statements.
F-21
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for financial
statements beginning January 1, 2000. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company is evaluating SFAS No. 133 and the
impact on existing accounting policies and financial reporting disclosures.
However, the Company has not to date engaged in activities or entered into
arrangements normally associated with derivative instruments.
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.
3. PER SHARE INFORMATION:
The computation of basic and diluted earnings per share for the three years
ended December 31, 1997 and the nine months ended September 30, 1997
(unaudited) is based upon the 3,000,000 shares of common stock issued in
connection with PAR and 951,945 shares issued in connection with the
acquisition of the Pooled Company during the quarter ended June 30, 1998.
The computation of basic earnings per share for the nine months ended
September 30, 1998 (unaudited) is based upon 14,398,526 shares of common stock
outstanding which includes the weighted average portion of (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) 5,750,000 shares of common
stock sold in the Offering to pay the cash portion of the consideration for the
Founding Companies to repay expenses incurred in connection with the Offering
and to retire debt, (iv) 951,945 shares issued for the acquisition of the
Pooled Company, and (v) the 3,386,288 shares issued in acquisitions accounted
for as purchases.
Shares used in the calculation of the diluted earnings per share for the nine
months ended September 30, 1998 (unaudited) include (i) the shares described
above, and (ii) the dilution
F-22
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
attributable to outstanding options to purchase common stock, using the
treasury stock method.
4. BUSINESS COMBINATIONS:
In February 1998, Quanta completed its initial public offering (the
"Offering"), concurrent with which, Quanta acquired, in separate transactions,
four entities (the "Founding Companies"). Subsequent to the date of the
Offering, and through September 30, 1998, the Company has acquired ten
additional businesses for approximately $73.0 million of cash and 4.3 million
shares of Common Stock. Of these additional businesses acquired, one was
accounted for as a pooling-of-interests and is referred to herein as the
"Pooled Company." The remaining businesses acquired were accounted for as
purchases and are referred to herein as the "Purchased Companies." Quanta
intends to continue to acquire through merger or purchase similar companies to
expand its national and regional operations.
Pooling
During the second quarter of 1998, Quanta completed the acquisition of all
the common stock of NorAm Telecommunications, Inc. ("NorAm" or the "Pooled
Company"), in a business combination accounted for as a "pooling-of-interests"
transaction in accordance with the requirements of APB No. 16. NorAm,
headquartered in Oregon, provides outside and inside fiberoptic networks and
technical support for the telecommunications industry. Quanta issued 951,945
shares of common stock in exchange for all the common stock of NorAm. There
were no transactions between Quanta and NorAm during the periods prior to the
business combination.
The following table summarizes the unaudited restated revenues, net income
and per share data of the Company after giving effect to the Pooled Company (in
thousands, except per share data).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1995 1996 1997
--------------- --------------- ---------------
NET NET NET
REVENUES INCOME REVENUES INCOME REVENUES INCOME
-------- ------ -------- ------ -------- ------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income--
As previously reported.. $38,915 $ 515 $42,684 $ 750 $49,132 $2,294
Pooled Company.......... 14,309 548 28,610 1,040 27,073 233
------- ------ ------- ------ ------- ------
As restated........... $53,224 $1,063 $71,294 $1,790 $76,205 $2,527
======= ====== ======= ====== ======= ======
Earnings per share basic
and diluted--
As previously reported.. $ 0.17 $ 0.25 $ 0.76
Pooled Company.......... 0.10 0.20 (0.12)
------ ------ ------
As restated........... $ 0.27 $ 0.45 $ 0.64
====== ====== ======
</TABLE>
Purchases
Through the third quarter of 1998, the Company completed nine acquisitions
accounted for as purchases. The aggregate consideration paid in these
transactions consisted of $73.0 million in cash and 3.4 million shares of
common stock. The accompanying balance sheet as of September 30, 1998 includes
preliminary allocations of the respective purchase prices and is subject to
final adjustment. Set forth below are unaudited pro forma combined revenue and
income data reflecting the pro forma
F-23
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
effect of these acquisitions on the Company's results of operations for the
year ended December 31, 1997 and the nine months ended September 30, 1998. The
unaudited data presented below consists of the income statement data as
presented in these consolidated financial statements plus (i) the income
statement data of the Founding Companies for the periods prior to February 19,
1998 and (ii) the effects of the Pooled Company and (iii) all Purchased
Companies as if the acquisitions were effective on the first day of the year
being reported. The revenue and net income data are in thousands.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
1997 1998
------------ -----------------
<S> <C> <C>
Revenues...................................... $326,809 $293,640
Net income.................................... $ 18,686 $ 13,857
Earnings per share basic and diluted.......... $ 0.92 $ 0.66
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to: (a)
reductions in former owners, and certain key employees, salaries and benefits;
(b) adjustment to depreciation and amortization expense due to the purchase
price allocations; (c) elimination of historical interest expense related to
certain obligations which were repaid or not assumed by the Company, and to
record interest expense on cash expended in the acquisitions of the Purchased
Companies; (d) elimination of non-recurring acquisition costs associated with
the Pooled Company; and (e) adjustment to the federal and state income tax
provisions based on the combined operations. 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.
5. 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...................................... -- $ 1,652 $ 1,861
Buildings and leasehold improvements...... 5-31 1,780 1,927
Operating equipment and vehicles.......... 5-10 27,618 32,768
Office equipment, furniture and fixtures.. 5 828 955
-------- --------
31,878 37,511
Less--Accumulated depreciation and
amortization............................. (17,126) (19,225)
-------- --------
Property and equipment, net............. $ 14,752 $ 18,286
======== ========
</TABLE>
F-24
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
6. 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....................................... $2,478 $3,196
Accrued compensation and other expenses....................... 2,394 3,382
------ ------
$4,872 $6,578
====== ======
</TABLE>
Contracts in progress are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Costs incurred on contracts in progress................ $ 12,395 $ 11,578
Estimated earnings, net of losses...................... 3,067 3,017
-------- --------
15,462 14,595
Less--Billings to date................................. (15,879) (13,587)
-------- --------
$ (417) $ 1,008
======== ========
Costs and profits recognized in excess of billings..... $ 799 $ 1,746
Less--Billings in excess of costs and profits
recognized............................................ (1,216) (738)
-------- --------
$ (417) $ 1,008
======== ========
</TABLE>
7. DEBT:
The Company's long-term debt obligations consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
---------------- SEPTEMBER 30,
1996 1997 1998
------- ------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit facility................... $ -- $ -- $104,650
Bank lines of credit, with total borrowing
capacity of $2,000,000, interest at bank's
prime rate plus 1%, secured by accounts
receivable and guaranteed by NorAm's
stockholders............................... 605 968 --
Bank lines of credit, with total borrowing
capacity of $8,000,000, interest at bank's
prime rate, secured by equipment,
receivables and other assets............... 2,378 2,510 --
Notes payable to bank, interest ranging from
9.08% to 10%, payments due monthly from
$9,313 to $36,613 including interest,
secured by equipment....................... 1,729 1,578 --
Note payable to bank, prime interest rate,
due $250,000 annually including interest,
secured by stock........................... 2,105 1,831 --
Notes payable to various banks, interest
ranging from 7.0% to 15.35%, secured by
certain equipment, receivables and other
assets..................................... 1,434 1,658 2,992
Notes payable to various banks, interest
ranging from 6.50% to 9.75%, secured by
certain equipment, receivables and other
assets..................................... 4,555 5,642 --
Capital lease obligations................... 99 555 3,265
------- ------- --------
12,905 14,742 110,907
Less--Current maturities.................... (6,427) (7,200) (2,610)
------- ------- --------
Total long-term debt...................... $ 6,478 $ 7,542 $108,297
======= ======= ========
</TABLE>
F-25
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Credit Facility
In August 1998, the Company amended its $50.0 million revolving credit
facility (the "Credit Facility") to increase it to $125 million. In November
1998, the Company expanded its bank group from two banks to nine banks and
amended its Credit Facility to increase it to $175 million. The Credit Facility
is secured by a pledge of all of the capital stock of the Company's material
operating subsidiaries and the majority of the Company's assets 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, certain financial ratio covenants and
the consent of the lenders for acquisitions exceeding a certain level of cash
consideration. As of October 16, 1998, $69.3 million was borrowed under the
credit facility.
The maturities of long-term debt (excluding capital leases) as of December
31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................ $ 7,001
1999............................................................ 4,002
2000............................................................ 1,983
2001............................................................ 1,171
2002............................................................ 30
-------
$14,187
=======
</TABLE>
The Company leases certain buildings and equipment under non-cancellable
lease agreements. The following schedule shows the future minimum lease
payments under these leases as of December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending December 31--
1998..................................................... $ 233 $ 553
1999..................................................... 233 258
2000..................................................... 134 134
2001..................................................... 12 117
2002..................................................... -- 89
----- ------
Total minimum lease payments........................... 612 $1,151
======
Less--Amounts representing interest........................ (57)
-----
Present value of minimum lease payments................. 555
Less--Current portion...................................... (199)
-----
Long-term obligation.................................... $ 356
=====
</TABLE>
F-26
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rent expense related to operating leases was approximately $21,000, $205,000
and $462,000 for the years ended December 31, 1995, 1996 and 1997,
respectively. Assets under capital leases are included as part of property and
equipment.
8. 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 $ 840 $ 1,475
Deferred......................................... 138 299 10
State--
Current.......................................... 33 185 306
Deferred......................................... 28 65 (5)
------ -------- --------
$ 353 $ 1,389 $ 1,786
====== ======== ========
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate 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 $ 1,093 $ 1,504
Increase resulting from--
State income tax, net of related tax effect..... 40 166 187
Nondeductible expenses.......................... 9 -- 29
Permanent differences........................... -- 57 42
FAS 109 adoption................................ -- 93 --
Other........................................... -- (20) 24
------ -------- --------
$ 353 $ 1,389 $ 1,786
====== ======== ========
</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.................................. $(2,281) $(2,500)
State taxes............................................. 9 10
Other................................................... (156) (172)
------- -------
Total deferred income tax liabilities................. (2,428) (2,662)
------- -------
Deferred income tax assets--
Bad debt reserves....................................... 42 42
Accounts receivable..................................... 28 35
Goodwill................................................ 27 41
Inventory............................................... -- 29
State taxes............................................. (18) (29)
Other accruals not currently deductible................. 283 473
------- -------
Total deferred income tax assets...................... 362 591
------- -------
Total net deferred income tax liabilities............. $(2,066) $(2,071)
======= =======
</TABLE>
F-27
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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................................................. $ 362 $ 591
Long-term............................................... -- --
------- -------
Total................................................. 362 591
------- -------
Deferred tax liabilities--
Current................................................. (147) (183)
Long-term............................................... (2,281) (2,479)
------- -------
Total................................................. (2,428) (2,662)
------- -------
Net deferred income tax liabilities................... $(2,066) $(2,071)
======= =======
</TABLE>
9. STOCKHOLDERS' EQUITY:
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.
Stock Plan
In December 1997, the Board of Directors adopted, and the stockholders of the
Company approved, the 1997 Stock Option Plan. The purpose of the 1997 Stock
Option Plan is to provide directors, key employees, officers and certain
advisors with additional incentives by increasing their proprietary interest in
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 2,380,850 shares
or 15% of the outstanding shares of common stock. On February 27, 1998, the
Company filed a Registration Statement on Form S-8 with respect to 2,380,850
shares of common stock issuable in connection with the 1997 Stock Option Plan.
The 1997 Stock Option Plan provides for the grant of incentive stock options
("ISOs") as defined in Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code") and nonqualified stock options (collectively, the
"Awards"). The amount of ISOs that may be granted under the 1997 Stock Option
Plan is limited to 2,380,850 shares. The 1997 Stock Option Plan is administered
by the Compensation Committee of the Board of Directors. The Compensation
Committee has, subject to the terms of the 1997 Stock Option Plan, the sole
authority to grant Awards under the 1997 Stock Option Plan, to construe and
interpret the 1997 Stock Option Plan and to make all other determinations and
take any and all actions necessary or advisable for the administration of the
1997 Stock Option Plan.
F-28
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All of the Company's employees, non-employee directors, officers and advisors
are eligible to receive Awards under the 1997 Stock Option Plan, but only
employees of the Company are eligible to receive ISOs. Options will be
exercisable during the period specified in each option agreement and will
generally become exercisable in installments pursuant to a vesting schedule
designated by the Compensation Committee. In the discretion of the Compensation
Committee, option agreements may provide that options will become immediately
exercisable in the event of a "change in control" (as defined in the 1997 Stock
Option Plan) of the Company. No ISO will remain exercisable later than ten
years after the date of grant (or five years in the case of ISOs granted to
employees owning more than 10% of the voting capital stock).
As of October 16, 1998, the Company has outstanding options to purchase
approximately 1,555,150 shares of common stock issued pursuant to the 1997
Stock Option Plan.
The 1997 Stock Option 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 non-employee director will receive a non-
qualified option to purchase 10,000 shares of common stock, and each continuing
or re-elected non-employee director annually will receive an option to purchase
5,000 shares of common stock. Options granted to non-employee directors are
fully exercisable following the expiration of six months from the date of
grant.
The exercise price for ISOs granted under the 1997 Stock Option Plan may be
no less than the fair market value of a share of the common stock on the date
of grant (or 110% in the case of ISOs granted to employees owning more than 10%
of the voting capital stock).
Initial Public Offering
In February, 1998, Quanta completed its initial public offering, which
involved the issuance of 5.0 million shares of its common stock at a price of
$9.00 per share, resulting in net proceeds to the Company of $38.6 million
after deducting underwriting discounts and commissions and expenses related to
the IPO. In March 1998, the Company sold 750,000 shares of common stock
pursuant to the over-allotment granted to the underwriters. The Company
realized net proceeds from the sale of $6.3 million.
Employee Stock Ownership Plan.
The Company issued shares of common stock to an Employee Stock Ownership Plan
(the "ESOP") in connection with the acquisition of the Pooled Company. The ESOP
was terminated on July 31, 1998, and pending a favorable determination letter
from the Internal Revenue Service, a portion of the shares of the Company's
common stock held by the ESOP will be sold to repay debt owed by the ESOP to
the Company and the remaining portion of the unallocated shares will be
distributed to its participants. The cost of the unallocated ESOP shares is
reflected as a reduction in the Company's stockholders' equity. Upon
distribution from the ESOP, the Company will owe an excise tax equal to 10% of
the value of the Company's common stock distributed. In addition, the
F-29
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Company will eliminate the remaining balance reflected as Unearned ESOP Shares
on the Company's balance sheet and will have to recognize a non-cash non-
recurring compensation charge equal to the value of the unallocated shares held
by the ESOP at the time it allocates and distributes such shares. Although the
Company currently cannot determine the amount of the excise tax that will be
owed or the non-cash non-recurring compensation charge that will be recognized,
the amount of such obligations would not be material to the Company's financial
condition based on the market price for the Company's common stock on October
16, 1998.
10. 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.
Certain subsidiaries of the Company provide various defined contribution
plans to their employees. The plans cover substantially all full time employees
of the Company. Contributions to the plans by the Company vary from plan to
plan. Contributions to the plan were approximately $230,000, $214,000 and
$217,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
In addition to certain defined contribution plans noted above, 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.
11. 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.
12. COMMITMENTS AND CONTINGENCIES:
Litigation
Subsidiaries of the Company are 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.
F-30
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
In August 1998, the Company consolidated the casualty insurance program for
all subsidiaries of Quanta. This program has no self-insurance provisions.
Self-insured claims under previous policies are monitored to ensure that such
remaining accruals are 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. In July 1998, the Company acquired the U.S. patent for this
product.
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.
13. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company grants credit, generally without collateral, to its customers,
which include utility companies, municipalities and commercial companies
located primarily in the United States. Consequently, the Company is subject to
potential credit risk related to changes in business and economic factors
throughout the United States. However, the Company generally is entitled to
payment for work performed and has certain lien rights in that work. Further,
management believes that its contract acceptance, billing and collection
policies are adequate to minimize the potential credit risk.
F-31
<PAGE>
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
14. SUBSEQUENT EVENTS:
Business Combinations
Subsequent to June 30, 1998, the Company has acquired one additional company
for an aggregate consideration of $11.3 million in cash and 660,104 shares of
common stock. The cash portion of such consideration was provided by borrowings
under the Company's credit facility.
Strategic Investment
In October 1998, the Company entered a strategic investment agreement with
Enron Capital & Trade Resources Corp. ("Enron Capital"), a subsidiary of Enron
Corp., pursuant to which Enron Capital and an affiliate made an investment of
$49.4 million in Quanta. The investment is in the form of Convertible
Subordinated Notes bearing interest at 6 7/8 percent and convertible into
Quanta common stock at a price of $13.75 per share. Additionally, Quanta and
Enron Capital entered into a strategic alliance under which Enron Capital and
Quanta will exchange information regarding the design, construction and
maintenance of electric power transmission and distribution systems and fiber
optic communications systems. Further, the Company paid a commitment fee of
approximately $2.0 million to Enron Capital at the closing date. This fee will
be included in other assets on the Company's balance sheet and amortized over
the original life of the notes. The Convertible Subordinated Notes require
quarterly interest payments and equal semi-annual principal payments beginning
in 2006 until the notes are paid in full in 2010. The Company has the option to
redeem the notes at a premium beginning in 2002.
F-32
<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
F-33
<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, 36,654,667 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.
F-34
<PAGE>
QUANTA SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 19, 1997)
THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND 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.
F-35
<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.
F-36
<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 "IPO") 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 IPO. 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 IPO. 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 IPO and the Acquisitions. All expenditures of the
Company through December 31, 1997 were 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 IPO, and
such costs will be treated as a reduction of the proceeds from the IPO. 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
F-37
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
$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.
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 36.7 million and
increased the number of authorized shares of $.00001 par value preferred stock
to 10.0 million.
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 IPO, 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
F-38
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 5.0 million 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 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.
F-39
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 IPO 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 IPO and
related transactions were closed on January 1, 1997 and present certain data
for the Company as adjusted for: i) the acquisition of the Founding Companies,
ii) the IPO completed on February 18, 1998 (including the exercise of the
underwriter's over-allotment option), iii) certain reductions in salaries,
bonuses and benefits to former owners of the Founding Companies, iv)
amortization of goodwill resulting from the acquisitions, v) reduction in
interest expense, net of interest expense on borrowings to fund S corporation
distributions by certain of the Founding Companies and vi) 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 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
F-40
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
management, historical combined results may not be comparable to, or indicative
of, future performance.
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
COMBINED
-----------------
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS)
<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
========
Diluted................................................... 16,043
========
</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
IPO 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 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.
F-41
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Union Power Construction Company:
We have audited the accompanying balance sheets of Union Power Construction
Company, a Colorado corporation, as of August 31, 1996 and 1997, and the
related statements of operations, cash flows and stockholders' equity for the
three years ended August 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 Union Power Construction
Company as of August 31, 1996 and 1997, and the results of its operations and
its cash flows for the three years ended August 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
December 5, 1997
F-42
<PAGE>
UNION POWER CONSTRUCTION COMPANY
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
AUGUST 31,
------------------- NOVEMBER 30,
1996 1997 1997
ASSETS ------ ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................... $ 612 $ 404 $ 951
Marketable securities....................... 101 110 123
Accounts receivable--
Trade, net of allowance for doubtful
accounts of $84,000...................... 3,902 8,822 12,259
Retainage................................. 204 498 601
Related-party receivables................... 65 32 --
Costs and estimated earnings in excess of
billings on uncompleted contracts.......... -- 77 113
Deferred income taxes....................... 30 115 --
Prepaid expenses and other current assets... 44 95 46
------ ------- -------
Total current assets.......................... 4,958 10,153 14,093
PROPERTY AND EQUIPMENT, net................... 4,810 5,868 6,836
------ ------- -------
Total assets.................................. $9,768 $16,021 $20,929
====== ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt........ $ 249 $ 663 $ 1,916
Current maturities of related-party debt.... 238 128 200
Accounts payable and accrued expenses....... 2,878 6,209 8,239
Related-party payable....................... 22 -- --
Billings in excess of costs and estimated
earnings on uncompleted contracts.......... -- 322 700
------ ------- -------
Total current liabilities..................... 3,387 7,322 11,055
LONG-TERM DEBT, net of current maturities..... 1,065 748 1,234
RELATED-PARTY DEBT, net of current
maturities................................... 38 328 237
DEFERRED INCOME TAXES......................... 843 1,257 1,311
OTHER LONG-TERM LIABILITIES................... 20 22 --
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1.00 par value, 25,000 shares
authorized, 25,000 shares issued and
outstanding................................ 25 25 25
Unrealized loss on securities............... (62) (56) (44)
Retained earnings........................... 4,452 6,375 7,111
------ ------- -------
Total stockholders' equity.................... 4,415 6,344 7,092
------ ------- -------
Total liabilities and stockholders' equity.... $9,768 $16,021 $20,929
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-43
<PAGE>
UNION POWER CONSTRUCTION COMPANY
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
ENDED
YEAR ENDED AUGUST 31, NOVEMBER 30,
------------------------- ---------------
1995 1996 1997 1996 1997
------- ------- ------- ------ -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES.......................... $12,614 $25,636 $42,792 $7,211 $15,357
COST OF SERVICES (including
depreciation).................... 10,240 22,319 37,766 6,037 13,474
------- ------- ------- ------ -------
Gross profit.................... 2,374 3,317 5,026 1,174 1,883
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES.......... 1,896 1,563 1,966 491 677
------- ------- ------- ------ -------
Income from operations.......... 478 1,754 3,060 683 1,206
------- ------- ------- ------ -------
OTHER INCOME (EXPENSE):
Interest expense................ (7) (84) (110) (36) (39)
Related-party interest expense.. (10) (6) (22) (2) (7)
Other, net...................... 142 166 229 7 45
------- ------- ------- ------ -------
Other income, net............. 125 76 97 (31) (1)
------- ------- ------- ------ -------
INCOME BEFORE PROVISION FOR INCOME
TAXES............................ 603 1,830 3,157 652 1,205
PROVISION FOR INCOME TAXES........ 239 718 1,234 254 469
------- ------- ------- ------ -------
NET INCOME........................ $ 364 $ 1,112 $ 1,923 $ 398 $ 736
======= ======= ======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-44
<PAGE>
UNION POWER CONSTRUCTION COMPANY
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE
MONTHS
ENDED
YEAR ENDED AUGUST NOVEMBER
31, 30,
--------------------- ------------
1995 1996 1997 1996 1997
----- ------ ------ ---- ------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................... $ 364 $1,112 $1,923 $398 $ 736
Adjustments to reconcile net income to
net cash provided by operating
activities--
Depreciation and amortization........... 217 486 577 156 362
Deferred taxes.......................... 137 296 329 132 172
Changes in operating assets and
liabilities--
(Increase) decrease in--
Accounts receivable.................... 249 (2,523) (5,180) (381) (3,540)
Costs and estimated earnings in excess
of billings on uncompleted contracts.. (226) 237 (77) -- (36)
Prepaid expenses and other current
assets................................ 12 15 (51) 22 47
Increase (decrease) in--
Accounts payable and accrued expenses.. 280 1,578 3,331 222 2,030
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................. (28) -- 322 65 378
Other, net............................. 80 84 (132) 7 8
----- ------ ------ ---- ------
Net cash provided by operating
activities........................... 1,085 1,285 1,042 621 157
----- ------ ------ ---- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment............................... 41 27 105 -- --
Additions of property and equipment...... (605) (2,771) (1,634) (283) (1,330)
----- ------ ------ ---- ------
Net cash used in investing activities.... (564) (2,744) (1,529) (283) (1,330)
----- ------ ------ ---- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt............. 300 1,432 786 -- 2,450
Payments of long-term debt............... (272) (239) (507) (101) (730)
----- ------ ------ ---- ------
Net cash provided by financing
activities.............................. 28 1,193 279 (101) 1,720
----- ------ ------ ---- ------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.............................. 549 (266) (208) 237 547
CASH AND CASH EQUIVALENTS, beginning of
year..................................... 329 878 612 612 404
----- ------ ------ ---- ------
CASH AND CASH EQUIVALENTS, end of year.... $ 878 $ 612 $ 404 $849 $ 951
===== ====== ====== ==== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid for--
Interest................................ $ 17 $ 90 $ 161 $ 27 $ 50
Income taxes............................ 55 340 831 290 532
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-45
<PAGE>
UNION POWER CONSTRUCTION COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
COMMON STOCK UNREALIZED TOTAL
------------- RETAINED HOLDING STOCKHOLDERS'
SHARES AMOUNT EARNINGS GAIN (LOSS) EQUITY
------ ------ -------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, August 31, 1994...... 25 $25 $2,976 $ -- $3,001
Change in market value of
securities................. -- -- -- (70) (70)
Net income.................. -- -- 364 -- 364
--- --- ------ ---- ------
BALANCE, August 31, 1995...... 25 25 3,340 (70) 3,295
Change in market value of
securities................. -- -- -- 8 8
Net income.................. -- -- 1,112 -- 1,112
--- --- ------ ---- ------
BALANCE, August 31, 1996...... 25 25 4,452 (62) 4,415
Change in market value of
securities................. -- -- -- 6 6
Net income.................. -- -- 1,923 -- 1,923
--- --- ------ ---- ------
BALANCE, August 31, 1997...... 25 25 6,375 (56) 6,344
--- --- ------ ---- ------
Change in market value of
securities (unaudited)..... -- -- -- 12 12
Net income (unaudited)...... -- -- 736 -- 736
--- --- ------ ---- ------
BALANCE, November 30, 1997
(unaudited).................. 25 $25 $7,111 $(44) $7,092
=== === ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-46
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Union Power Construction Company, a Colorado corporation (the Company or
Union), provides electrical power line installation, repair and maintenance
services for utilities throughout the western United States. The Company
performs the majority of its contract work under time and equipment contracts,
fixed price contracts and unit cost contracts with contract terms generally
ranging from one month to two years. The Company performs the majority of its
work in Colorado, Nevada and California.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the three months ended November 30, 1996
and 1997 are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnote disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of the Company's management, the unaudited interim financial statements
contain all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
life of the lease or the estimated useful life of the asset. Depreciation
expense was $217,000, $486,000 and $577,000 for the years ended August 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
F-47
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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,
subcontractor and labor costs and those indirect costs related to contract
performance, such as indirect labor, supplies, tools, repairs and depreciation
costs. Provisions for the total estimated losses on uncompleted contracts are
made in the period in which such losses are determined. Changes in job
performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income, and their effects are
recognized in the period in which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in 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 one to two
years after project completion. An accrual for warranty costs is recorded based
upon the historical level of warranty claims and management's estimate of
future costs.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is deemed no
longer probable and an allowance based upon the level of accounts receivable
balances.
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.
F-48
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Collective Bargaining Agreement
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
will expire at various times through 2005.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote for discussion of significant
estimates reflected in the Company's financial statements.
New Accounting Pronouncements
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.
SFAS No. 130, "Reporting Comprehensive Income," requires the presentation of
comprehensive income in an entity's financial statements. Comprehensive income
represents all changes in equity of an entity during the reporting period,
including net income and charges directly to equity which are excluded from net
income. This statement will be adopted by the Company during fiscal year 1998.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
ESTIMATED USEFUL --------------
LIVES IN YEARS 1996 1997
---------------- ------ -------
<S> <C> <C> <C>
Land.................................... -- $ 126 $ 126
Operating equipment and vehicles........ 5-10 9,440 10,497
Leasehold improvements.................. 10 88 113
Office furniture and equipment.......... 5 110 145
------ -------
9,764 10,881
Less--Accumulated depreciation and
amortization........................... 4,954 5,013
------ -------
Property and equipment, net............. $4,810 $ 5,868
====== =======
</TABLE>
F-49
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
AUGUST 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Accounts payable, trade..................................... $1,750 $3,840
Accrued compensation and benefits........................... 456 1,300
Other accrued expenses...................................... 672 1,069
------ ------
$2,878 $6,209
====== ======
</TABLE>
Contracts in progress are as follows (in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
---------------
1996 1997
------- -------
<S> <C> <C>
Costs incurred on contracts in progress................. $15,529 $45,025
Estimated earnings, net of losses....................... 603 4,183
------- -------
16,132 49,208
Less--Billings to date.................................. 16,132 49,453
------- -------
$ -- $ (245)
======= =======
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. $ -- $ 77
Less--Billings in excess of costs and estimated earnings
on uncompleted contracts............................... -- (322)
------- -------
$ -- $ (245)
======= =======
</TABLE>
5. LONG-TERM DEBT:
In August 1995, the Company entered into a $300,000 secured installment loan
with a bank. The loan is due August 1999 and bears interest at 8.27 percent
with monthly payments of $7,400. Amounts outstanding under this loan were
$221,000 and $149,000 at August 31, 1996 and 1997, respectively. In November
1995, the Company entered into a $200,000 secured installment loan with a bank
for the purchase of construction equipment. This loan is due November 1999 and
bears interest at 8.22 percent with monthly payments of $5,000. At August 31,
1996 and 1997, $163,000 and $116,000, respectively, were outstanding under this
agreement.
The Company entered into a $1 million secured installment loan with a bank in
August 1996. The loan matures in April 2000 and bears interest at a rate of 8
percent with monthly payments due of $24,000. Amounts outstanding under this
agreement were $929,000 and $682,000 at August 31, 1996 and 1997, respectively.
In April 1997, the Company entered into a $360,000 installment loan with a
bank. This loan matures February 2001 with monthly payments of $8,800 and an
interest rate of 8.25 percent. There was $314,000 outstanding under this
arrangement at August 31, 1997.
The Company has established a $2 million secured revolving line of credit
with a bank effective August 1997. Borrowings under this facility bear interest
at a rate of prime, as defined, minus 1
F-50
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
percent for the first $1 million in borrowings and at prime for any balance
over $1 million and are due February 1998. Outstanding indebtedness under this
facility was $150,000 and $1,500,000 at August 31, 1997 and November 30, 1997,
respectively.
The Company also has loans outstanding from certain stockholders or other
related parties totaling $277,000 and $456,000 at August 31, 1996 and 1997,
respectively. These loans bear interest at rates ranging from 7 percent to 9
percent and are due at various times from November 1997 to June 2001.
The loan agreement covering the bank line of credit contains various
covenants, including a minimum tangible net worth requirement, a minimum
working capital requirement and various financial ratios.
All of the Company's debt is secured by property and equipment. Two of the
Company's stockholders have personally guaranteed substantially all debt with
banks.
The maturities of long-term debt as of August 31, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending August 31--
1998............................................................. $ 791
1999............................................................. 588
2000............................................................. 406
2001............................................................. 82
------
$1,867
======
</TABLE>
6. LEASES:
Union leases its Denver office and facility from a company which is owned by
the Company's stockholders. The lease is renewable on a monthly basis at
Union's election. Rent paid under this related-party lease was approximately
$42,000 for each of the years ended August 31, 1995, 1996 and 1997.
The Company also leases its Las Vegas, Nevada, office and yard from two of
the Company's stockholders. The lease terminates in June 2006 and rent paid was
$19,000 and $56,000 for each of the years ended August 31, 1996 and 1997,
respectively.
The Company also enters into various vehicle and construction equipment
operating leases. Vehicle lease terms are typically five years or less, and
construction equipment leases typically are short-term (one year or less).
Payments made for vehicle leases were $11,000, $19,000 and $149,000 for the
years ended August 31, 1995, 1996 and 1997, respectively.
Union rents various construction equipment under a one-year operating lease
from a company owned by two of Union's stockholders. Total related-party
equipment rental expense was $96,000 for the year ended August 31, 1997.
F-51
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Future minimum lease payments under these noncancelable operating leases are
as follows (in thousands):
<TABLE>
<S> <C>
Year ending August 31--
1998............................................................. $ 343
1999............................................................. 248
2000............................................................. 240
2001............................................................. 188
2002............................................................. 56
Thereafter....................................................... 215
------
$1,290
======
</TABLE>
7. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
AUGUST 31,
----------------
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Federal--
Current................................................ $ 87 $358 $ 745
Deferred............................................... 116 251 303
State--
Current................................................ 15 64 160
Deferred............................................... 21 45 26
---- ---- ------
$239 $718 $1,234
==== ==== ======
</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
AUGUST 31,
----------------
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Provision at the statutory rate........................ $211 $641 $1,106
Increase resulting from--
Permanent differences, mainly meals and
entertainment....................................... 5 7 7
State income tax, net of benefit for federal
deduction........................................... 23 70 121
---- ---- ------
$239 $718 $1,234
==== ==== ======
</TABLE>
F-52
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):
<TABLE>
<CAPTION>
AUGUST 31,
---------------
1996 1997
------ -------
<S> <C> <C>
Deferred income tax liabilities--
Property and equipment $ (843) $(1,257)
Other................................................. (347) (14)
------ -------
Total deferred income tax liabilities............... (1,190) (1,271)
Deferred income tax assets--
Property and equipment................................ 5 5
Other accruals not currently deductible............... 377 129
------ -------
Total deferred income tax assets.................... 382 134
Valuation allowance..................................... (5) (5)
------ -------
Total deferred income tax liabilities............... $ (813) $(1,142)
====== =======
</TABLE>
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
AUGUST 31,
---------------
1996 1997
------ -------
<S> <C> <C>
Deferred tax assets--
Current............................................... $ 377 $ 129
Long-term............................................. -- --
------ -------
Total............................................... 377 129
------ -------
Deferred tax liabilities--
Current............................................... (347) (14)
Long-term............................................. (843) (1,257)
------ -------
Total............................................... (1,190) (1,271)
------ -------
Net deferred income tax liabilities................. $ (813) $(1,142)
====== =======
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
Note Receivable
The Company has loaned funds to various entities owned by the Company's
stockholders. Interest income under this arrangement was $15,000, $13,000 and
$3,000 for the years ended August 31, 1995, 1996 and 1997, respectively.
Rental Income
Union has from time to time leased or rented construction equipment on a
short-term basis to various related parties. Total rental revenue under these
arrangements was $4,000 for the year ended August 31, 1996.
F-53
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Management Fee Income
The Company also receives management fee income from a related-party owned by
two of Union's stockholders for financial and management services rendered.
Total payments received were $7,000, $13,000 and $9,000 for the years ended
August 31, 1995, 1996 and 1997.
9. EMPLOYEE BENEFIT PLAN:
In connection with its collective bargaining agreements with various
electrical, labor and operating engineer unions, the Company participates with
other companies in the various multiemployer 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 multiemployer plan in the event of the employer's
withdrawal from, or upon termination of, such plan. The Company has no plan 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 are not ascertainable at this time. Total
contributions to these plans were approximately $1.2 million, $2.3 million and
$2.9 million at August 31, 1995, 1996 and 1997, respectively.
The Company has a defined contribution profit-sharing plan for employees not
covered by a union bargaining agreement. The plan provides for the Company to
make discretionary contributions of up to 15 percent of an employee's salary.
Total contributions by the Company under the plan were approximately $127,000,
$130,000 and $155,000 for the years ended August 31, 1995, 1996 and 1997,
respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, available for sale securities, a line 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.
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.
F-54
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 27 percent, 17 percent and 16 percent of
total sales), three major customers (comprising approximately 39 percent, 27
percent and 11 percent of total sales) and two major customers (comprising
approximately 40 percent and 34 percent of total sales) during the years ended
August 31, 1995, 1996 and 1997, respectively.
The Company grants credit, generally without collateral, to its customers,
which are major public utilities, located primarily in the western United
States. Consequently, the Company is subject to potential credit risk related
to changes in business and economic factors within the region it operates.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
13. CONTRACT CLAIM:
In 1995, the Company received a $970,000 settlement from the Western Area
Power Administrator (WAPA). During the course of the project, the job was shut
down by WAPA for a protracted length of time due to an accident by an unrelated
contractor working on the same project. As a result, the Company incurred
significant idle crew time. The Company presented WAPA with a claim for costs
incurred by the Company for WAPA's actions and received the settlement, which
is included in 1995 revenues.
14. SUBSEQUENT EVENTS:
Construction Contract
In October 1997, the Company was awarded a major contract for construction of
164 miles of electrical transmission lines and two substation facilities. The
contract requires substantial completion by December 1, 1998, and carries
significant penalties for work not being completed by the substantial
completion date. Work began in December 1997.
Debt
In November 1997, the Company entered into a $500,000 term loan agreement due
November 2001 with a bank for the purchase of construction equipment. The loan
bears interest at a rate of 8.5 percent and monthly principal and interest
payments of $12,300. The loan is secured by the equipment purchased.
F-55
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
15. SUBSEQUENT EVENTS TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
(UNAUDITED):
In December 1997, the Company amended its $2 million secured revolving line
of credit to increase total available borrowings under the facility to $3
million. The terms of the facility, including interest and maturity date,
remain unchanged. See discussion of the facility in Note 5.
In December 1997, the Company and its stockholders 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 key
executives of the Company entered into employment agreements with the Company
and Quanta which have an initial term of three years and generally restricts
the disclosure of confidential information as well as competition with the
Company and Quanta for a period of five years following 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, two of Company's stockholders purchased
certain nonoperating assets not used in the business at a price equal to the
net book value of such assets (approximately $183,000 at August 31, 1997).
F-56
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To TRANS TECH Electric, Inc.:
We have audited the accompanying balance sheets of TRANS TECH Electric, Inc.,
an Indiana Subchapter S corporation, as of December 31, 1996 and 1997, and the
related statements of operations, cash flows and shareholders' equity for each
of the three years in the period 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 TRANS TECH Electric, Inc., as
of December 31, 1996 and 1997, and the results of its operations and its cash
flows for each of the three years in the period ended December 31, 1997, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 18, 1998
F-57
<PAGE>
TRANS TECH ELECTRIC, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997(1)
ASSETS ------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $ 389 $ 155 $ 155
Accounts receivable--
Trade, net of allowance of $130 and
$199, respectively................. 4,484 5,744 5,744
Retainage........................... 1,822 1,554 1,554
Inventories........................... 610 808 808
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................ 1,853 3,619 3,619
Prepaid expenses and other current
assets............................... 66 63 63
------- ------- -------
Total current assets................ 9,224 11,943 11,943
PROPERTY AND EQUIPMENT, net............. 2,642 2,905 2,905
OTHER ASSETS............................ 3 3 3
------- ------- -------
Total assets........................ $11,869 $14,851 $14,851
======= ======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Note payable.......................... $ 797 $ 1,976 $ 1,976
Current maturities of long-term debt.. 107 80 80
Current portion of capital lease
obligations.......................... 285 415 415
Accounts payable and accrued
expenses............................. 4,465 4,567 4,567
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................ 728 96 96
------- ------- -------
Total current liabilities........... 6,382 7,134 7,134
LONG-TERM DEBT, net of current
maturities............................. 607 5,575 7,180
LONG-TERM CAPITAL LEASE OBLIGATIONS, net
of current obligations................. 467 474 474
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 1,000
shares authorized, 926 shares issued
and outstanding...................... 125 125 125
Retained earnings..................... 4,350 1,605 --
Treasury stock, 150 shares, at cost... (62) (62) (62)
------- ------- -------
Total shareholders' equity.......... 4,413 1,668 63
------- ------- -------
Total liabilities and shareholders'
equity............................. $11,869 $14,851 $14,851
======= ======= =======
</TABLE>
- --------
(1) The pro forma balance sheet column presented reflects the impact of Sub S
distributions. See Note 11 for further discussion.
The accompanying notes are an integral part of these financial statements.
F-58
<PAGE>
TRANS TECH ELECTRIC, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
REVENUES............................................. $21,397 $24,414 $32,817
COST OF SERVICES (including depreciation)............ 18,934 20,426 26,519
------- ------- -------
Gross profit....................................... 2,463 3,988 6,298
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......... 1,639 1,848 2,015
------- ------- -------
Income from operations............................. 824 2,140 4,283
------- ------- -------
OTHER INCOME (EXPENSE):
Interest expense................................... (297) (313) (405)
Other, net......................................... 34 45 51
------- ------- -------
Other income (expense), net...................... (263) (268) (354)
------- ------- -------
NET INCOME........................................... $ 561 $ 1,872 $ 3,929
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-59
<PAGE>
TRANS TECH ELECTRIC, 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....................................... $ 561 $ 1,872 $ 3,929
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization................... 442 574 674
Gain on sale of property and equipment.......... (19) (31) (19)
Bad debt expense................................ 83 34 79
Changes in operating assets and liabilities-
(Increase) decrease in--
Accounts receivable............................ 827 (2,134) (1,071)
Inventories.................................... (254) 256 (198)
Costs and estimated earnings in excess of
billings on uncompleted contracts............. (241) 377 (1,766)
Prepaid expenses and other current assets...... (33) (7) 3
Increase (decrease) in--
Accounts payable and accrued expenses.......... (878) 1,359 103
Billings in excess of costs and estimated
earnings on uncompleted contracts............. (141) 583 (632)
-------- ------- --------
Net cash provided by operating activities..... 347 2,883 1,102
-------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.... 46 69 105
Additions of property and equipment............. (1,180) (923) (1,023)
-------- ------- --------
Net cash used in investing activities......... (1,134) (854) (918)
-------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (repayments) on line of credit... 1,139 (2,283) 1,178
Proceeds from long-term debt.................... 537 1,185 5,507
Payments of long-term debt...................... (148) (477) (429)
Distributions to shareholders................... (457) (542) (6,674)
-------- ------- --------
Net cash provided by (used in) financing
activities................................... 1,071 (2,117) (418)
-------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS...................................... 284 (88) (234)
CASH AND CASH EQUIVALENTS, beginning of period.... 193 477 389
-------- ------- --------
CASH AND CASH EQUIVALENTS, end of period.......... $ 477 $ 389 $ 155
======== ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest.......................... $ 310 $ 297 $ 405
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-60
<PAGE>
TRANS TECH ELECTRIC, 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........ 926 $125 $ 2,916 $(62) $ 2,979
Distributions to shareholders... -- -- (457) -- (457)
Net income...................... -- -- 561 -- 561
--- ---- ------- ---- -------
BALANCE, December 31, 1995........ 926 125 3,020 (62) 3,083
Distributions to shareholders... -- -- (542) -- (542)
Net income...................... -- -- 1,872 -- 1,872
--- ---- ------- ---- -------
BALANCE, December 31, 1996........ 926 125 4,350 (62) 4,413
Distributions to shareholders... -- -- (6,674) -- (6,674)
Net income...................... -- -- 3,929 -- 3,929
--- ---- ------- ---- -------
BALANCE, December 31, 1997........ 926 $125 $ 1,605 $(62) $ 1,668
=== ==== ======= ==== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-61
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
TRANS TECH Electric, Inc., an Indiana Subchapter S corporation (the Company),
focuses on providing traffic signals, street and sign lighting installation and
general commercial and industrial electrical construction primarily for
commercial, state and regulatory entities. The Company performs the majority of
its contract work under fixed price contracts, unit-price and fixed price
contracts modified by penalty provisions, with contract terms generally ranging
from six to 18 months. The Company performs the majority of its work in Indiana
and Michigan.
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 noncash investing and financing activities related to capital
leases and equipment acquired by seller financing of approximately $621,000,
$485,000 and $457,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
Inventories
Inventories consist of parts and supplies held for use in the ordinary course
of business and are stated at the lower of cost or market using the last-in,
first-out (LIFO) method. The excess of current costs over the carrying value of
LIFO inventories was $105,000 and $146,000 at December 31, 1996 and 1997,
respectively.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
deemed probable and an allowance based upon the level of total accounts
receivable balances.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
life of the lease or the estimated useful life of the asset. Depreciation
expense was $442,000, $574,000 and $674,000 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.
F-62
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a fixed price 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 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.
The balances billed but not paid by customers pursuant to retainage
provisions in fixed price contracts will be due upon completion of the
contracts and acceptance by the customer. Based on the Company's experience
with similar contracts in recent years, the retention balance at each balance
sheet date will be collected within the subsequent fiscal year.
The current asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The current liability "Billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
installation of new electrical systems. 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 has elected S corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S corporation status, the shareholders report their shares of
the Company's taxable earnings or losses in their personal tax returns. The
Company will terminate its S corporation status concurrently with the effective
date of the IPO (see Note 11).
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
will expire at various times through 2002.
F-63
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 9 for discussion of
certain estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in the
event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------
IN YEARS 1996 1997
------------ ------ ------
<S> <C> <C> <C>
Operating equipment and vehicles........... 5-7 $3,957 $4,653
Leasehold improvements..................... 10-31 384 384
Office furniture and equipment............. 5 317 285
------ ------
4,658 5,322
Less-Accumulated depreciation and
amortization.............................. (2,016) (2,417)
------ ------
Property and equipment, net.............. $2,642 $2,905
====== ======
</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.................................... $3,702 $3,765
Accrued compensation and benefits.......................... 340 341
Other accrued expenses..................................... 423 461
------ ------
$4,465 $4,567
====== ======
</TABLE>
F-64
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Contracts in progress are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
------ ------
<S> <C> <C>
Costs incurred on contracts in progress................... $9,178 $9,696
Estimated earnings, net of losses......................... 1,630 2,138
------ ------
10,808 11,834
Less-Billings to date..................................... 9,683 8,311
------ ------
$1,125 $3,523
====== ======
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................... $1,853 $3,619
Less-Billings in excess of costs and estimated earnings on
uncompleted contracts.................................... 728 96
------ ------
$1,125 $3,523
====== ======
</TABLE>
5. DEBT:
The Company has a $5 million line of credit agreement with a bank bearing
interest at the national prime rate. The line of credit is collateralized by
the Company's receivables, inventory, property and equipment. The Company's
weighted average interest rate for the facility was 8.4 percent and 8.5 percent
as of December 31, 1996 and 1997, respectively. At December 31, 1996 and 1997,
the outstanding balance on this facility was $797,000 and $1,976,000,
respectively, and is payable upon demand.
The Company's debt obligations consisted of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER
31,
-----------
1996 1997
---- ------
<S> <C> <C>
Note payable to bank, due in November 2000 with interest only
payments until that date, interest due at 8.0%................... $ -- $5,050
Note payable to bank, 8.2% and 8.6% weighted average interest
rate, respectively, due $10,000 monthly with final maturity on
May 1, 2001...................................................... 663 597
Note payable to commercial finance company, 8.1% interest rate,
$3,871 due monthly with final maturity on March 1, 1998.......... 51 8
---- ------
714 5,655
Less-Current maturities........................................... 107 80
---- ------
Total long-term debt.............................................. $607 $5,575
==== ======
</TABLE>
The long-term debt is secured by the Company's receivables, inventory,
property and equipment and is guaranteed by the Company's principal
shareholders. The line of credit and notes payable to the bank are subject to
certain financial reporting and financial ratio requirements. At December 31,
1997, the Company was in violation of its minimum debt to net worth ratio due
to the distribution of the Company's retained earnings (see Note 11). The
Company has received a waiver, effective through January 1, 1999, from the bank
for this violation.
F-65
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The maturities of long-term debt as of December 31, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998............................................................. $ 80
1999............................................................. 79
2000............................................................. 5,135
2001............................................................. 361
</TABLE>
6. LEASES:
The Company leases its office and warehouse space from an entity owned
principally by the Company's shareholders. The lease expires in June 2000 and
requires the Company to pay all taxes, insurance and maintenance on the
property. In November 1997, the Company amended the lease agreement. The
amended lease will begin on February 1, 1998 for a term of five years. The
Company has the option to renew the lease for an additional five years at a
current market value rent. The rent paid on this related-party lease was
approximately $49,000, $59,000 and $59,000 for the years ended December 31,
1995, 1996 and 1997, respectively.
The Company leases various equipment under noncancelable sale-leaseback
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>
Operating equipment and vehicles.......................... $1,022 $1,442
Less--Accumulated depreciation............................ (194) (357)
------ ------
Net capitalized leased assets............................. $ 828 $1,085
====== ======
</TABLE>
At December 31, 1997, the future minimum lease payments under operating and
capital leases are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
OPERATING CAPITAL
LEASES LEASES
--------- -------
<S> <C> <C>
1998.................................................... $ 70 $ 486
1999.................................................... 71 322
2000.................................................... 71 197
2001.................................................... 71 --
2002.................................................... 71 --
Thereafter.............................................. 6 --
---- -----
Total................................................. $360 1,005
Less-Amount representing interest....................... (116)
-----
Present value of minimum lease payments................. 889
Less-Current maturities................................. (415)
-----
Long-term obligations................................... $ 474
=====
</TABLE>
F-66
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. EMPLOYEE BENEFIT PLAN:
In connection with its collective bargaining agreements with various
electrical, labor and operating engineer unions, the Company participates with
other companies in the unions' multiemployer 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 multiemployer plan in the event of the employer's
withdrawal from, or upon termination of, such plan. The Company has no plan to
withdraw from these plans. The plans do not maintain information on net assets
and actuarial present value of the accumulated share of the plan's unfunded
vested benefits allocable to the Company, and amounts, if any, for which the
Company may be contingently liable are not ascertainable at this time. Total
contributions to the plans were approximately $403,000, $474,000 and $606,000
for the years ended December 31, 1995, 1996, 1997, respectively.
The Company has a defined contribution profit-sharing plan. The plan provides
for the Company to match one-half of employee contributions to the plan up to a
maximum of $3,500 per year per employee. Total contributions by the Company
under the plan were approximately $31,000, $30,000 and $23,000 for the years
ended December 31, 1995, 1996 and 1997, respectively. The Company may also make
discretionary contributions. The Company made discretionary contributions of
$44,000, $70,000 and none for the years ended December 31, 1995, 1996 and 1997,
respectively.
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, a line 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.
9. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including workers'
compensation, business auto liability, general liability and an umbrella
policy. The Company is self-insured for medical claims up to $5,000 per year
per covered individual. The Company has recorded accruals for its estimated
portion of self-insured claims based on estimated claims incurred through
December 31, 1995, 1996 and 1997.
F-67
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 shareholders of the Company.
10. MAJOR CUSTOMERS AND RISK CONCENTRATION:
During 1995 and 1996, one customer accounted for 17 percent and 21 percent of
the Company's revenue, respectively. During 1997, two customers accounted for
23 percent and 11 percent of the Company's revenues, respectively.
The Company grants credit, generally without collateral, to its customers,
which include real estate operators, general contractors and state and
regulatory agencies, located primarily in Indiana and Michigan. Consequently,
the Company is subject to potential credit risk related to changes in business
and economic factors within Indiana and Michigan. However, management believes
that its contract acceptance, billing and collection policies are adequate to
minimize the potential credit risk.
11.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, two
executives of the Company entered into employment agreements with the Company
and Quanta which have an initial term of three years and generally restricts
the disclosure of confidential information as well as restricts 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.
Prior to the closing of the transaction discussed above, the Company made a
distribution of approximately $1,605,000. The Company funded the distribution
through bank borrowings.
F-68
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Potelco, Inc.:
We have audited the accompanying balance sheets of Potelco, Inc., a Washington
Subchapter S corporation, as of December 31, 1996 and 1997, and the related
statements of operations, cash flows and stockholder's equity for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Potelco, Inc., as of December
31, 1996 and 1997, and the results of its operations and its cash flows for the
years then ended, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 18, 1998
F-69
<PAGE>
POTELCO, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1996 1997 1997(1)
ASSETS ------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............. $ 36 $ 107 $ 107
Accounts receivable--
Trade, net of allowance of $15 and
$103 respectively.................... 2,987 5,002 5,002
Retainage............................. 902 546 546
Costs and estimated earnings in excess
of billings on uncompleted
contracts............................ 117 532 532
Prepaid expenses and other current
assets............................... 25 -- --
------ ------ ------
Total current assets................ 4,067 6,187 6,187
PROPERTY AND EQUIPMENT, net............. 2,679 3,778 3,778
------ ------ ------
Total assets........................ $6,746 $9,965 $9,965
====== ====== ======
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
CURRENT LIABILITIES:
Note payable to bank.................. $ 550 $1,095 $3,095
Note payable to stockholder........... 109 10 10
Current maturities of long-term debt.. 445 589 589
Current portion of note payable to
related party........................ 216 1,033 1,033
Accounts payable and accrued
expenses............................. 1,839 2,224 2,224
Billings in excess of costs and
estimated earnings on uncompleted
contracts............................ 139 72 72
------ ------ ------
Total current liabilities........... 3,298 5,023 7,023
LONG-TERM DEBT, net of current
maturities--
Note payable to related party......... 863 -- --
Other long-term debt.................. 537 928 928
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, $5 par value, 10,000
shares authorized, 22 shares issued
and 2 shares outstanding............. -- -- --
Additional paid-in capital............ 160 160 160
Retained earnings..................... 1,888 3,854 1,854
------ ------ ------
Total stockholder's equity.......... 2,048 4,014 2,014
------ ------ ------
Total liabilities and stockholder's
equity............................. $6,746 $9,965 $9,965
====== ====== ======
</TABLE>
- --------
(1) The pro forma balance sheet column presented reflects the impact of Sub S
distributions. See Note 13 for further discussion.
The accompanying notes are an integral part of these financial statements.
F-70
<PAGE>
POTELCO, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
REVENUES...................................................... $14,549 $19,220
COST OF SERVICES (including depreciation)..................... 12,946 15,563
------- -------
Gross profit................................................ 1,603 3,657
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.................. 971 1,478
------- -------
Income from operations...................................... 632 2,179
------- -------
OTHER INCOME (EXPENSE):
Interest expense............................................ (321) (202)
Other, net.................................................. (123) (11)
------- -------
Other income (expense), net............................... (444) (213)
------- -------
NET INCOME.................................................... $ 188 $ 1,966
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-71
<PAGE>
POTELCO, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------
1996 1997
----- ------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income..................................................... $ 188 $1,966
Adjustments to reconcile net income to net cash provided by
operating activities--
Depreciation.................................................. 473 506
Loss on sale of property and equipment........................ 129 14
Changes in operating assets and liabilities--
(Increase) decrease in--
Accounts receivable........................................ 208 (1,659)
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... 79 (415)
Prepaid expenses and other current assets.................. (16) 25
Increase (decrease) in--
Accounts payable and accrued expenses...................... (611) 385
Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (371) (67)
----- ------
Net cash provided by operating activities................. 79 755
----- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.................. 60 52
Additions to property and equipment........................... (322) (1,671)
----- ------
Net cash used in investing activities..................... (262) (1,619)
----- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in note payable to bank.......................... 250 545
Net decrease in note payable to stockholder................... (8) (99)
Payments of note payable to related party..................... (45) (46)
Payments of other long-term debt.............................. (437) (567)
Proceeds from other long-term debt............................ 50 1,102
Distributions to stockholder.................................. (101) --
----- ------
Net cash provided by (used in) financing activities....... (291) 935
----- ------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (474) 71
CASH AND CASH EQUIVALENTS, beginning of period.................. 510 36
----- ------
CASH AND CASH EQUIVALENTS, end of period........................ $ 36 $ 107
===== ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest........................................ $ 328 $ 215
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-72
<PAGE>
POTELCO, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN RETAINED STOCKHOLDER'S
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1995..................... 2 $ -- $160 $1,801 $1,961
Distributions to
stockholder............ -- -- -- (101) (101)
Net income.............. -- -- -- 188 188
--- ---- ---- ------ ------
BALANCE, December 31,
1996..................... 2 -- 160 1,888 2,048
Net income.............. -- -- -- 1,966 1,966
--- ---- ---- ------ ------
BALANCE, December 31,
1997..................... 2 $ -- $160 $3,854 $4,014
=== ==== ==== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-73
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Potelco, Inc., a Washington Subchapter S corporation (the Company), focuses
on providing underground and overhead power and telephone cable installation
primarily under commercial, industrial and governmental contracts. The Company
performs the majority of its contract work in Washington under lump-sum, cost-
plus and unit-priced contracts, with contract terms generally ranging from 30
days to 18 months.
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 noncash investing and financing activities related to capital
leases of approximately $374,000 and $378,000 during the years ended December
31, 1996 and 1997, respectively.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
deemed probable and an allowance based upon the level of total accounts
receivable balances.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed using
the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
life of the lease or the estimated useful life of the asset. Depreciation
expense was approximately $473,000 and $506,000 for the years ended December
31, 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 fixed price or cost-plus-fee contracts. Such contracts
generally provide that the
F-74
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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. Revenues from cost-plus-fee contracts are recognized on the
basis of costs incurred during the year, plus the fee earned, and are measured
by the cost-to-cost method. Contract costs include all direct material and
labor costs and those indirect costs related to contract performance, such as
indirect labor, supplies, tools, repairs and depreciation costs.
Provisions for the total estimated losses on uncompleted contracts are made
in the period in which such losses are determined. Changes in job performance,
job conditions, estimated profitability and final contract settlements may
result in revisions to costs and income, and their effects are recognized in
the period in which the revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in 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 completion of the installation. 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 has elected S corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S corporation status, the shareholders report their shares of
the Company's taxable earnings or losses in their personal tax returns. The
Company will terminate its S corporation status concurrently with the effective
date of the Offering (see Note 13).
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
will expire at various times through 2000.
F-75
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote for discussion of significant
estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards 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.
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>
Operating equipment and vehicles............ 5-10 $5,279 $6,607
Office equipment, furniture and fixtures.... 5 99 116
Leasehold improvements...................... 5 184 210
------ ------
Total cost................................ 5,562 6,933
Less-Accumulated depreciation............... (2,883) (3,155)
------ ------
Property and equipment, net............... $2,679 $3,778
====== ======
</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.................................... $1,117 $ 881
Accrued compensation and benefits.......................... 149 479
Other accrued expenses..................................... 573 864
------ ------
$1,839 $2,224
====== ======
</TABLE>
F-76
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Contracts in progress are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Costs incurred on contracts in progress................. $1,147 $3,386
Estimated earnings, net of losses....................... 782 1,125
------ ------
1,929 4,511
Less-Billings to date................................... (1,951) (4,051)
------ ------
$ (22) $ 460
====== ======
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. $ 117 $ 532
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. (139) (72)
------ ------
$ (22) $ 460
====== ======
</TABLE>
5. NOTE PAYABLE TO BANK:
The note payable to bank as of December 31, 1996, represents borrowings under
a revolving credit agreement maturing April 30, 1997. Borrowings are based on
percentages of contract billings and are secured by substantially all of the
Company's assets. This agreement provides for a total credit limit of $800,000,
of which $550,000, had been drawn at December 31, 1996, and requires monthly
interest payments of prime plus .75 percent.
On May 2, 1997, the Company entered into revolving credit agreements with a
bank maturing May 1, 1998. The agreements provide for total credit limits of
$1,000,000 and $400,000, and require monthly interest payments of prime (8.5
percent at December 31, 1997) plus .75 percent beginning June 1, 1997. On
October 1, 1997, the $1,000,000 revolving credit agreement was amended to
increase the credit limit to $1,500,000, of which approximately $1,095,000 had
been drawn at December 31, 1997.
The notes payable outstanding as of December 31, 1996 and 1997, related to
the revolving credit agreements contain several ratio and covenant
requirements, including a minimum working capital ratio and a debt to net worth
restriction. Furthermore, these notes are guaranteed by the stockholder. The
Company was in compliance with these requirements for the years ended December
31, 1996 and 1997.
F-77
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LONG-TERM DEBT AND CAPITAL LEASES:
Long-term debt and capital leases consist of the following:
<TABLE>
<CAPTION>
DECEMBER
31,
------------
1996 1997
----- -----
<S> <C> <C>
Notes payable to a third party due in monthly installments
aggregating approximately $10,000 including interest ranging
from 7.9% to 11%, collateralized by equipment.................. $ 263 $ 434
Note payable to a bank due in monthly installments of
approximately $6,000 including interest at prime plus .75,
collateralized by equipment.................................... -- 289
Notes payable to a third party due in monthly installments
aggregating approximately $12,000 plus interest at 10%,
collateralized by equipment.................................... 128 116
Notes payable to a third party due in monthly installments of
approximately $800 plus interest at 10.27%, collateralized by
equipment...................................................... 21 13
Obligations under capital leases................................ 570 665
----- -----
982 1,517
Less-Current maturities of long-term debt....................... (445) (589)
----- -----
Other long-term debt............................................ $ 537 $ 928
===== =====
</TABLE>
Future required principal payments on long-term debt (excluding capital
leases) as of December 31, 1997, over the next five years and are as follows
(in thousands):
<TABLE>
<S> <C>
Year ending December 31, 1997--
1998.............................................................. $303
1999.............................................................. 200
2000.............................................................. 134
2001.............................................................. 146
2002.............................................................. 69
</TABLE>
The $400,000 revolving credit agreement was terminated during the fourth
quarter of 1997 and the balance ($289,000 at December 31, 1997) was converted
to a long-term note payable to the bank.
The Company has entered into noncancelable lease agreements with third-party
leasing companies for the acquisition of trucks and equipment. The required
lease payments, including interest at varying rates implicit in the leases, as
of December 31, 1997, over the next four years are as follows (in thousands):
<TABLE>
<S> <C>
Twelve months ending December 31--
1998.............................................................. $313
1999.............................................................. 244
2000.............................................................. 152
2001.............................................................. 34
----
Net minimum lease payments........................................ 743
Less amount representing interest................................. (78)
----
Present value of net minimum lease payments....................... $665
Less-Current maturities........................................... (286)
----
Long-term obligations............................................. $379
====
</TABLE>
F-78
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. RELATED-PARTY NOTES PAYABLE:
The Company entered into a debt agreement with the father of the Company's
sole stockholder for approximately $1,163,000, as amended. The agreement
stipulates that the note will accrue interest at 8 percent, with required
monthly payments including interest and principal of at least $10,000. The note
is scheduled to mature on December 1, 2014. The balance outstanding was
approximately $1,079,000 and $1,033,000 as of December 31, 1996 and 1997,
respectively.
The Company's sole stockholder advanced funds to the Company totaling
$200,000 to provide short-term liquidity during 1994. The interest rate on the
advance is based on a blended annual rate, which is approximately 6.35 percent
as of December 31, 1996 and 1997, respectively. Amounts due totaled
approximately $109,000 and $10,000 as of December 31, 1996 and 1997,
respectively.
All related party debt is classified as current as of December 31, 1997,
based upon the Company's intent to repay such amounts during 1998.
8. RELATED-PARTY LEASES:
The Company leases a facility from the father of the Company's sole
stockholder for a monthly rental of $2,000 plus annual property taxes. The
lease is month-to-month, with no termination date.
The Company also leases a facility from its sole stockholder at a monthly
rental of $2,800 plus annual property taxes. The lease is month-to-month, with
no termination date.
Lease payments on the above facilities aggregated approximately $58,000 for
each of the years ended December 31, 1996 and 1997, respectively.
9. EMPLOYEE BENEFIT PLANS:
In connection with its collective bargaining agreements with various
electrical, labor and operating engineer unions, the Company participates with
other companies in the unions' multiemployer 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 multiemployer 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 plan's unfunded
vested benefits allocable to the Company, and amounts, if any, for which the
Company may be contingently liable are not ascertainable at this time. Total
contributions to the plans were approximately $246,000 and $352,000 for the
years ended December 31, 1996 and 1997, respectively.
The Company has two retirement plans covering all employees not included in a
collective bargaining unit. These noncontributory plans consist of a money
purchase pension plan and a profit-
F-79
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
sharing plan. The money purchase pension plan requires Company contributions
equal to 10 percent of the covered salaries. Contributions to this plan totaled
approximately $27,000 and $35,000 for the years ended December 31, 1996 and
1997, respectively. The Company made discretionary contributions to the profit-
sharing plan of approximately $14,000 and $49,000 for the years ended December
31, 1996 and 1997, respectively. In addition, during the year December 31,
1997, the Company accrued $228,000 related to employee bonuses that are
anticipated to be paid subsequent to December 31, 1997.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, a line 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.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, general liability, workers' compensation and an umbrella
policy.
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:
During the year ended December 31, 1996, three customers accounted for 36
percent, 20 percent and 12 percent of the Company's revenues, respectively.
During the year ended December 31, 1997, three customers accounted for 34
percent, 16 percent and 7 percent of the Company's revenues, respectively.
The Company grants credit, generally without collateral, to its customers,
which are located primarily in the northwestern United States. Consequently,
the Company is subject to potential credit risk related to changes in business
and economic factors within this region. However, management believes that its
contract acceptance, billing and collection policies are adequate to minimize
the potential credit risk.
F-80
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. SUBSEQUENT EVENTS:
In December 1997, the Company and its stockholder entered into a definitive
agreement with Quanta Services, Inc. ("Quanta"), subject to certain conditions
pursuant to which all outstanding shares of the Company's common stock would 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 key executives of the Company entered into
employment agreements with the Company and Quanta which have an initial term of
three years, and generally restricts the disclosure of confidential information
as well as restricts competition with the Company and Quanta for a period of
five years following termination of employment. Reference is made to Note 1 of
Quanta Services, Inc. financial statements included elsewhere herein.
Prior to the closing of the transaction noted above, the Company made a Sub S
distribution of approximately $2.0 million representing substantially all of
the previously-taxed undistributed earnings through December 31, 1997. The
Company funded the distribution through borrowings.
F-81
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Spalj Construction Company:
We have audited the accompanying balance sheet of Spalj Construction Company (a
Minnesota Subchapter S Corporation) as of December 31, 1997, and the related
statements of operations, cash flows and shareholders' equity for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Spalj Construction Company as
of December 31, 1997, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
May 1, 1998
F-82
<PAGE>
SPALJ CONSTRUCTION COMPANY
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, DECEMBER 31,
1997 1997(1)
ASSETS ------------ ------------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents.......................... $ 3,251 $ 3,251
Accounts receivable--
Trade, net of allowance of $100.................. 2,788 2,788
Retainage........................................ 1,429 1,429
Note receivable due from affiliate................. 125 125
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... 556 556
Prepaid expenses and other current assets.......... 262 262
------- -------
Total current assets............................. 8,411 8,411
PROPERTY AND EQUIPMENT, net.......................... 2,349 2,349
------- -------
Total assets..................................... $10,760 $10,760
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Accounts payable and accrued expenses.............. $ 1,947 $ 5,526
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 142 142
------- -------
Total current liabilities........................ 2,089 5,668
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, no par value, 400 shares authorized,
62 shares issued and outstanding.................. 21 21
Additional paid-in capital......................... 226 226
Retained earnings.................................. 8,424 4,845
------- -------
Total shareholders' equity....................... 8,671 5,092
------- -------
Total liabilities and shareholders' equity....... $10,760 $10,760
======= =======
</TABLE>
- --------
(1) The pro forma balance sheet column presented reflects the impact of
Subchapter S Corporation distributions. See Note 12 for further discussion.
The accompanying notes are an integral part of this financial statement.
F-83
<PAGE>
SPALJ CONSTRUCTION COMPANY
STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
REVENUES............................................................... $21,492
COST OF SERVICES, including depreciation............................... 15,099
-------
Gross profit......................................................... 6,393
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........................... 1,145
-------
Income from operations............................................... 5,248
OTHER INCOME (EXPENSE), net............................................ 115
-------
INCOME BEFORE PROVISION FOR INCOME TAXES............................... 5,363
PROVISION FOR INCOME TAXES............................................. 14
-------
NET INCOME............................................................. $ 5,349
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-84
<PAGE>
SPALJ CONSTRUCTION COMPANY
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................................... $ 5,349
Adjustments to reconcile net income to net cash provided by operating
activities--
Depreciation and amortization....................................... 537
Loss on sale of property and equipment.............................. 13
Changes in operating assets and liabilities-
Decrease (increase) in--
Accounts receivable................................................ (2,205)
Note receivable due from affiliate................................. 125
Costs and estimated earnings in excess of billings on uncompleted
contracts......................................................... (446)
Prepaid expenses and other current assets.......................... (183)
Increase (decrease) in--
Accounts payable and accrued expenses.............................. 1,295
Billings in excess of costs and estimated earnings on uncompleted
contracts......................................................... (333)
-------
Net cash provided by operating activities......................... 4,152
-------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment........................ 16
Additions of property and equipment................................. (981)
Other............................................................... 19
-------
Net cash used in investing activities............................. (946)
-------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to shareholders....................................... (3,852)
-------
Net cash used in financing activities............................. (3,852)
-------
NET DECREASE IN CASH AND CASH EQUIVALENTS............................. (646)
CASH AND CASH EQUIVALENTS, beginning of year.......................... 3,897
-------
CASH AND CASH EQUIVALENTS, end of year................................ $ 3,251
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid................................................... $ 3
=======
Interest paid....................................................... $ --
=======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-85
<PAGE>
SPALJ CONSTRUCTION COMPANY
STATEMENT OF SHAREHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
------------- PAID-IN RETAINED SHAREHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS EQUITY
------ ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1996..... 62 $21 $226 $ 6,927 $ 7,174
Net income................... -- -- -- 5,349 5,349
Distributions to
shareholders................ -- -- -- (3,852) (3,852)
--- --- ---- ------- -------
BALANCE, December 31, 1997..... 62 $21 $226 $ 8,424 $ 8,671
=== === ==== ======= =======
</TABLE>
The accompanying notes are an integral part of this financial statement.
F-86
<PAGE>
SPALJ CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Spalj Construction Company (the Company), a Minnesota Subchapter S
Corporation located in Deerwood, Minnesota, is primarily engaged in the
installation of telephone fiber optic lines and buried cables in the
continental United States.
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.
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 $537,000 for the year ended December 31,
1997.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated over its
estimated life. 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 statement of operations.
Revenue Recognition
The Company generally recognizes revenue as services are performed. The
Company's contracts generally provide that the customer accept completion of
progress to date and compensate the Company for services rendered. Measurement
is typically in terms of units installed or some other measure of progress.
Revenues are recognized using the percentage-of-completion method measured by
the percentage of costs incurred to date to the total estimated costs for each
contract. Contract costs include all direct material, direct labor, subcontract
costs and 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 contract costs and income. The resulting effects are recognized in the
period in which the revisions are determined.
F-87
<PAGE>
SPALJ CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounts receivable billed but not paid by customers pursuant to contract
retainage provisions is due upon completion of the contract and acceptance by
the customer. Based on the Company's experience with similar contracts in
recent years, the retainage balance as of the 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
As provided in its contracts, the Company generally warrants labor for the
first year after completion and acceptance of the work by the customer. 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 has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their shares of
the Company's taxable earnings or losses in their personal tax returns.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results may differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 8 for discussion of
certain estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to Be Disposed Of." Accordingly, in the
event that facts and circumstances indicate that property and equipment or
other assets may be impaired, an evaluation of recoverability would be
performed. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such property is necessary. Adoption of this
standard did not have a material effect on the financial position or results of
operations of the Company.
F-88
<PAGE>
SPALJ CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following as of December 31, 1997 (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS
------------
<S> <C> <C>
Buildings and leasehold improvements................ 7-31.5 $ 115
Operating equipment and vehicles.................... 3-7 5,375
Office equipment, furniture and fixtures............ 7 154
------
5,644
Less--Accumulated depreciation and amortization..... (3,295)
------
Property and equipment, net....................... $2,349
======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following as of December
31, 1997 (in thousands):
<TABLE>
<S> <C>
Accounts payable, trade........................................... $1,711
Accrued compensation and other expenses........................... 236
------
$1,947
======
</TABLE>
Contracts in progress are as follows as of December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Costs incurred on contracts in progress......................... $6,761
Estimated earnings, net of losses............................... 1,733
------
8,494
Less--Billings to date.......................................... 8,080
------
$ 414
======
Costs and estimated earnings in excess of billings on
uncompleted contracts.......................................... $ 556
Less--Billings in excess of costs and estimated earnings on
uncompleted contracts.......................................... (142)
------
$ 414
======
</TABLE>
5. LEASES:
Operating Leases
The Company rents various pieces of equipment and warehouse space near its
job sites under several operating lease agreements on a month-to-month basis.
The rent paid under these lease agreements was approximately $198,000 for the
year ended December 31, 1997.
The Company also leases certain management vehicles on a longer-term basis.
The total future minimum lease payments under these noncancelable operating
leases are $12,000 for 1998.
F-89
<PAGE>
SPALJ CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. INCOME TAXES:
According to the Internal Revenue Service, certain S Corporations are
responsible for a tax on the "built-in gain" realized on the sale of an asset
that existed at the time a company changes its status from a C Corporation. The
Company had previously elected S Corporation status effective April 1, 1994. Of
the Company's provision for income taxes for the year ended December 31, 1997,
$9,000 is a result of these taxes, and the remaining $5,000 relates to tax
imposed by certain states in which the Company does business.
7. RELATED-PARTY TRANSACTIONS:
During 1997, the Company leased building and yard space located in Deerwood,
Minnesota, from certain Company shareholders for $60,000. During 1998, the
Company extended this lease agreement to December 31, 1998 for an additional
annual rate of $60,000.
At December 31, 1997, an affiliate was indebted to the Company for a note
receivable of approximately $125,000. The note receivable is due on demand with
interest calculated at the prime rate. Interest income from this note totaled
approximately $9,000 during the year ended December 31, 1997.
At December 31, 1997, the Company's cash and cash equivalents were deposited
in a financial institution controlled by certain shareholders.
During 1997, the Company charged approximately $93,000 to an affiliated
company controlled by certain Company shareholders for various office,
administrative and other costs. At December 31, 1997, approximately $53,000 was
due to the Company related to such charges and was included in prepaid expenses
and other current assets in the accompanying balance sheet.
8. EMPLOYEE BENEFIT PLAN:
The Company has a self-funded medical plan covering substantially all
employees. The Company is responsible for all family claims paid in the plan
year up to a specific stop-loss amount of $10,000 per family. Aggregate excess
coverage is purchased to protect the Company for claims above the self-funded
limit. The financial statements reflect an estimated accrued liability for
outstanding claims.
The Company has a 401(k) plan and profit-sharing plan covering substantially
all employees. Participant contributions to the 401(k) plan are limited to 17
percent of total compensation paid to participants during the plan year. The
Company may also make discretionary contributions up to a maximum of $2,000 for
each participant. Contributions to the plan were approximately $73,000 for the
year ended December 31, 1997.
F-90
<PAGE>
SPALJ CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable and accounts payable. The Company believes that the
carrying value of these instruments on the accompanying balance sheet
approximates their fair values.
10. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's 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.
11. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10 percent of total sales to four major
customers (comprising approximately 19 percent, 16 percent, 13 percent and 12
percent, respectively) during the year ended December 31, 1997.
The Company grants credit, generally without collateral, to its customers
which include telecommunication companies, utilities and municipalities located
primarily in the Midwestern, Central and Southern regions of the United States.
Consequently, the Company is subject to potential credit risk related to
changes in business and economic factors within the Midwestern, Central and
Southern regions of the United States. However, management believes that its
contract acceptance, billing and collection policies are adequate to minimize
the potential credit risk.
12. SUBSEQUENT EVENT:
In January 1998, the Company made cash distributions to shareholders of
approximately $3,579,000 funded through its operations. Had this transaction
been recorded at December 31, 1997, the effect on the accompanying balance
sheet would be an increase in liabilities of $3,579,000 and a decrease in
shareholders' equity of $3,579,000.
13. SUBSEQUENT EVENTS TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
On May 5, 1998, the Company was acquired by Quanta Services, Inc.
F-91
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Underground Construction Co., Inc.:
We have audited the accompanying balance sheet of Underground Construction Co.,
Inc. (a California Subchapter S Corporation) as of December 31, 1997, and the
related statements of operations, cash flows and shareholders' equity for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Underground Construction Co.,
Inc., as of December 31, 1997, and the results of its operations and cash flows
for the year then ended in conformity with generally accepted accounting
principles.
S. J. Gallina & Co., LLP
Walnut Creek, California
February 23, 1998
F-92
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 278 $ 859
Marketable securities............................... 216 249
Accounts receivable--
Trade, net of allowance of $135................... 11,627 8,759
Retainage......................................... 1,764 1,994
Other receivables................................. 112 150
Costs and estimated earnings in excess of billings
on uncompleted contracts........................... 1,645 854
Prepaid expenses and other current assets........... 105 116
------- -------
Total current assets............................ 15,747 12,981
PROPERTY AND EQUIPMENT, net........................... 5,604 5,486
CASH SURRENDER VALUE OF LIFE INSURANCE................ 748 773
------- -------
Total assets.................................... $22,099 $19,240
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................ $ 202 $ 114
Current maturities of capital lease obligations..... 422 214
Bank line of credit................................. 700 --
Accounts payable and accrued expenses............... 7,827 4,967
Billings in excess of costs and estimated earnings
on uncompleted contracts........................... 1,688 1,558
------- -------
Total current liabilities....................... 10,839 6,853
LONG-TERM DEBT, net of current maturities............. 217 468
LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current
maturities........................................... 768 823
COMMITMENTS AND CONTINGENCIES......................... -- --
------- -------
Total liabilities............................... 11,824 8,144
SHAREHOLDERS' EQUITY:
Common stock, $1 par value, 100,000 shares
authorized, 42,983 shares issued and outstanding at
December 31, 1997 and 40,923 shares issued and
outstanding at June 30, 1998....................... 43 41
Paid-in capital..................................... 2,943 2,802
Accumulated other comprehensive income.............. 135 154
Notes receivable from shareholders for purchase of
common stock....................................... (577) (377)
Retained earnings................................... 7,731 8,476
------- -------
Total shareholders' equity...................... 10,275 11,096
------- -------
Total liabilities and shareholders' equity...... $22,099 $19,240
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-93
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30
DECEMBER 31, ----------------
1997 1997 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES........................................ $48,478 $16,920 $25,345
COST OF SERVICES, including depreciation........ 40,858 15,113 21,582
------- ------- -------
Gross profit................................ 7,620 1,807 3,763
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 4,152 1,781 1,680
------- ------- -------
Income from operations...................... 3,468 26 2,083
OTHER INCOME (EXPENSE), net:
Interest expense.............................. (225) (96) (98)
Other, net.................................... 365 92 312
------- ------- -------
Other income (expense), net................. 140 (4) 214
------- ------- -------
INCOME BEFORE PROVISION FOR INCOME TAXES........ 3,608 22 2,297
PROVISION FOR INCOME TAXES...................... 103 1 156
------- ------- -------
NET INCOME...................................... $ 3,505 $ 21 $ 2,141
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-94
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ----------------
1997 1997 1998
------------ ------- -------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................... $ 3,505 $ 21 $ 2,141
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation and amortization............... 1,073 506 550
Gain on sale of property and equipment...... (19) (16) (210)
Changes in operating assets and
liabilities--
Decrease (increase) in--
Accounts receivable....................... (7,603) (68) 2,696
Costs and estimated earnings in excess of
billings on uncompleted contracts........ (53) (408) 791
Prepaid expenses and other current
assets................................... 88 146 (11)
Cash surrender value of life insurance.... (119) -- (25)
Increase (decrease) in--
Accounts payable and accrued expenses..... 3,871 328 (1,844)
Billings in excess of costs and estimated
earnings on uncompleted contracts........ 999 39 (129)
------- ------- -------
Net cash provided by operating
activities............................. 1,742 548 3,959
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.. 66 30 216
Additions of property and equipment........... (462) (205) (77)
Purchase of marketable securities............. (4) (3) (14)
Proceeds from shareholder notes............... 142 87 200
Other, net.................................... 5 (22) (102)
------- ------- -------
Net cash provided by (used in) investing
activities............................. (253) (113) 223
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments made to acquire common stock......... (2,048) (2,048) (559)
Payments of long-term debt and capital lease
obligations.................................. (722) (330) (345)
Net borrowings (repayments) under bank line of
credit....................................... 700 1,000 (700)
Distributions to shareholders................. (1,166) (680) (1,997)
------- ------- -------
Net cash used in financing activities... (3,236) (2,058) (3,601)
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (1,747) (1,623) 581
CASH AND CASH EQUIVALENTS, beginning of period.. 2,025 2,025 278
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period........ $ 278 $ 402 $ 859
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid........................... $ 11 $ 3 $ 121
Interest paid............................... $ 218 $ 96 $ 102
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-95
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ACCUMULATED NOTES
COMMON STOCK OTHER RECEIVABLE TOTAL
-------------- PAID-IN RETAINED COMPREHENSIVE FROM STOCKHOLDERS'
SHARES AMOUNT CAPITAL EARNINGS INCOME SHAREHOLDERS EQUITY
------ ------ ------- -------- ------------- ------------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996................... 49,783 $50 $3,109 $ 7,507 $107 $(280) $10,493
Net income............. -- -- -- 3,505 -- -- 3,505
Distributions to
shareholders.......... -- -- -- (1,845) -- -- (1,845)
Redemption of stock.... (8,800) (9) (603) (1,436) -- -- (2,048)
Issuance of stock...... 2,000 2 437 -- -- (439) --
Change in market value
of securities......... -- -- -- -- 28 -- 28
Payments received on
notes receivable...... -- -- -- -- -- 142 142
------ --- ------ ------- ---- ----- -------
BALANCE, December 31,
1997................... 42,983 43 2,943 7,731 135 (577) 10,275
Net income
(unaudited)........... -- -- -- 2,141 -- -- 2,141
Distributions to
shareholders
(unaudited)........... -- -- -- (980) -- -- (980)
Redemption of stock
(unaudited)........... (2,060) (2) (141) (416) -- -- (559)
Change in market value
of securities
(unaudited)........... -- -- -- -- 19 -- 19
Payments received on
notes receivable
(unaudited)........... -- -- -- -- -- 200 200
------ --- ------ ------- ---- ----- -------
BALANCE, June 30, 1998
(unaudited)............ 40,923 $41 $2,802 $ 8,476 $154 $(377) $11,096
====== === ====== ======= ==== ===== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-96
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Underground Construction Co., Inc. (the Company), a California Subchapter S
Corporation located in Benicia, California, is primarily engaged in various
types of construction projects. The Company performs its contract work under
fixed-fee, unit price and cost-plus contracts with contract terms generally
ranging from one month to one year. The Company performs the majority of its
work in California, Texas and Oregon.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the six months ended June 30, 1997 and
1998, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnote disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of the Company's management, the unaudited interim financial statements
contain all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental Cash Flow Information
The Company had noncash investing activities of approximately $1,132,000,
$654,000 and $361,000 related to property and equipment during the year ended
December 31, 1997, and the six months ended June 30, 1997 and June 30, 1998,
respectively. The Company also had noncash investing and financing activities
of approximately $439,000 related to issuance of common stock during the year
ended December 31, 1997.
Marketable Securities
The Company's marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in shareholders' equity. Aggregate cost, gross
unrealized holding gains and gross unrealized holding losses were approximately
$81,000, $140,000 and $5,000, respectively, at December 31, 1997. Unrealized
gains of approximately $28,000, $13,000 and $19,000 were recorded during the
year ended December 31, 1997, and the six months ended June 30, 1997 and June
30, 1998, respectively. Realized gains and losses and declines in value judged
to be other-than-temporary on available-for-sale securities are included in
other income. The costs of securities sold are based on the specific
identification method. Interest and dividends from these securities are
included in other income.
F-97
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the level
of total accounts receivable balances.
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.
Building improvements are capitalized and depreciated over the estimated useful
life of the building. Depreciation expense was approximately $1,073,000,
$506,000 and $550,000 for the year ended December 31, 1997, and the six months
ended June 30, 1997 and June 30, 1998, 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 over its
estimated life. 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 statement of operations.
Revenue Recognition
The Company generally recognizes revenue as services are performed. The
Company's contracts generally provide that the customer accept completion of
progress to date and compensate the Company for services rendered. Revenues are
recognized using the percentage-of-completion method measured by the percentage
of costs incurred to date to the total estimated costs for each contract.
Contract costs include all direct material, direct labor, subcontract costs and
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation. 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 contract costs and
income. The resulting effects are recognized in the period in which the
revisions are determined.
Accounts receivable billed but not paid by customers pursuant to contract
retainage provisions are due upon completion of the contract and acceptance by
the customer. Based on the Company's experience with similar contracts in
recent years, the retainage balance as of the 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
As provided in its contracts, the Company generally warrants labor for the
first year after completion and acceptance of the work by the customer. An
accrual for warranty costs is recorded based upon the historical level of
warranty claims and management's estimate of future costs.
F-98
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the shareholders report their shares of
the Company's taxable earnings or losses in their personal tax returns.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates. Reference is
made to the "Revenue Recognition" and "Warranty Costs" sections of this
footnote for discussion of certain estimates reflected in the Company's
financial statements.
New Accounting Pronouncements
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 131, "Disclosures About Segments of
an Enterprise and Related Information," which requires that a public business
enterprise report financial and descriptive information about its reportable
operating segments. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The Company will adopt SFAS No. 131
in 1998.
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. See
Note 13 for other comprehensive income.
3. PROPERTY AND EQUIPMENT:
Property and equipment as of December 31, 1997, consist of the following (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS
------------
<S> <C> <C>
Land................................................... -- $ 767
Buildings and building improvements.................... 10-25 2,824
Operating equipment and vehicles....................... 5-10 13,026
Office equipment, furniture and fixtures............... 3-7 683
-------
17,300
Less--Accumulated depreciation......................... (11,696)
-------
Property and equipment, net............................ $ 5,604
=======
</TABLE>
F-99
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses as of December 31, 1997, consist of the
following (in thousands):
<TABLE>
<S> <C> <C>
Accounts payable, trade....................................... $ 4,518
Accrued compensation and other expenses....................... 3,309
-------
$ 7,827
=======
Contracts in progress as of December 31, 1997, are as follows (in thousands):
Costs incurred on contracts in progress....................... $38,367
Estimated earnings, net of losses............................. 4,865
-------
43,232
Less--Billings to date........................................ (43,275)
-------
$ (43)
=======
Costs and estimated earnings in excess of billings on uncom-
pleted contracts............................................. $ 1,645
Less--Billings in excess of costs and estimated earnings on
uncompleted contracts........................................ (1,688)
-------
$ (43)
=======
</TABLE>
5. DEBT:
The Company has a $3,000,000 line of credit with a bank, bearing interest at
the bank's prime rate (8.5 percent at December 31, 1997), of which $700,000 and
$0 was outstanding as of December 31, 1997, and June 30, 1998, respectively.
The line of credit expires June 1, 1999, and is secured by personal guarantees
of certain officers and directors of the Company. Commitment fees of
approximately $8,000 and $7,500 were charged on this line of credit during the
year ended December 31, 1997, and the six months ended June 30, 1998,
respectively. The Company also has a $500,000 standby letter of credit with a
bank supported by an unsecured promissory note. As of December 31, 1997, and
June 30, 1998, there was no outstanding balance under this letter of credit.
The loan agreement covering the line of credit contains various covenants
which, among other things, limit the Company's ability to incur additional
indebtedness and require the Company to maintain a minimum tangible net worth
of not less than $6.5 million as of December 31, 1997. The Company is also to
maintain a ratio of current assets to current liabilities of not less than 1.25
to 1.00 and other various coverage ratios.
The Company's long-term debt obligations as of December 31, 1997, consist of
the following (in thousands):
<TABLE>
<S> <C>
Notes payable to third parties due in monthly installments through
2001; interest ranging from 7.01% to 8.75%; collateralized by
equipment............................................................ $419
Less--Current maturities.............................................. (202)
----
Total long-term debt.............................................. $217
====
</TABLE>
F-100
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The maturities of long-term debt as of December 31, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
1998.................................................................... $202
1999.................................................................... 118
2000.................................................................... 91
2001.................................................................... 8
</TABLE>
6. LEASES:
The Company leases certain vehicles under capital leases, and the leased
assets are included as part of property and equipment, net. Details of the
capital leased assets as of December 31, 1997, are as follows (in thousands):
<TABLE>
<S> <C>
Vehicles............................................................. $1,800
Less--Accumulated depreciation....................................... (481)
------
Net capital leased assets........................................ $1,319
======
</TABLE>
Future minimum lease payments under the capital leases as of December 31,
1997, are as follows (in thousands):
<TABLE>
<S> <C>
1998................................................................. $ 507
1999................................................................. 384
2000................................................................. 318
2001................................................................. 145
2002................................................................. 5
------
Total minimum lease payments..................................... 1,359
Less--Amounts representing interest.................................. (169)
------
Present value of minimum lease payments............................ 1,190
Less--Current portion................................................ (422)
------
Long-term obligation............................................... $ 768
======
</TABLE>
7. INCOME TAXES:
Federal and state income taxes as of December 31, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
Current--
Federal............................................................... $ 1
State................................................................. 102
----
$103
====
</TABLE>
As a result of the Company's S Corporation status, the only corporate-level
taxes for the year ended December 31, 1997, are built-in gains taxes on
property dispositions, the 1.5 percent California surtax on California-
apportioned income and other non-California state taxes. Of the Company's
provision for income taxes for the year ended December 31, 1997, approximately
$47,000 relates to taxes imposed on California-apportioned income, $55,000
relates to taxes imposed by certain states in which the Company does business
and the remaining $1,000 relates to the built-in gains tax.
F-101
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
8. RELATED-PARTY TRANSACTIONS:
The Company and its shareholders have an agreement which describes procedures
for transfer of the Company's common stock due to termination of active
employment, retirement, death or other occasion. The Company and its employee
benefit trusts have first priority for the purchase of shares tendered by a
shareholder in such instances. If the Company and its employees benefit trusts
do not accept such offer, the remaining shareholders may purchase all or part
of the offered shares. The methodology for determining the purchase price is
set forth in the agreement.
The Company holds unsecured notes receivable due from shareholders for
purchase of common stock. These notes receivable bear interest at 5.0 percent
to 7.0 percent and are due in installments through January 2006.
During the year ended December 31, 1997, bonuses to shareholders totaled
approximately $899,000, of which approximately $599,000 is included in accrued
expenses at December 31, 1997.
Accrued shareholder distributions of approximately $1,017,000 are included in
accrued expenses at December 31, 1997.
Personal guarantees of certain officers and directors of the Company secure
the line of credit discussed in Note 5.
9. EMPLOYEE BENEFIT PLAN:
The Company has a defined contribution plan covering full-time employees with
two or more years of service which is funded entirely by the Company.
Contributions to the plan for the year ended December 31, 1997, were
approximately $791,000. All contributions are fully vested. As of December 31,
1997, there is no unfunded vested liability. The Company owes the plan
approximately $62,000 at December 31, 1997.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
marketable securities, accounts receivable, notes receivable, a line of credit,
accounts payable and debt. The Company believes that the carrying values of
these instruments on the accompanying balance sheets approximates their fair
values.
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial position
or results of operations.
F-102
<PAGE>
UNDERGROUND CONSTRUCTION CO., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10 percent of total sales to two major
customers (comprising approximately 33 percent and 16 percent of total sales)
during the year ended December 31, 1997 and to two major customers (comprising
approximately 25 percent and 23 percent of total sales) during the six months
ended June 30, 1998.
The Company grants credit, generally without collateral, to its customers,
which include national industrial or commercial enterprises or regional
utilities located primarily in the Western United States. Consequently, the
Company is subject to potential credit risk related to changes in business and
economic factors within these regions. However, management believes that its
contract acceptance, billing and collection policies are adequate to minimize
the potential credit risk.
13. COMPREHENSIVE INCOME:
Comprehensive income for the six months ended June 30, 1998 consists of the
following (in thousands):
<TABLE>
<S> <C>
Net income........................................................... $2,141
Unrealized gains on marketable securities............................ 19
------
$2,160
======
</TABLE>
14. SUBSEQUENT EVENTS:
On January 1,1998, the Company redeemed 2,060 shares of common stock for
$559,000.
15. SUBSEQUENT EVENTS TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
The Company paid shareholder distributions of approximately $342,000 and
$638,000 on April 15, 1998 and June 9, 1998, respectively.
On August 4, 1998, the Company was acquired by Quanta Services, Inc.
F-103
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Sumter Builders, Inc.:
We have audited the accompanying balance sheet of Sumter Builders, Inc. (a
South Carolina corporation) as of December 31, 1997 and the related statements
of operations, stockholders' equity and cash flows for the year then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sumter Builders, Inc. as of
December 31, 1997 and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Columbia, South Carolina
March 23, 1998
F-104
<PAGE>
SUMTER BUILDERS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1997 1998
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents........................... $ 1,053 $ 904
Contract receivables................................ 2,360 3,196
Costs and estimated earnings in excess of billings
on contracts in progress........................... 2,476 1,641
Prepaid expenses.................................... 3 11
------- -------
Total current assets.............................. 5,892 5,752
------- -------
PROPERTY AND EQUIPMENT:
Cost................................................ 14,104 14,455
Less--Accumulated depreciation...................... (10,539) (11,198)
------- -------
Net property and equipment........................ 3,565 3,257
------- -------
OTHER ASSETS:
Due from officers and employees..................... 93 98
Cash surrender value of life insurance.............. 62 62
Investments......................................... 1,534 1,094
------- -------
Total other assets................................ 1,689 1,254
------- -------
Total assets...................................... $11,146 $10,263
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accrued expenses.................................... $ 956 $ 738
Accounts payable.................................... 734 594
Billings in excess of costs and estimated earnings
on contracts in progress........................... 295 8
Current maturities of long-term debt and capital
lease obligations.................................. 527 756
------- -------
Total current liabilities......................... 2,512 2,096
LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS.......... 801 662
DEFERRED COMPENSATION................................. 83 64
POSTRETIREMENT BENEFITS............................... 678 666
------- -------
Total liabilities................................. 4,074 3,488
------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock, $1 par value; 60,000 shares
authorized, 1,632 shares issued and outstanding in
1997 and 1998, respectively........................ 2 2
Additional paid-in capital.......................... 557 557
Retained earnings................................... 6,358 5,947
Unrealized holding gain, net........................ 155 269
------- -------
Total stockholders' equity........................ 7,072 6,775
------- -------
Total liabilities and stockholders' equity........ $11,146 $10,263
======= =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
balance sheets.
F-105
<PAGE>
SUMTER BUILDERS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1997 1997 1998
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES....................................... $22,445 $ 9,749 $ 13,556
COST OF SERVICES (including depreciation)...... 19,131 8,184 11,745
------- ------- --------
Gross profit............................... 3,314 1,565 1,811
------- ------- --------
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES... 2,150 783 953
------- ------- --------
Income from operations..................... 1,164 782 858
------- ------- --------
OTHER INCOME (EXPENSE):
Interest expense............................. (86) (36) (62)
Interest and dividends....................... 112 62 33
Gain on sale of investments.................. 144 44 --
Gain on sale of property and equipment....... 171 159 16
Miscellaneous................................ 109 101 8
------- ------- --------
Total other income (expense)............... 450 330 (5)
------- ------- --------
NET INCOME..................................... $ 1,614 $ 1,112 $ 853
======= ======= ========
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-106
<PAGE>
SUMTER BUILDERS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ------------------
1997 1997 1998
------------ -------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.................................. $ 1,614 $ 1,112 $ 853
Adjustments to reconcile net income to net
cash provided by operating activities--
Depreciation.............................. 1,485 615 759
Gain on sale of property and equipment.... (171) (159) (16)
Gain on sale of investments............... (144) (44) --
Change in assets and liabilities:
Contract receivables.................... 85 321 (836)
Costs and estimated earnings in excess
of billings on contracts in progress... (1,821) (519) 835
Prepaid expenses........................ (1) -- (8)
Due from officers and employees......... (71) (19) (5)
Cash surrender value of life insurance.. 9 -- --
Accrued expenses........................ 241 (377) (218)
Accounts payable........................ 232 53 (140)
Billings in excess of costs and
estimated earnings on contracts in
progress............................... 127 (110) (287)
Deferred compensation................... (77) -- (19)
Postretirement benefits................. (11) -- (12)
------- -------- --------
Net cash provided by operating
activities........................... 1,497 873 906
------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment......... (1,320) (660) (451)
Proceeds from sale of property and
equipment.................................. 222 159 16
Proceeds from sale of investments........... 1,394 528 754
Additions to investments.................... (928) (452) (200)
------- -------- --------
Net cash used in investing
activities........................... (632) (425) 119
------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt.... -- -- 397
Principal payments on long-term debt and
capital lease obligations.................. (328) (136) (307)
Cash dividends paid......................... (1,017) (931) (1,264)
------- -------- --------
Net cash used in financing
activities........................... (1,345) (1,067) (1,174)
------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS..... (480) (619) (149)
------- -------- --------
Cash and cash equivalents, beginning of
period....................................... 1,533 1,533 1,053
------- -------- --------
Cash and cash equivalents, end of period...... $ 1,053 $ 914 $ 904
======= ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION--
Cash paid during the year for interest...... $ 93 $ 36 $ 62
Purchase of property and equipment through
the issuance of capital lease obligations.. 747 -- 213
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-107
<PAGE>
SUMTER BUILDERS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL UNREALIZED
---------------- PAID-IN RETAINED HOLDING
SHARES PAR VALUE CAPITAL EARNINGS GAIN, NET TOTAL
------ --------- ---------- -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31,
1996................... 1,632 $ 2 $557 $ 5,761 $ 55 $ 6,375
Dividends paid........ -- -- -- (1,017) -- (1,017)
Net income............ -- -- -- 1,614 -- 1,614
Change in unrealized
holding gain, net.... -- -- -- 0 100 100
----- ---- ---- ------- ---- -------
BALANCE, December 31,
1997................... 1,632 2 557 6,358 155 7,072
===== ==== ==== ======= ==== =======
Dividends paid
(unaudited).......... -- -- -- (1,264) -- (1,264)
Net Income
(unaudited).......... -- -- -- 853 -- 853
Change in unrealized
holding gain, net
(unaudited).......... -- -- -- -- 114 114
----- ---- ---- ------- ---- -------
BALANCE, June 30, 1998
(unaudited)............ 1,632 $ 2 $557 $ 5,947 $269 $ 6,775
===== ==== ==== ======= ==== =======
</TABLE>
The accompanying notes to financial statements are an integral part of these
statements.
F-108
<PAGE>
SUMTER BUILDERS, INC.
NOTES TO FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization and Operation
Sumter Builders, Inc. (the Company), incorporated in 1935, constructs
electrical substations, installs transmission and distribution lines and
provides maintenance services for existing power distribution lines. The
Company provides its services primarily to utility companies located in the
Southeastern United States.
Revenue and Cost Recognition
Revenues from long-term fixed price construction contracts are recognized by
the percentage of completion method. The percentages of completion are
determined by relating actual cost of work performed to date to the estimated
total cost of the respective contracts.
Generally, profits from short-term cost plus and unit price contracts are
recognized upon substantial completion of each contract. The substantial
completion requirement is deemed to have been met when such contracts have been
accepted by the owner(s).
At the time a loss on a contract becomes known, the full amount of the
estimated loss is accrued.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash in banks and all highly
liquid debt instruments with an original maturity of three months or less.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided primarily
using accelerated methods based on the estimated useful lives of the assets,
which generally range from 5 to 31 1/2 years.
Investments
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities," requires debt and equity
securities to be classified according to the Company's investment strategy. The
classifications are held-to-maturity, available-for-sale and trading.
The Company's investments are held for an indefinite period and are
classified as available-for-sale as defined by SFAS No. 115. These investments
are stated at market value with the difference between cost and market
classified as unrealized holding gain or loss as part of stockholders' equity.
During 1997, an increase in the value of the investments resulted in unrealized
gains of $100,246. The net increase in unrealized gains resulted in the
unrealized holding gain, net reported in stockholders' equity of $155,528 at
December 31, 1997. The Company's investments had an aggregate fair value and
cost basis of $1,533,667 and $1,378,139 at December 31, 1997, respectively.
F-109
<PAGE>
SUMTER BUILDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of December 31, 1997, the Company's investments are primarily in equity
securities. These investments are classified as long-term investments in the
accompanying balance sheet.
Income Taxes
The Company elected to include its taxable income with that of its
stockholders (an S Corporation election) effective January 1, 1983.
Accordingly, the accompanying financial statements do not include a provision
for income taxes.
Postretirement Benefits Other Than Pensions
In 1995, the Company adopted the provisions of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." The statement
requires employers to accrue the cost of postretirement benefits during the
employees' careers with the Company based on actuarially determined costs from
the date of hire to the full eligibility date of employees who are expected to
qualify for benefits. In applying the provisions of this statement, the Company
recognized the accumulated postretirement benefit obligation as of the
beginning of 1995 of $637,367 as a change in accounting principle.
Postretirement benefits other than pensions consist of certain health care
and life insurance benefits provided to a group of retired employees.
For purposes of measuring the expected postretirement obligation, a 6 percent
annual rate of increase in the per capita claims cost was assumed for 1997.
This rate is assumed to remain at 6 percent. The discount rate used in
determining the accumulated postretirement benefit obligation was 8 percent.
If the health care cost trend rate were increased by 1 percent, the
accumulated postretirement benefit obligation as of the end of 1997 would have
been increased by $65,972. The service cost and interest cost for 1997 would
have been unchanged.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities as of 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.
F-110
<PAGE>
SUMTER BUILDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
2. PROPERTY AND EQUIPMENT:
At December 31, 1997, property and equipment consist of the following (in
thousands):
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Autos and trucks................................................... $ 9,405
Heavy equipment.................................................... 3,124
Computer equipment................................................. 129
Leasehold improvements............................................. 157
Office and other buildings......................................... 298
Land............................................................... 123
Office equipment................................................... 92
Warehouse and shops................................................ 29
Equipment under capital leases..................................... 747
--------
14,104
Less--Accumulated depreciation..................................... (10,539)
--------
$ 3,565
========
</TABLE>
3. COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROGRESS:
Information related to contracts in progress at December 31, 1997, is
presented below (in thousands):
<TABLE>
<CAPTION>
1997
-------
<S> <C>
Costs incurred on contracts in progress................................ $35,319
Estimated profit earned to date........................................ 1,397
-------
36,716
Less--Billings to date on contracts in progress........................ (34,535)
-------
$ 2,181
=======
</TABLE>
These amounts (in thousands) are included in the accompanying balance sheets
under the following captions:
<TABLE>
<CAPTION>
1997
------
<S> <C>
Costs and estimated earnings in excess of billings on contracts in
progress............................................................. $2,476
Billings in excess of costs and estimated earnings on contracts in
progress............................................................. (295)
------
$2,181
======
</TABLE>
Contract receivables at December 31, 1997, are as follows (in thousands):
<TABLE>
<CAPTION>
1997
------
<S> <C>
Due currently............................................................ $2,220
Retainage................................................................ 140
------
$2,360
======
</TABLE>
F-111
<PAGE>
SUMTER BUILDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT AND CAPITAL LEASE OBLIGATIONS:
Long-term debt consists of the following at December 31, 1997 (in thousands):
<TABLE>
<CAPTION>
1997
----
<S> <C>
Note payable to bank, monthly payments of $12 with a maturity of January
2000, interest rate is prime rate (8.5% at December 31, 1997), secured
by equipment of the Company............................................. $264
Note payable to bank, monthly payments of $10 with a maturity of October
2000, interest rate is fixed at 8.5%, secured by equipment of the
Company................................................................. 297
Note payable to bank, monthly payments of $6, with a maturity of December
1998, interest rate is prime rate (8.5% at December 31, 1997), secured
by equipment of the Company............................................. 72
----
633
Less--Current portion.................................................... (292)
----
Long-term debt........................................................... $341
====
</TABLE>
As of December 31, 1997, the annual maturities of long-term debt are: 1998,
$292; 1999, $238 and 2000, $103.
Capital Leases
The Company is party to various equipment leases expiring through 2000 which
transfer ownership at the end of the lease terms. These leases have been
capitalized using interest rates from 6.89 percent through 7.61 percent.
Amortization on the capital leases is included in depreciation expense. Future
minimum lease payments under these leases are as follows (in thousands):
<TABLE>
<CAPTION>
PRESENT VALUE OF
MINIMUM LEASE
TOTAL PAYMENT INTEREST PAYMENTS
------------- -------- ----------------
<S> <C> <C> <C>
1998.................................... $278 $43 $235
1999.................................... 278 25 253
2000.................................... 213 6 207
---- --- ----
$769 $74 $695
==== === ====
</TABLE>
Interest expense incurred related to the leases totaled $18,077 for the year
ended December 31, 1997. The lease obligations are reflected in the
accompanying balance sheet under the following captions (in thousands):
<TABLE>
<S> <C>
Current maturities of long-term debt and capital lease obligations........ $235
Long-term debt and capital lease obligations.............................. 460
----
$695
====
</TABLE>
F-112
<PAGE>
SUMTER BUILDERS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. COMMITMENTS AND CONTINGENCIES:
The Company leases vehicles and office equipment under various operating
leases. Rentals for the year ended 1997 were $786,968. Minimum rental payments
required under the operating leases are as follows (in thousands):
<TABLE>
<S> <C>
1998................. $1,228
1999................. 1,252
2000................. 1,119
2001................. 1,076
2002................. 504
------
Total.............. $5,179
======
</TABLE>
The Company maintains a self-insurance program, administrated by an insurance
carrier, for that portion of workers' compensation costs that are not covered
by insurance. As of December 31, 1997, the Company was liable for workers'
compensation claims in the aggregate amount of $300,000 per incident and in the
aggregate amount of $1,000,000 annually.
As part of the Company's workers compensation insurance agreement, the
Company has obtained letters of credit from a bank in the aggregate amount of
$700,000. These letters of credit expire on various dates through May 1998. At
December 31, 1997, the Company owed no amounts under these letters of credit.
The Company is involved in various legal proceedings arising in the ordinary
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the Company's
financial condition or results of operations.
6. BENEFIT PLAN:
The Company has a 401(k) benefit plan for which employees meeting certain
requirements are eligible. The Company made matching contributions of
approximately $107,000 in 1997.
7. SHAREHOLDER AGREEMENT:
Effective February 17, 1993, the shareholders of the Company entered into an
agreement that establishes the compensation level for the shareholders and
outlines commitments of the minority shareholder to sell his ownership in the
Company and of the majority shareholder to purchase this ownership. In
accordance with the shareholder agreement, the Company has accrued
approximately $160,650 as of December 31, 1997, of which $83,750 is classified
as long term, to provide for the present value of the future obligation for
deferred compensation to the minority shareholder (a former employee of the
Company).
8. SUBSEQUENT EVENTS TO DATE OF AUDITORS' REPORT OF INDEPENDENT PUBLIC
ACCOUNTANTS (UNAUDITED):
On August 14, 1998, the Company was acquired by Quanta Services, Inc.
F-113
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Manuel Bros., Inc.:
We have audited the accompanying balance sheet of Manuel Bros., Inc. (a
California Stock Corporation) as of September 30, 1997, and the related
statements of operations, stockholders' equity and cash flows for the year then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Manuel Bros., Inc., as of
September 30, 1997, and the results of its operations and cash flows for the
year then ended in conformity with generally accepted accounting principles.
S. J. Gallina & Co., LLP
Sacramento, California
October 21, 1998
F-114
<PAGE>
MANUEL BROS., INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
SEPTEMBER 30, JUNE 30,
1997 1998
------------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash............................................... $1,246 $ 995
Marketable securities.............................. 292 322
Accounts receivable:
Trade, net of allowance of $0.................... 2,486 1,339
Retainage........................................ 304 253
Other receivables................................ 111 119
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... 115 678
Prepaid expenses and other current assets.......... 12 66
Deferred Income Taxes.............................. -- 112
------ ------
Total current assets........................... 4,566 3,884
PROPERTY AND EQUIPMENT, net.......................... 3,452 3,328
NOTES RECEIVABLE, noncurrent......................... 79 149
------ ------
Total assets................................... $8,097 $7,361
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............... $ 228 $ 281
Bank line of credit................................ 540 --
Accounts payable and accrued expenses.............. 1,514 2,088
Billings in excess of costs and estimated earnings
on uncompleted contracts.......................... 495 --
Deferred income taxes.............................. 16 --
------ ------
Total current liabilities...................... 2,793 2,369
LONG-TERM DEBT, net of current maturities............ 1,468 1,395
DEFERRED INCOME TAXES................................ 64 100
------ ------
Total liabilities.............................. 4,325 3,864
STOCKHOLDERS' EQUITY:
Common stock, $0 par value, 10,000 shares
authorized, 3,852 shares issued and outstanding at
September 30, 1997 and 3,852 shares issued and
outstanding at June 30, 1998...................... 58 58
Accumulated other comprehensive income............. 41 41
Retained earnings.................................. 3,673 3,398
------ ------
Total stockholders' equity..................... 3,772 3,497
------ ------
Total liabilities and stockholders' equity..... $8,097 $7,361
====== ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-115
<PAGE>
MANUEL BROS., INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30,
SEPTEMBER 30, ------------------
1997 1997 1998
------------- -------- --------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................... $16,571 $ 12,789 $ 11,761
COST OF SERVICES, including interest and
depreciation............................... 13,169 9,511 10,132
------- -------- --------
Gross profit............................ 3,402 3,278 1,629
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES................................... 1,683 1,075 1,990
------- -------- --------
Income (loss) from operations........... 1,719 2,203 (361)
OTHER INCOME (EXPENSE), net:
Interest expense.......................... (87) (64) (77)
Other, net................................ 186 120 71
------- -------- --------
Other income (expense), net............. 99 56 (6)
------- -------- --------
INCOME (LOSS) BEFORE PROVISION FOR INCOME
TAXES...................................... 1,818 2,259 (367)
PROVISION FOR INCOME TAXES.................. 699 524 (92)
------- -------- --------
Net income (loss)....................... $ 1,119 $ 1,735 $ (275)
======= ======== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-116
<PAGE>
MANUEL BROS., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER TOTAL
-------------- RETAINED COMPREHENSIVE STOCKHOLDERS'
SHARES AMOUNT EARNINGS INCOME EQUITY
------ ------ -------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, September 30,
1996....................... 4,221 $63 $2,807 $22 $2,892
Net income................ -- -- 1,119 -- 1,119
Redemption of stock....... (369) (5) (253) -- (258)
Change in market value of
securities............... -- -- -- 19 19
----- --- ------ --- ------
BALANCE, September 30,
1997....................... 3,852 58 3,673 41 3,772
Net income (loss)
(unaudited).............. -- -- (275) -- (275)
Change in market value of
securities (unaudited)... -- -- -- -- --
----- --- ------ --- ------
BALANCE, June 30, 1998
(unaudited)................ 3,852 $58 $3,398 $41 $3,497
===== === ====== === ======
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-117
<PAGE>
MANUEL BROS., INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JUNE 30,
SEPTEMBER 30, -------------------
1997 1997 1998
------------- --------- --------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss).......................... $ 1,119 $ 1,735 $ (275)
Adjustments to reconcile net income (loss)
to net cash provided by (used for)
operating activities:
Depreciation.............................. 776 588 587
(Gain) loss on sale of property and
equipment................................ (3) 1 (1)
Gain on sale of marketable securities..... (5) -- --
Change in deferred income taxes........... 39 1 (92)
Changes in operating assets and
liabilities:
Decrease (increase) in:
Accounts receivable...................... (756) 1,143 959
Costs and estimated earnings in excess of
billings on uncompleted contracts....... 417 403 (562)
Prepaid expenses and other current
assets.................................. (1) (9) 4
Increase (decrease) in:
Accounts payable and accrued expenses.... (20) (957) 573
Billings in excess of costs and estimated
earnings on uncompleted contracts....... (1,475) (1,735) (495)
Income taxes payable..................... (576) (552) --
------- --------- --------
Net cash provided by (used for) operating
activities.............................. (485) 618 698
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and
equipment................................. 60 15 30
Additions of property and equipment........ (1,035) (932) (285)
Reinvestment of dividends and purchase of
marketable securities, net of sales....... (136) (126) (30)
Collections (loans) on notes receivable,
net....................................... (43) (48) 103
------- --------- --------
Net cash provided by (used for) investing
activities.............................. (1,154) (1,091) (182)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt................. (325) (251) (227)
Net borrowings (repayments) under bank line
of credit................................. 540 -- (540)
------- --------- --------
Net cash provided by (used for) financing
activities.............................. 215 (251) (767)
------- --------- --------
Net increase (decrease) in cash.......... (1,424) (724) (251)
CASH, beginning of period................... 2,670 2,670 1,246
------- --------- --------
CASH, end of period......................... $ 1,246 $ 1,946 $ 995
======= ========= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Income taxes paid.......................... $ 1,251 $ 1,076 $ 22
Interest paid.............................. $ 132 $ 97 $ 126
</TABLE>
The accompanying notes are an integral part of the financial statements.
F-118
<PAGE>
MANUEL BROS., INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Manuel Bros., Inc. (the Company), a California Corporation located in Grass
Valley, California, is primarily engaged in heavy engineering construction
which includes installation of underground telephone cable and paving. The
Company performs its contract work under unit-price contracts with various
contracts being modified by incentive and penalty provisions. The Company is
also engaged in the limited production of concrete and concrete materials. The
Company sells these products to a variety of users on a retail basis.
Approximately ninety-six percent of the Company's revenues are derived from its
heavy engineering construction operations.
The accompanying financial statements include all amounts relating to the
Company's concrete production and sales activities. The accompanying financial
statements also include all amounts relating to the rental of non-residential
real estate owned by the Company.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Interim Financial Information
The interim financial statements for the nine months ended June 30, 1997 and
1998, are unaudited and have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnote disclosures required by generally
accepted accounting principles for complete financial statements. In the
opinion of the Company's management, the unaudited interim financial statements
contain all adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation. The results of operations for the interim
periods are not necessarily indicative of the results for the entire fiscal
year.
Supplemental Cash Flow Information
The Company had noncash investing activities of approximately $963,672,
$783,726 and $207,478 related to property and equipment during the year ended
September 30, 1997, and the nine months ended June 30, 1997 and June 30, 1998,
respectively. The Company also had noncash investing and financing activities
of $258,286 related to redemption of common stock during the year ended
September 30, 1997 and approximately $160,000 related to the conversion of
accounts receivable to a note for the nine months ended June 30, 1998. See Note
16.
Marketable Securities
The Company's marketable securities are classified as available-for-sale.
Available-for-sale securities are carried at fair value, with the unrealized
gains and losses reported in stockholders' equity. Aggregate cost, gross
unrealized holding gains and gross unrealized holding losses were approximately
$224,388, $69,011 and $1,375, respectively, at September 30, 1997. Unrealized
gains, net of deferred income taxes of $27,148, of approximately $40,488 were
recorded during the year ended September 30, 1997. No unrealized gains were
recorded for the nine months ended June 30, 1997 and June 30, 1998,
respectively. Realized gains and losses and declines in value judged to be
F-119
<PAGE>
MANUEL BROS., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
other-than-temporary on available-for-sale securities are included in other
income. The costs of securities sold are based on the specific identification
method. Interest and dividends from these securities are included in other
income.
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.
Building improvements are capitalized and depreciated over the estimated useful
life of the building. Depreciation expense was $775,954, $587,859 and $587,181
for the year ended September 30, 1997, and the nine months ended June 30, 1997
and June 30, 1998, 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 over its
estimated life. 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 statement of operations.
Revenue Recognition
The Company generally recognizes revenue as services are performed. The
Company's contracts generally provide that the customer accept completion of
progress to date and compensate the Company for services rendered. Revenues are
recognized using the percentage-of-completion method measured by the percentage
of costs incurred to date to the total estimated costs for each contract.
Contract costs include all direct material, direct labor, subcontract costs and
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, interest and depreciation. 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
contract costs and income. The resulting effects are recognized in the period
in which the revisions are determined.
Accounts receivable billed but not paid by customers pursuant to contract
retainage provisions are due upon completion of the contract and acceptance by
the customer. Based on the Company's experience with similar contracts in
recent years, the retainage balance as of the 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.
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."
F-120
<PAGE>
MANUEL BROS., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates. Reference is
made to the "Revenue Recognition" section of this footnote for discussion of
certain estimates reflected in the Company's financial statements.
New Accounting Pronouncements
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. See Note 15 for other
comprehensive income.
3. NOTES RECEIVABLE:
Notes receivable consist of various promissory notes amounting to $149,372
bearing interest from 8.00% to 10.00%.
4. PROPERTY AND EQUIPMENT:
Property and equipment as of September 30, 1997, consist of the following (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS
------------
<S> <C> <C>
Land.................................................... -- $ 308
Buildings and building improvements..................... 10-31.5 1,038
Operating equipment and vehicles........................ 5-7 5,522
Office equipment, furniture and fixtures................ 5-7 174
------
7,042
Less--Accumulated depreciation.......................... 3,590
------
Property and equipment, net............................. $3,452
======
</TABLE>
F-121
<PAGE>
MANUEL BROS., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
5. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses as of September 30, 1997, consist of
the following (in thousands):
<TABLE>
<S> <C> <C>
Accounts payable, trade........................................ $1,171
Accrued compensation and other expenses........................ 343
------
$1,514
======
Contracts in progress as of September 30, 1997, are as follows (in
thousands):
Costs incurred on contracts in progress........................ $7,778
Estimated earnings, net of losses.............................. 1,019
------
8,797
Less--Billings to date......................................... 9,177
------
$ (380)
======
Costs and estimated earnings in excess of billings on uncom-
pleted contracts.............................................. $ 115
Less--Billings in excess of costs and estimated earnings on
uncompleted contracts......................................... (495)
------
$ (380)
======
</TABLE>
6. DEBT:
The Company has available a $1,250,000 revolving line of credit through
February 1, 1998 with Bank of America. Interest accrues on outstanding advances
at the bank's prime rate plus 0.50% and is payable monthly. The Company has
signed a security agreement pledging accounts receivable, inventory, and
equipment as security for this line of credit. The line of credit is personally
guaranteed by the principal stockholder of the Company. As of September 30,
1997, there was an outstanding balance of $540,000 on the line of credit.
The Company also has a $150,000 non-revolving line of credit through February
1, 1998 with Bank of America. Interest accrues at the bank's prime rate plus
0.50%. This line of credit is for the purchase of equipment used for
operations. Payments on the line of credit are made over one to four years,
depending on the type of equipment purchased. The line of credit is personally
guaranteed by the principal stockholder of the Company. The unpaid balance on
the equipment line of credit amounted to $5,878 and $39,068 classified as
current and noncurrent liabilities, respectively, as of September 30, 1997.
Both lines of credit were renewed on February 1, 1998. See Note 16.
F-122
<PAGE>
MANUEL BROS., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company's long-term debt obligations as of September 30, 1997, consist of
the following (in thousands):
<TABLE>
<S> <C>
Notes payable to third parties due in monthly installments through
2026; interest ranging from 7.0% to 9.75%; collateralized by equipment
and deed of trust ($177 unsecured).................................... $1,365
Notes payable to related parties due in monthly installments through
2007, interest ranging from 8% to 10%, collateralized by deed of trust
and common stock...................................................... 331
------
Total debt......................................................... 1,696
Less--Current maturities............................................... (228)
------
Total long-term debt............................................... $1,468
======
</TABLE>
The maturities of long-term debt as of September 30, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
1998..................................................................... $228
1999..................................................................... 231
2000..................................................................... 245
2001..................................................................... 175
Thereafter............................................................... 817
</TABLE>
7. OPERATING LEASES:
Operating Leases--Lessee:
The Company enters into various construction equipment operating leases.
Construction equipment lease terms are typically five years or less. Payments
made for operating leases were $216,908 for the year ended September 30, 1997.
Future minimum lease payments under these cancellable operating leases are as
follows (in thousands):
<TABLE>
<S> <C>
Year ending September 30--
1998.................................................................... $118
1999.................................................................... 68
2000.................................................................... 4
----
190
====
</TABLE>
Operating Leases--Lessor:
The Company currently leases office space to various businesses under
operating lease agreements. The cost and accumulated depreciation related to
the building and land, included in property and equipment, for the year ended
September 30, 1997 are as follows (in thousands):
<TABLE>
<S> <C>
Cost.................................................................... $555
Accumulated depreciation................................................ (28)
----
Book value............................................................ $527
====
</TABLE>
F-123
<PAGE>
MANUEL BROS., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Rents received during the year ended September 30, 1997 amounted to $75,541.
Rental income for the year ended September 30, 1997 amounted to $45,101, net of
$30,440 of expenses.
The aggregate rental revenues over the next four years are as follows (in
thousands):
<TABLE>
<S> <C>
Year Ending September 30:
1998..................................................................... $ 50
1999..................................................................... 42
2000..................................................................... 30
2001..................................................................... 25
----
$147
====
</TABLE>
8. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Federal--
Current...................................................... $564
Deferred..................................................... 28
State--
Current...................................................... 96
Deferred..................................................... 11
----
$699
====
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 34 percent to income
before provision for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
SEPTEMBER 30,
1997
-------------
<S> <C>
Provision at the statutory rate................................ $618
Increase resulting from--
State income tax, net of related tax effect.................. 62
Nondeductible expenses....................................... 14
Permanent differences........................................ 5
----
$699
====
</TABLE>
F-124
<PAGE>
MANUEL BROS., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Deferred income tax liabilities--
Property and equipment....................................... $ 82
Marketable Securities........................................ 27
Other........................................................ 2
----
Total deferred income tax liabilities...................... 111
----
Deferred income tax assets--
State taxes.................................................. 30
Other accruals not currently deductible...................... 1
----
Total deferred income tax assets........................... 31
----
Total net deferred income tax liabilities.................. $ 80
====
</TABLE>
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30,
1997
-------------
<S> <C>
Deferred tax assets--
Current...................................................... $ 31
Long-term.................................................... --
----
Total...................................................... 31
----
Deferred tax liabilities--
Current...................................................... 47
Long-term.................................................... 64
----
Total...................................................... 111
----
Net deferred income tax liabilities........................ $ 80
====
</TABLE>
9. RELATED-PARTY TRANSACTIONS:
Operating lease:
The Company rents, on a month-to-month basis, yard space in California and
Montana from a stockholder and a former stockholder, respectively. Rent expense
relating to these leases amounted to $38,927 for the year ended September 30,
1997.
Stock Redemption:
On January 1, 1997, the Company redeemed 369 shares of stock, held by Joan
Manuel, by issuing a note in the amount of $258,286. The note is secured by the
redeemed shares of stock, is payable in monthly principal and interest payments
of $3,134 and bears interest at 8.00%. See Note 6.
F-125
<PAGE>
MANUEL BROS., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. EMPLOYEE PROFIT SHARING PLAN AND BENEFIT PLAN:
The Company maintains a defined contribution profit sharing plan for
substantially all of its employees. The amount of the contribution to the
profit sharing plan is determined annually by the board of directors and may
not exceed fifteen percent of the participant's compensation. The board of
directors elected not to make a contribution to the profit sharing plan for the
year ended September 30, 1997.
In addition, the Company maintains an employee 401(k) plan. The Company
contributes to the plan at the discretion of management. Matching contributions
made by the Company amounted to $30,000 for the year ended September 30, 1997.
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash, marketable securities,
accounts receivable, notes receivable, a line of credit, accounts payable and
debt. The Company believes that the carrying values of these instruments on the
accompanying balance sheets approximate their fair values.
12. CONTRACT BACKLOG:
The following schedule is a reconciliation of contract backlog representing
signed contracts as of September 30, 1997 (in thousands):
<TABLE>
<S> <C>
Balance, September 30, 1996.......................................... $11,280
Contract adjustments and new contracts awarded....................... 9,000
-------
Subtotal........................................................... 20,280
Less contract revenue earned......................................... 15,906
-------
Balance, September 30, 1997.......................................... $ 4,374
=======
</TABLE>
13. 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.
Internal Revenue Service Audit
In 1996, the Internal Revenue Service (the "Service") completed an
examination of the Company's federal income tax returns for 1993, 1994, and
1995. The examining agent proposed
F-126
<PAGE>
MANUEL BROS., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
adjustments relating to per diem and other issues that, if sustained, would
result in additional federal income taxes and penalties for those years of
approximately $123,866 plus interest. In addition, if similar adjustments were
applied to 1996 and 1997, the Company estimates that the additional federal
income taxes and penalties as well as the state taxes and penalties for those
years would approximate $182,000 plus interest. The Company does not agree with
the adjustments proposed by the Service and is contesting the proposed tax
deficiencies in the federal tax court. The Company is confident that upon final
resolution of the issue, the proposed tax deficiencies will be substantially
reduced.
No provision has been made in the accompanying financial statement for the
proposed additional taxes, penalties, and interest since the ultimate liability
cannot be reasonably estimated.
14. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10 percent of total sales to two major
customers (comprising approximately 46 percent and 28 percent of total sales)
during the year ended September 30, 1997. Approximately 31% and 39% of trade
and retainage receivables are due from these two customers.
The Company grants credit, generally without collateral, to its customers,
which include publicly traded utility companies, governmental agencies and
general contractors. Consequently, the Company is subject to potential credit
risk related to changes in business and economic factors. However, management
believes that its contract acceptance, billing and collection policies are
adequate to minimize the potential credit risk.
15. COMPREHENSIVE INCOME:
Comprehensive income for the year ended September 30, 1997 consists of the
following (in thousands):
<TABLE>
<S> <C>
Net income........................................................... $1,119
Unrealized gains on marketable securities............................ 19
------
$1,138
======
</TABLE>
16. SUBSEQUENT EVENTS:
In September 1998, the Company wrote off approximately $160,000 of
uncollectible contract billings which are included in accounts receivable at
September 30, 1997 and notes receivable at June 30, 1998.
Subsequent to September 30, 1997, the Company made revisions to the estimated
contract revenues and costs which would have resulted in a decrease in gross
profit of $128,000. These revisions are reflected in the June 30, 1998
financial statements.
F-127
<PAGE>
MANUEL BROS., INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
On October 15, 1998, the Company was acquired by Quanta Services, Inc. In
conjunction with this acquisition, the following events occurred: (i) the
related party notes payable of $330,816 and third party notes payable of
$652,657 were paid off; (ii) the Company's concrete production and sales
activities and the rental activities were sold; and (iii) the availability on
both lines of credit terminated at the time of acquisition.
F-128
<PAGE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS. WE
HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION DIFFERENT FROM THAT
CONTAINED IN THIS PROSPECTUS. WE ARE OFFERING TO SELL SHARES OF COMMON STOCK
AND SEEKING OFFERS TO BUY SHARES OF COMMON STOCK ONLY IN JURISDICTIONS WHERE
OFFERS AND SALES ARE PERMITTED. THE INFORMATION CONTAINED IN THIS PROSPECTUS
IS ACCURATE ONLY AS OF THE DATE OF THIS PROSPECTUS, REGARDLESS OF THE TIME OF
DELIVERY OF THIS PROSPECTUS OR OF ANY SALE OF THE COMMON STOCK.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary....................................................... 2
Risk Factors............................................................. 7
Use of Proceeds.......................................................... 13
Price Range of Common Stock.............................................. 14
Dividend Policy.......................................................... 14
Capitalization........................................................... 15
Dilution................................................................. 16
Selected Financial Data.................................................. 17
Management's Discussion and Analysis of Financial Condition and Results
of Operations........................................................... 21
Business................................................................. 33
Management............................................................... 42
Certain Transactions..................................................... 49
Principal Stockholders................................................... 52
Description of Capital Stock............................................. 54
Shares Eligible for Future Sale.......................................... 58
Plan of Distribution..................................................... 60
Experts.................................................................. 61
Legal Matters............................................................ 61
Additional Information................................................... 62
Index to Financial Statements............................................ F-1
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
3,500,000 SHARES
[LOGO OF QUANTA APPEARS HERE]
COMMON STOCK
------------
PROSPECTUS
------------
BT ALEX. BROWN
BANCBOSTON ROBERTSON STEPHENS
BEAR, STEARNS & CO. INC.
SANDERS MORRIS MUNDY
SUNTRUST EQUITABLE SECURITIES
, 1999
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the expenses to be paid by the Company (other
than underwriting compensation expected to be incurred) in connection with the
offering described in this Registration Statement. All amounts are estimates,
except the SEC Registration Fee, the NASD Filing Fee and the NYSE Listing Fee.
<TABLE>
<S> <C>
SEC Registration Fee......................................... $ 23,988
NASD Filing Fee.............................................. 8,827.00
NYSE Listing Fee............................................. 40,400.00
Printing Costs............................................... 75,000.00
Legal Fees and Expenses...................................... 95,000.00
Accounting Fees and Expenses................................. 95,000.00
Transfer Agent and Registrar Fees and Expenses............... 7,500.00
Miscellaneous................................................ 34,285
-----------
Total.................................................... $380,000.00
===========
</TABLE>
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Delaware General Corporation Law
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a corporation may indemnify any person who was or is a
party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation)
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by the person in connection with such action, suit or proceeding if
the person acted in good faith and in a manner the person reasonably believed
to be in or not opposed to the best interests of the corporation, and, with
respect to any criminal action or proceeding, had no reasonable cause to
believe the person's conduct was unlawful. The termination of any action, suit
or proceeding by judgment, order, settlement, conviction, or upon a plea of
nolo contendere or its equivalent, shall not, of itself, create a presumption
that the person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation, and,
with respect to any criminal action or proceeding, had reasonable cause to
believe that the person's conduct was unlawful.
Section 145(b) of the DGCL states that a corporation may indemnify any person
who was or is a party or is threatened to be made a party to any threatened,
pending or completed action or suit by or in the right of the corporation to
procure a judgment in its favor by reason of the fact that the person is or was
a director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee or agent of
another corporation,
II-1
<PAGE>
partnership, joint venture, trust or other enterprise against expenses
(including attorneys' fees) actually and reasonably incurred by the person in
connection with the defense or settlement of such action or suit if the person
acted in good faith and in a manner the person reasonably believed to be in or
not opposed to the best interests of the corporation and except that no
indemnification shall be made in respect of any claim, issue or matter as to
which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the Court of Chancery or the court in which
such action or suit was brought shall determine upon application that, despite
the adjudication of liability but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to indemnity for such expenses
which the Court of Chancery or such other court shall deem proper.
Section 145(c) of the DGCL provides that to the extent that a present or
former director or officer of a corporation has been successful on the merits
or otherwise in defense of any action, suit or proceeding referred to in
subsections (a) and (b) of Section 145, or in defense of any claim, issue or
matter therein, he shall be indemnified against expenses (including attorneys'
fees) actually and reasonably incurred by such person in connection therewith.
Section 145(d) of the DGCL states that any indemnification under subsections
(a) and (b) of Section 145 (unless ordered by a court) shall be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the present or former director, officer, employee or agent
is proper in the circumstances because he has met the applicable standard of
conduct set forth in subsections (a) and (b). Such determination shall be made
with respect to a person who is a director or officer at the time of such
determination (1) by a majority vote of the directors who are not parties to
such action, suit or proceeding, or (2) by a committee of such directors
designated by majority vote of such directors, even though less than a quorum,
or (3) if there are no such directors, or if such directors so direct, by
independent legal counsel in a written opinion, or (4) by the stockholders.
Section 145(e) of the DGCL provides that expenses (including attorneys' fees)
incurred by an officer or director in defending any civil, criminal,
administrative or investigative action, suit or proceeding may be paid by the
corporation in advance of the final disposition of such action, suit or
proceeding upon receipt of an undertaking by or on behalf of such director or
officer to repay such amount if it shall ultimately be determined that he is
not entitled to be indemnified by the corporation as authorized in Section 145.
Such expenses (including attorneys' fees) incurred by other employees and
agents may be so paid upon such terms and conditions, if any, as the
corporation deems appropriate.
Section 145(f) of the DGCL provides that the indemnification and advancement
of expenses provided by, or granted pursuant to, the other subsections of
Section 145 shall not be deemed exclusive of any other rights to which those
seeking indemnification or advancement of expenses may be entitled under any
bylaw, agreement, vote of stockholders or disinterested directors or otherwise,
both as to action in such person's official capacity and as to action in
another capacity while holding such office.
Section 145(g) of the DGCL provides that a corporation shall have the power
to purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was serving
at the request of the corporation as a director, officer, employee
II-2
<PAGE>
or agent of another corporation, partnership, joint venture, trust or other
enterprise, against any liability asserted against such person and incurred by
such person in any such capacity, or arising out of his status as such, whether
or not the corporation would have the power to indemnify such person against
such liability under the provisions of Section 145.
Section 145(j) of the DGCL provides that the indemnification and advancement
of expenses provided by, or granted pursuant to, Section 145 shall, unless
otherwise provided when authorized or ratified, continue as to a person who has
ceased to be a director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of such a person.
Certificate of Incorporation
The Certificate of Incorporation provides that a director of the Company
shall not be personally liable to the Company or its stockholders for monetary
damages for breach of fiduciary duty as a director, except for liability for
unlawful payments of dividends or unlawful stock repurchases or redemptions as
provided for in Section 174 of the DGCL. If the DGCL is amended to authorize
the further elimination or limitation of the liability of directors, then the
liability of a director of the Company, in addition to the limitation on
personal liability described above, shall be limited to the fullest extent
permitted by the amended DGCL. Further, any repeal or modification of such
provision of the Certificate of Incorporation by the stockholders of the
Company shall be prospective only, and shall not adversely affect any
limitation on the personal liability of a director of the Company existing at
the time of such repeal or modification.
Bylaws
The Bylaws of the Company provide that the Company will indemnify and hold
harmless any director or officer of the Company to the fullest extent permitted
by applicable law, as in effect as of the date of the adoption of the Bylaws or
to such greater extent as applicable law may thereafter permit, from and
against all losses, liabilities, claims, damages, judgments, penalties, fines,
amounts paid in settlement and expenses (including attorneys' fees) whatsoever
arising out of any event or occurrence related to the fact that such person is
or was a director or officer of the Company and further provide that the
Company may, but is not required to, indemnify and hold harmless any employee
or agent of the Company or a director, officer, employee or agent of any other
corporation, partnership, joint venture, trust, employee benefit plan or other
enterprise who is or was serving in such capacity at the written request of the
Company; provided, however, that the Company is only required to indemnify
persons serving as directors, officers, employees or agents of the Company for
the expenses incurred in a proceeding if such person has met the standards of
conduct that make it permissible under the laws of the State of Delaware for
the Company to indemnify the claimant for the amount claimed, but the burden of
proving such defense will be on the Company. The Bylaws further provide that,
in the event of any threatened, or pending action, suit or proceeding in which
any of the persons referred to above is a party or is involved and that may
give rise to a right of indemnification under the Bylaws, following written
request by such person, the Company will promptly pay to such person amounts to
cover expenses reasonably incurred by such person in such proceeding in advance
of its final disposition upon the receipt by the Company of (i) a written
undertaking executed by or on behalf of such person providing that such person
will repay the advance if it is ultimately determined that such person is not
entitled to be indemnified by the Company as provided in the Bylaws and (ii)
satisfactory evidence as to the amount of such expenses.
II-3
<PAGE>
Underwriting Agreement
The Underwriting Agreement provides for the indemnification of the directors
and officers of the Company in certain circumstances.
Insurance
The Company intends to maintain liability insurance for the benefit of its
directors and officers.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES.
The following information relates to securities issued or sold by the
Company within the last three years:
(a) Quanta was initially capitalized in August 1997 by several
independent investors, including Midwest Acquisition Support, LLC (an
entity controlled by Bernard J. Gram), Kevin D. Miller, Steven P. Colmar
and William G. Parkhouse, and certain of their affiliates, who paid
aggregate cash consideration of $10.47 for 1,048 shares of pre-split common
stock that were reclassified into 1,620,624 shares of Limited Vote Common
Stock.
(b) In November 1997 Main Street paid cash consideration of $9.60 for 960
shares of pre-split common stock that were reclassified into 1,484,542
shares of Limited Vote Common Stock.
(c) In November 1997, James H. Haddox, Chief Financial Officer of the
Company, paid nominal consideration for shares of pre-split common stock
that were reclassified into 100,000 shares of Limited Vote Common Stock.
(d) In December 1997, the Company issued 37,500 shares of Limited Vote
Common Stock to Derrick Jensen, Vice President and Controller of the
Company, for nominal consideration.
(e) In January 1998, the Company issued, for nominal consideration,
20,000 shares of Limited Vote Common Stock to each of Messrs. James R.
Ball, Rodney R. Proto and Michael T. Willis, each a director of the
Company.
(f) The Company issued shares of Limited Vote Common Stock in an amount
equal to $375,000 divided by the IPO price to an investor who agreed to
advance the Company up to $125,000 prior to the IPO in order to cover
expenses. This resulted in 41,667 shares of Limited Vote Common Stock being
issued in connection with this transaction.
(g) The Company issued 500 shares of Limited Vote Common Stock to each of
two consultants in consideration for services rendered to the Company prior
to the IPO.
(h) Concurrent with the IPO, the Company acquired all of the outstanding
shares of equity stock of the Founding Companies in exchange for an
aggregate of 7,527,000 shares of Common Stock and $21.0 million in cash.
(i) Between February 19, 1998 and December 1, 1998, the Company issued
4,046,392 shares of common stock as part of the consideration for the
business acquired subsequent to the IPO.
(j) On October 5, 1998, the Company issued and sold $49,350,000 principal
amount of Convertible Subordinated Notes that are convertible, at the
option of the holder, into an aggregate of 3,589,091 shares of common
stock.
II-4
<PAGE>
All of the transactions described above were exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereunder. All of
such sales were conducted without any public solicitation and all of the
purchasers were provided with all material information that was available
regarding the Company. All of such purchasers were informed that the
transactions were being effected without registration under the Securities Act
and that the shares acquired by them could not be resold without registration
under the Securities Act unless the sale was effected pursuant to an exemption
from the registration requirements thereof.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
1.1 --Form of Underwriting Agreement
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**
5.1 --Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.****
10.1 --Form of Employment Agreement**
10.2 --1997 Stock Option Plan**
10.3 --Acquisition Agreement and Plan of Reorganization dated as of May 5,
1998, by and among Quanta Services, Inc., Spalj Acquisition, Inc.
and Spalj Construction Company and its stockholders***
10.4 --Acquisition Agreement and Plan of Reorganization dated as of August
4, 1998, by and among Quanta Services, Inc., Underground
Construction Co., Inc., Five Points Construction Company and their
Stockholders+
10.5 --Second Amended and Restated Secured Credit Agreement dated as of
November 12, 1998 among Quanta Services, Inc. as Borrower and Bank
One Texas, National Association, National City Bank and the other
financial institutions parties thereto, as Lenders++
10.6 --Securities Purchase Agreement among Quanta Services, Inc. and Enron
Capital & Trade Resources Corp. ("Enron Capital") and Joint Energy
Development Investments II Limited Partnership ("JEDI") dated as of
September 29, 1998***
10.7 --Registration Rights Agreement dated as of September 29, 1998 by and
among Quanta Services, Inc., JEDI and Enron Capital***
10.8 --Form of Convertible Promissory Note issued to Enron Capital and
JEDI***
21.1 --Subsidiaries****
23.1 --Consent of Arthur Andersen LLP
</TABLE>
II-5
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
23.2 --Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P. (contained in
Exhibit 5.1)****
23.3 --Consent of Arthur Andersen LLP
23.4 --Consent of S.S. Gallina & Co., LLP
23.5 --Consent of S.S. Gallina & Co., LLP
24.1 --Power of Attorney (included on the signature page)
</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 Registration Statement on
Form S-4 (No. 333-47083) and incorporated herein by reference.
****To be filed by amendment
+ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998 and incorporated herein by
reference.
++ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998 and incorporated herein by
reference.
(b) Financial Statement Schedules.
All schedules are omitted because they are not applicable or because the
required information is contained in the Financial Statements or Notes thereto.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions,
or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense
of any action, suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
(2) For purposes of determining any liability under the Securities Act of
1933, the information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act of 1933 shall be deemed to be part
of this registration statement as of the time it was declared effective.
(3) For the purposes of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offering thereof.
II-6
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, QUANTA SERVICES, INC. HAS
DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE
UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS,
ON DECEMBER 18, 1998.
Quanta Services, Inc.
/s/ John R. Colson
By _________________________________
John R. Colson
Chief Executive Officer
POWER OF ATTORNEY
Each person whose signature appears below authorizes John R. Colson and James
H. Haddox, and each of them, each of whom may act without joinder of the other
to execute in the name of each such person who is then an officer or director
of the Registrant to file any amendments to this Registration Statement
necessary or advisable to enable the Registrant to comply with the Securities
Act of 1933, as amended (the "Securities Act"), and any rules, regulations and
requirements of the Securities and Exchange Commission, in respect thereof, in
connection with the registration of the securities which are the subject of
this Registration Statement, which amendments may make such changes to such
Registration Statement as such attorney may deem appropriate (and to file any
Registration Statement pursuant to Rule 462(b) of the Securities Act).
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT, AS AMENDED, THIS
REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING PERSONS IN THE
CAPACITIES INDICATED AND ON DECEMBER 18, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ John R. Colson Chief Executive Officer,
____________________________________ Director (Principal
John R. Colson Executive Officer)
/s/ James H. Haddox Chief Financial Officer
____________________________________ (Principal Financial and
James H. Haddox Accounting Officer)
/s/ Vincent D. Foster Director
____________________________________
Vincent D. Foster
/s/ John R. Wilson Director
____________________________________
John R. Wilson
</TABLE>
II-7
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
/s/ Timothy A. Soule Director
____________________________________
Timothy A. Soule
/s/ John A. Martell Director
____________________________________
John A. Martell
/s/ Gary A. Tucci Director
____________________________________
Gary A. Tucci
/s/ James R. Ball Director
____________________________________
James R. Ball
/s/ Rodney R. Proto Director
____________________________________
Rodney R. Proto
/s/ Michael T. Willis Director
____________________________________
Michael T. Willis
</TABLE>
II-8
<PAGE>
EXHIBIT 1.1
3,500,000 Shares
QUANTA SERVICES, INC.
Common Stock
UNDERWRITING AGREEMENT
_____________, 1999
BT Alex. Brown Incorporated
BancBoston Robertson Stephens
Bear, Stearns & Co., Inc.
Sanders Morris Mundy Inc.
SunTrust Equitable Securities Corporation
As Representatives of the
Several Underwriters
c/o BT Alex. Brown Incorporated
One South Street
Baltimore, Maryland 21202
Ladies and Gentlemen:
Quanta Services, Inc., a Delaware corporation (the "Company"), proposes to
sell to the several underwriters (the "Underwriters") named in Schedule I hereto
for whom you are acting as representatives (the "Representatives") an aggregate
of 3,500,000 shares of the Company's Common Stock, par value $.00001 per share
(the "Firm Shares"). The respective amounts of the Firm Shares to be so
purchased by the several Underwriters are set forth opposite their names in
Schedule I hereto. The Company also proposes to sell at the Underwriters'
option an aggregate of up to 525,000 additional shares of the Company's Common
Stock (the "Option Shares") as set forth below.
As the Representatives, you have advised the Company that you are authorized
to enter into this Agreement on behalf of the several Underwriters, and that the
several Underwriters are willing, acting severally and not jointly, to purchase
the numbers of Firm Shares set forth opposite their respective names in Schedule
I, plus their pro rata portion of the Option Shares if you elect to exercise the
over-allotment option in whole or in part for the accounts of the several
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<PAGE>
Underwriters. The Firm Shares and the Option Shares (to the extent the
aforementioned option is exercised) are herein collectively called the "Shares."
In consideration of the mutual agreements contained herein and of the
interests of the parties in the transactions contemplated hereby, the parties
hereto agree as follows:
1. Representations and Warranties of the Company.
The Company represents and warrants to each of the Underwriters as follows:
(a) A registration statement on Form S-1 (Reg. No. 333-______) with
respect to the Shares has been carefully prepared by the Company in
conformity with the requirements of the Securities Act of 1933, as amended
(the "Act"), and the Rules and Regulations (the "Rules and Regulations") of
the Securities and Exchange Commission (the "Commission") thereunder and
has been filed with the Commission. The Company has complied with the
conditions for the use of Form S-1. Copies of such registration statement,
including any amendments thereto, the preliminary prospectuses (meeting the
requirements of the Rules and Regulations) contained therein and the
exhibits, financial statements and schedules, as finally amended and
revised, have heretofore been delivered by the Company to you. Such
registration statement, together with any registration statement filed by
the Company pursuant to Rule 462(b) of the Act, herein referred to as the
"Registration Statement," which shall be deemed to include all information
omitted therefrom in reliance upon Rule 430A and contained in the
Prospectus referred to below, has become effective under the Act and no
post-effective amendment to the Registration Statement has been filed as of
the date of this Agreement. "Prospectus" means (a) the form of prospectus
first filed with the Commission pursuant to Rule 424(b) or (b) the last
preliminary prospectus included in the Registration Statement filed prior
to the time it becomes effective or filed pursuant to Rule 424(a) under the
Act that is delivered by the Company to the Underwriters for delivery to
purchasers of the Shares, together with the term sheet or abbreviated term
sheet filed with the Commission pursuant to Rule 424(b)(7) under the Act.
Each preliminary prospectus included in the Registration Statement prior to
the time it becomes effective is herein referred to as a "Preliminary
Prospectus."
(b) The Company has been duly organized and is validly existing as a
corporation in good standing under the laws of the State of Delaware, with
corporate power and authority to own or lease its properties and conduct
its business as described in the Registration Statement. Each of the
Company's subsidiaries as listed in Exhibit 21 of the Registration
Statement (collectively, the "Subsidiaries") has been duly organized and is
validly existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, with corporate power and authority to
own or lease its properties and conduct its business as described in the
Registration Statement. As of the date hereof, the
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<PAGE>
Company has no subsidiaries except those listed as an Exhibit to the
Registration Statement. The Company and each of the Subsidiaries are duly
qualified to transact business in all jurisdictions in which the conduct of
their respective businesses requires such qualification. The outstanding
shares of capital stock of each of the Subsidiaries have been duly
authorized and validly issued, are fully paid and non-assessable. As of the
Closing Date (as hereinafter defined), all of the outstanding shares of
capital stock of each of the Subsidiaries will be owned by the Company free
and clear of all liens, encumbrances and equities and claims, except that
such shares have been pledged to secure its obligations under the Second
Amended and Restated Credit Facility, dated as of November 12, 1998; and no
options, warrants or other rights to purchase, agreements or other
obligations to issue or other rights to convert any obligations into shares
of capital stock or ownership interests in any of the Subsidiaries will be
outstanding.
(c) The outstanding shares of Common Stock of the Company have been duly
authorized and validly issued and are fully paid and non-assessable; the
Shares to be issued and sold by the Company pursuant to the terms of this
Agreement have been duly authorized and when issued and paid for as
contemplated herein will be validly issued, fully paid and non-assessable;
and no preemptive rights of stockholders exist with respect to any of the
Shares or the issue and sale thereof, except that Enron Capital & Trade
Resources Corp. ("ECT") and Joint Energy Development Investments II Limited
Partnership ("JEDI") have preemptive rights to acquire shares of the
Company's Common Stock sufficient to maintain their respective ownership in
Quanta after this offering, which preemptive rights have been waived.
Neither the filing of the Registration Statement nor the offering or sale
of the Shares as contemplated by this Agreement gives rise to any rights,
other than those which have been waived or satisfied, for or relating to
the registration of any shares of Common Stock, except that ECT and JEDI
have piggy-back registration rights with respect to the shares of the
Company's Common Stock issuable upon conversion of the $49,350,000
principal amount of convertible subordinated notes held by ECT and JEDI,
which such piggy-back registration rights have been waived.
(d) The information set forth under the caption "Capitalization" in the
Prospectus is true and correct. All of the Shares conform to the
description thereof contained in the Registration Statement. The form of
certificates for the Shares conforms to the corporate law of the
jurisdiction of the Company's incorporation.
(e) The Commission has not issued an order preventing or suspending the
use of any Prospectus relating to the proposed offering of the Shares nor
instituted proceedings for that purpose. The Registration Statement
contains, and the Prospectus and any amendments or supplements thereto will
contain, all statements which are required to be stated therein by, and
will conform to the requirements of the Act and the Rules and Regulations.
The Registration Statement and any amendment thereto do not
3
<PAGE>
contain, and will not contain, any untrue statement of a material fact and
do not omit, and will not omit, to state any material fact required to be
stated therein or necessary to make the statements therein not misleading.
The Prospectus and any amendments and supplements thereto do not contain,
and will not contain, any untrue statement of a material fact; and do not
omit, and will not omit, to state any material fact required to be stated
therein or necessary to make the statements therein, in the light of the
circumstances under which they were made, not misleading; provided,
however, that the Company makes no representations or warranties as to
information contained in or omitted from the Registration Statement or the
Prospectus, or any such amendment or supplement, in reliance upon, and in
conformity with, written information furnished to the Company by or on
behalf of any Underwriter through the Representatives, specifically for use
in the preparation thereof.
(f) All of the financial statements of the Company and the Subsidiaries
and the separate financial statements of Union Power Construction Company
("Union Power"), Trans Tech Electric, Inc. ("Trans Tech"), Polelco, Inc.
("Polelco") and certain other companies acquired by the Company since its
February 1998 initial public offering (the "Acquired Companies"), in each
case together with related notes and schedules, as set forth in the
Registration Statement, present fairly in all material respects the
financial position and the results of operations and cash flows of the
Company, the Subsidiaries and of each of Union Power, Trans Tech, Polelco
and the acquired companies, respectively, at the indicated dates and for
the indicated periods. Such financial statements and related schedules have
been prepared in accordance with generally accepted principles of
accounting, consistently applied throughout the periods involved, except as
disclosed therein, and all adjustments necessary for a fair presentation of
results for such periods have been made. The summary historical and pro
forma financial and statistical data included in the Registration Statement
present fairly the information shown therein and such data have been
compiled on a basis consistent with the financial statements presented
therein and the books and records of the Company and each of Union Power,
Trans Tech, Polelco and the Acquired Companies, as applicable. The pro
forma combined financial statements of the Company, together with the
related notes, as set forth in the Registration Statement and the
Prospectus, present fairly the information shown therein, have been
prepared in accordance with the Commission's rules and guidelines with
respect to pro forma financial statements and have been properly compiled
on the pro forma bases described therein, and in the opinion of the
Company, the assumptions used in the preparation thereof are reasonable and
the adjustments used therein are appropriate to give effect to the
transactions or circumstances referred to therein.
(g) Arthur Andersen LLP, who have certified certain of the financial
statements filed with the Commission as part of the Registration Statement,
are independent public accountants as required by the Act and the Rules and
Regulations.
4
<PAGE>
(h) There is no action, suit, claim or proceeding pending or, to the
knowledge of the Company, threatened against the Company or any of the
Subsidiaries before any court or administrative agency or otherwise, which
if determined adversely to the Company or any of the Subsidiaries is
reasonably likely to result in any material adverse change in the earnings,
business, management, properties, assets, rights, operations, condition
(financial or otherwise) or prospects of the Company and the Subsidiaries,
taken as a whole, or to prevent the consummation of the transactions
contemplated, hereby except as set forth in the Registration Statement.
(i) The Company and the Subsidiaries each has good and marketable title
to all of its properties and assets reflected in its financial statements
(or as described in the Registration Statement) hereinabove described,
subject to no lien, mortgage, pledge, charge or encumbrance of any kind
except those reflected in such financial statements (or as described in the
Registration Statement) or which are not material in amount. Each of the
Company and the Subsidiaries occupies its leased properties under valid and
binding leases conforming in all material respects to the description
thereof set forth in the Registration Statement.
(j) Each of the Company and the Subsidiaries has filed all Federal,
state, local and foreign income tax returns which have been required to be
filed and have paid all taxes indicated by said returns and all assessments
received by it or any of them to the extent that such taxes have become due
and are not being contested in good faith. All tax liabilities have been
adequately provided for in the financial statements of the Company and the
Subsidiaries, as applicable.
(k) Since the respective dates as of which information is given in the
Registration Statement, as it may be amended or supplemented, there has not
been any material adverse change or any development involving a prospective
material adverse change in or affecting the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise),
or prospects of the Company and the Subsidiaries, taken as a whole, whether
or not occurring in the ordinary course of business, and there has not been
any material transaction entered into or any material transaction that is
probable of being entered into by the Company the Subsidiaries, other than
transactions in the ordinary course of business and changes and
transactions described in the Registration Statement, as it may be amended
or supplemented. Neither the Company nor any of the Subsidiaries has any
material contingent obligations which are not disclosed in the Company's
financial statements, as applicable, included in the Registration
Statement.
(l) Neither the Company nor any of the Subsidiaries is, or with the
giving of notice or lapse of time or both, will be, in violation of or in
default under its Charter or
5
<PAGE>
By-Laws or under any agreement, lease, contract, indenture or other
instrument or obligation to which it is a party or by which it, or any of
its properties, is bound and which default is of material significance in
respect of the condition (financial or otherwise) of the Company and the
Subsidiaries, taken as a whole, or the business, management, properties,
assets, rights, operations, condition (financial or otherwise) or prospects
of the Company and the Subsidiaries, taken as a whole. The execution and
delivery of this Agreement and the consummation of the transactions herein
contemplated and the fulfillment of the terms hereof will not conflict with
or result in a breach of any of the terms or provisions of, or constitute a
default under, any indenture, mortgage, deed of trust or other agreement or
instrument to which the Company or any of the Subsidiaries is a party, or
of the Charter or By-Laws of the Company or any of the Subsidiaries or any
order, rule or regulation applicable to the Company or any of the
Subsidiaries of any court or of any regulatory body or administrative
agency or other governmental body having jurisdiction. No consent,
approval, authorization or order of, or filing with, any court or
governmental agency or body is required for the consummation of the
transactions contemplated by this Agreement in connection with the issuance
or sale of the securities by the Company, except such as have been obtained
under the Act and such as may be required under the state securities laws
in connection with the purchase and distribution of the Shares by the
Underwriters.
(m) Each approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or other
governmental body necessary in connection with the execution and delivery
by the Company of this Agreement and the consummation of the transactions
herein contemplated (except such additional steps as may be required by the
Commission or the National Association of Securities Dealers, Inc. (the
"NASD")) has been obtained or made and is in full force and effect.
(n) The Company and each of the Subsidiaries hold all material licenses,
certificates and permits from governmental authorities which are necessary
to the conduct of their businesses; and neither the Company nor any of the
Subsidiaries has infringed any patents, patent rights, trade names,
trademarks or copyrights, which infringement is material to the business of
the Company or such Subsidiary. The Company knows of no material
infringement by others of patents, patent rights, trade names, trademarks
or copyrights owned by or licensed to the Company or any of the
Subsidiaries.
(o) Neither the Company, nor to the Company's best knowledge, any of its
affiliates or any of the Subsidiaries or any of their affiliates, has taken
or may take, directly or indirectly, any action designed to cause or result
in, or which has constituted or which might reasonably be expected to
constitute, the stabilization or manipulation of the price of the shares of
Common Stock to facilitate the sale or resale of the Shares.
6
<PAGE>
(p) Neither the Company nor any of the Subsidiaries is an "investment
company" within the meaning of such term under the Investment Company Act
of 1940, as amended (the "1940 Act") and the rules and regulations of the
Commission thereunder.
(q) The Company and each of its Subsidiaries maintain a system of
internal accounting controls sufficient to provide reasonable assurances
that (i) transactions are executed in accordance with management's general
or specific authorization; (ii) transactions are recorded as necessary to
permit preparation of financial statements in conformity with generally
accepted accounting principles and to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(r) The Company and each of its Subsidiaries carry, or are covered by,
insurance in such amounts and covering such risks as is adequate for the
conduct of their respective businesses and the value of their respective
properties and as is customary for companies engaged in similar industries.
(s) The Company and each of its Subsidiaries are in compliance in all
material respects with all presently applicable provisions of the Employee
Retirement Income Security Act of 1974, as amended, including the
regulations and published interpretations thereunder ("ERISA"); no
"reportable event" (as defined in ERISA) has occurred with respect to any
"pension plan" (as defined in ERISA) for which the Company or any of its
Subsidiaries would have any liability; neither the Company nor any of its
Subsidiaries has incurred nor expects to incur liability under (i) Title IV
of ERISA with respect to termination of, or withdrawal from, any "pension
plan," or (ii) Sections 412 or 4971 of the Internal Revenue Code of 1986,
as amended, including the regulations and published interpretations
thereunder (the "Code"); and each "pension plan" for which the Company or
any of its Subsidiaries would have any liability that is intended to be
qualified under Section 401(a) of the Code is so qualified in all material
respects and nothing has occurred, whether by action or by failure to act,
which would cause the loss of such qualification.
(t) No labor dispute with the employees of the Company or any of its
Subsidiaries exists, or to the knowledge of the Company, is threatened
other than such disputes which would not individually or in the aggregate,
have a material adverse effect upon the condition (financial or otherwise)
business, management, properties, assets, rights, operations or prospects
of the Company.
(u) There is (i) no significant unfair labor practice complaint pending
against the Company or any of its Subsidiaries or, to the best knowledge of
the Company,
7
<PAGE>
threatened against any of them, before the National Labor Relations Board
or any state or local labor relations board, and no significant grievance
or more significant arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the company or any of
its Subsidiaries or, to the best knowledge of the Company, threatened
against any of them, and (ii) no significant strike, labor dispute,
slowdown or stoppage pending against the Company or any of its Subsidiaries
or, to the best knowledge of the Company, threatened against it any of its
Subsidiaries except for such actions specified in clause (i) or (ii) above,
which, singly or in the aggregate could not reasonably be expected to have
a material adverse effect on the Company and its Subsidiaries, taken as a
whole.
(v) (i) To the best of the Company's knowledge and belief, except as
otherwise disclosed in writing to the Underwriters, (A) each of the Company
and its Subsidiaries has conducted its business in compliance with
applicable Environmental Laws, including without limitation, having all
permits, licenses and other approvals and authorizations necessary for the
operation of their respective businesses as presently conducted, (B) none
of the properties owned by the Company and its Subsidiaries contain any
Hazardous Substance as a result of any activity of any of the Founding
Companies in amounts exceeding the levels permitted by applicable
Environmental Laws, (C) the Company and its Subsidiaries have not received
any notices, demand letters or requests for information from any Federal,
state, local or foreign governmental entity or third party indicating that
it may be in violation of, or liable under, any Environmental Law in
connection with the ownership or operation of its business, (D) there are
no civil, criminal or administrative actions, suits, demands, claims,
hearings, investigations or proceedings pending or threatened, against the
Company or any of the Subsidiaries relating to any violation, or alleged
violation, of any Environmental Law, (E) no reports have been filed, or are
required to be filed, by the Company or any of the Subsidiaries concerning
the release of any Hazardous Substance or the threatened or actual
violation of any Environmental Law, (F) no Hazardous Substance has been
disposed of, released or transported in violation of any applicable
Environmental Law from any properties owned by the Company or any of the
Subsidiaries as a result of any activity of the Company or of any of the
Subsidiaries during the time such properties were owned, leased, or
operated by the Company or any of the Subsidiaries, (G) there have been no
environmental investigations, studies, audits, tests, reviews or other
analysis regarding compliance or non-compliance with any applicable
Environmental Law conducted by or which are in the possession of the
Company or any of the Subsidiaries relating to the activities of the
Company or any of the Subsidiaries (H) there are no underground storage
tanks on, in or under any properties owned by Company or any of its
Subsidiaries and no underground storage tanks have been closed or removed
from any of such properties during the time such properties were owned,
leased or operated by the Company or any of its Subsidiaries, (I) there is
no asbestos or asbestos containing material present in any of the
properties owned by the Company or any of its Subsidiaries, and no asbestos
has been
8
<PAGE>
removed from any of such properties during the time such properties were
owned, leased or operated by it, and (J) neither the Company or any of its
Subsidiaries nor any of their respective properties are subject to any
material liabilities or expenditures (fixed or contingent) relating to any
suit, settlement, court order, administrative order, regulatory
requirement, judgment or claim asserted or arising under any Environmental
Law, except for violations of the foregoing clauses (A) through (K) that,
singly or in the aggregate, would not reasonably be expected to have a
material adverse effect on the condition or (financial or otherwise)
business, management, properties, assets, rights, operations or prospects
of the Company and its Subsidiaries taken as a whole.
(ii) As used herein, "Environmental Law" means any Federal, State, local
or foreign law, statute, ordinance, rule, regulation, code, license,
permit, authorization, approval, consent, legal doctrine, order, judgment,
decree, injunction, requirement or agreement with any governmental entity
relating to (A) the protection, preservation or restoration of the
environment (including, without limitation, air, water vapor, surface
water, groundwater, drinking water supply, surface land, subsurface land,
plant and animal life or any other nature resource) or to human health or
safety or (B) the exposure to, or the use, storage, recycling, treatment,
generation, transportation, processing, handling, labeling, production,
release or disposal of Hazardous Substances, in each case as amended as in
effect on the Closing Date. The term Environmental Law includes, without
limitation, (X) the Federal Comprehensive Environmental Response
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act, the Federal
Resource Conservation and Recovery Act of 1976 (including the Hazardous and
Solid Waste Amendments thereto), the Federal Solid Waste Disposal and the
Federal Toxic Substances Control Act, the Federal Insecticide, Fungicide
and Rodenticide Act, the Federal Occupational Safety and Health Act of
1970, each as amended and as in effect on the Closing Date, and (Y) any
common law or equitable doctrine (including, without limitation, injunctive
relief and tort doctrines such as negligence, nuisance, trespass and strict
liability) that may impose liability or obligations for injuries or damages
due to, or threatened as a result of, the presence of, effects of or
exposure to any Hazardous Substance.
(iii) As used herein, "Hazardous Substance" means any substance
presently or hereafter listed, defined, designated, or classified as
hazardous, toxic, radioactive, or dangerous, or otherwise regulated, under
any Environmental Law. Hazardous Substance includes any substance to which
exposure is regulated by any governmental authority or any Environmental
Law including, without limitation, any toxic waste, pollutant, contaminant,
hazardous substance, toxic substance, hazardous waste, special waste,
industrial substance or petroleum or any derivative or by-product thereof,
radon, radioactive material, asbestos or asbestos containing material,
urea, formaldehyde, foam insulation, lead or polychlorinated biphenyls.
9
<PAGE>
2. Purchase, Sale and Delivery of the Firm Shares.
(a) On the basis of the representations, warranties and covenants herein
contained, and subject to the conditions herein set forth, the Company agrees to
sell to the Underwriters and each Underwriter agrees, severally and not jointly,
to purchase, at a price of $_____ per share, the number of Firm Shares set forth
opposite the name of each Underwriter in Schedule I hereof, subject to
adjustments in accordance with Section 9 hereof.
(b) Payment for the Firm Shares to be sold hereunder is to be made in same day
funds via wire transfer to the order of the Company against delivery of the Firm
Shares to the Representatives for the several accounts of the Underwriters. Such
payment and delivery are to be made at the offices of BT Alex. Brown
Incorporated, One South Street, Baltimore, Maryland, at 10:00 a.m., Baltimore
time, on the third business day after the date of this Agreement or at such
other time and date not later than three business days thereafter as you and the
Company shall agree upon, such time and date being herein referred to as the
"Closing Date." (As used herein, "business day" means a day on which the New
York Stock Exchange is open for trading and on which banks in New York are open
for business and are not permitted by law or executive order to be closed).
(c) In addition, on the basis of the representations and warranties herein
contained and subject to the terms and conditions herein set forth, the Company
hereby grants an option to the several Underwriters to purchase the Option
Shares at the price per share as set forth in paragraph (a) of this Section 2.
The option granted hereby may be exercised in whole or in part by giving written
notice (i) at any time before the Closing Date and (ii) only once thereafter
within 30 days after the date of this Agreement, by you, as Representatives of
the several Underwriters, to the Company setting forth the number of Option
Shares as to which the several Underwriters are exercising the option, the names
and denominations in which the Option Shares are to be registered and the time
and date at which such certificates are to be delivered. The time and date at
which the Option Shares are to be delivered shall be determined by the
Representatives but shall not be earlier than three nor later than 10 full
business days after the exercise of such option, nor in any event prior to the
Closing Date (such time and date being herein referred to as the "Option Closing
Date"). If the date of exercise of the option is three or more days before the
Closing Date, the notice of exercise shall set the Closing Date as the Option
Closing Date. The number of Option Shares to be purchased by each Underwriter
shall be in the same proportion to the total number of Option Shares being
purchased as the number of Firm Shares being purchased by such Underwriter bears
to 3,500,000, adjusted by you in such manner as to avoid fractional shares. The
option with respect to the Option Shares granted hereunder may be exercised only
to cover over-allotments in the sale of the Firm Shares by the Underwriters.
You, as Representatives of the several Underwriters, may cancel such option at
any time prior to its expiration by giving written
10
<PAGE>
notice of such cancellation to the Company. To the extent, if any, that the
option is exercised, payment for the Option Shares shall be made on the Option
Closing Date in same day funds via wire transfer to the order of the Company
against delivery of certificates therefor at the offices of BT Alex. Brown
Incorporated, One South Street, Baltimore, Maryland.
3. Offering by the Underwriters.
It is understood that the Underwriters are to make a public offering of the
Firm Shares as soon as the Representatives deem it advisable to do so. The Firm
Shares are to be initially offered to the public at the public offering price
set forth in the Prospectus. The Representatives may from time to time
thereafter change the public offering price and other selling terms. To the
extent, if at all, that any Option Shares are purchased pursuant to Section 2
hereof, the Underwriters will offer them to the public on the foregoing terms.
It is further understood that you will act as the Representatives for the
Underwriters in the offering and sale of the Shares in accordance with a Master
Agreement Among Underwriters entered into by you and the several other
Underwriters.
4. Covenants of the Company.
The Company covenants and agrees with the Underwriters that:
(a) The Company will (A) use its best efforts to cause the Registration
Statement to become effective or, if the procedure in Rule 430A of the
Rules and Regulations is followed, to prepare and timely file with the
Commission under Rule 424(b) of the Rules and Regulations a Prospectus in a
form approved by the Representatives containing information previously
omitted at the time of effectiveness of the Registration Statement in
reliance on Rule 430A of the Rules and Regulations, and (B) not file any
amendment to the Registration Statement or supplement to the Prospectus of
which the Representatives shall not previously have been advised and
furnished with a copy or to which the Representatives shall have reasonably
objected in writing or which is not in compliance with the Rules and
Regulations.
(b) The Company will advise the Representatives promptly (A) when the
Registration Statement or any post-effective amendment thereto shall have
become effective, (B) of receipt of any comments from the Commission, (C)
of any request of the Commission for amendment of the Registration
Statement or for supplement to the Prospectus or for any additional
information and (D) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the use of
the Prospectus or of the institution of any proceedings for that purpose.
The Company will use its best efforts to prevent the issuance of any such
stop order preventing or
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suspending the use of the Prospectus and to obtain as soon as possible the
lifting thereof, if issued.
(c) The Company will cooperate with the Representatives in endeavoring
to qualify the Shares for sale under the securities laws of such
jurisdictions as the Representatives may reasonably have designated in
writing and will make such applications, file such documents, and furnish
such information as may be reasonably required for that purpose, provided
the Company shall not be required to qualify as a foreign corporation or to
file a general consent to service of process in any jurisdiction where it
is not now so qualified or required to file such a consent. The Company
will, from time to time, prepare and file such statements, reports, and
other documents, as are or may be required to continue such qualifications
in effect for so long a period as the Representatives may reasonably
request for distribution of the Shares.
(d) The Company will deliver to, or upon the order of, the
Representatives, from time to time, as many copies of any Preliminary
Prospectus as the Representatives may reasonably request. The Company will
deliver to, or upon the order of, the Representatives during the period
when delivery of a Prospectus is required under the Act, as many copies of
the Prospectus in final form, or as thereafter amended or supplemented, as
the Representatives may reasonably request. The Company will deliver to the
Representatives at or before the Closing Date, three signed copies of the
Registration Statement and all amendments thereto including all exhibits
filed therewith, and will deliver to the Representatives such number of
copies of the Registration Statement (including such number of copies of
the exhibits filed therewith that may reasonably be requested), and of all
amendments thereto, as the Representatives may reasonably request.
(e) The Company will comply with the Act and the Rules and Regulations
and the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations of the Commission thereunder, so as to permit
the completion of the distribution of the Shares as contemplated in this
Agreement and the Prospectus. If during the period in which a prospectus is
required by law to be delivered by an Underwriter or dealer, any event
shall occur as a result of which, in the judgment of the Company or in the
reasonable opinion of the Underwriters, it becomes necessary to amend or
supplement the Prospectus in order to make the statements therein, in the
light of the circumstances existing at the time the Prospectus is delivered
to a purchaser, not misleading, or, if it is necessary at any time to amend
or supplement the Prospectus to comply with any law, the Company promptly
will prepare and file with the Commission an appropriate amendment to the
Registration Statement or supplement to the Prospectus so that the
Prospectus as so amended or supplemented will not, in the light of the
circumstances when it is so delivered, be misleading, or so that the
Prospectus will comply with the law.
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(f) The Company will make generally available to its security holders,
as soon as it is practicable to do so, but in any event not later than 15
months after the effective date of the Registration Statement, an earning
statement (which need not be audited) in reasonable detail, covering a
period of at least 12 consecutive months beginning after the effective date
of the Registration Statement, which earning statement shall satisfy the
requirements of Section 11(a) of the Act and Rule 158 of the Rules and
Regulations and will advise you in writing when such statement has been so
made available.
(g) The Company will, for a period of five years from the Closing Date,
deliver to the Representatives copies of annual reports and copies of all
other documents, reports and information furnished by the Company to its
stockholders or filed with any securities exchange pursuant to the
requirements of such exchange or with the Commission pursuant to the Act or
the Exchange Act. The Company will deliver to the Representatives similar
reports with respect to significant subsidiaries, as that term is defined
in the Rules and Regulations, which are not consolidated in the Company's
financial statements.
(h) No offering, sale, short sale or other disposition of any shares of
Common Stock of the Company or other securities convertible into or
exchangeable or exercisable for shares of Common Stock or derivative of
Common Stock (or agreement for such) will be made for a period of 90 days
after the date of the Prospectus, directly or indirectly, by the Company
otherwise than hereunder or with the prior written consent of BT Alex.
Brown Incorporated, except that the Company may, without such consent,
issue shares (i) upon exercise of options granted under the 1997 Stock
Option Plan, (ii) in connection with acquisitions of businesses (iii) in
connection with the conversion to Common Stock of shares of Limited Vote
Common Stock or the Convertible subordinated notes held by ECT and JEDI.
(i) The Company will use its best efforts to list, subject to notice of
issuance, the Shares on the New York Stock Exchange.
(j) Each executive officer, director and stockholder of the Company
immediately prior to the Company's initial public offering and each person
who acquired shares of the Company's Common Stock in connection with the
acquisitions of PAR Electrical Contractors, Inc., Union Power, Trans Tech
and Polelco have furnished to you, on or prior to the date of this
Agreement, a letter or letters, in form and substance satisfactory to the
Underwriters, pursuant to which each such person has agreed not to offer,
sell, sell short or otherwise dispose of any shares of Common Stock or
Limited Vote Common Stock of the Company, as the case may be, owned by such
person (or as to which such person has the right to direct the disposition
of) or request the registration for
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the offer or sale of any of the foregoing until February 18, 2000, directly
or indirectly, except with the prior written consent of BT Alex. Brown
Incorporated ("Lockup Agreements").
(k) The Company shall apply the net proceeds of its sale of the Shares
as set forth in the Prospectus and shall file such reports with the
Commission with respect to the sale of the Shares and the application of
the proceeds therefrom as may be required in accordance with Rule 463 under
the Act.
(l) The Company shall not invest, or otherwise use, the proceeds
received by the Company from its sale of the Shares in such a manner as
would require the Company or any of the Founding Companies to register as
an investment company under the 1940 Act.
(m) The Company will maintain a transfer agent and, if necessary under
the jurisdiction of incorporation of the Company, a registrar for the
Common Stock.
(n) The Company will not take, directly or indirectly, any action
designed to cause or result in, or that has constituted or might reasonably
be expected to constitute, the stabilization or manipulation of the price
of any securities of the Company.
5. Costs and Expenses.
The Company will pay all costs, expenses and fees incident to the performance
of the obligations of the Company under this Agreement, including, without
limiting the generality of the foregoing, the following: accounting fees of the
Company; the fees and disbursements of counsel for the Company; the cost of
printing and delivering to, or as requested by, the Underwriters copies of the
Registration Statement, Preliminary Prospectuses, the Prospectus, and this
Agreement; the Underwriters' Selling Memorandum and the Underwriters' Invitation
Letter; the fees of the Commission; the filing fee of the NASD; transfer agent
and registrar fees and expenses; and the Listing Fee of The New York Stock
Exchange. The Company shall not, however, be required to pay for any of the
Underwriters' expenses (other than those related to qualification under NASD
regulations) except that, if this Agreement shall not be consummated because the
conditions in Section 6 hereof are not satisfied, or because this Agreement is
terminated by the Representatives pursuant to Section 11 hereof, or by reason of
any failure, refusal or inability on the part of the Company to perform any
undertaking or satisfy any condition of this Agreement or to comply with any of
the terms hereof on its part to be performed, unless such failure to satisfy
said condition or to comply with said terms be due to the default or omission of
any Underwriter, then the Company shall reimburse the several Underwriters for
reasonable out-of-pocket expenses, including fees and disbursements of counsel,
reasonably incurred in connection with investigating,
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marketing and proposing to market the Shares or in contemplation of performing
their obligations hereunder; but the Company shall not in any event be liable to
any of the several Underwriters for damages on account of loss of anticipated
profits from the sale by them of the Shares.
6. Conditions of Obligations of the Underwriters.
The several obligations of the Underwriters to purchase the Firm Shares on the
Closing Date and the Option Shares, if any, on the Option Closing Date are
subject to the accuracy, as of the Closing Date or the Option Closing Date, as
the case may be, of the representations and warranties of the Company contained
herein, and to the performance by the Company of its covenants and obligations
hereunder and to the following additional conditions:
(a) The Registration Statement and all post-effective amendments
thereto shall have become effective and any and all filings required by
Rule 424 and Rule 430A of the Rules and Regulations shall have been made,
and any request of the Commission for additional information (to be
included in the Registration Statement or otherwise) shall have been
disclosed to the Representatives and complied with to their reasonable
satisfaction. No stop order suspending the effectiveness of the
Registration Statement, as amended from time to time, shall have been
issued and no proceedings for that purpose shall have been taken or, to the
knowledge of the Company, shall be contemplated by the Commission and no
injunction, restraining order, or order of any nature by a Federal or state
court of competent jurisdiction shall have been issued as of the Closing
Date, which would prevent the issuance of the Shares.
(b) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, the opinion of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., counsel for the Company, dated the Closing
Date or the Option Closing Date, as the case may be, addressed to the
Underwriters (and stating that it may be relied upon by counsel to the
Underwriters) to the effect that:
(i) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the State of
Delaware, with corporate power and authority to own or lease its
properties and conduct its business as described in the Registration
Statement; each of Company's Subsidiaries has been duly incorporated
and is validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, with corporate power
and authority to own or lease its properties and conduct its business;
the Company and each of its Subsidiaries is duly qualified to transact
business in all jurisdictions in which the conduct of their business
requires such qualification, or in which the failure to qualify would
have a materially adverse effect upon the business of the Company and
its Subsidiaries taken as a whole; and, the
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outstanding shares of capital stock of each of the Company's
Subsidiaries will have been duly authorized and validly issued and
will be fully paid and non-assessable and will be owned by the
Company; and, to the best of such counsel's knowledge, the outstanding
shares of capital stock of each of the Company's Subsidiaries will be
owned by the Company, free and clear of all liens, encumbrances and
equities and claims Common Stock issuableupon conversion of the
$49,350,000 principal amont of convertible subordinatednotes held by
ECT and JEDI, which such piggy-back registration rights have been
waived, and no options, warrants or other rights to purchase,
agreements or other obligations to issue or other rights to convert
any obligations into any shares of capital stock of or other ownership
interests in any of the Company's Subsidiaries will be outstanding.
(ii) The Company has authorized and outstanding capital stock as
set forth under the caption "Capitalization" in the Prospectus; the
outstanding shares of the Company's Common Stock and the Company's
Limited Vote Common Stock have been duly authorized and validly issued
and are fully paid and non-assessable; all of the Shares conform to
the description thereof contained in the Prospectus; the certificates
for the Shares, assuming they are in the form filed with the
Commission, are in the form required by Delaware law; the shares of
Common Stock including the Firm Shares and Option Shares, if any, to
be sold by the Company pursuant to this Agreement have been duly
authorized and will be validly issued, fully paid and non-assessable
when issued and paid for as contemplated by this Agreement; and no
statutory or, to the best of such counsel's knowledge, contractual
preemptive rights of stockholders exist with respect to any of the
Shares or the issue or sale thereof, except that Enron Capital & Trade
Resources Corp. ("ECT") and Joint Energy Development Investments II
Limited Partnership ("JEDI") have preemptive rights to acquire shares
of the Company's Common Stock sufficient to maintain their respective
ownership in Quanta after this offering, which preemptive rights have
been waived.
(iii) Except as described in or contemplated by the Prospectus, to
the best knowledge of such counsel, there are no outstanding
securities of the Company convertible or exchangeable into or
evidencing the right to purchase or subscribe for any shares of
capital stock of the Company and there are no outstanding or
authorized options, warrants or rights of any character obligating the
Company to issue any shares of its capital stock or any securities
convertible or exchangeable into or evidencing the right to purchase
or subscribe for any shares of such stock; and except as described in
the Prospectus, to the best knowledge of such counsel, no holder of
any securities of the Company or any other person has the right,
contractual or otherwise, which has not been satisfied or effectively
waived, to cause the Company to sell or otherwise issue to them, or to
permit them to underwrite the sale of, any of the Shares or the right
to have any shares of Common Stock or other securities of the Company
included in the Registration Statement or the right, as a result of
the filing of the Registration Statement, to require registration
under the Act of any shares of Common Stock or other securities of the
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Company, except that ECT and JEDI have piggy-back registration rights
with respect to the shares of the Company's Common Stock issuable upon
conversion of the $49,350,000 principal amount of Convertible
Subordinated Notes held by ECT and JEDI, which such piggy-back
registration rights have been waived.
(iv) The Registration Statement has become effective under the Act
and, to the best of the knowledge of such counsel, no stop order
proceedings with respect thereto have been instituted or are pending
or threatened under the Act.
(v) The Registration Statement, the Prospectus and each amendment
or supplement thereto comply as to form in all material respects with
the requirements of the Act and the applicable rules and regulations
thereunder (except that such counsel need express no opinion as to the
financial statements, notes thereto and related schedules and other
financial and statistical information included therein or any
information furnished by the Underwriters for use therein).
(vi) The statements under the captions "Business--Employees,"
"Management--Executive Compensation," "--Employment Agreements,"
"--1997 Stock Option Plan," "Certain Transactions," "Description of
Capital Stock" and "Shares Eligible for Future Sale" in the
Prospectus, insofar as such statements constitute a summary of
documents referred to therein or matters of law, fairly summarize in
all material respects the information called for with respect to such
documents and matters.
(vii) Such counsel does not know of any contracts or documents
required to be filed as exhibits to the Registration Statement or
described in the Registration Statement or the Prospectus which are
not so filed or described as required, and such contracts and
documents as are summarized in the Registration Statement or the
Prospectus are fairly summarized in all material respects.
(viii) Such counsel knows of no material legal or governmental
proceedings pending or threatened against the Company or any of its
Subsidiaries except as set forth in the Prospectus.
(ix) The execution and delivery of this Agreement and the
consummation of the transactions herein contemplated do not and will
not conflict with or result in a breach of any of the terms or
provisions of, or constitute a default under, the Certificate of
Incorporation, as amended or restated, or By-Laws of the Company, or,
any agreement or instrument known to such counsel to which the Company
or any of its Subsidiaries is a party or by which the Company or any
of its Subsidiaries may be bound.
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(x) This Agreement has been duly authorized, executed and delivered
by the Company.
(xi) No approval, consent, order, authorization, designation,
declaration or filing by or with any regulatory, administrative or
other governmental body is necessary in connection with the execution
and delivery of this Agreement and the consummation of the
transactions herein contemplated (other than as may be required by the
NASD as to which such counsel need express no opinion), except such as
have been obtained or made or except as relate to state, county or
municipal engineering or related licenses or permits relating to the
business of the Company.
(xii) The Company is not, and will not become, as a result of the
consummation of the transactions contemplated by this Agreement, and
application of the net proceeds therefrom as described in the
Prospectus, required to register as an investment company under the
1940 Act.
In rendering such opinion, Akin, Gump, Strauss, Hauer & Feld, L.L.P.
may provide that its opinion is limited to matters governed by the laws of
Texas and the General Corporation law of the State of Delaware and the
Federal securities laws of the United States. In addition to the matters
set forth above, the opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
shall also include a statement to the effect that nothing has come to the
attention of such counsel which leads them to believe that (i) the
Registration Statement, at the time it became effective under the Act (but
after giving effect to any modifications incorporated therein pursuant to
Rule 430A under the Act) and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact
or omitted to state a material fact required to be stated therein or
necessary to make the statements therein not misleading, and (ii) the
Prospectus, or any supplement thereto, on the date it was filed pursuant to
the Rules and Regulations and as of the Closing Date or the Option Closing
Date, as the case may be, contained an untrue statement of a material fact
or omitted to state a material fact necessary in order to make the
statements, in the light of the circumstances under which they are made,
not misleading (except that such counsel need express no view as to
financial statements, schedules and statistical information therein). With
respect to such statement Akin, Gump, Strauss, Hauer & Feld, L.L.P. may
state that their belief is based upon the procedures set forth therein, but
is without independent check and verification.
(c) The Representatives shall have received from Piper & Marbury L.L.P.,
counsel for the Underwriters, an opinion dated the Closing Date or the
Option Closing Date, as the case may be, substantially to the effect
specified in subparagraphs (ii), (iii), (iv) and (x) of Paragraph (b) of
this Section 6, and that the Company is a duly organized and validly
existing corporation under the laws of the State of Delaware. In rendering
such opinion, Piper & Marbury L.L.P. may rely as to the matters relating to
the laws of the
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States other than Maryland and Delaware or Federal laws on the opinions of
counsel referred to in Paragraph (b) of this Section 6. In addition to the
matters set forth above, such opinion shall also include a statement to the
effect that nothing has come to the attention of such counsel which leads
them to believe that (i) the Registration Statement, or any amendment
thereto, as of the time it became effective under the Act (but after giving
effect to any modifications incorporated therein pursuant to Rule 430A
under the Act) as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make
the statements therein not misleading, and (ii) the Prospectus, or any
supplement thereto, on the date it was filed pursuant to the Rules and
Regulations and as of the Closing Date or the Option Closing Date, as the
case may be, contained an untrue statement of a material fact or omitted to
state a material fact, necessary in order to make the statements, in the
light of the circumstances under which they are made, not misleading
(except that such counsel need express no view as to financial statements,
schedules and statistical information therein). With respect to such
statement, Piper & Marbury L.L.P. may state that their belief is based upon
the procedures set forth therein, but is without independent check and
verification.
(d) You shall have received, on the date hereof, the Closing Date and
the Option Closing Date, as the case may be, a letter dated the date
hereof, the Closing Date or the Option Closing Date, as the case may be, in
form and substance satisfactory to you, of Arthur Andersen LLP confirming
that they are independent public accountants within the meaning of the Act
and the applicable published Rules and Regulations thereunder and stating
that, in their opinion, the financial statements and schedules of the
Company, Union Power, Trans Tech, Polelco and the Acquired Companies
examined by them and included in the Registration Statement comply in form
in all material respects with the applicable accounting requirements of the
Act and the related published Rules and Regulations; and containing such
other statements and information as is ordinarily included in accountants'
"comfort letters" to Underwriters with respect to such financial statements
and certain financial and statistical information contained in the
Registration Statement and Prospectus.
(e) The Representatives shall have received on the Closing Date or the
Option Closing Date, as the case may be, a certificate or certificates of
the Company and signed by the Chief Executive Officer and the Chief
Financial Officer of the Company to the effect that, as of the Closing Date
or the Option Closing Date, as the case may be, each of them severally
represents as follows:
(i) The Registration Statement has become effective under the Act
and no stop order suspending the effectiveness of the Registration
Statement has been issued, and no proceedings for such purpose have
been taken or are, to his knowledge, contemplated by the Commission;
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(ii) The representations and warranties of the Company contained in
Section 1 hereof are true and correct as of the Closing Date or the
Option Closing Date, as the case may be;
(iii) All filings required to have been made pursuant to Rules 424
or 430A under the Act have been made;
(iv) He has carefully examined the Registration Statement and the
Prospectus and, in his or her opinion, as of the effective date of the
Registration Statement, the statements contained in the Registration
Statement were true and correct and such Registration Statement and
Prospectus did not omit to state a material fact required to be stated
therein or necessary in order to make the statements therein not
misleading, and since the effective date of the Registration
Statement, no event has occurred which should have been set forth in a
supplement to or an amendment of the Prospectus which has not been so
set forth in such supplement or amendment; and
(v) Since the respective dates as of which information is given in
the Registration Statement and Prospectus, there has not been any
material adverse change or any development involving a prospective
material adverse change in or affecting the condition, financial or
otherwise, of the Company or any of its Subsidiaries or the earnings,
business, management, properties, assets, rights, operations,
condition (financial or otherwise) or prospects of the Company or any
of its Subsidiaries, whether or not arising in the ordinary course of
business.
(f) The Company shall have furnished to the Representatives such further
certificates and documents confirming the representations and warranties,
covenants and conditions contained herein and related matters as the
Representatives may reasonably have requested.
(g) The Firm Shares and Option Shares, if any, shall have been approved
for designation upon notice of issuance on the New York Stock Exchange.
(h) The Lockup Agreements described in Section 4(j) shall be in full
force and effect.
The opinions and certificates mentioned in this Agreement shall be deemed to
be in compliance with the provisions hereof only if they are in all material
respects satisfactory to the Representatives and to Piper & Marbury L.L.P.,
counsel for the Underwriters.
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If any of the conditions hereinabove provided for in this Section 6 shall not
have been fulfilled when and as required by this Agreement to be fulfilled, the
obligations of the Underwriters hereunder may be terminated by the
Representatives by notifying the Company of such termination in writing or by
telegram at or prior to the Closing Date or the Option Closing Date, as the case
may be.
In such event, the Company and the Underwriters shall not be under any
obligation to each other (except to the extent provided in Sections 5 and 8
hereof).
7. Conditions of the Obligations of the Company.
The obligations of the Company to sell and deliver the portion of the Shares
required to be delivered as and when specified in this Agreement are subject to
the conditions that at the Closing Date or the Option Closing Date, as the case
may be, no stop order suspending the effectiveness of the Registration Statement
shall have been issued and in effect or proceedings therefor initiated or
threatened.
8. Indemnification.
(a) The Company agrees to indemnify and hold harmless each Underwriter and
each person, if any, who controls any Underwriter within the meaning of the Act,
against any losses, claims, damages or liabilities to which such Underwriter or
any such controlling person may become subject under the Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) arise out of or are based upon (i) any untrue
statement or alleged untrue statement of any material fact contained in the
Registration Statement, any Preliminary Prospectus, the Prospectus or any
amendment or supplement thereto or (ii) the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading; and will reimburse each Underwriter and
each such controlling person upon demand for any legal or other expenses
reasonably incurred by such Underwriter or such controlling person in connection
with investigating or defending any such loss, claim, damage or liability,
action or proceeding or in responding to a subpoena or governmental inquiry
related to the offering of the Shares, whether or not such Underwriter or
controlling person is a party to any action or proceeding; provided, however,
that the Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an untrue
statement or alleged untrue statement, or omission or alleged omission made in
the Registration Statement, any Preliminary Prospectus, the Prospectus, or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Company by or through the Representatives
specifically for use in the preparation thereof. This indemnity agreement will
be in addition to any liability which the Company may otherwise have.
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(b) Each Underwriter severally and not jointly will indemnify and hold
harmless the Company, each of its directors, each of its officers who has signed
the Registration Statement, and each person, if any, who controls the Company
within the meaning of the Act against any losses, claims, damages or liabilities
to which the Company or any such director, officer, or controlling person may
become subject under the Act or otherwise, insofar as such losses, claims,
damages or liabilities (or actions or proceedings in respect thereof) arise out
of or are based upon (i) any untrue statement or alleged untrue statement of any
material fact contained in the Registration Statement, any Preliminary
Prospectus, the Prospectus or any amendment or supplement thereto or (ii) the
omission or the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not misleading in the
light of the circumstances under which they were made; and will reimburse any
legal or other expenses reasonably incurred by the Company or any such director,
officer, or controlling person in connection with investigating or defending any
such loss, claim, damage, liability, action or proceeding; provided, however,
that each Underwriter will be liable in each case to the extent, but only to the
extent, that such untrue statement or alleged untrue statement or omission or
alleged omission has been made in the Registration Statement, any Preliminary
Prospectus, the Prospectus or such amendment or supplement, in reliance upon and
in conformity with written information furnished to the Company by or through
the Representatives specifically for use in the preparation thereof. This
indemnity agreement will be in addition to any liability which such Underwriter
may otherwise have.
(c) In case any proceeding (including any governmental investigation) shall be
instituted involving any person in respect of which indemnity may be sought
pursuant to this Section 8, such person (the "indemnified party") shall promptly
notify the person against whom such indemnity may be sought (the "indemnifying
party") in writing. No indemnification provided for in Section 8(a) or (b) shall
be available to any party who shall fail to give notice as provided in this
Section 8(c) if the party to whom notice was not given was unaware of the
proceeding to which such notice would have related and was materially prejudiced
by the failure to give such notice, but the failure to give such notice shall
not relieve the indemnifying party or parties from any liability which it or
they may have to the indemnified party for contribution or otherwise than on
account of the provisions of Section 8(a) or (b). In case any such proceeding
shall be brought against any indemnified party and it shall notify the
indemnifying party of the commencement thereof, the indemnifying party shall be
entitled to participate therein and, to the extent that it shall wish, jointly
with any other indemnifying party similarly notified, to assume the defense
thereof, with counsel satisfactory to such indemnified party and shall pay as
incurred the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel at its own expense. Notwithstanding the foregoing, the indemnifying
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party shall pay as incurred (or within 30 days of presentation) the fees and
expenses of the counsel retained by the indemnified party in the event (i) the
indemnifying party and the indemnified party shall have mutually agreed to the
retention of such counsel, (ii) the named parties to any such proceeding
(including any impleaded parties) include both the indemnifying party and the
indemnified party and representation of both parties by the same counsel would
be inappropriate due to actual or potential differing interests between them or
(iii) the indemnifying party shall have failed to assume the defense and employ
counsel acceptable to the indemnified party within a reasonable period of time
after notice of commencement of the action. It is understood that the
indemnifying party shall not, in connection with any proceeding or related
proceedings in the same jurisdiction, be liable for the reasonable fees and
expenses of more than one separate firm for all such indemnified parties. Such
firm shall be designated in writing by you in the case of parties indemnified
pursuant to Section 8(a) and by the Company in the case of parties indemnified
pursuant to Section 8(b). The indemnifying party shall not be liable for any
settlement of any proceeding effected without its written consent but if settled
with such consent or if there be a final judgment for the plaintiff, the
indemnifying party agrees to indemnify the indemnified party from and against
any loss or liability by reason of such settlement or judgment. In addition, the
indemnifying party will not, without the prior written consent of the
indemnified party, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action or proceeding of which
indemnification may be sought hereunder (whether or not any indemnified party is
an actual or potential party to such claim, action or proceeding) unless such
settlement, compromise or consent includes an unconditional release of each
indemnified party from all liability arising out of such claim, action or
proceeding.
(d) If the indemnification provided for in this Section 8 is unavailable to or
insufficient to hold harmless an indemnified party under Section 8(a) or (b)
above in respect of any losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) referred to therein, then each indemnifying
party shall contribute to the amount paid or payable by such indemnified party
as a result of such losses, claims, damages or liabilities (or actions or
proceedings in respect thereof) in such proportion as is appropriate to reflect
the relative benefits received by the Company on the one hand and the
Underwriters on the other from the offering of the Shares. If, however, the
allocation provided by the immediately preceding sentence is not permitted by
applicable law then each indemnifying party shall contribute to such amount paid
or payable by such indemnified party in such proportion as is appropriate to
reflect not only such relative benefits but also the relative fault of the
Company on the one hand and the Underwriters on the other in connection with the
statements or omissions which resulted in such losses, claims, damages or
liabilities, (or actions or proceedings in respect thereof), as well as any
other relevant equitable considerations. The relative benefits received by the
Company on the one hand and the Underwriters on the other shall be deemed to be
in the same proportion as the total net proceeds from the offering (before
deducting expenses)
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<PAGE>
received by the Company bears to the total underwriting discounts and
commissions received by the Underwriters, in each case as set forth in the table
on the cover page of the Prospectus. The relative fault shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company on the one hand or the
Underwriters on the other and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Company and the Underwriters agree that it would not be just and equitable
if contributions pursuant to this Section 8(d) were determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take account of the
equitable considerations referred to above in this Section 8(d). The amount paid
or payable by an indemnified party as a result of the losses, claims, damages or
liabilities (or actions or proceedings in respect thereof) referred to above in
this Section 8(d) shall be deemed to include any legal or other expenses
reasonably incurred by such indemnified party in connection with investigating
or defending any such action or claim. Notwithstanding the provisions of this
subsection (d), (i) no Underwriter shall be required to contribute any amount in
excess of the underwriting discounts and commissions applicable to the Shares
purchased by such Underwriter and (ii) no person guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the Act) shall be
entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. The Underwriters' obligations in this Section 8(d) to
contribute are several in proportion to their respective underwriting
obligations and not joint.
(e) In any proceeding relating to the Registration Statement, any Preliminary
Prospectus, the Prospectus or any supplement or amendment thereto, each party
against whom contribution may be sought under this Section 8 hereby consents to
the jurisdiction of any court having jurisdiction over any other contributing
party, agrees that process issuing from such court may be served upon him, her
or it by any other contributing party and consents to the service of such
process and agrees that any other contributing party may join him, her or it as
an additional defendant in any such proceeding in which such other contributing
party is a party.
(f) Any losses, claims, damages, liabilities or expenses for which an
indemnified party is entitled to indemnification or contribution under this
Section 8 shall be paid by the indemnifying party to the indemnified party as
such losses, claims, damages, liabilities or expenses are incurred. The
indemnity and contribution agreements contained in this Section 8 and the
representations and warranties of the Company set forth in this Agreement shall
remain operative and in full force and effect, regardless of (i) any
investigation made by or on behalf of any Underwriter or any person controlling
24
<PAGE>
any Underwriter, the Company, its directors or officers or any persons
controlling the Company, (ii) acceptance of any Shares and payment therefor
hereunder, and (iii) any termination of this Agreement. A successor to any
Underwriter, or to the Company, its directors or officers, or any person
controlling the Company, shall be entitled to the benefits of the indemnity,
contribution and reimbursement agreements contained in this Section 8.
9. Default by Underwriters.
If on the Closing Date or the Option Closing Date, as the case may be, any
Underwriter shall fail to purchase and pay for any portion of the Shares which
such Underwriter has agreed to purchase and pay for on such date (otherwise than
by reason of any default on the part of the Company), you, as Representatives of
the Underwriters, shall use your reasonable efforts to procure within 36 hours
thereafter one or more of the other Underwriters, or any others, to purchase
from the Company such amounts as may be agreed upon and upon the terms set forth
herein, the Firm Shares or Option Shares, as the case may be, which the
defaulting Underwriter failed to purchase. If during such 36 hours, you, as such
Representatives, shall not have procured such other Underwriters, or any others,
to purchase the Firm Shares or Option Shares, as the case may be, agreed to be
purchased by the defaulting Underwriter or Underwriters, then (a) if the
aggregate number of shares with respect to which such default shall occur does
not exceed 10% of the Firm Shares or Option Shares, as the case may be, covered
hereby, the other Underwriters shall be obligated, severally, in proportion to
the respective numbers of Firm Shares or Option Shares, as the case may be,
which they are obligated to purchase hereunder, to purchase the Firm Shares or
Option Shares, as the case may be, which such defaulting Underwriter or
Underwriters failed to purchase or (b) if the aggregate number of Firm Shares or
Option Shares, as the case may be, with respect to which such default shall
occur exceeds 10% of the Firm Shares or Option Shares, as the case may be,
covered hereby, the Company or you, as the Representatives of the Underwriters,
will have the right, by written notice given within the next 36-hour period to
the parties to this Agreement, to terminate this Agreement without liability on
the part of the non-defaulting Underwriters or of the Company except to the
extent provided in Section 8 hereof. In the event of a default by any
Underwriter or Underwriters, as set forth in this Section 9, the Closing Date or
Option Closing Date, as the case may be, may be postponed for such period, not
exceeding seven days, you, as the Representatives of the Underwriters, may
determine in order that the required changes in the Registration Statement or in
the Prospectus or in any other documents or arrangements may be effected. The
term "Underwriter" includes any person substituted for a defaulting Underwriter.
Any action taken under this Section 9 shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
25
<PAGE>
10. Notices.
All communications hereunder shall be in writing and, except as otherwise
provided herein, will be mailed, delivered, telecopied or telegraphed and
confirmed as follows: if to the Underwriters, to BT Alex. Brown Incorporated,
One South Street, Baltimore, Maryland 21202, Attention: David M. Gray, Managing
Director, with a copy to BT Alex. Brown Incorporated, One South Street,
Baltimore, Maryland 21202 Attention: General Counsel; and if to the Company; to
Quanta Services, Inc., 7360 Post Oak Boulevard, Suite 2100, Houston, Texas
77056, Attention: John R. Colson, Chief Executive Officer, with copies to Akin,
Gump, Strauss, Hauer & Feld, L.L.P., 1500 NationsBank Plaza, 300 Convent Street,
San Antonio, TX 78205, Attention: J. Patrick Ryan, Esq.
11. Termination.
This Agreement may be terminated by you by notice to the Company as follows:
(a) at any time prior to the earlier of (i) the time the Shares are
released by you for sale by notice to the Underwriters or (ii) 11:30 a.m.
on the date of this Agreement;
(b) at any time prior to the Closing Date if any of the following has
occurred: (i) since the respective dates as of which information is given
in the Registration Statement and the Prospectus, any material adverse
change or any development involving a prospective material adverse change
in or affecting the condition, financial or otherwise, of the Company and
its Subsidiaries taken as a whole or the earnings, business, management,
properties, assets, rights, operations, condition (financial or otherwise)
or prospects of the Company and its Subsidiaries taken as a whole, whether
or not arising in the ordinary course of business; (ii) any outbreak or
escalation of hostilities or declaration of war or national emergency or
other national or international calamity or crisis or change in economic or
political conditions if the effect of such outbreak, escalation,
declaration, emergency, calamity, crisis or change on the financial markets
of the United States would, in your reasonable judgment, make it
impracticable to market the Shares or to enforce contracts for the sale of
the Shares; (iii) trading generally shall have been suspended or materially
limited on or by, as the case may be, any of the New York Stock Exchange,
American Stock Exchange or the NASDAQ Stock Market or limitation on prices
(other than limitations on hours or numbers of days of trading); (iv) the
enactment, publication, decree or other promulgation of any statute,
regulation, rule or order of any court or other governmental authority
which in your opinion materially and adversely affects or may materially
and adversely affect the business or operations of the Company; (v)
declaration of a banking moratorium by United States or New York State
authorities; (vi) the suspension of trading of the Company's Common Stock
by the
26
<PAGE>
Commission on the New York Stock Exchange; or (vii) the taking of any
action by any governmental body or agency in respect of its monetary or
fiscal affairs which in your reasonable opinion has a material adverse
effect on the securities markets in the United States; or
(c) as provided in Sections 6 and 9 of this Agreement.
12. Successors.
This Agreement has been and is made solely for the benefit of the Underwriters
and the Company and their respective successors, executors, administrators,
heirs and assigns, and the officers, directors and controlling persons referred
to herein, and no other person will have any right or obligation hereunder. No
purchaser of any of the Shares from any Underwriter shall be deemed a successor
or assign merely because of such purchase.
13. Information Provided by Underwriters.
The Company and the Underwriters acknowledge and agree that the only
information furnished or to be furnished by any Underwriter to the Company for
inclusion in any Prospectus or the Registration Statement consists of the
legends required by Item 502(d) of Regulation S-K under the Act and the
information under the caption "Plan of Distribution" in the Prospectus.
14. Miscellaneous.
The reimbursement, indemnification and contribution agreements contained in
this Agreement and the representations and covenants in this Agreement shall
remain in full force and effect, regardless of (a) any termination of this
Agreement, (b) any investigation made by or on behalf of any Underwriter or
controlling person thereof, or by or on behalf of the Company or its directors
or officers and (c) delivery of and payment for the Shares under this Agreement.
27
<PAGE>
This Agreement may be executed in two or more counterparts, each of which
shall be deemed an original, but all of which together shall constitute one and
the same instrument.
This Agreement shall be governed by, and construed in accordance with, the
laws of the State of Delaware.
If the foregoing letter is in accordance with your understanding of our
agreement, please sign and return to us the enclosed duplicates hereof,
whereupon it will become a binding agreement among the Company and the
Underwriters in accordance with its terms.
Very truly yours,
QUANTA SERVICES, INC.
By: ____________________
John R. Colson,
Chief Executive Officer
The foregoing Underwriting Agreement
is hereby confirmed and accepted as
of the date first above written.
BT Alex. Brown Incorporated
BancBoston Robertson Stephens
Bear, Stearns & Co., Inc.
Sanders Morris Mundy Inc.
SunTrust Equitable Securities Corporation
By: BT Alex. Brown Incorporated
By: ________________________
Authorized Officer
28
<PAGE>
SCHEDULE I
Schedule of Underwriters
Number of Firm Shares
Underwriter to be Purchased
----------- ----------------------
BT Alex. Brown Incorporated......................
BancAmerica Robertson Stephens...................
Bear, Stearns & Co., Inc. .......................
Sanders Morris Mundy Inc. .......................
Suntrust Equitable Securities Corporation........
---------
Total............................... 3,500,000
=========
29
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports dated March 18, 1998 on the financial statements of the following
businesses included in or made a part of this registration statement: Quanta
Services, Inc.; TRANS TECH Electric, Inc.; and Potelco, Inc.; and to the use of
our report dated December 5, 1997 on the financial statements of Union Power
Construction Company; and to the use of our report dated May 1, 1998 on the
financial statements of Spalj Construction Company and to all references to our
Firm included in this registration statement; and to the use of our report
dated October 16, 1998 on the financial statements of Quanta Services, Inc. and
subsidiaries.
ARTHUR ANDERSEN LLP
Houston, Texas
December 16, 1998
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated March 23, 1998 on the financial statements of Sumter Builders, Inc. made
a part of this registration statement and to all references to our Firm
included in this registration statement.
ARTHUR ANDERSEN LLP
Columbia, South Carolina
December 16, 1998
<PAGE>
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report, dated February 23, 1998, on the financial statements of Underground
Construction Co., Inc. for the year ended December 31, 1997 included in or made
a part of this registration statement and to all references to our firm in this
registration statement.
/s/ S. J. Gallina & Co., LLP
-------------------------------------
S. J. Gallina & Co., LLP
Walnut Creek, California
December 16, 1998
<PAGE>
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report, dated February 23, 1998, on the financial statements of Manuel Bros.,
Inc. for the year ended December 31, 1997 included in or made a part of this
registration statement and to all references to our firm in this registration
statement.
/s/ S. J. Gallina & Co., LLP
-------------------------------------
S. J. Gallina & Co., LLP
Walnut Creek, California
December 16, 1998
