<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 5, 1998
REGISTRATION NO. 333-47083
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- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
QUANTA SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1731 74-2851603
(STATE OR OTHER (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
JURISDICTION CLASSIFICATION CODE NUMBER) IDENTIFICATION NUMBER)
OF INCORPORATION OR
ORGANIZATION)
JOHN R. COLSON
CHIEF EXECUTIVE OFFICER
3555 TIMMONS LANE
SUITE 610
HOUSTON, TEXAS 77027
(713) 629-7600
(NAME AND ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA
CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES AND AGENT FOR SERVICE)
----------------
Copies to:
JAMES S. RYAN, III
BRAD L. WHITLOCK
JACKSON WALKER L.L.P.
901 MAIN STREET
SUITE 6000
DALLAS, TEXAS 75287
(214) 953-6000
Approximate date of commencement of proposed sale to the public: From time
to time 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. [X]
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance
with General Instruction G, check the following box. [_]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(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. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION, DATED MAY 5, 1998
5,000,000 SHARES
[LOGO OF QUANTA SERVICES APPEARS HERE]
COMMON STOCK
-----------
This Prospectus covers the offer and sale of up to 5,000,000 shares of Common
Stock, par value $.00001 per share (the "Common Stock"), of Quanta Services,
Inc. (together with its subsidiaries, the "Company" or "Quanta"), which the
Company may issue from time to time in connection with the future direct and
indirect acquisitions of other businesses, properties or securities in business
combination transactions in accordance with Rule 415(a)(1)(viii) of Regulation
C under the Securities Act of 1933, as amended (the "Securities Act").
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. It is expected
that the shares that are issued will be valued at prices reasonably related to
market prices for the Common Stock prevailing either at the time an acquisition
agreement is executed or at the time an acquisition is consummated.
This Prospectus will only be used in connection with the acquisition of
businesses, properties or securities in business combination transactions that
would be exempt from registration but for the issuance of Common Stock and the
possibility of integration with other transactions. This Prospectus will be
furnished to security holders of the business, properties or securities to be
acquired.
Persons receiving Common Stock in connection with an acquisition may be
required to agree to hold all or some portion of the Common Stock for a period
of up to two years after the date of such acquisition. See "Plan of
Distribution."
If an acquisition has a material financial effect upon the Company, a current
report on Form 8-K and a post-effective amendment to the registration statement
of which this Prospectus is a part will be filed subsequent to the acquisition
containing financial and other information about the acquisition that would be
material to subsequent acquirers of Common Stock offered hereby, including pro
forma information for Quanta and historical financial information about the
company being acquired. A current report on Form 8-K and a post-effective
amendment to the registration statement of which this Prospectus is a part will
also be filed when an acquisition does not per se have a material effect upon
the Company, but if aggregated with other acquisitions since the date of the
Company's most recent audited financial statements, would have such a material
effect.
If an acquisition of a business, properties or securities in a business
combination transaction is not exempt from registration even if integration is
not taken into account, then the offerees of Common Stock in such acquisition
will be furnished with copies of this Prospectus as amended by a post-effective
amendment to the Registration Statement on Form S-4 of which this Prospectus is
a part.
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "PWR." Application will be made to list the shares offered hereby on
the NYSE. On May 1, 1998, the last reported sales price of the Common Stock on
the NYSE was $14.75 per share. See "Price Range of Common Stock."
All expenses of this offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of shares
by the Company in business combination transactions, although finder's fees may
be paid with respect to specific acquisitions. Any person receiving a finder's
fee may be deemed to be an underwriter within the meaning of the Securities
Act.
See "Risk Factors" beginning on Page 7 for a discussion of certain factors
that should be considered by prospective purchasers of the Common Stock offered
hereby.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the detailed
information and financial statements, including the notes thereto, appearing
elsewhere in this Prospectus. See "Risk Factors" for information that should be
carefully considered by prospective investors.
THE COMPANY
Quanta 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 addition, the
Company provides electrical contracting services to the commercial and
industrial markets and installs transportation control and lighting systems.
The Company's services include the installation, repair and maintenance of
electric power transmission and distribution lines and telecommunication 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, design and engineering services and the
provision of specialty contracting services for electric, video, security,
fire, voice and data systems. The Company's customers include electric
utilities, telecommunication and cable television system operators,
governmental entities, general contractors and builders, owners and managers of
commercial and industrial properties.
In February 1998, the Company acquired, in separate acquisitions
(collectively, the "Acquisitions"), in exchange for consideration including
shares of its Common Stock, four businesses: PAR Electrical Contractors, Inc.
("PAR"), Union Power Construction Company ("Union Power"), TRANS TECH Electric,
Inc. ("TRANS TECH") and Potelco, Inc. ("Potelco" and, together with PAR, Union
Power and TRANS TECH, the "Founding Companies"). The Company completed an
initial public offering (the "IPO") of shares of its Common Stock in February
1998, and such Common Stock is traded on the New York Stock Exchange under the
symbol "PWR". In May 1998, the Company acquired Spalj Construction Company
("Spalj") (the "Spalj Acquisition"). In addition, in April 1998, the Company
acquired Golden State Utility Company ("Golden State" and, collectively, with
the Founding Companies and Spalj, the "Acquired Businesses"). As a result of
the acquisitions of the Acquired Businesses, the Company has become one of the
largest providers of specialty electric and telecommunications infrastructure
contracting services in its markets. The Company has a total of 18 offices in 9
states and performed work in 24 states during 1997, principally in the midwest
and western U.S. The Company believes that its size, geographical diversity,
industry relationships, expertise in specialty services, design and engineering
capability and number of skilled personnel provide the Company with significant
competitive advantages. During 1997, the Founding Companies and Spalj generated
pro forma combined revenues, operating income and net income of $173.8 million,
$21.8 million and $11.5 million, respectively.
The Company estimates that the electrical and telecommunications contracting
industry generates annual revenues in excess of $40 billion. The Company
believes that it will be well-positioned to capitalize on significant trends
currently affecting its industry. The Company expects that these trends, which
include the continuing deregulation of utilities, the upgrading and expansion
of existing infrastructure and the increased outsourcing of services to
providers such as the Company, will provide significant opportunities for
growth.
The Company 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. The Company believes 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 required to complete acquisitions
and to capitalize on industry growth opportunities.
2
<PAGE>
GROWTH STRATEGY
The Company plans to achieve its goal of becoming a leading provider of
specialty electric and telecommunications infrastructure contracting services
in North America by (i) implementing its operating strategy, which focuses on
managing on a decentralized basis and achieving operating efficiencies, (ii)
emphasizing continued internal growth and (iii) expanding through acquisitions.
The key elements of the Company's strategy are:
Operating Strategy. The Company intends to manage its operations on a
decentralized basis while maintaining operating and financial controls. Local
management will retain responsibility for the operations, profitability and
growth of its business. Certain administrative functions will be centralized.
While local management will retain control of the operations of its business,
the Company's executive management will have responsibility for corporate
strategy and acquisitions, financing, insurance, investor relations and
employee benefit plans. In addition, by combining overlapping operations of
certain of the Acquired Businesses, the Company expects to achieve more
efficient asset utilization and realize savings in overhead and other expenses.
The Company believes that its 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.
Internal Growth. The Founding Companies experienced internal revenue growth
at a compound annual rate of 21.5% between 1994 and 1997. The Company is
focused on continuing its strong internal growth by (i) increasing the volume
of services provided to existing customers, including additional volumes
resulting from increased outsourcing by its customers, (ii) expanding the range
of services provided to existing customers to include additional specialties,
(iii) broadening its customer base to include additional businesses not
presently served by the Company and (iv) geographically expanding its service
area.
Acquisitions. The Company believes 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 for growth and cannot
provide a broad range of specialty contracting services on a regional or
national basis. In addition, the Company 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. The Company intends to actively pursue acquisitions of well-
established companies to enter new geographic markets and expand the range of
services and leverage existing operations within existing markets.
Quanta believes that the prominence and operating strength of the Company and
the experience of its executive management will provide the Company with
significant competitive advantages as it pursues its growth strategy.
3
<PAGE>
THE OFFERING
Common Stock being offered.. 5,000,000 shares to be issued by Quanta in
connection with the acquisition of businesses,
properties or securities in business combinations
Common Stock to be
outstanding after the
offering................... 22,906,040 shares(1)
Transfer of Shares.......... Persons acquiring shares of Common Stock in
business combinations pursuant to this offering
may be required to agree to hold all or some
portion of such shares for a period of up to two
years after the date of acquisition unless the
Company agrees to a shorter holding period or
agrees to waive such requirement in the future.
Listing..................... The shares of Common Stock are listed on the
NYSE. Application will be made to list the shares
of Common Stock offered hereby on the NYSE.
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(1) Includes 3,345,333 shares of a special class of Common Stock ("Limited Vote
Common Stock") issued to the initial stockholders and certain management
personnel of the Company. Excludes options to purchase approximately
872,500 shares of Common Stock that have been granted pursuant to the
Company's 1997 Stock Option Plan. See "Management--1997 Stock Option Plan,"
"Certain Transactions--Organization of the Company" and "Description of
Capital Stock--Common Stock and Limited Vote Common Stock."
4
<PAGE>
SUMMARY PRO FORMA COMBINED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
For financial statement presentation purposes, PAR has been identified as the
"accounting acquiror," as its former stockholders represent the largest voting
interest within the Company. The following summary unaudited pro forma combined
financial data present certain data for the Company, adjusted for (i) the
Acquisitions, (ii) the effects of certain other pro forma adjustments to the
historical financial statements, (iii) the consummation of the Company's IPO in
February 1998 and the application of the net proceeds therefrom and (iv) the
Spalj Acquisition. The unaudited pro forma combined income statement data
assume that the Acquisitions, the IPO and related transactions and the Spalj
Acquisition were closed on January l, 1997 and are not necessarily indicative
of the results that the Company would have obtained had these events actually
then occurred or of the Company's future results. During the periods presented
below, the Acquired Businesses were not under common control or management and,
therefore, the data presented may not be comparable to or indicative of post
combination results to be achieved by the Company. The unaudited pro forma
combined financial statements should be read in conjunction with the other
financial information included elsewhere in this Prospectus. See "Selected
Financial Data," the Unaudited Pro Forma Combined Financial Statements and
notes thereto and the historical financial statements of the Founding Companies
and Spalj and the notes thereto, all included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
PRO FORMA
COMBINED
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YEAR ENDED
DECEMBER 31,
1997
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<S> <C>
STATEMENT OF OPERATIONS DATA:
Revenues(1)..................................................... $ 173,795
Cost of services (including depreciation)....................... 138,369
----------
Gross profit.................................................... 35,426
Selling, general and administrative expenses(2)................. 11,311
Goodwill amortization(3)........................................ 2,280
----------
Income from operations.......................................... 21,835
Other income (expense), net(4).................................. (1,536)
----------
Income before income tax expense................................ 20,299
Provision for income taxes(5)................................... 8,807
----------
Net income...................................................... $ 11,492
==========
Basic and diluted earnings per share............................ $ 0.68
==========
Shares used in computing pro forma basic and diluted earnings
per share(6)................................................... 17,011,562
</TABLE>
<TABLE>
<CAPTION>
PRO FORMA
---------------------------
DECEMBER 31, 1997
---------------------------
AS
COMBINED(7) ADJUSTED(8)
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<S> <C> <C>
BALANCE SHEET DATA:(9)
Working capital (deficit)...................... $(10,999)(10) $ 29,918
Total assets................................... 136,072 176,356
Long-term debt, net of current maturities...... 13,763 24,423(11)
Total stockholders' equity..................... 63,893 121,977
</TABLE>
(Footnotes on following page)
5
<PAGE>
(1) Pro forma revenues for the year ended December 31, 1997 including Golden
State were approximately $196.0 million.
(2) The unaudited pro forma combined statement of operations data reflect an
aggregate of approximately $2.7 million for the year ended December 31,
1997, in pro forma reductions in salary, bonus and benefits of the owners
and management of the Founding Companies to which they have agreed
prospectively. Additionally, it excludes the $13.0 million non-recurring
non-cash charge recognized by Quanta related to the issuance of stock to
an initial stockholder and management, as a result of the issuance of such
shares for nominal consideration. See Note 2 of Notes to Financial
Statements of Quanta.
(3) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions and the Spalj Acquisition over a 40-year period and computed
on the basis described in the notes to the Unaudited Pro Forma Combined
Financial Statements.
(4) Reflects the reduction for interest expense of $1.4 million for the year
ended December 31, 1997, attributable to the repayment of $19.0 million of
historical debt of the Founding Companies with proceeds from the IPO, net
of increases in interest expense of $1.2 million on borrowings under the
Company's credit facility for the Spalj Acquisition and additional
interest expense as discussed in Note 9 below. Additionally, reflects
reductions in expenses associated with certain non-operating assets
transferred to the Founding Companies prior to the Acquisitions.
(5) Assumes all pretax income before non-deductible goodwill and other
permanent items is subject to an estimated 39.0% combined tax rate.
(6) Computed as described on page F-4 in Note (2) to the Unaudited Pro Forma
Combined Statements of Operations included elsewhere herein.
(7) Reflects the Acquisitions and related transactions as if they had occurred
on December 31, 1997 as described in the notes to the Unaudited Pro Forma
Combined Financial Statements. 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.
(8) Reflects the closing of the IPO and the Company's application of the net
proceeds therefrom to fund the cash paid to stockholders of the Founding
Companies and to repay certain indebtedness of the Founding Companies.
Also reflects the Spalj Acquisition.
(9) Two of the Founding Companies historically elected S corporation status
for tax purposes. Prior to Acquisitions, these Founding Companies made
distributions to their stockholders totaling approximately $8.7 million
(the "S Corporation Distributions"). In order to fund the S Corporation
Distributions, the companies borrowed $5.1 million prior to December 31,
1997 and approximately $3.6 million subsequent to year end. Accordingly,
pro forma interest expense has been increased by $0.8 million for the year
ended December 31, 1997 and pro forma stockholders' equity has been
reduced by approximately $3.6 million.
(10) Includes approximately $21.0 million paid to owners of the Founding
Companies, representing the actual cash portion of the consideration for
the Acquisitions paid from a portion of the net proceeds of the IPO.
(11) Includes approximately $17.7 million borrowed under the Company's credit
facility in connection with the Spalj Acquisition.
6
<PAGE>
RISK FACTORS
In addition to the other information in this Prospectus, the following
factors should be considered carefully in evaluating the Company and its
business in evaluating an investment in the shares of Common Stock offered
hereby. This Prospectus contains, in addition to historical information,
forward-looking statements that involve risks and uncertainties. The Company's
actual results could differ materially from those discussed herein. Factors
that could cause or contribute to such differences include, but are not
limited to, those discussed in the following risk factors, "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
"Business" and elsewhere in this Prospectus.
Absence of Combined Operating History. Quanta was founded in August 1997 but
conducted no operations and generated no revenues prior to the Acquisitions.
The Acquired Businesses have been operating and will continue to operate as
separate independent entities, and there can be no assurance that the Company
will be able to integrate the operations of these businesses successfully or
to institute the necessary systems and procedures, including accounting and
financial reporting systems, to manage the combined enterprise on a profitable
basis. In addition, there can be no assurance that the recently assembled
management group will be able to successfully manage the combined entity and
effectively implement the Company's operating or growth strategies. The pro
forma combined financial results of the Founding Companies and Spalj cover
periods during which the Founding Companies, Spalj and Quanta were not under
common control or management and, therefore, may not be indicative of the
Company's future financial or operating results. The success of the Company
will depend on management's ability to integrate the Founding Companies and
other companies acquired in the future into one organization in a profitable
manner. The inability of the Company to successfully integrate the Acquired
Businesses and to coordinate and integrate certain operational,
administrative, banking, insurance and accounting functions and computer
systems would have a material adverse effect on the Company's financial
condition and results of operations and would make it unlikely that the
Company's acquisition program will be successful. See "Business--Strategy" and
"Management."
Risks Related to Acquisition Strategy. One of the Company's principal growth
strategies is to increase its revenues and the markets it serves through the
acquisition of additional electric and telecommunications infrastructure
contracting companies. The Company expects to face competition for acquisition
candidates, which may limit the number of acquisition opportunities and may
lead to higher acquisition prices. There can be no assurance that the Company
will be able to identify, acquire or profitably manage additional businesses
or to integrate successfully any acquired businesses into the Company without
substantial costs, delays or other operational or financial problems. Further,
acquisitions involve a number of special risks, including failure of the
acquired business to achieve expected results, diversion of management's
attention, failure to retain key personnel of the acquired business and risks
associated with unanticipated events or liabilities, some or all of which
could have a material adverse effect on the Company's business, financial
condition and results of operations. Customer dissatisfaction or performance
problems at a single acquired company could have an adverse effect on the
reputation of the Company generally. In addition, there can be no assurance
that the Founding Companies or other businesses acquired in the future will
achieve anticipated revenues and earnings. See "Business--Strategy."
Risks Related to Acquisition Financing. The timing, size and success of the
company's acquisition efforts and the associated capital commitments cannot be
readily predicted. The Company intends to use its Common Stock for all or a
portion of the consideration for future acquisitions. If the Common Stock does
not maintain a sufficient market value or potential acquisition candidates are
unwilling to accept Common Stock as part of the consideration for the sale of
their businesses, the Company may be required to utilize more of its cash
resources, if available, in order to pursue its acquisition program. If the
company does not have sufficient cash resources, its growth could be limited
unless it is able to obtain additional capital through future debt or equity
financings. Using cash to complete acquisitions and finance internal growth
could substantially limit the company's financial flexibility, using debt
could result in financial covenants that limit the Company's operations and
financial flexibility, and using equity may result in dilution of the
ownership interests of the then-existing stockholders of
7
<PAGE>
the Company. The Company has entered into a credit facility with two
commercial banks. The credit facility will be used for acquisitions, working
capital and other general corporate purposes. The credit facility is subject
to certain financial covenants that may limit the company's operations and
financial flexibility. There can be no assurance that the Company will be able
to obtain financing if and when it is needed or that, if available, it will be
available on terms the Company deems acceptable. As a result, the Company may
be unable to pursue its acquisition strategy successfully. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Combined Liquidity and Capital Resources" and "Business--Strategy."
Risks Related to Operating and Internal Growth Strategies. A key element of
the Company's strategy is to increase the profitability and revenues of the
Founding Companies and any subsequently acquired businesses. Although the
Company intends to implement this strategy by various means, there can be no
assurance that the Company will be able to do so successfully. A key component
of the Company's strategy is to operate the Founding Companies and
subsequently acquired businesses on a decentralized basis, with local
management retaining responsibility for day-to-day operations, profitability
and the internal growth of the business. If proper overall business controls
are not implemented, this decentralized operating strategy could result in
inconsistent operating and financial practices at the Founding Companies and
subsequently acquired businesses, and the Company's overall profitability
could be adversely affected. The Company's ability to generate internal
earnings growth will be affected by, among other factors, its ability to
expand the range of services offered 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 these factors are beyond the control of the Company, and
there can be no assurance that the Company's strategies will be successful or
that it will be able to generate cash flow sufficient to fund its operations
and to support internal growth. The Company's inability to achieve internal
earnings growth could have a material adverse effect on the Company's
business, financial condition and results of operations. See "Business--
Strategy."
Management of Growth. The Company expects to grow both internally and
through acquisitions. Management expects to expend significant time and effort
in evaluating, completing and integrating acquisitions and opening new
facilities. There can be no assurance that the Company's systems, procedures
and controls will be adequate to support the Company's operations as they
expand. Any future growth also will impose significant additional
responsibilities on members of senior management, including the need to
identify, recruit and integrate new senior level managers and executives.
There can be no assurance that such additional management will be identified
and retained by the Company. To the extent that the Company is unable to
manage its growth efficiently and effectively, or is unable to attract and
retain additional qualified management, the Company's financial condition and
results of operations could be materially adversely affected. See "Business--
Strategy."
Availability of Qualified Employees. The Company's ability to provide high-
quality services on a timely basis requires an adequate supply of skilled
electricians, journeymen linemen and project managers. Accordingly, the
Company's ability to increase its productivity and profitability will be
limited by its ability to employ, train and retain skilled personnel necessary
to meet the Company's requirements. Many companies in the Company's industry
are currently experiencing shortages of qualified personnel, and there can be
no assurance that the Company will be able to maintain an adequate skilled
labor force necessary to operate efficiently, that the Company's labor
expenses will not increase as a result of a shortage in the supply of skilled
personnel or that the Company will not have to curtail its planned internal
growth as a result of labor shortages. See "Business--Employees" and "--
Training, Quality Assurance and Safety."
Unionized Workforce. Approximately 80% of the Company's employees are
covered by collective bargaining agreements. Although the majority of these
agreements prohibit strikes and work stoppages, there can be no assurance that
strikes or work stoppages will not occur in the future. Strikes or work
stoppages and the resultant adverse impact on the Company's relationship with
its customers could have a material adverse effect on the Company's business,
financial condition and results of operations. In addition, the Company's
acquisition strategy could be adversely affected because of its union status
for a variety of reasons, including without limitation, incompatibility with a
target's existing unions and reluctance of non-union targets to become
affiliated with a union based company. See "Business--Employees."
8
<PAGE>
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, there are relatively few, if any, barriers to entry into the market
in which the Company operates and, as a result, any organization that has
adequate financial resources and access to technical expertise may become a
competitor to the Company, including public utilities. Competition in the
industry depends on a number of factors, including price. Certain of the
company's competitors may have lower overhead cost structures and may,
therefore, be able to provide their services at lower rates than the Company.
In addition, some of the Company's competitors are larger and have greater
resources than the Company. There can be no assurance that the Company's
competitors will not develop the expertise, experience and resources to
provide services that are equal or superior in both price and quality to the
company's services, or that the Company will be able to maintain or enhance
its competitive position. The Company may also face competition from the in-
house service organizations of its existing or prospective customers,
including electric utility and telecommunications services providers, which
employ personnel who perform some of the same types of services as those
provided by the Company. There can be no assurance that existing or
prospective customers of the Company will continue to out source services in
the future. See "Business--Competition."
Contract Bidding Risks. A significant portion of the Company's revenues are,
and will continue to be, generated under fixed price contracts. The Company
must estimate the costs of completing a particular project, and the cost of
labor and materials may vary from the costs originally estimated by the
company. These variations and other risks inherent in performing fixed price
contracts may result in revenue and gross profits different from those
originally estimated, which could result in reduced profitability or losses on
projects. Depending upon the size of a particular project, variations from
estimated contract costs can have a significant impact on the Company's
operating results for any fiscal quarter or year. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Introduction."
Certain of the Company's contracts are master service agreements pursuant to
which work is assigned on a project by project basis. There is generally no
obligation on the part of the Company's customers to assign work to the
company under these agreements and there can be no assurance that customers
will continue to assign work to the Company. A significant decline in work
assigned pursuant to these contracts could have a material adverse effect on
the results of operations of the Company.
Seasonality; Fluctuations of Quarterly Results. The electric and
telecommunications infrastructure contracting business can be subject to
seasonal variations. Generally, during the winter months, demand for new
projects and maintenance services may be lower due to reduced construction
activity during inclement weather, while demand for electrical service and
repairs may be higher due to damage caused by such weather. Additionally, the
industry can be highly cyclical. As a result, the Company's volume of business
may be adversely affected by declines in new projects in various geographic
regions of the U.S. Quarterly results may also be materially affected by the
timing of acquisitions, variations in the margins of projects performed during
any particular quarter, the timing and magnitude of acquisition assimilation
costs and regional economic conditions. Accordingly, the Company's operating
results in any particular quarter may not be indicative of the results that
can be expected for any other quarter or for the entire year. See
"Management's Discussion and Analysis of Financial condition and Results of
Operations--Seasonality; Fluctuations of Quarterly Results."
Potential Exposure to Environmental Liabilities. The Company's operations
are subject to various environmental laws and regulations, including those
dealing with handling and disposal of waste products, polychlorinated
biphenyls, fuel storage and air quality. As a result of past and future
operations at its facilities, the Company may be required to incur remediation
costs and other expenses related thereto. In addition, although the Company
intends to conduct appropriate due diligence with respect to environmental
matters in connection with future acquisitions, there can be no assurance that
the Company will be able to identify or be indemnified for all potential
environmental liabilities relating to any acquired business.
Control by Existing Management and Stockholders. The Company's executive
officers and directors, former stockholders of the Founding Companies and
entities affiliated with them beneficially own approximately 8.1
9
<PAGE>
million shares of Common Stock and Limited Vote Common Stock, representing
approximately 45.0% of the aggregate outstanding shares of Common Stock and
Limited Vote Common Stock. The initial stockholders of the Company, certain
members of management and others own 3,345,333 shares of Limited Vote Common
Stock. Shares of Limited Vote Common Stock are entitled to elect one member of
the Company's Board of Directors and are entitled to 0.10 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 on the
election of any other directors. The Company's executive officers and
directors and former stockholders of the Founding Companies control in the
aggregate approximately 55.4% of all shares of Common Stock (which percentage
excludes shares of Limited Vote Common Stock) and, if acting in concert, are
able to control the Company's affairs, elect all except one of the members of
the Board of Directors and control the outcome of any matter submitted to a
vote of stockholders. See "Principal Stockholders."
Dependence on Key Personnel. The Company's operations are dependent on the
continued efforts of its executive officers and on senior management of the
Founding Companies. Furthermore, the Company will likely be dependent on the
senior management of companies that it may acquire in the future. Although the
company will enter into an employment agreement with each of the Company's
executive officers and other key employees, there can be no assurance that any
individual will continue in such capacity for any particular period of time.
The loss of key personnel, or the inability to hire and retain qualified
employees could have an adverse effect on the Company's business, financial
condition and results of operations. The Company does not intend to carry key-
person life insurance on any of its employees. See "Management."
Shares Eligible for Future Sale. The Company's directors, executive officers
and certain stockholders who beneficially own 10,872,333 shares of Common
Stock and Limited Vote Common Stock in the aggregate have agreed not to
directly or indirectly offer for sale, sell or otherwise dispose of their
shares until February 18, 2000 without the prior written consent of BT Alex.
Brown Incorporated, the lead underwriter of the IPO. These shares and an
additional 1,283,707 shares of Common Stock issued in the acquisitions of
Spalj and Golden State are "restricted securities" under Rule 144 and may be
publicly sold only if registered under the Securities Act or sold in
accordance with an applicable exemption from registration. Prior to the IPO
there had been no market for the Common Stock and no prediction can be made as
to the effect, if any, that the sale of shares or the availability of shares
for sale will have on the market price prevailing from time to time.
Nevertheless, sales of substantial amounts of the Common Stock in the public
market could adversely affect prevailing market prices and the ability of
Quanta to raise equity capital in the future. See "Shares Eligible for Future
Sale."
The 5,000,000 shares of Common Stock registered with the Commission under
the Securities Act in the registration statement of which this Prospectus
forms a part and issuable in business combination transactions will generally
be freely tradable by nonaffiliates after their issuance, unless the sale
thereof is contractually restricted or subject to accounting rules relating to
pooling-of-interest transactions. The purchasers of shares of Common Stock in
this offering may be required to execute an agreement whereby such persons
agree to hold all or a portion of such shares for a period of up to two years
after the date of acquisition. These agreements may be modified or waived by
Quanta in connection with any particular business combination.
Certain Anti-Takeover Provisions. Certain provisions of the Company's
Amended and Restated Certificate of Incorporation and Amended and Restated
Bylaws and Delaware law could, together or separately, discourage potential
acquisition proposals, delay or prevent a change in control of the Company or
limit the price that certain investors may be willing to pay in the future for
shares of the Common Stock. The Amended and Restated Certificate of
incorporation permits the Board of Directors to determine the rights,
preferences and restrictions of unissued series of the Company's authorized
Preferred Stock and to fix the number and the designation of shares thereunder
and to adopt amendments to the Amended and Restated Bylaws. The Amended and
Restated Bylaws contain restrictions regarding the right of stockholders to
nominate directors and to submit proposals to be considered at stockholder
meetings. Also, the Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws restrict the right of stockholders to call a
special meeting of stockholders and to act by written consent. The Company
also is subject to Section 203 of the Delaware General Corporation Law (the
"DGCL"), which, subject to certain exceptions, prohibits a Delaware
corporation 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 an interested stockholder. See "Description of
Capital Stock."
10
<PAGE>
Absence of Dividends. The Company has never paid any cash dividends and does
not anticipate paying cash dividends on its Common Stock in the immediate
future. See "Dividend Policy."
Possible Volatility of Stock Price. The Company's initial public offering of
Common Stock was completed in February 1998, and there can be no assurance
that a viable public market for the Common Stock will be sustained. The
trading price of the Common Stock could be subject to significant fluctuations
in response to variations in the Company's quarterly operating results,
general trends in the company's industry and other factors. See "Price Range
of Common Stock."
Forward-Looking Statements. There are a number of statements in this
Prospectus that address activities, events or developments which the Company
expects or anticipates will or may occur in the future, including such matters
as the Company's strategy for internal growth and improved profitability,
additional capital expenditures (including the amount and nature thereof),
acquisitions of assets and businesses, industry trends and other such matters.
These statements are based on certain assumptions and analyses made by the
Company in light of its perception of historical trends, current business and
economic conditions and expected future developments as well as other factors
it believes are reasonable or appropriate. However, whether actual results and
developments will conform with the Company's expectations and predictions 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 the Company; changes in laws or regulations and other factors, most
of which are beyond the control of the Company. Consequently, there can be no
assurance that the actual results or developments anticipated by the Company
will be realized or, even if substantially realized, that they will have the
expected consequences to or effects on the Company or its business or
operations.
11
<PAGE>
THE COMPANY
Quanta was founded in August 1997 to create a leading provider of specialty
electric and telecommunications infrastructure contracting services. Quanta
has recently acquired the four Founding Companies. For the year ended December
31,1997, the Founding Companies, which have been in business an average of 36
years, had pro forma combined annual revenues of approximately $152.3 million.
A brief description of each of the Founding Companies is set forth below.
PAR. PAR was founded in 1954 and is headquartered in North Kansas City,
Missouri. PAR maintains additional offices in Topeka, Kansas; Coal, Missouri;
Des Moines, Iowa; Aurora, Colorado and El Cajon, California and in 1997
provided services to customers in Missouri, Iowa, Colorado, Kansas, Nebraska,
California, Montana, Illinois and Hawaii. PAR had revenues of approximately
$49.1 million for the year ended December 31, 1997 and currently has
approximately 330 employees. PAR provides full 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, PAR provides emergency electrical
restoration services and other routine electrical system maintenance services.
UNION POWER. Union Power was founded in 1946 and is headquartered in
Englewood, Colorado. Union Power maintains additional offices in Las Vegas and
Reno, Nevada and Vacaville, California and in 1997 provided services to
customers in Colorado, Nevada, California and Oregon. Union Power had revenues
of approximately $42.8 million for the year ended August 31, 1997 and
currently has approximately 290 employees. Union Power provides 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.
TRANS TECH. 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 had revenues of approximately $32.8 million for
the year ended December 31, 1997 and currently has approximately 290
employees. 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. The company also
performs traditional electrical contracting services for private and public
entities in the commercial and industrial markets.
POTELCO. Potelco was founded in 1965 and is headquartered near Seattle,
Washington. Potelco maintains an additional office in Spokane, Washington and
in 1997 provided services to customers in Washington, Oregon and Idaho.
Potelco had revenues of approximately $19.2 million for the year ended
December 31, 1997 and currently has approximately 175 employees. Potelco
provides electric and telecommunication infrastructure 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 telecommunication installation, maintenance
and repair services to the commercial and industrial markets.
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. See "Certain Transactions--Organization of the Company." Its executive
offices are located at 3555 Timmons Lane, Suite 610, Houston, Texas 77027, and
its telephone number at that address is (713) 629-7600.
USE OF PROCEEDS
This Prospectus relates to shares of Common Stock that may be offered and
issued by the Company from time to time in connection with the acquisitions of
the securities and assets of other businesses. Other than the securities and
assets acquired, there will be no proceeds to the Company from this offering.
12
<PAGE>
PRICE RANGE OF COMMON STOCK
The Common Stock was initially offered to the public on February 12, 1998 at
a price of $9.00 per share and 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 (through May 1, 1998)......................... $17.75 $14.06
</TABLE>
On May 1, 1998, the last sale price for the Common Stock as reported by the
NYSE was $14.75 per share. On May 4, 1998, there were 47 holders of record of
Common Stock.
DIVIDEND POLICY
The Company currently intends to retain its future earnings, if any, to
finance the growth, development and expansion of its business and,
accordingly, does not currently intend to declare or pay any cash dividends on
the Common Stock in the immediate future. The declaration, payment and amount
of future cash dividends, if any, will be at the discretion of the Company's
Board of Directors after taking into account various factors, including, among
others, the Company's financial condition, results of operations, cash flows
from operations, current and anticipated capital requirements and expansion
plans, the income tax laws then in effect and the requirements of Delaware
law. In addition, the Company expects that the terms of any credit facility
that it may obtain in the future will include restrictions on payment of cash
dividends by the Company without the consent of the lender.
13
<PAGE>
SELECTED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Quanta acquired the Founding Companies simultaneously with the IPO. For
financial statement presentation purposes, however, PAR has been identified as
the "accounting acquiror," as its former stockholders represent the largest
voting interest within the Company. The following selected historical
financial data for PAR as of December 31, 1996 and December 31, 1997 and for
each of the three years in the period ended December 31, 1997, have been
derived from the audited financial statements of PAR included elsewhere in
this Prospectus. The following selected historical financial data for PAR as
of December 31, 1993, 1994 and 1995 and for each of the two years in the
period ended December 31, 1994, have been derived from the unaudited financial
statements of PAR, which have been prepared on the same basis as the audited
financial statements and, in the opinion of PAR's management, reflect all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of such data. The following selected historical financial
data for Quanta has been derived from the audited financial statements of
Quanta included elsewhere in this Prospectus.
The selected unaudited pro forma combined financial data below present
certain data for the Company, adjusted for (i) the Acquisitions, (ii) the
effects of certain other pro forma adjustments to the historical financial
statements (iii) the consummation of the IPO and the application of the net
proceeds therefrom and (iv) the Spalj Acquisition. The unaudited pro forma
combined income statement data assume that the Acquisitions, the IPO and
related transactions and the Spalj Acquisition were closed on January 1, 1997,
and are not necessarily indicative of the results the Company would have
obtained had these events actually then occurred or of the Company's future
results. During the periods presented below, the Founding Companies and Spalj
were not under common control or management and, therefore, the data presented
may not be comparable to or indicative of post-combination results to be
achieved by the Company. The unaudited pro forma financial data should be read
in conjunction with the other financial information included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------------------------
1993 1994 1995 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
HISTORICAL STATEMENT OF
OPERATIONS DATA:
PAR
Revenues............... $ 26,553 $ 43,909 $ 38,915 $ 42,684 $ 49,132
Costs of services
(including
depreciation)......... 22,834 36,525 33,193 35,789 37,691
--------- --------- --------- --------- ---------
Gross profit........... 3,719 7,384 5,722 6,895 11,441
Selling, general and
administrative
expenses.............. 2,895 4,836 4,342 5,012 6,891
--------- --------- --------- --------- ---------
Income from operations. 824 2,548 1,380 1,883 4,550
Other income (expense),
net................... (251) (412) (512) (646) (716)
--------- --------- --------- --------- ---------
Income before provision
for income taxes...... 573 2,136 868 1,237 3,834
Provision for income
taxes................. 152 867 353 487 1,540
--------- --------- --------- --------- ---------
Net income............. $ 421 $ 1,269 $ 515 $ 750 $ 2,294
========= ========= ========= ========= =========
Basic and diluted
earnings per share.... $ 0.14 $ 0.42 $ 0.17 $ 0.25 $ 0.76
========= ========= ========= ========= =========
Shares used in the
computation of basic
and diluted earnings
per share(1).......... 3,000,000 3,000,000 3,000,000 3,000,000 3,000,000
========= ========= ========= ========= =========
</TABLE>
- --------
(1) For financial statement presentation purposes, as required by the rules
and regulations of the Securities Act, PAR has been identified as the
accounting acquiror in the transaction with Quanta and its IPO, as its
former shareholders represent the largest shareholding interest of Quanta.
As such, the shares of Quanta Common Stock beneficially owned by the
former shareholders of PAR have been used in the calculation of basic and
diluted earnings per share for all periods presented herein.
14
<PAGE>
HISTORICAL STATEMENT OF OPERATIONS DATA:
QUANTA
<TABLE>
<CAPTION>
1997(1)
--------
<S> <C>
Revenues......................................................... $ --
Selling, general and administrative expenses..................... 13,003 (2)
--------
Loss before provision for income taxes........................... (13,003)
Provision for income taxes....................................... --
Net loss......................................................... $(13,003)
========
Basic and diluted earnings per share............................. $ (18.92)
========
Weighted average shares used in the computation of basic and
diluted earnings per share...................................... 687,336
========
</TABLE>
- --------
(1) Represents operations from the period from inception (August 19, 1997)
through December 31, 1997.
(2) As a result of the issuance of shares to Main Street Merchant Partners
II, L.P. and management for nominal consideration, the Company recorded a
non-recurring, non-cash charge of $13.0 million. See Note 2 to the Quanta
Services, Inc. financial statements included elsewhere herein.
(3) Shares used in the computation of basic and diluted earnings per share
include the weighted average portion of the 3,345,333 shares issued from
the period from inception through December 31, 1997.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1997
------------
<S> <C>
PRO FORMA COMBINED:
Revenues(1)...................................................... $ 173,795
Cost of services (including depreciation)........................ 138,369
----------
Gross profit..................................................... 35,426
Selling, general and administrative expenses (2)................. 11,311
Goodwill amortization(3)......................................... 2,280
----------
Income from operations........................................... 21,835
Other income (expense), net (4).................................. (1,536)
----------
Income before income tax expense................................. 20,299
Provision for income taxes (5)................................... 8,807
----------
Net income....................................................... $ 11,492
==========
Basic and diluted earnings per share............................. $ 0.68
==========
Shares used in computing pro forma basic and diluted earnings per
share (6)....................................................... 17,011,562
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL--
HISTORICAL--PAR QUANTA PRO FORMA
--------------------------------------- ------------ ------------------------------
DECEMBER 31, DECEMBER 31, 1997
--------------------------------------- DECEMBER 31, ------------------------------
1993 1994 1995 1996 1997 1997 COMBINED(7) AS ADJUSTED(8)
------- ------- ------- ------- ------- ------------ ----------- --------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance Sheet Data(9)
Working capital
(deficit)............. $ 1,162 $ 1,959 $ 1,344 $ 653 $ 1,409 $ -- $(10,999)(10) $ 29,918
Total assets........... 11,786 18,365 18,595 20,699 25,147 1,306 136,072 176,356
Long-term debt, net of
current maturities.... 1,225 3,532 2,932 2,000 3,213 -- 13,763 24,423 (11)
Total stockholders'
equity................ 5,174 6,443 6,958 7,708 10,002 -- 63,893 121,977
</TABLE>
15
<PAGE>
(1) Pro Forma revenues for the year ended December 31, 1997 including Golden
State were approximately $196.0 million.
(2) The unaudited pro forma combined statement of operations data reflect an
aggregate of approximately $2.7 million for the year ended December 31,
1997 in pro forma reductions in salary, bonus and benefits of the owners
and management of the Founding Companies to which they have agreed
prospectively. Additionally, it excludes the $13.0 million non-recurring,
non-cash charge recognized by Quanta related to the issuance of stock to
an initial stockholder and management, as a result of the issuance of such
shares for nominal consideration. See Note 2 of Notes to Financial
Statements of Quanta.
(3) Reflects amortization of the goodwill to be recorded as a result of the
Acquisitions and the Spalj Acquisition over a 40 year period.
(4) Reflects the reduction for interest expense of $1.4 million for the year
ended December 31, 1997 attributable to the repayment of $19.0 million of
historical debt of the Founding Companies with proceeds from the IPO, net
of additional interest expense of $1.2 million on borrowings under the
Company's credit facility for the Spalj Acquisition and additional
interest expense as discussed in Note 9 below. Additionally, reflects
reductions in expenses associated with certain non-operating assets
transferred to the Founding Companies prior to the Acquisitions.
(5) Assumes all pretax income before non-deductible goodwill and other
permanent items is subject to an estimated 39.0% combined tax rate.
(6) Computed as described on page F-4 in Note (2) to the Unaudited Pro Forma
Combined Statements of Operations included elsewhere herein.
(7) Reflects the Acquisitions and related transactions as if they had occurred
on December 31, 1997. The unaudited pro forma combined balance sheet data
should be read in conjunction with the other financial information and
historical financial statements and notes thereto included elsewhere
herein.
(8) Reflects the closing of the IPO and the Company's application of the net
proceeds therefrom to fund the cash portion of the Acquisition
Consideration and to repay certain indebtedness of the Founding Companies.
Also reflects the Spalj Acquisition.
(9) Two of the Founding Companies have historically elected S corporation
status for tax purposes. Prior to the Acquisitions, these Founding
Companies made S corporation distributions to their stockholders totaling
approximately $8.7 million (the "S Corporation Distributions"). In order
to fund the S Corporation Distributions, the companies borrowed
approximately $5.1 million prior to December 31, 1997, and approximately
$3.6 million subsequent to year end. Accordingly, pro forma interest
expense has been increased by $0.8 million for the year ended December 31,
1997 and pro forma stockholders' equity has been reduced by approximately
$3.6 million.
(10) Includes approximately $21.0 million payable to owners of the Founding
Companies, representing the actual cash portion of the Acquisition
Consideration paid from a portion of the net proceeds of the IPO.
(11) Includes approximately $17.7 million borrowed under the Company's credit
facility in connection with the Spalj Acquisition.
16
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis contains certain statements of a
forward-looking nature relating to future events or the future financial
performance of the Company. Such statements are only predictions and the
actual events or results may differ materially from the results discussed in
the forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to, those discussed in "Risk
Factors," as well as those discussed elsewhere in this Prospectus. The
historical results set forth in this discussion and analysis are not
indicative of trends with respect to any actual or projected future financial
performance of the Company. This discussion and analysis should be read in
conjunction with the Unaudited Pro Forma Combined Financial Statements, The
Founding Companies' and Spalj's Financial Statements and the related Notes
thereto included elsewhere in this Prospectus.
INTRODUCTION
The Company's revenues are derived from providing specialty electrical
contracting and maintenance services related to electric and
telecommunications infrastructure, providing electrical contracting services
to the commercial and industrial markets and installing transportation control
and lighting systems. The Company's services include the installation, repair
and maintenance of electric power transmission and distribution lines and
telecommunication 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, design and
engineering services, as well as the provision of specialty contracting
services for electric, video, security, fire, voice and data systems. The
Company's customers include electric utilities, telecommunication and cable
television system operators, governmental entities, general contractors and
owners and managers of commercial and industrial properties. The Founding
Companies and Spalj had pro forma combined revenues for the year ended
December 31, 1997 of $173.8 million, of which 64% was attributable to electric
utility infrastructure services, 17% was attributable to telecommunications
infrastructure services, 9% was attributable to commercial and industrial
services and 10% was attributable to transportation control and lighting
systems services.
The Company enters into contracts principally on the basis of competitive
bids, the final terms and prices of which are frequently negotiated with the
customer. Although the terms of the contracts undertaken by the Company vary
considerably, the contracts are usually on either a lump sum or unit price
basis in which the Company agrees to do the work for a fixed amount for the
entire project (lump sum) or for units of work performed (unit price). Most
installation projects are completed within one year, while maintenance and
repair work is frequently provided under open-ended, unit price master service
agreements which are renewable annually. Revenues from lump sum contracts are
generally recorded 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. The Company recognizes
revenue when services are performed except when work is being performed under
a fixed price or cost-plus-fee contract. Such contracts generally provide that
the customer accept completion of progress to date and compensate the Company
for services which have been rendered, measured typically in terms of units
installed, hours expended or some other measure of progress. Certain of the
company's customers require the Company to post performance and payment bonds
upon execution of the contract, depending upon the nature of the work to be
performed. The Company's 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 the Company 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. The Company's gross
margin, which is gross profit expressed as a percentage of revenues, is
typically higher on projects where labor, rather than materials, constitutes a
greater portion of the cost of services. Labor costs can be predicted with
relatively less accuracy than materials costs. Therefore, to compensate for
the potential variability of labor costs, the
17
<PAGE>
Company seeks to maintain higher margins on its labor-intensive projects. The
Company is subject to a $500,000 deductible for workers compensation insurance
on certain of its operations. Fluctuations in insurance accruals related to
this deductible could have a significant impact on gross margins in the period
in which such adjustments are made. Selling, general and administrative
expenses consist primarily of compensation and related benefits to owners,
administrative salaries and benefits, marketing, office rent and utilities,
communications and professional fees.
The Founding Companies have operated throughout the 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 Founding Companies. In connection with
the Acquisitions, certain owners of the Founding Companies have agreed to
reductions in their compensation and related benefits totaling $2.7 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 these persons and
the Company.
The Company believes that it will realize savings from (i) consolidation of
insurance and bonding programs, (ii) reduction in other general and
administrative expenses such as training, marketing, communications and
professional fees, (iii) the Company's ability to borrow at lower interest
rates than most, if not all, of the Acquired Businesses, (iv) consolidation of
operations in certain locations and (v) greater volume discounts from
suppliers of materials, parts and supplies. It is anticipated that costs
related to the Company's new corporate management, being a public company and
integrating the Acquired Businesses will offset these savings. The Company
believes that neither these savings nor the costs associated therewith can be
quantified as there have been no 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.
In November 1997, the Company sold 1.7 million shares of Limited Vote Common
Stock to management and an initial stockholder. As a result, the Company will
record 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"). The Compensation Charge has been estimated based on a fair value
that is discounted from the initial public offering price. This non-recurring
Compensation Charge is not included in the Unaudited Pro Forma Combined
Financial Statements.
The Acquisitions have been accounted for using the purchase method of
accounting. PAR has been designated as the "accounting acquiror" in the
Acquisitions. Accordingly, the excess of the fair value of the consideration
paid for the Acquisitions of $40.1 million over the fair value of the net
assets acquired by PAR from the other Founding Companies will be recorded as
"goodwill." In addition, goodwill of $25.6 million will be recorded
attributable to the 3,345,333 shares of Limited Vote Common Stock issued to
initial stockholders and management. Together, this goodwill, totaling $65.7
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, which is not deductible for tax purposes, is expected to be
approximately $1.6 million per year. For purposes of the transactions
discussed above, the Company utilized a $8.10 per share value for the Common
Stock and a $7.65 per share value for the Limited Vote Common Stock in
calculating goodwill. These valuations reflect a 10% and 15% discount,
respectively, from the initial public offering price, based on the two-year
lock-up agreement entered into by the stockholders of each Founding Company
and by the holders of the Limited Vote Common Stock with BT Alex. Brown
Incorporated. See "Certain Transactions--Organization of the Company."
REGULATORY MATTERS
The Company's operations are subject to the authority of various state and
municipal regulatory bodies concerned with the licensing of contractors. The
Company has experienced no material difficulty in complying with the
requirements imposed on it by such regulatory bodies. See "Business--
Regulation."
18
<PAGE>
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
The Company's results of operations can be subject to seasonal variations.
Generally, during the winter months, demand for new projects and maintenance
services may be lower due to reduced construction activity during such
weather, while demand for electrical service and repairs may be higher due to
damage caused by inclement weather. Additionally, the industry can be highly
cyclical. As a result, the Company's volume of business may be adversely
affected by declines in new projects in various geographic regions in the U.S.
Quarterly results may also be materially affected by the timing of
acquisitions, variations in the margins of projects performed during any
particular quarter, the timing and magnitude of acquisition assimilation costs
and regional economic conditions. Accordingly, the Company's operating result
in any particular quarter may not be indicative of the results that can be
expected for any other quarter or for the entire year.
COMBINED LIQUIDITY AND CAPITAL RESOURCES
In February 1998, Quanta completed the IPO, which involved the issuance of
5,000,000 shares of Common Stock at a price of $9.00 per share (before
deducting underwriter 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 underwriter discounts and commissions) pursuant to the
underwriter's overallotment option. The proceeds from these transactions, net
of the discounts and after deducting the expenses of the IPO, were
approximately $45.2 million. Of this amount, $21.0 million was used to fund
the cash portion of the purchase price relating to the acquisition of the
Founding Companies.
As of December 31, 1997, the Company had pro forma cash and cash equivalents
of $10.4 million, pro forma working capital of $29.9 million and long-term
debt of $24.4 million net of current maturities, after giving consideration to
the consummation of the Acquisitions, the Spalj Acquisition and the
application of the net proceeds of the IPO.
In connection with and prior to the Acquisitions, certain Founding Companies
made the S Corporation Distributions to their owners of substantially all of
their previously-taxed undistributed earnings. The pro forma combined balance
sheet as of December 31, 1997 included elsewhere in this Prospectus reflect
pro forma adjustments for the estimated amount of these S Corporation
Distributions had they occurred in their entirety as of December 31, 1997.
These pro forma adjustments reflect $3.6 million of S Corporation
Distributions. Additionally, in January 1998, Spalj made S Corporation
distributions to its owners totaling approximately $3.6 million. Such
distributions have been reflected as a current liability in the pro forma
combined balance sheet at December 31, 1997.
In April 1998, the Company obtained a $50,000,000 revolving credit facility
from two commercial banks. The facility is unsecured and is to provide funds
to be used for working capital, to finance acquisitions and for other general
corporate purposes. Amounts borrowed under the credit facility will bear
interest at a rate equal to either (a) the London Interbank Offered Rate
("LIBOR") plus 0.75% to 1.75%, as determined by the ratio of the Company's
total funded debt to EBITDA (as defined in the credit facility) or (b) the
bank's prime rate plus up to 0.25%, as determined by the ratio of the
Company's total funded debt to EBITDA. Commitment fees of 0.175% to 0.30%
(based on certain financial ratios) are due on any unused borrowing capacity
under the credit facility. The Company's existing and future subsidiaries will
guarantee the repayment of all amounts due under the facility and the facility
restricts pledges on all material assets. The credit facility contains usual
and customary covenants for a credit facility of this nature including the
prohibition of the payment of dividends and the consent of the lenders for
acquisitions exceeding a certain level of cash consideration. As of May 5,
1998, outstanding borrowings under the credit agreement totaled approximately
$28.3 million.
As part of its growth strategy, the Company is pursuing an acquisition
program. Through May 5, 1998 the Company has acquired two companies in
addition to the Founding Companies for an aggregate consideration of 1,283,707
shares of Common Stock and $23.7 million in cash. The cash portion of such
consideration was provided by borrowings under the Company's credit facility.
The Company has also signed non-binding letters of intent to acquire two
additional companies having combined revenues of approximately $35 million.
The consideration related to these companies is under negotiation. The timing,
size or success of any acquisition effort and the associated potential capital
commitments cannot be predicted. The Company expects to fund future
19
<PAGE>
acquisitions primarily with issuances of additional equity and borrowings
under its credit facility, as well as cash flow from operations. The Company
anticipates that its cash flow from operations and proceeds from the IPO will
provide sufficient cash to enable the Company to meet its working capital
needs, debt service requirements and planned capital expenditures for property
and equipment through 1998. On a combined basis, the Founding Companies and
Spalj made capital expenditures of $12.7 million in fiscal 1997.
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 the combined Founding Companies in those periods.
YEAR 2000
The Company utilizes software and technologies throughout its operations
that will be affected by the date in the year 2000. An assessment of the
systems that will be affected by the Year 2000 issue has been completed. The
Company does not believe that costs related to the Year 2000 issue will
materially impact its results of operations. However, there can be no
guarantee that the systems of other companies on which the Company's systems
rely will be timely converted or that a failure to convert by another company
or a conversion that is incompatible with the Company's system would not have
a material adverse effect on the Company.
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 its shareholders represent the largest shareholding interest in
Quanta.
PAR RESULTS OF OPERATIONS
PAR was founded in 1954 and is headquartered in North Kansas City, Missouri.
It operates primarily throughout the Midwestern and Western U.S. and maintains
divisional offices in Topeka, Kansas; Coal, Missouri; Des Moines, Iowa;
Aurora, Colorado and El Cajon, California. PAR focuses on providing full
electric infrastructure contracting services, including installation of
electric transmission lines, both underground and above ground, and
distribution lines and construction of electric substations. In 1997, PAR
provided services in Missouri, Iowa, Colorado, Kansas, Nebraska, California,
Montana, Illinois, Hawaii and Utah.
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,
-------------------------------------------
1995 1996 1997
------------- ------------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Revenues......................... $38,915 100.0% $42,684 100.0% $49,132 100.0%
Cost of services................. 33,193 85.3 35,789 83.8 37,691 76.7
------- ----- ------- ----- ------- -----
Gross profit.................... 5,722 14.7 6,895 16.2 11,441 23.3
Selling, general and
administrative expenses......... 4,342 11.2 5,012 11.7 6,891 14.0
------- ----- ------- ----- ------- -----
Income from operations........... $ 1,380 3.5% $ 1,883 4.4% $ 4,550 9.3%
======= ===== ======= ===== ======= =====
</TABLE>
PAR results for the year ended December 31, 1997 compared to the year ended
December 31, 1996
Revenues. Revenues increased $6.4 million, or 15.0%, from $42.7 million for
the year ended December 31, 1996 to $49.1 million for the year ended December
31, 1997, primarily as a result of an increased demand for the company's
services in Missouri, California and Colorado.
20
<PAGE>
Gross profit. Gross profit increased $4.5 million, or 65.2%, from $6.9
million for the year ended December 31, 1996 to $11.4 million for the year
ended December 31, 1997. As a percentage of revenues, gross profit increased
from 16.2% to 23.3%. 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.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.9 million, or 38.0%, from $5.0 million
for the year ended December 31, 1996 to $6.9 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. As a
percentage of revenues, selling, general and administrative expenses increased
from 11.7% to 14.0%.
PAR results for the year ended December 31, 1996 compared to the year ended
December 31, 1995
Revenues. Revenues increased $3.8 million, or 9.8%, from $38.9 million for
the year ended December 31, 1995 to $42.7 million for the year ended December
31, 1996, primarily as a result of increased demand for the company's services
in Colorado and, to a lesser extent, in California, but were partially offset
by decreased activity in Missouri.
Gross profit. Gross profit increased $1.2 million, or 21.1%, from $5.7
million for the year ended December 31, 1995 to $6.9 million for the year
ended December 31, 1996. As a percentage of revenues, gross profit increased
from 14.7% to 16.2%. This increase in gross profit was a result of improved
labor productivity and asset utilization but was 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 $0.7 million, or 16.3%, from $4.3 million
for the year ended December 31, 1995 to $5.0 million for the year ended
December 31, 1996, primarily due to 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 11.2%to
11.7%.
PAR liquidity and capital resources
PAR generated $3.7 million of net cash from operating activities for the
year ended December 31, 1997. Net cash used in investing activities was
approximately $4.8 million, primarily for the purchase of operating equipment
and vehicles. Net cash provided by financing activities of $1.0 million
resulted from net borrowings of long-term debt and borrowings under PAR's line
of credit for purchases of operating equipment and vehicles.
At December 31, 1997, PAR had working capital of $1.4 million and total
long-term debt, net of current maturities of $3.2 million outstanding.
PAR generated $2.7 million in net cash from operating activities for the
twelve months ended December 31, 1996. Net cash used in investing activities
was approximately $2.6 million, principally for the purchase of operating
equipment. Net cash used in financing activities of $0.4 million resulted from
repayments of long-term debt.
At December 31, 1996, PAR had working capital of $0.7 million and $2.0
million of total long-term debt outstanding, net of current maturities.
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.
21
<PAGE>
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 $0.7 million, 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 low
margin material costs.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $0.2 million, or 37.9%, from $0.5 million
for the three months ended November 30, 1996 to $0.7 million for the three
months ended November 30, 1997, due primarily to growth in the Company'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 the Company'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 $0.4 million, 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 the
company's services in Nevada and California.
22
<PAGE>
Gross profit. Gross profit increased $0.9 million, 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 $0.3 million, 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 $157,000 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 the Company's line of credit and additional borrowings.
At November 30, 1997, Union Power had $2.9 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 $0.2 million resulted from
advances on the company'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, sign age,
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 provided
by commercial and industrial customers and, to a lesser extent, by
transportation control and lighting systems customers.
23
<PAGE>
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 $0.2 million, or 11.1%, from $1.8 million
for the year ended December 31, 1996 to $2.0 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 61.9%, 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 $0.2 million, 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 $0.9 million, primarily for the purchase of operating equipment.
Net cash used in financing activities of $0.4 million 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 $0.9 million, 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
$0.6 million of total long-term debt outstanding.
POTELCO RESULTS OF OPERATIONS
Potelco was founded in 1965, is headquartered near Seattle, Washington and
operates primarily in Washington, Oregon and Idaho. Potelco provides electric
and telecommunications infrastructure 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.
24
<PAGE>
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 $0.5 million, 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 $0.8 million 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 $0.9 million 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 $0.9
million of total long-term debt outstanding.
25
<PAGE>
BUSINESS
GENERAL
Quanta 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 addition, the
company provides electrical contracting services to the commercial and
industrial markets and installs transportation control and lighting systems.
The Company's services include the installation, repair and maintenance of
electric power transmission and distribution lines and telecommunication 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, design and engineering services
and the provision of specialty contracting services for electric, video,
security, fire, voice and data systems. The Company's customers include
electric utilities, telecommunication and cable television system operators,
governmental entities, general contractors and owners and managers of
commercial and industrial properties.
The Company is one of the largest providers of electric and
telecommunications infrastructure contracting services in its markets. The
Company maintains a total of 18 offices in 9 states and performed work in 24
states during 1997. The Company believes that its size, geographical diversity
of operations, industry relationships, design and engineering capability,
expertise in specialty services and number of skilled personnel provide the
Company significant competitive advantages. During 1997, the Founding
Companies and Spalj generated pro forma combined revenues, operating income
and net income of $173.8 million, $21.8 million and $11.5 million,
respectively.
INDUSTRY OVERVIEW
The Company estimates that the electrical and telecommunications contracting
industry generates annual revenues in excess of $40 billion. The Company
believes 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. Management expects 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, the Company believes 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, the
company expects that utilities will modernize existing transmission systems,
which will increase the amount of upgrading and repair work available to
outside contractors. The Company also expects commercial and industrial
companies to continue to upgrade and expand their existing electrical
infrastructure as a result of (i) increasing levels of modernization activity,
(ii) the effects of more stringent electric codes, which establish minimum
power and safety requirements, (iii) revised national energy standards, (iv)
increases in use of electric power and (v) increased installation of
electrical capacity in excess of minimum code requirements in order to
facilitate marketing of properties.
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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, the Company
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.
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. The Company believes that electric
utilities and telecommunications providers will increasingly seek
comprehensive solutions to their infrastructure needs by utilizing fewer
qualified contractors that can provide the full range of new construction,
installation, repair, maintenance and emergency services.
The Company 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. The Company believes 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. The Company also believes that the
prominence and operating strength of the Founding Companies and the experience
of its executive management will provide the Company with significant
competitive advantages to capitalize on these opportunities.
STRATEGY
The Company plans to achieve its goal of becoming a leading provider of
electric and telecommunications infrastructure contracting services by
implementing its operating strategy, emphasizing continued internal growth and
expanding through acquisitions.
OPERATING STRATEGY. The key elements of the Company's operating strategy
are:
Operate on a Decentralized Basis. The Company intends to manage its
operations on a decentralized basis while maintaining operating and financial
controls. Local management will retain responsibility for the operations,
profitability and growth of its business. The Company believes that, while
maintaining operating and financial controls, a decentralized operating
structure will retain the entrepreneurial spirit of each of the Acquired
Businesses and will permit the Company to capitalize on the Acquired
Businesses' local and regional market knowledge, specialized skills and
customer relationships. In addition, the Company believes that its 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 will retain control of the
operations of its business, the Company's executive management will have
responsibility for corporate strategy and acquisitions, financing, insurance,
investor relations and employee benefit plans.
Achieve Operating Efficiencies. Certain administrative functions will be
centralized following the IPO. In addition, by combining overlapping
operations of certain of the Acquired Businesses, the Company expects to
achieve more efficient asset utilization and realize savings in overhead and
other expenses. The Company intends to use its increased purchasing power to
gain volume discounts in areas such as vehicles and equipment, electrical
materials, marketing, bonding, employee benefits and insurance. The Company
will seek to realize cost savings and other benefits by the sharing of
purchasing, pricing, bidding and other business practices and the sharing of
licenses. The Company intends to further develop and expand the use of
management information
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systems to facilitate financial control, project costing and asset
utilization. At some locations, the larger combined workforce will provide
additional staffing flexibility.
INTERNAL GROWTH. The Company is focused on continuing its strong internal
growth by (i) increasing the volume of services provided to existing
customers, (ii) expanding the scope of services provided to existing
customers, (iii) broadening its customer base and (iv) geographically
expanding its service area. The Company believes it will be able to expand the
services it offers in its 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 a
robotic arm that can be used to facilitate the repair of high voltage power
transmission lines without taking them out of service.
ACQUISITIONS. The Company believes 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
abroad range of specialty contracting services on a national basis. In
addition, the Company 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. The Company
believes that its financial strength and experienced management will be
attractive to acquisition candidates. The key elements of the Company's
acquisition strategy are:
Enter New Geographic Markets. The Company intends to expand into
geographic markets not currently served by the Founding Companies 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 the Company and can serve as "platforms" for the future
growth of the Company.
Expand Within Existing Markets. The Company intends to explore
acquisition opportunities in the geographic markets it already serves as
well as geographic markets served by businesses the Company acquires in the
future. Once the Company has entered a specific geographic market, it will
seek to acquire other well-established companies in that particular market
to deepen its market penetration and expand the range of services offered
to its customers. The Company will also pursue "tuck-in" acquisitions of
smaller companies whose operations can be integrated into and leveraged
with an existing operation.
ACQUISITION PROGRAM
The Company believes it will be regarded by acquisition candidates as an
attractive acquiror because of (i) the Company's strategy for creating a
national, comprehensive and professionally managed specialty electric and
telecommunications infrastructure contracting business, (ii) the Company's
decentralized operating strategy and opportunities to participate in a larger
organization, (iii) the Company's access to financial resources as a public
company, (iv) the potential for increased profitability due to centralizing
certain administrative functions, enhanced systems capabilities and economies
of scale and (v) the potential for owners of the businesses being acquired to
participate in the Company's planned growth while realizing liquidity. The
Company believes that the management of the Founding Companies will be
instrumental in identifying and assisting in the completion of future
acquisitions.
The Company has 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 (i) historical and projected financial performance, (ii) internal
rate of return, return on assets and return on revenue, (iii) experience and
reputation of the candidate's management and operations, (iv) composition and
size of the candidate's customer base, (v) whether the geographic location of
the candidate will enhance or expand the Company's market area or ability to
attract other acquisition candidates, (vi) whether the acquisition will
augment or increase the Company's market share or services offered or help
protect the Company's existing customer base, (vii) potential synergies gained
by combining the acquisition candidate with
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the Company's existing operations and (viii) liabilities, contingent or
otherwise, of the candidate. The Company anticipates that acquisition
candidates in the target markets and industries will have annual revenues
ranging from $10 million to $100 million.
As consideration for future acquisitions, the Company expects 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 the Company.
SERVICES
The Company provides a broad range of services, including the installation,
repair and maintenance of electric power transmission and distribution lines
and telecommunications 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,
design and engineering services and the provision of specialty contracting
services for electric, video, security, fire, voice and data systems. The
Company currently provides four broad business services: electric utility
infrastructure services; telecommunications infrastructure services;
commercial and industrial services; and transportation control and lighting
systems services. The Founding Companies and Spalj had pro forma combined
revenues for the year ended December 31, 1997 of $173.8 million, of which 64%
was attributable to electric utility infrastructure services, 17% was
attributable to telecommunications infrastructure services, 9% was
attributable to commercial and industrial services and 10% was attributable to
transportation control and lighting systems services.
ELECTRIC UTILITY INFRASTRUCTURE SERVICES. The Company performs specialty
electrical contracting services for electric utilities. These services include
installing, repairing and maintaining electric transmission and distribution
lines, principally above ground, 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. The Company also repairs and replaces lines which have been damaged
or destroyed as a result of adverse weather conditions.
TELECOMMUNICATIONS INFRASTRUCTURE SERVICES. The Company provides a variety
of services in connection with telecommunications, cable television and other
data transmission. The Company installs fiber optic, coaxial and copper cable
both above and below ground on behalf of telecommunications and cable service
providers. The services provided by the Company include 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. The
Company has 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, the Company is involved in the engineering, design and erection of
communications towers, including cellular telephone, PCS(R) and microwave
towers.
COMMERCIAL AND INDUSTRIAL SERVICES. The Company designs, installs, maintains
and repairs electrical wiring, telephone and data copper wiring, fiber optic
cabling and building control and automation systems for commercial and
industrial customers.
TRANSPORTATION CONTROL AND LIGHTING SYSTEMS SERVICES. The Company installs,
maintains and repairs traffic and highway control systems, such as signals,
signage, lighting and freeway management systems components. In addition, the
Company installs overhead cable and control systems for light rail
lines,"smart" highway control systems and airport lighting.
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CUSTOMERS
The Company's customers include electric utilities, telecommunications and
cable television system operators, governmental entities, general contractors
and builders, owners and managers of commercial and industrial properties. The
Company's customer base is highly concentrated. For the year ended December
31, 1997, approximately 11% of the Company's total revenues were derived from
Public Service Company of Colorado, 9% from Nevada Power Company and 6% from
Pacific Gas & Electric Company. Electric utilities, in the aggregate,
represent the largest customer base of the Company. General contractors, as a
group, account for a significant portion of customers for the Company's
commercial and industrial work. The Company believes that a substantial
portion of its total revenues and operating income will continue to be derived
from a concentrated group of customers. The loss of any of these customers
could have a material adverse effect on the Company's business, financial
condition and results of operations.
Management at each of the Acquired Businesses has been responsible for
developing and maintaining successful long-term relationships with key
customers. The Company relies heavily on repeat customers and uses both the
written and verbal referrals of its satisfied customers to help generate new
business. Many of the Company's 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. Such customers often maintain a list of vendors meeting such
standards and award contracts for individual jobs only to such vendors. The
Company strives to maintain its status as a preferred or qualified vendor to
such customers.
EMPLOYEES
As of December 31, 1997, the Company had approximately 87 salaried
employees, including executive officers, project managers or engineers, job
superintendents, staff and clerical personnel and approximately 1,059 hourly
rated employees, the number of which fluctuates depending upon the number and
size of the projects undertaken by the Company at any particular time. The
Company does not anticipate any overall reductions in staff as a result of the
consolidation of the Founding Companies, although there may be some job
realignments and new assignments in an effort to eliminate overlapping and
redundant positions.
Three of the Founding Companies are signatories to master collective
bargaining agreements with the International Brotherhood of Electrical Workers
(the "IBEW"). The other Founding Company is a signatory to various local IBEW
agreements as well as local agreements with the Laborers International Union
and the Operating Engineers Union. Under these agreements, the Founding
Companies agree to pay specified wages to its 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 the Company is
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 at any given time.
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 the Company's non-bargaining
employees.
The electric and telecommunications infrastructure contracting industry is
experiencing a shortage of skilled craftsmen. In response to the shortage, the
Company seeks to take advantage of various IBEW and NECA referral programs and
hire graduates of the joint IBEW/NECA apprenticeship program for training
qualified
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electricians. As a union employer, the Company believes that its access to
qualified personnel through these and other union sources will afford it a
distinct advantage over non-union employers in attracting much needed skilled
craftsmen in an ever-tightening labor market. None of the Acquired Businesses
has experienced any strikes or work stoppages in the past 20 years. The
Company believes its relationships with its employees and union
representatives is satisfactory.
TRAINING, QUALITY ASSURANCE AND SAFETY
Performance of the Company's services requires the use of equipment and
exposure to conditions that can be dangerous. Although the Company is
committed to a policy of operating safely and prudently, the Company has been
and is subject to claims by employees, customers and third parties for
property damage and personal injuries resulting from performance of the
Company's services. The Company performs on-site services using employees who
have completed applicable Company safety and training programs. The Company's
policies require that employees complete a prescribed training and service
program with the Company 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 Company requires
additional training, depending upon the sophistication and technical
requirements of each particular job. The Company 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
The Company operates 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 2,800
units. Most of this fleet is serviced by the Company's own mechanics who work
at various maintenance sites and facilities. The Company believes that these
vehicles generally are well-maintained and adequate for its present
operations. Management believes that in the future it will be able to lease or
purchase this equipment at lower prices due to its larger size and the volume
of its leasing and purchasing activity.
The Company leases its corporate headquarters in Houston, Texas. The Company
operates 18 sites in North Kansas City and Clinton, Missouri; South Bend,
Indiana; Las Vegas and Reno, Nevada; Topeka, Kansas; Des Moines, Iowa; Aurora
and Englewood, Colorado; Chico, El Cajon, Redwood City, Selma, Turlock and
Vacaville, California; Deerwood, Minnesota; and Sumner and Spokane,
Washington. This space is used for offices, warehousing, storage and vehicle
shops. The Company owns some of the facilities it occupies and leases others.
The Company believes that its facilities are sufficient for its current needs.
See "Certain Transactions."
REGULATION
The Company's operations are subject to various federal, state and local
laws and regulations including (i) licensing requirements applicable to
electricians and engineers, (ii) building and electrical codes, (iii)
permitting and inspection requirements applicable to construction projects,
(iv) regulations relating to worker safety and environmental protection and
(v) special bidding and procurement requirements on government projects.
The Company believes that it has all the required licenses to conduct its
operations and is in substantial compliance with applicable regulatory
requirements. Failure of the Company to comply with applicable regulations
could result in substantial fines and/or revocation of the Company's 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. The Company intends to
implement a policy to ensure that, where possible, any such permits or
licenses that may be material to the Company's operations are held by at least
two Company employees.
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COMPETITION
The markets in which the Company operates are highly competitive, requiring
substantial resources and skilled and experienced personnel. The Company
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 than the Company. In addition,
there are relatively few, if any, barriers to entry into the markets in which
the Company operates and, as a result, any organization that has adequate
financial resources and access to technical expertise may become a competitor
to the Company. A significant portion of the Company's revenues are currently
derived from master service agreements and price is often an important factor
in the award of such agreements. Accordingly, the Company could be outbid by
its competitors in an effort to procure such business. There can be no
assurance that the Company's competitors will not develop the expertise,
experience and resources to provide services that are equal or superior in
both price and quality to the Company's services, or that the Company will be
able to maintain or enhance its competitive position. The Company may also
face competition from the in-house service organizations of its 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 the Company. Although a significant portion of
these services is currently outsourced, there can be no assurance that
existing or prospective customers of the Company will continue to outsource
services in the future.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
The primary risks in the Company's operations are bodily injury, property
damage and injured workers' compensation. The Company maintains automobile and
general liability insurance for third party bodily injury and property damage
and workers' compensation coverage which it considers sufficient to insure
against these risks, subject to self-insured amounts. Accruals for outstanding
claims are estimated based on known facts and the Company's prior experience.
Actual experience and claims could differ from the Company's estimates. The
Company is consolidating the purchase of insurance, which management believes
will result in savings from the amounts paid by the Acquired Businesses.
Contracts in the electrical contracting industry may require performance
bonds or other means of financial assurance to secure contractual performance.
If the Company were unable to obtain surety bonds or letters of credit in
sufficient amounts or at acceptable rates, it may be precluded from entering
into additional contracts with certain of its customers.
LEGAL PROCEEDINGS
The Company is, from time to time, a party to litigation or administrative
proceedings that arise in the normal course of its business. The Company does
not have pending any litigation that, separately or in the aggregate, if
adversely determined, would have a material adverse effect on the Company's
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 the Company's
directors and executive officers:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
John R. Colson...................... 50 Chief Executive Officer, Director
James H. Haddox..................... 49 Chief Financial Officer, Secretary
Derrick A. Jensen................... 27 Vice President and Controller
John R. Wilson...................... 47 President of PAR, Director
Timothy A. Soule.................... 50 Vice President of Union Power, Director
John A. Martell..................... 42 Vice President of TRANS TECH, Director
Gary A. Tucci....................... 41 President of Potelco, Director
James R. Ball....................... 54 Director
Vincent D. Foster................... 41 Chairman of the Board of Directors
Rodney R. Proto..................... 49 Director
Michael T. Willis................... 52 Director
Ronald W. Soule..................... 53 President of Union Power
Robert J. Urbanski.................. 46 President of TRANS TECH
</TABLE>
John R. Colson was elected Chief Executive Officer of the Company in
December 1997 and became a director of the Company effective upon the
consummation of the IPO in February 1998. He joined PAR in 1971 and became
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 the Company since
November 1997 and Secretary since December 1997. From March 1996 until joining
the Company, 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 with Corporate
Express, Inc. in March 1996. 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.
Derrick A. Jensen has been Vice President and Controller of the Company
since December 1997. Prior to joining the Company, 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 was elected President of PAR in 1997. He joined PAR in 1977
and became an Executive Vice President in 1991. Mr. Wilson became a director
of the Company effective upon the consummation of the 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 the
Company effective upon the consummation of the IPO.
John A. Martell founded TRANS TECH in 1983 and serves as Vice President. He
is currently a member of the National Fire Protection Association and the
Illuminating Engineering Society. Mr. Martell is a Registered
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Professional Engineer. Mr. Martell became a director of the Company effective
upon the consummation of the IPO.
Gary A. Tucci joined Potelco in 1975 and became President in 1988. He is a
member of the Joint NECA/IBEW Apprenticeship and Training Committee as well as
the labor relations board. Mr. Tucci became a director of the Company
effective upon the consummation of the 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 the Company effective upon the
consummation of the IPO.
Vincent D. Foster has been a director of the Company since November 1997 and
became non-executive Chairman of the Board upon consummation of the IPO. Mr.
Foster is a Managing Director of Main Street Merchant Partners II, L.P., a
merchant banking firm which is a principal stockholder of the Company. 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.
Rodney R. Proto has been President, Chief Operating Officer and a director
of USA Waste Services, Inc. ("USA Waste"), the third largest solid waste
services company in North America, 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 USA Waste 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 the Company effective upon the consummation of
the 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 the Company effective upon the
consummation of the IPO.
Ronald W. Soule joined Union Power in 1963 and became President in 1987. He
is a member of the Board of Directors of the Colorado NECA/IBEW Negotiation
Committee, the Western Line Constructors Chapter of NECA and the Mountain
States Joint Apprenticeship and Training Committee. He is also Union Power's
representative to NECA and the past President of Western Line Constructors
Chapter of NECA.
Robert J. Urbanski founded TRANS TECH in 1983 and serves as President. He is
a member of the Institute of Transportation Engineers and the International
Municipal Sign Association.
The Amended and Restated Bylaws of the Company 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.
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The Board of Directors has established an Audit Committee and a Compensation
Committee.
DIRECTORS' COMPENSATION
Directors who also are employees of the Company or any of its subsidiaries
will not receive additional compensation for serving as directors. Each
director who is not an employee of the Company 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 the Company 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 the Company. 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 the Company's 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 the Company for nominal consideration.
EXECUTIVE COMPENSATION
The Company anticipates that during 1998 the annualized base salaries of its
most highly compensated executive officers will be $150,000 for each executive
officer. As part of Mr. Haddox's employment arrangement with the Company, he
purchased 100,000 shares of Limited Vote Common Stock for nominal
consideration and received an option under the 1997 Stock Option Plan to
purchase 125,000 shares of Common Stock at the IPO price. As part of Mr.
Jensen's employment arrangement with the Company, he purchased 37,500 shares
of Limited Vote Common Stock for nominal consideration and received an option
under the 1997 Stock Option Plan to purchase 62,500 shares of Common Stock at
the IPO price.
EMPLOYMENT AGREEMENTS
The Company has entered into an employment agreement with each executive
officer and certain key employees of the Company that prohibits such
individual from disclosing the Company's confidential information and trade
secrets and generally restricts these individuals from competing with the
Company for a period of five years after the date of the individual's
employment agreement. Each of the agreements has an initial term of three
years, provides for an automatic annual extension at the end of its initial
term and is terminable by the Company for "good cause" upon ten days' written
notice and without "good cause" by either party upon thirty days' written
notice. All employment agreements provide that if the officer's employment is
terminated by the Company 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 (i) the time period remaining under the initial term of the agreement or
(ii) 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.
The employment agreements contain certain provisions concerning a change-in-
control of the Company, including the following: (i) in the event five days'
advance notice of the transaction giving rise to the change-in-control is not
received by the Company and such officer, the change-in-control will be deemed
a termination of the employment agreement by the Company 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
the Company shall not apply and (ii) 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.
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<PAGE>
1997 STOCK OPTION 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.
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).
The Company has outstanding options to purchase approximately 872,500 shares
of Common Stock issued pursuant to the 1997 Stock Option Plan following the
IPO.
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).
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<PAGE>
CERTAIN TRANSACTIONS
ORGANIZATION OF THE COMPANY
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,
an advisory director of the Company, 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 the Company in consideration
for receiving, at the closing of the IPO, 41,665 shares of Limited Vote Common
Stock. These shares will be distributed to five individuals who each
individually advanced $25,000 to Fabal Funding Corp., none of whom is
affiliated with the initial stockholders. 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 and consummate the IPO, which advances were
repaid from the net proceeds of the IPO.
Quanta has acquired all of the issued and outstanding capital stock and
other equity interests of the Founding Companies for consideration of (i)
approximately $21.0 million in cash and (ii) 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 (i) in cash and
(ii) 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>
TRANSACTIONS INVOLVING CERTAIN OFFICERS, DIRECTORS AND STOCKHOLDERS
Certain stockholders of certain of the Founding Companies who are directors,
executive officers or key employees of the Company have guaranteed
indebtedness, performance bonds and other obligations of each of their
respective Founding Companies. These guarantees are expected to be terminated
within 90 days 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.
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 the Company. 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 provision for automatic one-year renewal periods. Such
lease covers 2.69 acres and the
37
<PAGE>
leasehold improvements located on such land for a monthly rental rate of
$4,700. In addition, Union Power will lease 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. provides for a
one-year term which will terminate on August 1, 1998, and a monthly rental
rate of $8,000. The Company believes that the economic terms of these leases
do not exceed fair market value.
Potelco has entered into written leases for its main office with the father
of Gary A. Tucci and for another office in Washington with Gary A. Tucci, who
is President of Potelco and a director of the Company. 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. The Company believes
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 the Company. 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. The Company believes that the economic terms of this lease do not
exceed fair market value.
Union Power has notes outstanding to various affiliates in the aggregate
amount of approximately $460,000, which the Company intends to use a portion
of the proceeds of the IPO to repay these notes.
Potelco owes approximately $1.1 million to its sole stockholder and his
father pursuant to a promissory note and other arrangements. The Company used
a portion of the proceeds of the IPO to repay this indebtedness.
COMPANY POLICY
In the future, any transactions with directors, officers, employees or
affiliates of the Company are anticipated to be minimal and will, in any case,
be approved by a majority of the Board of Directors, including a majority of
disinterested members of the Board of Directors.
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<PAGE>
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information with respect to the
beneficial ownership of the Company's voting capital stock by (i) each person
known by the Company to be a beneficial owner of more than 5% of any class of
the Company's voting capital stock, (ii) each director and executive officer
of the Company and (iii) all directors and executive officers of the Company
as a group. Except as otherwise indicated below, the persons named in the
table have advised the Company 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>
John R. Colson(1).............................. 2,100,000 11.7%
Main Street Merchant Partners II, L.P.(b)...... 1,546,399(a) 8.6
Vincent D. Foster(2)(b)........................ 1,546,399(a) 8.6
Gary A. Tucci(3)............................... 1,046,250 5.8
John R. Wilson(4).............................. 900,000 5.0
John A. Martell(5)............................. 781,875 4.4
Timothy A. Soule(6)............................ 337,392 1.9
James H. Haddox(1)............................. 100,000(a) *
Derrick A. Jensen(1)........................... 37,500(a) *
James R. Ball(1)(7)............................ 35,000 *
Rodney R. Proto(1)(7).......................... 35,000 *
Michael T. Willis(1)(7)........................ 35,000 *
Kevin D. Miller(b)(8).......................... 334,022(a) 1.9
Midwest Acquisition Support, LLC(b)(9)......... 334,022(a) 1.9
Stephen P. Colmar(b)(10)....................... 208,764(a) 1.2
William G. Parkhouse(b)(11).................... 179,382(a) 1.0
All directors and executive officers as a group
(11 persons)(12).............................. 6,909,416 38.6
</TABLE>
- --------
* Less than 1%.
(a) Consists entirely of Limited Vote Common Stock. See "Description of
Capital Stock" for a description of the Limited Vote Common Stock.
(b) Owns more than 5% of the outstanding shares of Limited Vote Common Stock.
(1) The address for Messrs. Ball, Colson, Proto, Haddox, Jensen and Willis is
3555 Timmons Lane, Suite 610, Houston, Texas 77027.
(2) Includes 1,546,399 shares issued to Main Street. Mr. Foster is a Managing
Director of Main Street. The address for Main Street and Mr. Foster is
1360 Post Oak Blvd., Suite 800, 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) Consists of 20,000 shares of Limited Vote Common Stock and 15,000 shares
of Common Stock.
(8) The address for Mr. Miller is 109 E. 5th Street, Suite E, Auburn, Indiana
46706.
(9) 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.
(10) 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.
(11) 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.
(12) Includes 1,743,899 shares of Limited Vote Common Stock.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 40,000,000 shares of
Common Stock, par value $.00001 per share, including 3,345,333 shares of
Limited Vote Common Stock. The Company has also authorized the issuance of
10,000,000 shares of Preferred Stock, par value $.00001 per share ("Preferred
Stock").
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.
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 the Company upon liquidation after payment or
provision for all liabilities and any preferential liquidation rights of any
Preferred Stock then outstanding. Holders of Common Stock and holders of
Limited Vote Common Stock have no preemptive rights to purchase shares of
stock of the Company. Shares of Common Stock are not subject to any redemption
provisions and are not convertible into any other securities of the Company.
Shares of 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
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.
The 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 Amended and
Restated Certificate of Incorporation and limitations prescribed by law, the
Board of Directors is expressly authorized to adopt resolutions to issue the
shares, to fix the number of shares and to change the number of shares
constituting any series and to provide for or change the voting powers,
designations, preferences and relative, participating, 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.
40
<PAGE>
Although the Company has 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 the stockholders of the Company, 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 the Company's securities are traded.
STATUTORY BUSINESS COMBINATION PROVISION
The Company is a Delaware corporation and is subject to Section 203 of the
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 (i) 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, (ii) 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 (iii) 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 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 Amended and
Restated Certificate of Incorporation limits the liability of directors of the
Company to the Company or its stockholders to the fullest extent permitted by
Delaware law. Specifically, directors of the Company will not be personally
liable to the Company 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
41
<PAGE>
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 Amended and Restated Certificate of Incorporation provides that each
officer and director of the Company 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 the Company or, while being at the time a
director or officer of the Company, is or was serving at the request of the
Company as a director, trustee, officer, employee or agent of another entity.
The Company 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 Amended and Restated Bylaws also
provide for mandatory advancement of expenses of officers and directors
incurred in defending any covered proceeding in advance of its final
disposition. The Company also carries directors' and officers' liability
insurance.
The inclusion of these provisions in the Amended and Restated 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
benefitted the Company and its stockholders. The Company's Amended and
Restated Bylaws provide indemnification to the Company's officers and
directors and certain other persons with respect to certain matters.
OTHER MATTERS
The Amended and Restated 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
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 Amended and Restated 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 Amended and Restated 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 Amended and Restated 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
The Company's Amended and Restated Bylaws contain provisions (i) requiring
that advance notice be delivered to the Company of any business to be brought
by a stockholder before an annual meeting of stockholders and (ii)
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 the
Company by a stockholder (a) in the event of business to be brought by a
stockholder before, (i) 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 (ii) 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, (i) 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 (ii) 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
42
<PAGE>
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 the Company's Amended and Restated Bylaws. The foregoing
summary is qualified in its entirety by reference to the Company's Amended and
Restated Bylaws.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company.
SHARES ELIGIBLE FOR FUTURE SALE
The Company has outstanding 17,906,400 shares of Common Stock, of which
5,750,000 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 the Company, which shares will be
subject to the resale limitations of Rule 144 under the Securities Act. The
remaining 12,156,040 shares of Common Stock are deemed "restricted securities"
under Rule 144 in that they were originally issued and sold by the Company 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 Securities and Exchange Commission (the "Commission") 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 Commission 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 approximately 872,500 shares of Common Stock have been
issued 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, the Company who purchased his or her shares pursuant to a written
compensatory plan or contract is entitled to rely on the resale provisions of
Rule 701, 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 each case
commencing 90 days after the date of this Prospectus. In addition, the Company
has 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.
The Company, its executive officers, directors, current stockholders and
persons acquiring shares of Common Stock in connection with the Acquisitions
have agreed not to offer, sell, contract to sell, grant any
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<PAGE>
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, except that the Company
may, subject to certain conditions, issue Common Stock in connection with
acquisitions, upon conversion of Limited Vote Common Stock into Common Stock
and may grant Awards (or Common Stock upon exercise of Awards) under the 1997
Stock Option Plan. See "Underwriting." These restrictions will be applicable
to any shares acquired by any of those persons during the Lockup Period. In
connection with the Acquisitions, the Company has granted registration rights
to stockholders of the Founding Companies in connection with registrations of
sales of Common Stock by the Company following the Lockup Period (other than
registrations in connection with acquisitions and pursuant to employee benefit
plans).
Prior to the IPO, there was no established public market for the Common
Stock. No prediction can be made of the effect, if any, that sales of shares
under Rule 144, or otherwise, or the availability of shares for sale will have
on the market price of the Common Stock prevailing from time to time. The
Company is unable to estimate the number of shares that may be sold in the
public market under Rule 144, or otherwise, because such amount will depend on
the trading volume in, and market price for, the Common Stock and other
factors. Nevertheless, sales of substantial amounts of the Common Stock in the
public market, or the perception that such sales could occur, could adversely
affect the market price of the Common Stock of the Company and the Company's
future ability to raise equity capital and complete any additional
acquisitions for Common Stock.
PLAN OF DISTRIBUTION
This Prospectus covers the offer and sale of up to 5,000,000 shares of
Common Stock which Quanta may issue from time to time in connection with the
future direct and indirect acquisitions of other businesses, properties or
securities in business combination transactions in accordance with Rule
415(a)(1)(viii) of Regulation C under the Securities Act.
Quanta expects that the terms upon which it may issue the shares will be
determined through negotiations with the security holders or principal owners
of the businesses whose securities or assets are acquired. It is expected that
the shares that are issued will be valued at prices reasonably related to
market prices for the Common Stock prevailing either at the time an
acquisition agreement is executed or at the time an acquisition is
consummated.
All expenses of this offering will be paid by the Company. No underwriting
discounts or commissions will be paid in connection with the issuance of
shares by Quanta in business combination transactions, although finder's fees
may be paid with respect to specific acquisitions. Any person receiving a
finder's fee may be deemed to be an underwriter within the meaning of the
Securities Act.
The shares of Common Stock offered hereunder will be listed on the NYSE, but
may be subject to certain contractual holding period requirements. See "Shares
Eligible for Future Sale."
This Prospectus, as appropriately amended or supplemented, may also be used
by persons who receive from the Company shares of Common Stock in connection
with direct and indirect acquisitions by the Company of securities and assets
of businesses held by such persons, or their transferees, and who wish to
offer and sell such shares (such persons being referred to herein as "Selling
Stockholders") in transactions in which they and any broker-dealer through
whom such shares are sold may be deemed to be underwriters within the meaning
of the Securities Act; provided, however, that no Selling Stockholder will be
authorized to use this Prospectus for any offer of such shares of Common Stock
without first obtaining the written consent of the Company. The Company may
consent to the use of this Prospectus by Selling Stockholders for a limited
period of time and subject to conditions and limitations that may vary as to
any given Selling Stockholder. The Company will receive none of the proceeds
from any such sale of shares of Common Stock by Selling Stockholders.
44
<PAGE>
Agreements with Selling Stockholders permitting the use of this Prospectus
may provide that any such offering be effected in an orderly manner through
securities dealers, acting as brokers or dealers, selected by the Company;
that Selling Stockholders enter into custody agreements with certain persons
with respect to such shares; and that sales be made only by one or more of the
methods described under this caption, as appropriately supplemented or amended
as required.
Selling Stockholders may from time to time sell all or a portion of the
shares of Common Stock in transactions on the NYSE, in negotiated
transactions, or a combination of such methods of sale, at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The shares of Common Stock may be sold
directly or through broker-dealers. If shares of Common Stock are sold through
broker-dealers, the Selling Stockholders may pay brokerage commissions and
charges. The methods by which Selling Stockholders' shares of Common Stock may
be sold include (a) block trades (which may involve crosses) in which the
broker or dealer so engaged will attempt to sell the securities as agent but
may position and resell a portion of the block as principal to facilitate the
transaction; (b) purchases by a broker or dealer as principal and resale by
such broker or dealer for its own account pursuant to this Prospectus; (c)
exchange distributions and/or secondary distributions in accordance with the
rules of the NYSE; (d) ordinary brokerage transactions and transactions in
which the broker solicits purchasers; and (e) privately negotiated
transactions.
Selling Stockholders and any broker-dealer participating in the
distribution of the shares of Common Stock may be deemed to be "underwriters"
within the meaning of the Securities Act, and any profit and any commissions
paid or any discounts or concessions allowed to any such broker-dealer may be
deemed to be underwriting discounts and commissions under the Securities Act.
The Selling Stockholders may indemnify any broker-dealer that participates in
transactions involving the sale of shares of Common Stock against certain
liabilities, including liabilities under the Securities Act.
There can be no assurances that Selling Stockholders will sell any or all of
the shares of Common Stock offered hereunder.
LEGAL MATTERS
The validity of the shares of Common Stock offered hereby will be passed
upon for the Company by Jackson Walker L.L.P., Dallas, Texas.
EXPERTS
The audited financial statements of Quanta, the Founding Companies and
Spalj, 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.
45
<PAGE>
ADDITIONAL INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (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, certain portions of which have been omitted in
accordance with the rules and regulations of the Commission. For further
information with respect to the Company and the Common Stock offered hereby,
reference is made to the Registration Statement. Statements contained in this
Prospectus as to the contents of any contract or other document filed as an
exhibit to the Registration Statement accurately describes the material
provisions of such document and 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 Commission at Judiciary Plaza, 450 Fifth Street, N.W., Room 1024,
Washington, D.C. 20549, and at the following regional offices of the
Commission: 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
Commission at prescribed rates. The Commission 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
Commission.
The Company is subject to the reporting requirements of Section 13 or 15(d)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), and
in accordance therewith files periodic reports, proxy statements and other
information with the Commission. Such periodic reports, proxy statements and
other information will be available for inspection and copying at the public
reference facilities and other regional offices referred to above. 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.
46
<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-3
Unaudited Pro Forma Combined Statements of Operations................... F-4
Notes to Unaudited Pro Forma Combined Financial Statements.............. F-5
Quanta Services, Inc.
Report of Independent Public Accountants................................ F-11
Balance Sheet........................................................... F-12
Statement of Operations................................................. F-13
Statement of Stockholders' Equity....................................... F-14
Notes to Financial Statements........................................... F-15
Par Electrical Contractors, Inc.
Report of Independent Public Accountants................................ F-20
Balance Sheets.......................................................... F-21
Statements of Operations................................................ F-22
Statements of Cash Flows................................................ F-23
Statements of Shareholders' Equity...................................... F-24
Notes to Financial Statements........................................... F-25
FOUNDING COMPANIES
Union Power Construction Company
Report of Independent Public Accountants................................ F-34
Balance Sheets.......................................................... F-35
Statements of Operations................................................ F-36
Statements of Cash Flows................................................ F-37
Statements of Stockholders' Equity...................................... F-38
Notes to Financial Statements........................................... F-39
Trans Tech Electric, Inc.
Report of Independent Public Accountants................................ F-47
Balance Sheets.......................................................... F-48
Statements of Operations................................................ F-49
Statements of Cash Flows................................................ F-50
Statements of Shareholders' Equity...................................... F-51
Notes to Financial Statements........................................... F-52
Potelco, Inc.
Report of Independent Public Accountants................................ F-58
Balance Sheets.......................................................... F-59
Statements of Operations................................................ F-60
Statements of Cash Flows................................................ F-61
Statements of Stockholder's Equity...................................... F-62
Notes to Financial Statements........................................... F-63
SPALJ ACQUISITION
Spalj Construction Company
Report of Independent Public Accountants................................ F-70
Balance Sheet........................................................... F-71
Statement of Operations................................................. F-72
Statement of Cash Flows................................................. F-73
Statement of Shareholders' Equity....................................... F-74
Notes to Financial Statements........................................... F-75
</TABLE>
F-1
<PAGE>
QUANTA SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements give effect
to (i) the acquisitions by Quanta Services, Inc. ("Quanta"), of the
outstanding capital stock of PAR, TRANS TECH, Union Power and Potelco
(together, the "Founding Companies"), and related transactions (ii) the IPO
and (iii) the subsequent acquisition of Spalj Construction Company ("Spalj"),
(the "Spalj Acquisition"). The acquisitions of the Founding Companies (the
"Acquisitions") occurred simultaneously with the closing of Quanta's initial
public offering (the "Offering") and were accounted for using the purchase
method of accounting. PAR has been identified as the accounting acquiror for
financial statement presentation purposes as its former stockholders represent
the largest voting interest within Quanta. The Spalj Acquisition was accounted
for using the purchase method of accounting.
The unaudited pro forma combined balance sheet gives effect to the
Acquisitions and related transactions, the IPO and the Spalj Acquisition as if
they had occurred on December 31, 1997. The unaudited pro forma combined
statements of operations give effect to these transactions as if they had
occurred 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 Founding Companies have contractually agreed to
prospective reductions in salary, 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 offset by costs
related to Quanta's new corporate management and by the costs associated with
being a public company. However, because these costs cannot be accurately
quantified at this time, they have not been included in the pro forma
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 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
Founding Companies and Spalj were not under common control or management,
historical combined results may not be comparable to, or indicative of, future
performance. The unaudited pro forma combined financial statements should be
read in conjunction with the other financial statements and notes thereto
included elsewhere in this Prospectus. See also "Risk Factors" included
elsewhere herein.
F-2
<PAGE>
QUANTA SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
DECEMBER 31, 1997
(IN THOUSANDS)
<TABLE>
<CAPTION>
FOUNDING COMPANIES
---------------------------------
PRO
TRANS UNION PRO FORMA FORMA POST MERGER
PAR POTELCO TECH POWER QUANTA ADJUSTMENTS COMBINED ADJUSTMENTS TOTAL SPALJ
ASSETS ------- ------- ------- ------- ------- ----------- -------- ----------- -------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents...... $ 400 $ 107 $ 155 $ 486 $ -- $ 806 $ 1,954 $ 5,212 $ 7,166 $ 3,251
Accounts
receivable....... 8,762 5,651 7,497 12,303 -- (855) 33,358 -- 33,358 4,317
Less--Allowance.. 100 103 199 84 -- -- 486 -- 486 100
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Accounts
receivable, net.. 8,662 5,548 7,298 12,219 -- (855) 32,872 -- 32,872 4,217
Costs and profits
recognized in
excess of
billings......... 1,025 532 3,619 177 -- -- 5,353 -- 5,353 556
Other
receivables...... 36 -- -- -- -- -- 36 -- 36 125
Inventories...... -- -- 808 -- -- -- 808 -- 808 --
Prepaid expenses
and other........ 661 -- 63 63 1,306 -- 2,093 (1,306) 787 262
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total current
assets.......... 10,784 6,187 11,943 12,945 1,306 (49) 43,116 3,906 47,022 8,411
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
PROPERTY AND EQUIPMENT,
NET............... 14,122 3,778 2,905 7,017 -- (857) 26,965 -- 26,965 2,349
OTHER ASSETS...... 241 -- 3 -- -- -- 244 -- 244 --
GOODWILL.......... -- -- -- -- -- 65,747 65,747 -- 65,747 --
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total assets.... $25,147 $9,965 $14,851 $19,962 $ 1,306 $64,841 $136,072 $ 3,906 $139,978 $10,760
======= ====== ======= ======= ======= ======= ======== ======== ======== =======
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
CURRENT
LIABILITIES:
Current
maturities of
long-term debt... $ 5,138 $1,684 $ 2,471 $ 1,651 $ -- $ 1,975 $ 12,919 $(10,919) $ 2,000 $ --
Accounts payable
and accrued
expenses......... 3,812 2,224 4,567 6,846 -- (855) 16,594 -- 16,594 1,947
Payables to
Founding Company
stockholders..... -- 1,043 -- -- 1,306 21,000 23,349 (23,349) -- --
Billings in
excess of costs
and profits
recognized....... 425 72 96 660 -- -- 1,253 -- 1,253 142
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total current
liabilities..... 9,375 5,023 7,134 9,157 1,306 22,120 54,115 (34,268) 19,847 2,089
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
LONG-TERM
LIABILITIES:
Long-term debt,
net of current
maturities....... 3,569 928 6,049 1,570 -- 1,647 13,763 (7,040) 6,723 --
Deferred income
taxes............ 2,201 -- -- 1,312 -- 788 4,301 -- 4,301 --
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total long-term
liabilities..... 5,770 928 6,049 2,882 -- 2,435 18,064 (7,040) 11,024 --
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock..... 50 -- 125 25 -- (200) -- -- -- 21
Limited Vote
Common Stock..... -- -- -- -- -- -- -- -- -- --
Additional paid-
in capital....... -- 160 -- -- 13,003 39,322 52,485 45,214 97,699 226
Unrealized loss
on securities.... -- -- -- (56) -- -- (56) -- (56) --
Retained earnings
(deficit)........ 11,464 3,854 1,605 7,954 (13,003) (410) 11,464 -- 11,464 8,424
Treasury stock... (1,512) -- (62) -- -- 1,574 -- -- -- --
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total
stockholders'
equity............ 10,002 4,014 1,668 7,923 -- 40,286 63,893 $ 45,214 109,107 8,671
------- ------ ------- ------- ------- ------- -------- -------- -------- -------
Total liabilities
and stockholders'
equity............ $25,147 $9,965 $14,851 $19,962 $ 1,306 $64,841 $136,072 $ 3,906 $139,978 $10,760
======= ====== ======= ======= ======= ======= ======== ======== ======== =======
<CAPTION>
PRO FORMA AS
ADJUSTMENTS ADJUSTED
ASSETS ----------- ---------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash
equivalents...... $ -- $ 10,417
Accounts
receivable....... -- 37,675
Less--Allowance.. -- 586
----------- ---------
Accounts
receivable, net.. -- 37,089
Costs and profits
recognized in
excess of
billings......... -- 5,909
Other
receivables...... -- 161
Inventories...... -- 808
Prepaid expenses
and other........ -- 1,049
----------- ---------
Total current
assets.......... -- 55,433
----------- ---------
PROPERTY AND EQUIPMENT,
NET............... -- 29,314
OTHER ASSETS...... -- 244
GOODWILL.......... 25,618 91,365
----------- ---------
Total assets.... $25,618 $176,356
=========== =========
<CAPTION>
LIABILITIES AND
STOCKHOLDERS' EQUITY
<S> <C> <C>
CURRENT
LIABILITIES:
Current
maturities of
long-term debt... $ -- $ 2,000
Accounts payable
and accrued
expenses......... 3,579 22,120
Payables to
Founding Company
stockholders..... -- --
Billings in
excess of costs
and profits
recognized....... -- 1,395
----------- ---------
Total current
liabilities..... 3,579 25,515
----------- ---------
LONG-TERM
LIABILITIES:
Long-term debt,
net of current
maturities....... 17,700 24,423
Deferred income
taxes............ 140 4,441
----------- ---------
Total long-term
liabilities..... 17,840 28,864
----------- ---------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common Stock..... (21) --
Limited Vote
Common Stock..... -- --
Additional paid-
in capital....... 12,644 110,569
Unrealized loss
on securities.... -- (56)
Retained earnings
(deficit)........ (8,424) 11,464
Treasury stock... -- --
----------- ---------
Total
stockholders'
equity............ 4,199 121,977
----------- ---------
Total liabilities
and stockholders'
equity............ $25,618 $176,356
=========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
QUANTA SERVICES, INC. AND FOUNDING COMPANIES
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
<TABLE>
<CAPTION>
FOUNDING COMPANIES
----------------------------------
TRANS UNION PRO FORMA PRO FORMA AS
PAR POTELCO TECH POWER QUANTA ADJUSTMENTS TOTAL SPALJ ADJUSTMENTS ADJUSTED
------- ------- ------- ------- -------- ----------- -------- ------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
REVENUES(1)............. $49,132 $19,220 $32,817 $54,251 $ $(3,117) $152,303 $21,492 $ -- $ 173,795
COST OF SERVICES
(including
depreciation)........... 37,691 15,563 26,519 46,614 -- (3,117) 123,270 15,099 -- 138,369
------- ------- ------- ------- -------- ------- -------- ------- ------- ----------
Gross profit.......... 11,441 3,657 6,298 7,637 -- -- 29,033 6,393 -- 35,426
SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES. 6,891 1,478 2,015 2,501 13,003 (15,722) 10,166 1,145 11,311
GOODWILL AMORTIZATION... -- -- -- -- -- 1,640 1,640 -- 640 2,280
------- ------- ------- ------- -------- ------- -------- ------- ------- ----------
INCOME (LOSS) FROM
OPERATIONS.............. 4,550 2,179 4,283 5,136 (13,003) 14,082 17,227 5,248 (640) 21,835
OTHER INCOME (EXPENSE):
Interest expense...... (627) (202) (405) (95) -- 562 (767) -- (1,195) (1,962)
Other, net............ (89) (11) 51 230 -- 130 311 115 -- 426
------- ------- ------- ------- -------- ------- -------- ------- ------- ----------
Other income
(expense), net........ (716) (213) (354) 135 -- 692 (456) 115 (1,195) (1,536)
------- ------- ------- ------- -------- ------- -------- ------- ------- ----------
INCOME (LOSS) BEFORE
INCOME TAX EXPENSE...... 3,834 1,966 3,929 5,271 (13,003) 14,774 16,771 5,363 (1,835) 20,299
PROVISION FOR INCOME
TAXES................... 1,540 -- -- 1,461 -- 4,180 7,181 14 1,612 8,807
------- ------- ------- ------- -------- ------- -------- ------- ------- ----------
NET INCOME (LOSS)....... $ 2,294 $ 1,966 $ 3,929 $ 3,810 $(13,003) $10,594 $ 9,590 $ 5,349 $(3,447) $ 11,492
======= ======= ======= ======= ======== ======= ======== ======= ======= ==========
BASIC AND DILUTED EARN-
INGS PER SHARE.......... $ 0.68
==========
SHARES USED IN COMPUTING
PRO FORMA BASIC AND DI-
LUTED EARNINGS PER
SHARE(2)................ 17,011,562
==========
</TABLE>
- ----
(1) Unaudited pro forma revenues for the year ended December 31, 1997
including Golden State were approximately $196.0 million.
(2) Includes (i) 3,345,333 shares issued to certain management personnel and
the initial stockholders of Quanta, (ii) 7,527,000 shares issued to
owners of the Founding Companies and (iii) 5,000,000 shares sold in the
IPO to pay the cash portion of the Acquisition consideration, expenses of
the IPO and retirement of debt (iv) the issuance of 968,451 related to
the Spalj Acquisition and (v) 170,778 of the 750,000 shares of Common
Stock issued as part of the exercise of the underwriter's over-allotment
option. The 579,222 shares excluded reflect net cash to Quanta.
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
QUANTA SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
1. GENERAL:
Quanta was founded to create a leading provider of specialty electrical
contracting and maintenance services primarily related to electric and
telecommunications infrastructure in North America. Quanta has conducted no
operations prior to the IPO and acquired the Founding Companies concurrently
with and as a condition of the closing of the IPO. In May 1998, the Company
acquired, Spalj Construction Company (the "Spalj Acquisition" or "Spalj").
The historical financial statements reflect the financial position and
results of operations of the Founding Companies and were derived from the
respective Founding Companies' financial statements where indicated. The
periods included in these financial statements for the individual Founding
Companies are as of and for the year ended December 31, 1997. 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.
2. ACQUISITION OF FOUNDING COMPANIES:
Concurrently with the closing of the IPO, Quanta acquired all of the
outstanding capital stock of the Founding Companies. The acquisitions will be
accounted for using the purchase method of accounting with PAR being reflected
as the accounting acquiror as its stockholders will represent the largest
voting interest within Quanta.
The following table sets forth the consideration paid (a) in cash and (b) in
shares of Common Stock to the common stockholders of each of the Founding
Companies, other than the accounting acquiror (PAR). For purposes of computing
the estimated purchase price for accounting purposes, the value of the shares
was determined using an estimated fair value of $8.10 per share (or $36.7
million), which is less than the initial public offering price of $9.00 per
share due primarily to restrictions on the sale and transferability of the
shares issued. The total estimated purchase price of $49.3 million for the
acquisition is based upon preliminary estimates and is subject to certain
purchase price adjustments at and following closing. The table does not
reflect distributions totaling $8.7 million consisting of certain Founding
Companies' undistributed earnings previously taxed to their stockholders (S
Corporation Distributions) prior to the Acquisitions.
<TABLE>
<CAPTION>
SHARES
OF
COMMON
CASH STOCK
------- ------
(IN THOUSANDS)
<S> <C> <C>
Potelco.................................................... $ 2,919 1,046
TRANS TECH................................................. 4,363 1,564
Union Power................................................ 5,348 1,917
------- -----
Total.................................................... $12,630 4,527
======= =====
</TABLE>
Additionally, the Limited Vote Common Stock issued to an initial stockholder
and management has been accounted for by the Company as a purchase
transaction. For purposes of estimating the purchase price for accounting
purposes, the value of the shares was determined using an estimated fair value
of $7.65 per share (or $25.6 million) which is less than the initial public
offering price of $9.00 per share due to restrictions on the sale and
transferability of the shares issued, and the limited vote provisions
applicable to such shares.
For purposes of the transactions discussed above, the Company utilized a
$8.10 per share value for the Common Stock and a $7.65 per share value for the
Limited Vote Common Stock in calculating goodwill. These valuations reflect a
10% and 15% discount, respectively, from the initial public offering price,
based on the two-year lock-up agreement entered into by the stockholders of
each Founding Company and by the holders of the Limited Vote Common Stock with
BT Alex. Brown Incorporated.
F-5
<PAGE>
QUANTA SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. UNAUDITED PRO FORMA COMBINED BALANCE SHEET ADJUSTMENTS:
(a) Records the S Corporation Distributions of $8.7 million, which was
distributed using borrowings in December 1997 of $5.1 million and new
borrowings of $3.6 million subsequent to year end.
(b) Records the liability for the cash portion of the consideration to be
paid to PAR, the accounting acquiror, and the merger of Quanta with PAR.
(c) Records the transfer of certain net nonoperating assets to the Founding
Companies prior to the Acquisition at a price equal to the net book value of
such assets. Management believes that the historical carrying value of such
net non-operating assets approximate fair value. Additionally, reflects the
elimination of payables and receivables between PAR and Union Power.
(d) Records the purchase of the Founding Companies by Quanta consisting of
payables to Founding Company stockholders of $12.6 million (to reflect the
cash consideration payable to the Founders excluding PAR) and 4.53 million
shares of Common Stock valued at $8.10 per share (or $36.7 million) for a
total estimated purchase price of $49.3 million resulting in excess purchase
price of $40.1 million over the net assets acquired (see Note 2).
Additionally, records the 3.3 million shares of Limited Vote Common Stock,
issued to the sponsors and management valued at $7.65 per share (or $25.6
million) resulting in excess purchase price of $25.6 million over the net
assets acquired. Based on its initial assessment, management believes that the
historical carrying value of the Founding Companies' assets and liabilities
will approximate fair value and that there are no other identifiable
intangible assets to which any material purchase price can be allocated.
The following reconciles the historical net assets of the Founding Companies
to the net assets acquired (in thousands):
<TABLE>
<CAPTION>
ACQUIRED
TOTAL LESS-- FOUNDING
COMBINED PAR COMPANIES
-------- -------- ---------
<S> <C> <C> <C>
Historical net assets....................... $22,819 $(10,002) $12,817
S Corporation Distributions (as discussed
elsewhere herein).......................... (3,673) -- (3,673)
------- -------- -------
Net assets after transfers.................. $19,146 $(10,002) $ 9,144
======= ======== =======
</TABLE>
(e) Records the cash proceeds of $45.2 million from the issuance of shares
of Quanta Common Stock through the IPO and the exercise of the underwriter's
over-allotment option, net of estimated offering costs of $6.6 million. IPO
costs primarily consist of underwriting discounts and commissions, accounting
fees, legal fees and printing expenses.
(f) Records payment of the cash portion of the consideration to the
stockholders of the Founding Companies of $21.0 million in connection with the
Acquisitions and the expected repayment of outstanding short- and long-term
debt totaling $19.0 million.
F-6
<PAGE>
QUANTA SERVICES, INC. AND FOUNDING COMPANIES
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) ADJUSTMENTS
ASSETS ------- ------- ----- ------- -----------
<S> <C> <C> <C> <C> <C>
Current assets--
Cash and cash equivalents...... $ -- $ -- $ 806 $ -- $ 806
Accounts receivable............ -- -- (855) -- (855)
Prepaid expenses and other..... -- -- -- -- --
------- ------- ----- ------- -------
Total current assets......... -- -- (49) -- (49)
Property and equipment, net...... -- -- (857) -- (857)
Goodwill......................... -- -- -- 65,747 65,747
------- ------- ----- ------- -------
Total assets..................... $ -- $ -- $(906) $65,747 $64,841
======= ======= ===== ======= =======
<CAPTION>
LIABILITIES AND STOCKHOLDERS'
EQUITY
<S> <C> <C> <C> <C> <C>
Current liabilities--
Current maturities of long-term
debt.......................... $ 2,000 $ -- $ (25) $ -- $ 1,975
Accounts payable and accrued
expenses...................... -- -- (855) -- (855)
Payables to Founding Company
Stockholders.................. -- 8,370 -- 12,630 21,000
------- ------- ----- ------- -------
Total current liabilities.... 2,000 8,370 (880) 12,630 22,120
Long-term debt, net of current
maturities...................... 1,673 -- (26) -- 1,647
Deferred income taxes............ -- -- -- 788 788
------- ------- ----- ------- -------
Total liabilities............ 3,673 8,370 (906) 13,418 24,555
Stockholders' equity--
Common Stock................... -- (50) -- (150) (200)
Limited Vote Common Stock...... -- -- -- -- --
Additional paid-in capital..... -- (9,832) -- 49,154 39,322
Retained earnings.............. (3,673) -- -- 3,263 (410)
Treasury stock................. -- 1,512 -- 62 1,574
------- ------- ----- ------- -------
Total stockholders' equity... (3,673) (8,370) -- 52,329 40,286
------- ------- ----- ------- -------
Total liabilities and
stockholders' equity........ $ -- $ -- $(906) $65,747 $64,841
======= ======= ===== ======= =======
</TABLE>
F-7
<PAGE>
QUANTA SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
ADJUSTMENT
------------------ POST MERGER
(E) (F) ADJUSTMENTS
ASSETS ------------------ -----------
<S> <C> <C> <C>
Current assets--
Cash and cash equivalents.. $ 45,214 $(40,002) $ 5,212
Prepaid expenses and other. (1,306) -- (1,306)
-------- -------- --------
Total current assets..... 43,908 (40,002) 3,906
-------- -------- --------
Total assets............. $ 43,908 $(40,002) $ 3,906
======== ======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities--
Current maturities of long-
term debt................. $ -- $(10,919) $(10,919)
Payable to Founding Company
stockholders.............. (1,306) (22,043) (23,349)
-------- -------- --------
Total current
liabilities............. (1,306) (32,962) (34,268)
Long-term debt, net of cur-
rent maturities............. -- (7,040) (7,040)
-------- -------- --------
Total liabilities........ (1,306) (40,002) (41,308)
-------- -------- --------
Stockholders' equity--
Common Stock............... -- -- --
Limited Vote Common Stock.. -- -- --
Additional paid-in capital. 45,214 -- 45,214
Retained earnings.......... -- -- --
Treasury stock............. -- -- --
-------- -------- --------
Total stockholders'
equity.................. 45,214 -- 45,214
-------- -------- --------
Total liabilities and
stockholders' equity.... $ 43,908 $(40,002) $ 3,906
======== ======== ========
</TABLE>
4. UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS ADJUSTMENTS:
Year Ended December 31, 1997
(a) Reflects the $2.7 million reduction in salaries, bonuses and benefits to
the owners of the Founding Companies. 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 will
be transferred to the Founding Companies prior to the Acquisitions.
(b) Reflects the amortization of goodwill to be recorded as a result of
these Acquisitions over a 40-year estimated life.
(c) Reflects interest expense of $0.8 million on borrowings of $8.7 million
necessary to fund the S Corporation Distributions, net of interest savings of
$1.4 million on $19.0 million of debt to be repaid using proceeds from the IPO
or distributed prior to the Acquisitions. The additional $0.8 million of
interest expense was calculated utilizing an annual effective interest rate of
approximately 8.5%.
(d) Reflects the elimination of revenues between PAR and Union Power.
(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 December 1997.
(f) Reflects the incremental provision for federal and state income taxes at
an approximate 39.0% 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-8
<PAGE>
QUANTA SERVICES, INC. AND FOUNDING COMPANIES
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
----------------------------------------------- PRO FORMA
(A) (B) (C) (D) (E) (F) ADJUSTMENTS
------ ------- ---- ------- ------- ------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue................. $ -- $ -- $ -- $(3,117) $ -- $ -- $(3,117)
Cost of service......... -- -- -- (3,117) -- -- (3,117)
------ ------- ---- ------- ------- ------- -------
Gross profit............ -- -- -- -- -- -- --
Selling, general and
administrative
expenses............... (2,719) -- -- -- (13,003) -- (15,722)
Goodwill amortization... -- 1,640 -- -- -- -- 1,640
------ ------- ---- ------- ------- ------- -------
Income (loss) from oper-
ations................. 2,719 (1,640) -- -- 13,003 -- 14,082
Other income (expense)--
Interest expense...... -- -- 562 -- -- -- 562
Other, net............ 130 -- -- -- -- -- 130
------ ------- ---- ------- ------- ------- -------
Income (loss) before
income taxes......... 2,849 (1,640) 562 -- 13,003 -- 14,774
Provision for income
taxes.................. -- -- -- -- -- 4,180 4,180
------ ------- ---- ------- ------- ------- -------
Net income (loss)....... $2,849 $(1,640) $562 $ -- $13,003 $(4,180) $10,594
====== ======= ==== ======= ======= ======= =======
</TABLE>
5. UNAUDITED PRO FORMA ADJUSTMENTS FOR SPALJ ACQUISITION:
Unaudited Pro Forma Combined Balance Sheet Adjustments--
(a) Records S Corporation distributions for Spalj of $3.6 million, which were
distributed using cash flow generated from operations.
(b) Records the purchase of Spalj. Consideration for the acquisition included
$17.7 million in cash financed through Quanta's credit facility and
968,451 shares of Common Stock for a total purchase price of $30.6 million
resulting in excess purchase price of $25.6 million over the net assets
acquired.
F-9
<PAGE>
QUANTA SERVICES, INC. AND FOUNDING COMPANIES
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) ADJUSTMENTS
ASSETS ------ ------- -----------
<S> <C> <C> <C>
Goodwill........................................... $ -- $25,618 $ 25,618
------ ------- --------
Total assets....................................... $ $25,618 $ 25,618
====== ======= ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C>
Current liabilities--
Accounts payable and accrued expenses............ $3,579 $ -- $ 3,579
------ ------- --------
Total current liabilities........................ 3,579 -- 3,579
Long-term debt, net of current maturities.......... -- 17,700 17,700
Deferred income taxes.............................. -- 140 140
------ ------- --------
Total liabilities.............................. 3,579 17,840 21,419
Stockholders' equity--
Common Stock..................................... -- (21) (21)
Limited Vote Common Stock........................ -- -- --
Additional paid-in capital....................... -- 12,644 12,644
Retained earnings................................ (3,579) (4,845) (8,424)
Treasury stock................................... -- -- --
------ ------- --------
Total stockholders' equity..................... (3,579) 7,778 4,199
------ ------- --------
Total liabilities and stockholders' equity..... $ -- $25,618 $ 25,618
====== ======= ========
</TABLE>
Unaudited Pro Forma Combined Statement of Operations Adjustments:
(a) Reflects the amortization of goodwill to be recorded as a result of the
acquisition over a 40 year estimated life.
(b) Reflects interest expense of $1.2 million on borrowings under Quanta's
credit facility calculated utilizing an annual effective interest rate of
6.75%.
(c) Reflects the incremental provision for federal and state income taxes at
an approximate 39.0% overall tax rate before goodwill and other permanent
items, relating to the other statements of operations adjustments and for
income taxes on the S Corporation income not provided for in the
historical financial statements.
The following table summarizes unaudited pro forma combined statements of
operations adjustments (in thousands):
<TABLE>
<CAPTION>
ADJUSTMENT
----------------------- PRO FORMA
(A) (B) (C) ADJUSTMENTS
----- ------- ------- -----------
<S> <C> <C> <C> <C>
Goodwill amortization...................... $ 640 $ -- $ -- $ 640
----- ------- ------- -------
Loss from operations....................... (640) -- -- (640)
Other income (expense)--
Interest expense......................... -- (1,195) -- (1,195)
----- ------- ------- -------
Loss before income taxes................. (640) (1,195) -- (1,835)
Provision for income taxes................. -- -- 1,612 1,612
----- ------- ------- -------
Net loss................................... $(640) $(1,195) $(1,612) $(3,447)
===== ======= ======= =======
</TABLE>
F-10
<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-11
<PAGE>
QUANTA SERVICES, INC.
BALANCE SHEET--DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CASH AND CASH EQUIVALENTS............................................ $ --
DEFERRED OFFERING COSTS.............................................. 1,306
--------
Total assets..................................................... $ 1,306
========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C>
ACCRUED LIABILITIES AND AMOUNTS DUE TO STOCKHOLDER................... $ 1,306
STOCKHOLDERS' EQUITY:
Preferred stock, $.00001 par value, 10,000,000 authorized, none
issued and outstanding............................................ --
Common stock, $.00001 par value, 40,000,000 shares authorized, none
issued and outstanding............................................ --
Limited Vote Common Stock, $.00001 par value, 3,345,333 shares
authorized, issued and outstanding................................ --
Additional paid-in capital......................................... 13,003
Retained deficit................................................... (13,003)
--------
Total stockholders' equity....................................... --
--------
Total liabilities and stockholders' equity....................... $ 1,306
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-12
<PAGE>
QUANTA SERVICES, INC.
STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION (AUGUST 19, 1997)
THROUGH DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<S> <C>
REVENUES............................................................. $ --
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES......................... 13,003
--------
LOSS BEFORE INCOME TAXES............................................. (13,003)
PROVISION FOR INCOME TAXES........................................... --
--------
NET LOSS............................................................. $(13,003)
========
BASIC AND DILUTED EARNINGS PER SHARE................................. $ (18.92)
========
WEIGHTED AVERAGE SHARES USED IN THE COMPUTATION OF BASIC AND DILUTED
EARNINGS PER SHARE.................................................. 687,336
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-13
<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-14
<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 $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.
F-15
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Quanta effected a 1,613.6016 for-one stock split in December 1997 for each
share of Common Stock of the Company then outstanding. In addition, the
Company increased the number of authorized shares of Common Stock to
40,000,000 and increased the number of authorized shares of $.00001 par value
preferred stock to 10,000,000.
In December 1997, the 3.3 million shares of Common Stock held by certain
primary stockholders of Quanta were converted into 3.3 million shares of
Limited Vote Common Stock. The shares of Limited Vote Common Stock have rights
similar to shares of Common Stock, except that such shares are entitled to
elect one member of the board of directors and are entitled to one-tenth of
one vote for each share held on all other matters. Each share of Limited Vote
Common Stock will convert into Common Stock upon disposition by the holder of
such shares in accordance with the transfer restrictions applicable to such
shares.
Shares used in the Calculation of Basic and Diluted Earnings Per Share
Shares used in the calculation of basic and diluted earnings per share
include the weighted average portion of the 3,345,333 shares issued from the
period from inception through December 31, 1997.
Stock Plan
In December 1997, the Company's board of directors and stockholders approved
the Company's 1997 Stock Option Plan (the "Plan"), which provides for the
granting or awarding of incentive or nonqualified stock options to directors,
officers, key employees and consultants of the Company. The aggregate amount
of Common Stock of the Company with respect to which options may be granted
may not exceed the greater of 2.38 million shares or 15 percent of the
aggregate number of shares of Common Stock outstanding. The Plan will be
administered by the compensation committee (the "Committee") of the Company's
board of directors. The Company has filed a registration statement on Form S-8
under the Securities Act of 1933 registering the issuance of shares upon
exercise of options granted under this Plan. In February 1998, concurrent with
the 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 of grant (or
110 percent in the case of options granted to employees owning more than 10
percent of the voting capital stock).
The Plan also provides for automatic option grants to directors who are not
otherwise employed by the Company or its subsidiaries. Upon commencement of
service, a nonemployee director will receive a nonqualified option to purchase
10,000 shares of Common Stock and continuing or re-elected nonemployee
directors annually will receive options to purchase 5,000 shares of Common
Stock. Options granted to nonemployee directors are fully exercisable
following the expiration of six months from the date of grant.
S-4 Registration Statement
In February 1998, the Company filed a Form S-4 Registration Statement in
order to register an additional 5,000,000 shares of Common Stock which the
Company may issue from time to time in connection with future acquisitions of
other businesses, properties or securities in business combination
transactions. The Company expects that the terms upon which it may issue the
shares will be determined through negotiations with the shareholders or
principal owners of the businesses whose securities or assets are to be
acquired.
3. STOCK-BASED COMPENSATION:
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for
Stock-Based Compensation," allows entities to choose between a new fair value
method of accounting for employee stock options or similar equity instruments
and the current method of accounting prescribed by Accounting Principles Board
(APB) Opinion No. 25, under which compensation expense is recorded to the
extent that the fair market value of the related stock is in excess of the
options' exercise price at date of grant. Entities electing to remain
F-16
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
with the accounting in APB Opinion No. 25 must make pro forma disclosures of
net income and earnings per share as if the fair value method of accounting
prescribed in SFAS No. 123 had been applied. The Company will measure
compensation expense attributable to stock options based on the method
prescribed in APB Opinion No. 25 and will provide the required pro forma
disclosure of net income and earnings per share, as applicable, in the notes
to future consolidated annual financial statements.
4. NEW ACCOUNTING PRONOUNCEMENTS:
SFAS No. 128 requires the presentation of basic earnings per share and
diluted earnings per share in financial statements of public enterprises
rather than primary and fully diluted earnings per share as previously
required. Under the provisions of this statement, basic earnings per share are
computed based on weighted average shares outstanding and excludes dilutive
securities such as options and warrants. Diluted earnings per share are
computed including the impact of all potentially dilutive securities.
Supplementally, basic and diluted earnings per share are presented in Note 5
below for 1997 on a pro forma basis.
5. BUSINESS COMBINATIONS:
As discussed in Note 1, Quanta acquired the Founding Companies in February
1998. Pursuant to the Securities and Exchange Commission's Staff Accounting
Bulletin No. 97 (SAB 97), the financial statements of Quanta for periods prior
to February 18, 1998 (the effective closing date of the Acquisitions), are the
financial statements of PAR Electrical Contractors, Inc. (PAR) (the
"Accounting Acquiror"). The operations of the other Founding Companies and
Quanta, acquired by the Accounting Acquiror, will be included in the Company's
historical financial statements beginning February 19, 1998.
The following summary unaudited pro forma combined balance sheet information
presented below, gives effect to the Acquisitions, the 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: 1) the acquisition of the Founding Companies,
2) the IPO completed on February 18, 1998 (including the exercise of the
underwriter's over-allotment option), 3) certain reductions in salaries,
bonuses and benefits to former owners of the Founding Companies, 4)
amortization of goodwill resulting from the acquisitions, 5) reduction in
interest expense, net of interest expense on borrowings to fund S corporation
distributions by certain of the Founding Companies and 6) adjustments to the
federal and state income tax provision based on pro forma operating results.
F-17
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The pro forma adjustments are based on estimates, available information and
certain assumptions which may be revised as additional information becomes
available. The pro forma financial data do not purport to represent what the
Company's combined financial position or results of operations would actually
have been if such transactions had in fact occurred on those dates and are not
necessarily representative of the Company's financial position or results of
operations for any future period. Since Quanta and the Founding Companies were
not under common control or management, historical combined results may not be
comparable to, or indicative of, future performance.
<TABLE>
<CAPTION>
UNAUDITED
PRO FORMA
COMBINED
-----------------
YEAR ENDED
DECEMBER 31, 1997
-----------------
(IN THOUSANDS,
EXCEPT PER SHARE
INFORMATION)
<S> <C>
Revenues.................................................... $ 152,303
Cost of services (including depreciation)................... 123,270
-----------
Gross profit................................................ 29,033
Selling, general and administrative expenses................ 10,166
Goodwill amortization....................................... 1,640
-----------
Income from operations...................................... 17,227
-----------
Other income (expense):
Interest expense.......................................... (767)
Other, net................................................ 311
-----------
Other income (expense), net............................... (456)
-----------
Income before income tax expense............................ 16,771
Provision for income taxes.................................. 7,181
-----------
Net income.................................................. $ 9,590
===========
Basic earnings per share.................................... $ 0.60
===========
Diluted earnings per share.................................. $ 0.60
===========
Shares used in the pro forma computation of earnings per
share--
Basic..................................................... 16,043,111
===========
Diluted................................................... 16,043,111
===========
</TABLE>
Shares Used in Calculation of Pro Forma Combined Earnings Per Share
Shares used in the calculation of the unaudited pro forma combined basic and
diluted earnings per share include (i) 7,527,000 shares of Common Stock issued
to the owners of the Founding Companies, (ii) 3,345,333 shares of Limited Vote
Common Stock issued to the initial stockholders and certain management
personnel of the Company, (iii) 5,000,000 shares of Common Stock sold in the
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
F-18
<PAGE>
QUANTA SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
individuals from disclosing confidential information and trade secrets, and
restrict such individuals from competing with the Company for a period of five
years from the date of the employment agreement. The initial term of these
employment agreements is three years with provisions for annual extensions at
the end of the initial term.
6. SUBSEQUENT EVENTS TO THE DATE OF AUDITORS' REPORT (UNAUDITED):
In April 1998, the Company obtained a $50,000,000 revolving credit facility
from two banks. The facility is unsecured and is to provide funds to be used
for working capital, to finance acquisitions and for other general corporate
purposes. Amounts borrowed under the credit facility bear interest at a rate
equal to either (a) the London Interbank Offered Rate ("LIBOR") plus 0.75% to
1.75%, as determined by the ratio of the Company's total funded debt to EBITDA
(as defined in the credit facility) or (b) the bank's prime rate plus up to
0.25%, as determined by the ratio of the Company's total funded debt to
EBITDA. Commitment fees of 0.175% to 0.30% (based on certain financial ratios)
are due on any unused borrowing capacity under the credit facility. The
Company's existing and future subsidiaries will guarantee the repayment of all
amounts due under the facility and the facility restricts pledges on all
material assets. The credit facility contains usual and customary covenants
for a credit facility of this nature including the prohibition of the payment
of dividends and the consent of the lenders for acquisitions exceeding a
certain level of cash consideration. At May 5, 1998, outstanding borrowings
under the credit facility totaled $28.3 million.
F-19
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To PAR Electrical Contractors, Inc.:
We have audited the accompanying balance sheets of PAR Electrical Contractors,
Inc. (a Missouri corporation), as of December 31, 1996 and 1997, and the
related statements of operations, cash flows and shareholders' equity for the
three years ended December 31, 1997. These financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of PAR Electrical Contractors,
Inc., as of December 31, 1996 and 1997, and the results of its operations and
its cash flows for the three years ended December 31, 1997, in conformity with
generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
March 18, 1998
F-20
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
ASSETS ------- -------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................ $ 479 $ 400
Accounts receivable--
Trade, net of allowance of $100........................ 7,390 8,527
Retainage.............................................. 374 135
Other receivables...................................... 78 36
Costs and estimated earnings in excess of billings on un-
completed contracts..................................... 663 1,025
Deferred income taxes.................................... 160 303
Prepaid expenses and other current assets................ 360 358
------- -------
Total current assets................................... 9,504 10,784
PROPERTY AND EQUIPMENT, net................................ 10,977 14,122
OTHER ASSETS............................................... 218 241
------- -------
Total assets........................................... $20,699 $25,147
======= =======
<CAPTION>
LIABILITIES AND SHAREHOLDERS' EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Current maturities of long-term debt..................... $ 2,555 $ 2,429
Current portion of capital lease obligations............. 25 199
Bank line of credit...................................... 2,378 2,510
Accounts payable and accrued expenses.................... 2,725 3,812
Billings in excess of costs and estimated earnings on un-
completed contracts..................................... 1,168 425
------- -------
Total current liabilities.............................. 8,851 9,375
LONG-TERM DEBT, net of current maturities.................. 2,000 3,213
LONG-TERM CAPITAL LEASE OBLIGATIONS, net of current maturi-
ties...................................................... 74 356
DEFERRED INCOME TAXES...................................... 2,066 2,201
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS' EQUITY:
Common stock, $100 par value, 500 shares authorized, 200
shares issued and outstanding........................... 50 50
Retained earnings........................................ 9,170 11,464
Treasury stock, 300 shares, at cost...................... (1,512) (1,512)
------- -------
Total shareholders' equity............................. 7,708 10,002
------- -------
Total liabilities and shareholders' equity............. $20,699 $25,147
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-21
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES................................... $ 38,915 $ 42,684 $ 49,132
COST OF SERVICES (including depreciation).. 33,193 35,789 37,691
---------- ---------- ----------
Gross profit............................. 5,722 6,895 11,441
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.................................. 4,342 5,012 6,891
---------- ---------- ----------
Income from operations................. 1,380 1,883 4,550
---------- ---------- ----------
OTHER INCOME (EXPENSE):
Interest expense....................... (568) (576) (627)
Other, net............................. 56 (70) (89)
---------- ---------- ----------
Other income (expense), net.......... (512) (646) (716)
---------- ---------- ----------
INCOME BEFORE PROVISION FOR INCOME TAXES... 868 1,237 3,834
PROVISION FOR INCOME TAXES................. 353 487 1,540
---------- ---------- ----------
NET INCOME................................. $ 515 $ 750 $ 2,294
========== ========== ==========
BASIC AND DILUTED EARNINGS PER SHARE....... $ 0.17 $ 0.25 $ 0.76
========== ========== ==========
SHARES USED IN THE COMPUTATION OF BASIC AND
DILUTED EARNINGS PER SHARE................ 3,000,000 3,000,000 3,000,000
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-22
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1996 1997
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 515 $ 750 $ 2,294
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization..................... 1,805 1,935 2,350
Loss (gain) on sale of property and equipment..... 5 (57) --
Deferred income taxes............................. 166 204 (8)
Changes in operating assets and liabilities--
(Increase) decrease in--
Accounts receivable............................. 64 (892) (856)
Costs and estimated earnings in excess of
billings on uncompleted contracts.............. 154 (531) (362)
Prepaid expenses and other current assets....... 169 (54) 2
Increase (decrease) in--
Accounts payable and accrued expenses........... (308) 363 1,087
Billings in excess of costs and estimated
earnings on uncompleted contracts.............. (362) 983 (743)
Other, net...................................... (14) (10) (23)
------- ------- -------
Net cash provided by operating activities....... 2,194 2,691 3,741
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment....... 100 57 154
Additions of property and equipment................ (2,427) (2,663) (4,957)
------- ------- -------
Net cash used in investing activities........... (2,327) (2,606) (4,803)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt....................... 1,501 1,787 3,950
Payments of long-term debt......................... (1,935) (2,395) (3,099)
Net borrowings under bank lines of credit.......... 655 238 132
------- ------- -------
Net cash provided by (used in) financing activi-
ties........................................... 221 (370) 983
------- ------- -------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVA-
LENTS.............................................. 88 (285) (79)
CASH AND CASH EQUIVALENTS, beginning of period...... 676 764 479
------- ------- -------
CASH AND CASH EQUIVALENTS, end of period............ $ 764 $ 479 $ 400
======= ======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for--
Interest.......................................... $ 575 $ 572 $ 618
Income taxes, net of refunds...................... 553 279 1,264
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-23
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
------------- RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT EARNINGS STOCK EQUITY
------ ------ -------- -------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994........ 200 $50 $ 7,905 $(1,512) $ 6,443
Net income...................... -- -- 515 -- 515
--- --- ------- ------- -------
BALANCE, December 31, 1995........ 200 50 8,420 (1,512) 6,958
Net income...................... -- -- 750 -- 750
--- --- ------- ------- -------
BALANCE, December 31, 1996........ 200 50 9,170 (1,512) 7,708
Net income...................... -- -- 2,294 -- 2,294
--- --- ------- ------- -------
BALANCE, December 31, 1997........ 200 $50 $11,464 $(1,512) $10,002
=== === ======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
PAR Electrical Contractors, Inc., a Missouri corporation (the "Company"),
focuses on providing electrical contractor services primarily for utility
companies, municipal and commercial companies. The Company performs the
majority of its contract work under cost-plus-fee and fixed price contracts
with contract terms generally ranging from four to 36 months. The Company
performs the majority of its work in the Midwest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental Cash Flow Information
The Company had non-cash investing and financing activities related to
capital leases of approximately $111,000 and $692,000 during the years ended
December 31, 1996 and 1997, respectively. There were no significant non-cash
investing activities for the year ended December 31, 1995.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts when collection is
considered doubtful.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the
life of the lease or the estimated useful life of the asset. Depreciation and
amortization expense was approximately $1,805,000, $1,935,000 and $2,350,000
for the years ended December 31, 1995, 1996 and 1997, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain
or loss is recognized in the statements of operations.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a fixed price or cost-plus-fee contract. Such
contracts generally provide that the customer accept completion of progress to
date and compensate the Company for services which have been rendered,
measured typically in terms of units installed, hours expended or some other
measure of progress. Revenues from fixed price or cost-plus-fee contracts are
recognized on the percentage-of-completion method measured by the percentage
of costs incurred to date to total estimated costs for each contract. Contract
costs include all direct material, labor and subcontract costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and their effects are recognized in the period in which the
revisions are determined.
F-25
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provisions in fixed price or cost-plus-fee contracts will be due upon
completion of the contracts and acceptance by the customer. Based on the
Company's experience with similar contracts in recent years, the retention
balance at each balance sheet date will be collected within the subsequent
fiscal year.
The current asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The current liability "Billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company generally warrants labor for the first
year after installation of new electrical systems. The Company generally
warrants labor for 30 days after servicing of existing electrical systems. An
accrual for warranty costs is recorded based upon the historical level of
warranty claims and management's estimate of future costs.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards (SFAS) No. 109,
"Accounting for Income Taxes." Under this method, deferred assets and
liabilities are recorded for future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that will be in effect when
the underlying assets or liabilities are recovered or settled.
Collective Bargaining Agreements
The Company is a party to various collective bargaining agreements with
certain of its employees. The agreements require the Company to pay specified
wages and provide certain benefits to its union employees. These agreements
expire at various times through the year 2000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions
by management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 11 for discussion of
certain estimates reflected in the Company's financial statements.
New Accounting Pronouncement
Effective January 1, 1996, the Company adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed
Of." Accordingly, in the event that facts and circumstances indicate that
property and equipment or other assets may be impaired, an evaluation of
recoverability would be performed. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are compared to the
asset's carrying amount to determine if an impairment of such property is
necessary. Adoption of this standard did not have a material effect on the
financial position or results of operations of the Company.
F-26
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES ------------------
IN YEARS 1996 1997
------------ -------- --------
<S> <C> <C> <C>
Land.......................................... -- $ 1,105 $ 1,221
Buildings and leasehold improvements.......... 5-31 1,255 1,255
Operating equipment and vehicles.............. 5-10 21,980 26,495
Office equipment, furniture and fixtures...... 5 386 543
-------- --------
24,726 29,514
Less--Accumulated depreciation and amortiza-
tion......................................... (13,749) (15,392)
-------- --------
Property and equipment, net................. $ 10,977 $ 14,122
======== ========
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Accounts payable, trade.................................... $ 1,068 $ 1,093
Accrued compensation and other expenses.................... 1,657 2,719
-------- --------
$ 2,725 $ 3,812
======== ========
Contracts in progress are as follows (in thousands):
<CAPTION>
DECEMBER 31,
------------------
1996 1997
-------- --------
<S> <C> <C>
Costs incurred on contracts in progress.................... $ 9,926 $ 8,971
Estimated earnings, net of losses.......................... 2,322 2,517
-------- --------
12,248 11,488
Less-Billings to date...................................... (12,753) (10,888)
-------- --------
$ (505) $ 600
======== ========
Costs and estimated earnings in excess of billings on un-
completed contracts....................................... $ 663 $ 1,025
Less--Billings in excess of costs and estimated earnings on
uncompleted contracts..................................... (1,168) (425)
-------- --------
$ (505) $ 600
======== ========
</TABLE>
5. DEBT:
The Company has an $8,000,000 bank revolving line of credit bearing interest
at the bank's prime rate (8.5 percent at December 31, 1997), of which
$2,378,000 and $2,510,000 was outstanding as of December 31, 1996 and 1997,
respectively. With regard to the line of credit, the Company has outstanding a
$1,000,000 letter of credit outstanding related to its workman's compensation
insurance program (see Note 11 for discussion related to the Company self-
insuring for certain workers' compensation insurance). The Company also has a
$4,000,000 equipment fixed line of credit bearing interest at the bank's prime
rate (8.5 percent at December 31, 1997). These lines of credit expire in May
1998.
F-27
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company's long-term debt obligations consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1996 1997
------ ------
<S> <C> <C>
Note payable to bank, prime plus 1%, interest rate, due
$79,359 monthly including interest with final payment October
1997......................................................... $ 797 $ --
Note payable to bank, prime plus .75%, interest rate, due
$47,968 monthly including interest with final payment Decem-
ber 1997..................................................... 551 --
Note payable to bank, prime plus .50% interest rate, due
$47,795 monthly including interest with final maturity Decem-
ber 1998..................................................... 1,042 542
Note payable to bank, prime plus .50% interest rate, due
$31,747 monthly including interest with final maturity May
1999......................................................... 825 506
Note payable to bank, prime plus .50% interest rate, due
$25,391 monthly including interest with final maturity Decem-
ber 1999..................................................... 800 558
Note payable to bank, prime interest rate, due $42,695 monthly
including interest with final maturity April 2000............ -- 1,080
Note payable to bank, prime interest rate, due $82,076 monthly
including interest with final maturity December 2000......... -- 2,600
Installment note payable to bank, fixed 9.75% interest rate,
due $3,631 monthly including interest with balance due Decem-
ber 1999; collateralized by real estate...................... 318 305
Installment note payable, fixed 9% interest rate, with final
payment December 1997........................................ 145 --
Installment note payable, fixed 6.5% interest rate, with final
payment made in January 1998................................. 77 51
------ ------
4,555 5,642
Less--Current maturities...................................... (2,555) (2,429)
------ ------
Total long-term debt.......................................... $2,000 $3,213
====== ======
</TABLE>
The loan agreement covering the notes payable to bank and the bank lines of
credit contains various covenants, including a minimum net worth requirement
and a compensating balance requirement.
The notes payable to bank and the bank lines of credit are collateralized by
all equipment, receivables and other assets. The Company's two shareholders
have pledged their stock as security to the bank on this indebtedness.
The maturities of long-term debt as of December 31, 1997, are as follows (in
thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998................................................................... $2,429
1999................................................................... 2,106
2000................................................................... 1,107
------
$5,642
======
</TABLE>
F-28
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. LEASES:
Obligations Under Capital Leases
The Company leases various equipment under noncancelable capital leases and
the leased assets are included as part of "Property and Equipment." Details of
the capital leased assets are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1996 1997
----- ------
<S> <C> <C>
Automobiles...................................................... $ 44 $ 44
Operating equipment and vehicles................................. 540 1,233
----- ------
584 1,277
Less--Accumulated depreciation................................... (479) (575)
----- ------
Net capitalized leased assets.................................... $ 105 $ 702
===== ======
</TABLE>
The following is a schedule showing the future minimum lease payments under
capital leases by years and the present value of the minimum lease payments as
of December 31, 1997 (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998................................................................... $ 233
1999................................................................... 233
2000................................................................... 134
2001................................................................... 12
-----
Total minimum lease payments......................................... 612
Less--Amounts representing interest...................................... (57)
-----
Present value of minimum lease payments.............................. 555
Less--Current portion.................................................... (199)
-----
Long-term obligation................................................. $ 356
=====
</TABLE>
Operating Leases
The Company rents certain office equipment and warehouse space under several
operating lease agreements which vary in length and terms. The rent paid under
these lease agreements was approximately $21,000, $205,000 and $462,000 for
the years ended December 31, 1995, 1996 and 1997, respectively.
Future minimum lease payments under these noncancelable operating leases are
as follows (in thousands):
<TABLE>
<S> <C>
Year ending December 31--
1998..................................................................... $424
1999..................................................................... 134
2000..................................................................... 24
2001..................................................................... 24
2002..................................................................... 3
----
$609
====
</TABLE>
F-29
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
7. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Federal--
Current..................................................... $154 $234 $1,278
Deferred.................................................... 138 169 (6)
State--
Current..................................................... 33 49 270
Deferred.................................................... 28 35 (2)
---- ---- ------
$353 $487 $1,540
==== ==== ======
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate of 35 percent to income
(loss) before provision for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------
1995 1996 1997
---- ---- ------
<S> <C> <C> <C>
Provision at the statutory rate............................... $304 $433 $1,341
Increase resulting from--
State income tax, net of related tax effect................. 40 54 170
Nondeductible expenses...................................... 9 -- 29
---- ---- ------
$353 $487 $1,540
==== ==== ======
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for
tax purposes. The tax effects of these temporary differences, representing
deferred tax assets and liabilities, result principally from the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Deferred income tax liabilities--
Property and equipment..................................... $(2,066) $(2,222)
State taxes................................................ 9 10
Other...................................................... (156) (172)
------- -------
Total deferred income tax liabilities.................... (2,213) (2,384)
------- -------
Deferred income tax assets--
Bad debt reserves.......................................... 42 42
State taxes................................................ (18) (29)
Other accruals not currently deductible.................... 283 473
------- -------
Total deferred income tax assets......................... 307 486
Valuation allowance........................................ -- --
------- -------
Total deferred income tax liabilities.................... $(1,906) $(1,898)
======= =======
</TABLE>
F-30
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1996 1997
------- -------
<S> <C> <C>
Deferred tax assets--
Current.................................................... $ 307 $ 475
Long-term.................................................. -- --
------- -------
Total.................................................... 307 475
------- -------
Deferred tax liabilities--
Current.................................................... (147) (172)
Long-term.................................................. (2,066) (2,201)
------- -------
Total.................................................... (2,213) (2,373)
------- -------
Net deferred income tax liabilities...................... $(1,906) $(1,898)
======= =======
</TABLE>
8. RELATED-PARTY TRANSACTIONS:
As of December 31, 1996, the Company had a $45,000 note receivable due from
one of its shareholders. The note receivable included in "Accounts
receivable--other receivables" in the accompanying balance sheet as of
December 31, 1996, was paid in full by the shareholder in October 1997.
9. EMPLOYEE BENEFIT PLAN:
In connection with its collective bargaining agreements with various
electrical unions, the Company participates with other companies in the
unions' multi-employer pension plans. These plans cover all of the Company's
employees who are members of such unions. The Employee Retirement Income
Security Act of 1974, as amended by the Multi-Employer Pension Plan Amendments
Act of 1980, imposes certain liabilities upon employers who are contributors
to a multi-employer plan in the event of the employer's withdrawal from, or
upon termination of such plan. The Company has no plans to withdraw from these
plans. The plans do not maintain information on net assets and actuarial
present value of the accumulated share of the plans' unfunded vested benefits
allocable to the Company, and amounts, if any, for which the Company may be
contingently liable is not ascertainable at this time.
The Company has a 401(k) plan and profit sharing plan covering substantially
all nonbargaining employees. Participant contributions to be in the 401(k)
plan are limited to 6.6 percent of total compensation paid to participants
during the plan year. The Company may also make discretionary contributions.
Contributions to the plan were approximately $230,000, $182,000 and $168,000
for the years ended December 31, 1995, 1996 and 1997, respectively, and the
Company had accrued approximately $182,000 and $168,000 at December 31, 1996
and 1997, respectively.
In addition to the 401(k) plan and profit sharing plan, the financial
statements include discretionary bonuses to employees of $564,000, $1,087,000
and $2,300,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
10. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, lines of credit, accounts payable, notes payable and
debt. The Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
F-31
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
11. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the ordinary
course of business. Management does not believe the outcome of such legal
actions will have a material adverse effect on the Company's financial
position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, business property liability, workers' compensation, general
liability and an umbrella policy.
Effective January 1, 1996, the Company began self-insuring for certain
workers' compensation risks up to $1,000,000 per occurrence. In October 1997,
the Company reduced the deductible to $500,000 per occurrence. The Company has
accrued for the estimated probable claims costs in satisfying the deductible
provisions of the insurance policies for claims occurring through December 31,
1997. The accrual is based on known facts and historical trends, and
management believes such accrual to be adequate.
Product Rights
In May 1997, the Company entered into an agreement with a third party which
gives the Company exclusive rights for 30 months to the use of a patented
product used in the construction, maintenance, repair and improvement of
energized transmission and distribution lines in all states west of the
Mississippi River.
The product is a telescoping robotic arm for temporarily supporting
energized power lines to enable repair or replacement of transmission poles,
cross-arms, insulators and the like while maintaining an energized connection.
In exchange for the exclusive rights, the Company agreed to pay the third
party a fixed fee and a percentage of gross profits generated from the use of
the product. As of December 31, 1997, the Company had made payments totaling
$225,000 related to fees for the use of such product.
Performance Bonds
In certain circumstances, the Company is required to provide performance
bonds in connection with its contract commitments which are personally
guaranteed by certain stockholders of the Company.
12. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10 percent of total sales to three major
customers (comprising approximately 16 percent, 15 percent and 11 percent of
total sales), three major customers (comprising approximately 23 percent, 12
percent and 10 percent of total sales) and three major customers (comprising
approximately 21 percent, 11 percent and 10 percent of total sales) during the
years ended December 1995, 1996 and 1997, respectively.
The Company grants credit, generally without collateral, to its customers,
which include utility companies, municipalities and commercial companies
located primarily in the Midwestern region of the United States. Consequently,
the Company is subject to potential credit risk related to changes in business
and economic factors within the Midwestern region of the United States.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize the potential credit risk.
F-32
<PAGE>
PAR ELECTRICAL CONTRACTORS, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
13. SUBSEQUENT EVENTS:
In December 1997, the Company and its shareholders entered into a definitive
agreement with Quanta Services, Inc. ("Quanta"), providing for all outstanding
shares of the Company's common stock to be exchanged for cash and shares of
Quanta common stock, concurrent with an initial public offering of additional
common stock by Quanta which closed in February 1998. In addition, the two
executives of the Company entered into employment agreements with the Company
and Quanta which have an initial term of three years and generally restrict
the disclosure of confidential information as well as restrict competition
with the Company and Quanta for a period of five years from the date of the
employment agreement. Reference is made to Note 1 of Quanta Services, Inc.
financial statements included elsewhere herein.
In connection with the acquisition, the shareholders of the Company
purchased a portion of land and equipment from the Company. The net book value
of the land and the equipment purchased was approximately $759,000 and
$731,000 at December 31, 1996 and 1997, respectively.
Earnings per share
For financial statement presentation purposes, as required by the rules and
regulations of the Securities Act, the Company has been identified as the
accounting acquiror in the transaction with Quanta and its initial public
offering, as its former shareholders represent the largest shareholding
interest in Quanta. As such, the shares of Quanta common stock beneficially
owned by the shareholders have been used in the calculation of basic and
diluted earnings per share of the Company for the periods presented herein.
F-33
<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-34
<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-35
<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-36
<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-37
<PAGE>
UNION POWER CONSTRUCTION COMPANY
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<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...... 25,000 $25 $2,976 $ -- $3,001
Change in market value of
securities................. -- -- -- (70) (70)
Net income.................. -- -- 364 -- 364
------ --- ------ ---- ------
BALANCE, August 31, 1995...... 25,000 25 3,340 (70) 3,295
Change in market value of
securities................. -- -- -- 8 8
Net income.................. -- -- 1,112 -- 1,112
------ --- ------ ---- ------
BALANCE, August 31, 1996...... 25,000 25 4,452 (62) 4,415
Change in market value of
securities................. -- -- -- 6 6
Net income.................. -- -- 1,923 -- 1,923
------ --- ------ ---- ------
BALANCE, August 31, 1997...... 25,000 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).................. 25,000 $25 $7,111 $(44) $7,092
====== === ====== ==== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-38
<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 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.
F-39
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The balances billed but not paid by customers pursuant to retainage
provisions in fixed price or cost-plus-fee contracts will be due upon
completion of the contracts and acceptance by the customer. Based on the
Company's experience with similar contracts in recent years, the retention
balance at each balance sheet date will be collected within the subsequent
fiscal year.
The current asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The current liability "Billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company generally warrants labor for 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.
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
F-40
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 amor-
tization................................ 4,954 5,013
------ -------
Property and equipment, net.............. $4,810 $ 5,868
====== =======
</TABLE>
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>
F-41
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 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.
F-42
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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-43
<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-44
<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.
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.
F-45
<PAGE>
UNION POWER CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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-46
<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-47
<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 maturi-
ties................................... 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-48
<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-49
<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-50
<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-51
<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.
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
F-52
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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."
F-53
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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 amortiza-
tion....................................... (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>
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>
F-54
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-55
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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>
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.
F-56
<PAGE>
TRANS TECH ELECTRIC, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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-57
<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-58
<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-59
<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-60
<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-61
<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-62
<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 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
F-63
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-64
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES --------------
IN YEARS 1996 1997
------------ ------ ------
<S> <C> <C> <C>
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>
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.
F-65
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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 Decebmer 31, 1997) was converted
to a long-term note payable to the bank.
F-66
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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>
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
F-67
<PAGE>
POTELCO, INC.
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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-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%,
20% and 12% of the Company's revenues, respectively. During the year ended
December 31, 1997, three customers accounted for 34%, 16% and 7% 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-68
<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-69
<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-70
<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-71
<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-72
<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-73
<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-74
<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.
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.
F-75
<PAGE>
SPALJ CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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>
F-76
<PAGE>
SPALJ CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-77
<PAGE>
SPALJ CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
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.
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.
F-78
<PAGE>
SPALJ CONSTRUCTION COMPANY
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.
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-79
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALES REPRESENTATIVE OR ANY OTHER PERSON HAS BEEN AUTHORIZED IN
CONNECTION WITH THE OFFERING MADE HEREBY TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, AND, IF GIVEN OR
MADE, SUCH INFORMATION AND REPRESENTATION MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR SOLICITATION OF AN OFFER TO BUY, SECURITIES
OTHER THAN THE REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR
SOLICITATION OF, ANY PERSON IN ANY JURISDICTION WHERE AN OFFER OR SOLICITATION
WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE
INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE
HEREOF.
----------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 2
Risk Factors.............................................................. 7
The Company............................................................... 12
Use of Proceeds........................................................... 12
Price Range of Common Stock............................................... 13
Dividend Policy........................................................... 13
Selected Financial Data................................................... 14
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 17
Business.................................................................. 26
Management................................................................ 33
Certain Transactions...................................................... 37
Principal Stockholders.................................................... 39
Description of Capital Stock.............................................. 40
Shares Eligible for Future Sale........................................... 43
Plan of Distribution...................................................... 44
Legal Matters............................................................. 45
Experts................................................................... 45
Additional Information.................................................... 46
Index to Financial Statements............................................. F-1
</TABLE>
----------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
5,000,000 SHARES
[LOGO OF QUANTA SERVICES, INC. APPEARS HERE]
COMMON STOCK
------------
PROSPECTUS
------------
, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
PART I-B
QUANTA SERVICES, INC.
The alternate Prospectus cover page set forth below may be used together
with the remainder of the Prospectus from time to time by stockholders who
seek to sell shares of Common Stock in transactions in which they or the
broker-dealers through whom such shares are sold may be deemed to be
underwriters under the Securities Act of 1933, as amended.
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
[ALTERNATE PROSPECTUS COVER PAGE]
SUBJECT TO COMPLETION, DATED MAY 5, 1998
[LOGO OF QUANTA APPEARS HERE]
COMMON STOCK
------------
This Prospectus, as appropriately amended or supplemented, may be used from
time to time principally by persons who have received shares of Common Stock,
$.00001 par value (the "Common Stock"), of Quanta Services, Inc. (together with
its subsidiaries, the "Company" or "Quanta") in connection with direct or
indirect acquisitions by the Company of securities or assets held by such
persons, or their transferees, and who wish to offer and sell such Common Stock
in transactions in which they and any broker-dealer through whom such shares
are sold may be deemed to be underwriters within the meaning of the Securities
Act of 1933, as amended (the "Securities Act"), as more fully described herein.
Any commissions paid or concessions allowed to any broker-dealer, and, if any
broker-dealer purchases such shares as principal, any profits received on the
resale of such shares, may be deemed to be underwriting discounts and
commissions under the Securities Act. Printing, filing and other similar
expenses of this offering will by paid by the Company. Selling Stockholders
will bear all expenses of this offering, including brokerage fees and any
underwriting discounts or commissions.
The Common Stock is listed on the New York Stock Exchange (the "NYSE") under
the symbol "PWR." Application will be made to list the shares offered hereby on
the NYSE. On May 1, 1998, the last reported sales price of the Common Stock on
the NYSE was $14.75 per share. See "Price Range of Common Stock."
See "Risk Factors" beginning on Page 7 for a discussion of certain factors
that should be considered by prospective purchasers of the Common Stock offered
hereby.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR
ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is , 1998.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. 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 him in connection with such action, suit or proceeding
if he acted in good faith and in a manner he reasonably believed to be in or
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe his conduct
was unlawful. 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 his
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 he
is or was a director, officer, employee or agent of the corporation, or is or
was serving at the request or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses (including attorneys'
fees) actually and reasonably incurred by him in connection with the defense
or settlement of such action or suit if he acted in good faith and in a manner
he reasonably believed to be in or not opposed to the best interests of the
corporation 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 director,
officer, employee or agent 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 him 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 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 (1) by the board
of directors by a majority vote of a quorum consisting of directors who were
not parties to such action, suit or proceeding, or (2) if such a quorum is not
obtainable, or, even if obtainable, a quorum of disinterested directors so
directs, by independent legal counsel in a written opinion, or (3) 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
II-1
<PAGE>
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 board of directors deems
appropriate.
Section 145(f) of the DGCL states 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 his 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 or agent of
another corporation, partnership, joint venture, trust or other enterprise,
against any liability asserted against him and incurred by him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145.
Section 145(j) of the DGCL states 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.
Amended and Restated Certificate of Incorporation
The Amended and Restated 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 Amended and Restated
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
II-2
<PAGE>
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.
Insurance
The Company intends to maintain liability insurance for the benefit of its
directors and officers.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
2.1 --Amended and Restated Agreement and Plan of Organization dated as of
December 11, 1997 by and among Quanta Services, Inc. and PAR
Electrical Contractors, Inc. and its stockholders**
2.2 --Amended and Restated Agreement and Plan of Organization dated as of
December 11, 1997 by and among Quanta Services, Inc. and Union Power
Construction Company and its stockholders**
2.3 --Amended and Restated Agreement and Plan of Organization dated as of
December 11, 1997 by and among Quanta Services, Inc. and TRANS TECH
Electric, Inc. and its stockholders**
2.4 --Amended and Restated Agreement and Plan of Organization dated as of
December 11, 1997 by and among Quanta Services, Inc. and Potelco,
Inc. and its stockholders**
3.1 --Amended and Restated Certificate of Incorporation**
3.2 --Amended and Restated Bylaws**
4.1 --Form of Common Stock Certificate**
5.1 --Opinion of Jackson Walker 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
21.1 --Subsidiaries**
23.1 --Consent of Arthur Andersen LLP
23.2 --Consent of Jackson Walker L.L.P. (contained in Exhibit 5.1)
24.1 --Power of Attorney***
27 --Financial Data Schedule**
</TABLE>
- --------
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-42957) and incorporated herein by reference.
*** Previously filed.
(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.
II-3
<PAGE>
ITEM 22. UNDERTAKINGS.
The undersigned registrant hereby undertakes as follows:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(4) 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.
(5) That, for the purpose of determining any liability under the
Securities Act of 1933, each filing of the registrant's annual report
pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act
of 1934 (and where applicable, each filing of an employee benefit plan's
annual report pursuant to section 15(d) of the Securities Exchange Act of
1934) that is incorporated by reference in the registration statement 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.
(6) That prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this registration
statement, by any person or party who is deemed to be an underwriter within
the meaning of Rule 145(c), the issuer undertakes that such reoffering
prospectus will contain the information called for by the applicable
registration form with respect to reofferings by persons who may be deemed
underwriters, in addition to the information called for by the other Items
of the applicable form.
II-4
<PAGE>
(7) That every prospectus (i) that is filed pursuant to paragraph (6)
immediately preceding, or (ii) that purports to meet the requirements of
Section 10(a)(3) of the Securities Act and is used in connection with an
offering of securities subject to Rule 415, will be filed as a part of an
amendment to the registration statement and will not be used until such
amendment is effective, and that, for purposes of determining any liability
under the Securities Act, each such post-effective amendment 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.
(8) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this
Form, within one business day of receipt of such request, and to send the
incorporated documents by first class mail or other equally prompt means.
This includes information contained in documents filed subsequent to the
effective date of the registration statement through the date of responding
to the request.
(9) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein,
that was not the subject of and included in the registration statement when
it became effective.
II-5
<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 May 5, 1998.
Quanta Services, Inc.
/s/ John R. Colson
By___________________________________
John R. Colson
Chief Executive Officer
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 May 5, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C>
/s/ John R. Colson Chief Executive Officer,
- ------------------------------------ Director (Principal
John R. Colson Executive Officer)
James H. Haddox* Chief Financial Officer
- ------------------------------------ (Principal Financial and
James H. Haddox Accounting Officer)
Vincent D. Foster* Director
- ------------------------------------
Vincent D. Foster
John R. Wilson* Director
- ------------------------------------
John R. Wilson
Timothy A. Soule* Director
- ------------------------------------
Timothy A. Soule
John A. Martell* Director
- ------------------------------------
John A. Martell
Gary A. Tucci* Director
- ------------------------------------
Gary A. Tucci
James R. Ball* Director
- ------------------------------------
James R. Ball
Rodney R. Proto* Director
- ------------------------------------
Rodney R. Proto
Michael T. Willis* Director
- ------------------------------------
Michael T. Willis
</TABLE>
/s/ John R. Colson
*By____________________________
John R. Colson
ATTORNEY IN FACT
II-6
<PAGE>
EXHIBIT 10.3
ACQUISITION AGREEMENT AND PLAN OF REORGANIZATION
by and among
QUANTA SERVICES, INC.,
SPALJ ACQUISITION, INC.,
SPALJ CONSTRUCTION COMPANY,
J.R. SPALJ,
LUKE SPALJ,
MARK ANDERSON,
AND
JANE M. SPALJ
Dated as of May 5, 1998
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE I
DEFINITIONS
1.1. DEFINITIONS............................................. 1
1.2. INTERPRETATION.......................................... 5
ARTICLE II
THE MERGER AND THE SURVIVING CORPORATION
2.1. THE MERGER.............................................. 6
2.2. EFFECTIVE TIME OF THE MERGER............................ 6
2.3. ARTICLES OF INCORPORATION, BY-LAWS AND BOARD OF
DIRECTORS OF SURVIVING CORPORATION...................... 6
ARTICLE III
CONVERSION OF SHARES
3.1. CONVERSION OF SHARES.................................... 7
3.2. NEWCO SHARES............................................ 7
3.3. DELIVERY OF MERGER CONSIDERATION........................ 7
ARTICLE IV
CLOSING
4.1. CLOSING................................................. 7
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
5.1. DUE ORGANIZATION AND QUALIFICATION...................... 7
5.2. AUTHORIZATION; NON-CONTRAVENTION; APPROVALS............. 8
5.3. CAPITALIZATION AND OWNERSHIP............................ 9
5.4. SUBSIDIARIES............................................ 9
5.5. FINANCIAL STATEMENTS.................................... 9
5.6. LIABILITIES AND OBLIGATIONS............................. 10
5.7. ACCOUNTS AND NOTES RECEIVABLE........................... 10
5.8. ASSETS.................................................. 11
5.9. MATERIAL CUSTOMERS AND CONTRACTS........................ 11
5.10. PERMITS................................................. 12
5.11. ENVIRONMENTAL MATTERS................................... 13
5.12. LABOR AND EMPLOYEE RELATIONS 13
5.13. INSURANCE 13
5.14. COMPENSATION; EMPLOYMENT AGREEMENTS 13
5.15. NONCOMPETITION, CONFIDENTIALITY AND NONSOLICITATION
AGREEMENTS.............................................. 14
5.16. EMPLOYEE BENEFIT PLANS.................................. 14
5.17. LITIGATION AND COMPLIANCE WITH LAW...................... 16
5.18. TAXES................................................... 16
5.19. ABSENCE OF CHANGES...................................... 17
5.20. ACCOUNTS WITH BANKS AND BROKERAGES; POWERS OF ATTORNEY.. 18
5.21. ABSENCE OF CERTAIN BUSINESS PRACTICES................... 18
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5.22. COMPETING LINES OF BUSINESS; RELATED-PARTY TRANSACTIONS. 18
5.23. INTANGIBLE PROPERTY..................................... 18
5.24. TAX REORGANIZATION REPRESENTATION....................... 18
5.25. TOTAL ASSETS............................................ 18
5.26. DISCLOSURE.............................................. 19
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF QUANTA AND NEWCO
6.1. ORGANIZATION........................................... 19
6.2. AUTHORIZATION; NON-CONTRAVENTION; APPROVALS............ 19
6.3. QUANTA COMMON STOCK.................................... 20
6.4. TAX REORGANIZATION REPRESENTATIONS..................... 20
6.5. SEC FILINGS; DISCLOSURE................................ 21
6.6. DISCLOSURE............................................. 21
6.7. REGISTRATION STATEMENT................................. 21
ARTICLE VII
CERTAIN COVENANTS
7.1. RELEASE FROM GUARANTEES................................ 21
7.2. FUTURE COOPERATION; TAX MATTERS........................ 21
7.3. EXPENSES............................................... 22
7.4. LEGAL OPINION.......................................... 22
7.5. EMPLOYMENT AGREEMENTS.................................. 22
7.6. PRE-CLOSING DISTRIBUTIONS.............................. 22
7.7. REPAYMENT OF RELATED PARTY INDEBTEDNESS................ 23
7.8. STOCK OPTIONS.......................................... 23
7.9. STOCK PURCHASE PROGRAM................................. 23
7.10. REGISTRATION RIGHTS.................................... 24
7.11. TRANSACTIONS WITH AFFILIATES; EQUIPMENT................ 27
ARTICLE VIII
INDEMNIFICATION
8.1. GENERAL INDEMNIFICATION BY THE EMPLOYEE STOCKHOLDERS... 27
8.2. INDEMNIFICATION BY QUANTA.............................. 27
8.3. THIRD PERSON CLAIMS.................................... 27
8.4. INDEMNIFICATION DEDUCTIBLE............................. 28
8.5. INDEMNIFICATION LIMITATION............................. 28
8.6. EXCLUSIVE REMEDY....................................... 29
8.7. INDEMNIFICATION FOR NEGLIGENCE OF INDEMNIFIED PARTY.... 29
ARTICLE IX
NONCOMPETITION COVENANTS
9.1. PROHIBITED ACTIVITIES.................................. 29
9.2. EQUITABLE RELIEF....................................... 30
9.3. REASONABLE RESTRAINT................................... 30
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<PAGE>
9.4. SEVERABILITY; REFORMATION.............................. 30
9.5. MATERIAL AND INDEPENDENT COVENANT...................... 30
ARTICLE X
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
10.1. GENERAL............................................... 31
10.2. EQUITABLE RELIEF...................................... 31
ARTICLE XI
INTENDED TAX TREATMENT
11.1. TAX-FREE REORGANIZATION............................... 31
ARTICLE XII
FEDERAL SECURITIES ACT AND CONTRACTUAL RESTRICTIONS
ON QUANTA COMMON STOCK
12.1. COMPLIANCE WITH LAW................................... 31
12.2. ECONOMIC RISK; SOPHISTICATION......................... 32
12.3. RULE 144 REPORTING.................................... 32
12.4. CONSENT TO RESELL SHARES UNDER PROSPECTUS............. 32
12.5. CONTRACTUAL RESTRICTIONS ON TRANSFERS OF QUANTA COMMON
STOCK................................................. 33
12.6. SATISFACTION OF INDEMNIFICATION OBLIGATIONS........... 33
ARTICLE XIII
MISCELLANEOUS
13.1. SUCCESSORS AND ASSIGNS................................ 34
13.2. ENTIRE AGREEMENT...................................... 34
13.3. COUNTERPARTS.......................................... 34
13.4. BROKERS AND AGENTS.................................... 34
13.5. NOTICES............................................... 34
13.6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES............ 35
13.7. EXERCISE OF RIGHTS AND REMEDIES....................... 35
13.8. REFORMATION AND SEVERABILITY.......................... 35
iii
<PAGE>
ACQUISITION AGREEMENT AND PLAN OF REORGANIZATION
------------------------------------------------
THIS ACQUISITION AGREEMENT AND PLAN OF REORGANIZATION (this "Agreement") is
made as of the fifth day of May, 1998, by and among Quanta Services, Inc., a
Delaware corporation ("Quanta"), Spalj Acquisition, Inc., a Delaware corporation
that is a subsidiary of Quanta ("Newco"), Spalj Construction Company, a
Minnesota corporation (the "Company"), J.R. Spalj, Luke Spalj, Mark Anderson
(such individuals being collectively referred to herein as the "Employee
Stockholders"), and Jane M. Spalj (together with the Employee Stockholders, the
"Stockholders"), with the Stockholders being the Company's only stockholders.
WHEREAS, the respective Boards of Directors of Newco and the Company
(collectively referred to as "Constituent Corporations") deem it advisable and
in the best interests of the Constituent Corporations and their respective
stockholders that the Company merge with and into Newco (the "Merger"); and
WHEREAS, the Boards of Directors of the Constituent Corporations have
approved and adopted this Agreement as a plan of reorganization within the
provisions of Section 368 of the Internal Revenue Code of 1986, as amended (the
"Code"); and
WHEREAS, the stockholders of the Constituent Corporations have approved the
Merger in accordance with the GCL and the MBC Act; and
NOW, THEREFORE, in consideration of the premises and of the mutual
agreements, representations, warranties, provisions and covenants contained
herein, the parties hereto, intending to be legally bound, agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. Capitalized terms used in this Agreement shall have the
following meanings:
"Actual Amount" has the meaning set forth in Section 76.
"Actual Income" has the meaning set forth in Section 76.
"Actual Tax Rate" has the meaning set forth in Section 76.
"Affiliate" of, or "Affiliated" with, a specified person or entity means a
person or entity that directly, or indirectly through one or more
intermediaries, controls, or is controlled by, or is under common control with,
the specified person or entity.
"Agreement" has the meaning set forth in the first paragraph of this
Agreement.
<PAGE>
"Assumed Tax Rate" has the meaning set forth in Section 7.6.
"Balance Sheet Date" has the meaning set forth in Section 5.5.
"Broker" has the meaning set forth in Section 13.4.
"Closing" has the meaning set forth in Section 4.1.
"Closing Date" has the meaning set forth in Section 4.1.
"Code" has the meaning set forth in the third paragraph of this Agreement.
"Company" has the meaning set forth in the first paragraph of this
Agreement.
"Company Common Stock" has the meaning set forth in Section 3.1.
"Compensation Committee" has the meaning set forth in Section 7.8.
"Competitive Business" means any business that competes with the Company or
the Surviving Corporation, including, without limitation, any business that
provides network construction for U.S. telecommunication and power service
providers, including, without limitation, construction, installation and
maintenance of fiber-optic networks.
"Constituent Corporations" has the meaning set forth in the second
paragraph of this Agreement.
"Deerwood" has the meaning set forth in Section 9.1(b).
"Effective Time" has the meaning set forth in Section 2.2.
"Encumbrances" means all liens, encumbrances, mortgages, pledges, security
interests, conditional sales agreements, charges, options, preemptive rights,
rights of first refusal, reservations, restrictions or other encumbrances or
defects in title.
"Employee benefit plan" has the meaning set forth in Section 5.16.
"Employee pension benefit plan" has the meaning set forth in Section 5.16.
"Employee Stockholders" has the meaning set forth in the first paragraph of
this Agreement.
"Employment Agreements" has the meaning set forth in Section 7.5.
"Environmental Laws" means any Law or agreement with any Governmental
Authority 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 natural resource) or to human health or safety or (b)
the exposure to, or the use, storage,
2
<PAGE>
recycling, treatment, generation, transportation, processing, handling,
labeling, production, release or disposal of any substance, in each case as
amended and as in effect on the Closing Date. The term "Environmental Law"
includes, without limitation, (i) the Federal Comprehensive Environmental
Response Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act, the Federal Water Pollution Control Act of 1972, the
Federal Clean Air Act, the Federal Clean Water 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 (ii) 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 substance.
"ERISA" has the meaning set forth in Section 5.16.
"ERISA Affiliate" has the meaning set forth in Section 5.16.
"Estimated Amount" has the meaning set forth in Section 7.6.
"Estimated Income" has the meaning set forth in Section 7.6.
"Expiration Date" has the meaning set forth in Section 13.6.
"Financial Statements" has the meaning set forth in Section 5.5.
"GAAP" means generally accepted accounting principles as currently applied
by the respective party on a basis consistent with preceding years and
throughout the periods involved.
"Governmental Authority" means any federal, state, local or foreign
government, political subdivision or governmental or regulatory authority,
agency, board, bureau, commission, instrumentality or court or quasi-
governmental authority.
"GCL" means General Corporation Law of the State of Delaware, as amended.
"Hazardous Substances" means any substance presently listed, defined,
designated or classified as hazardous, toxic, radioactive or dangerous, or
otherwise regulated, under any Environmental Law. The term "Hazardous
Substances" includes, without limitation, 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.
"Indemnified Party" has the meaning set forth in Section 8.3.
"Indemnifying Party" has the meaning set forth in Section 8.3.
3
<PAGE>
"Interim Balance Sheet" has the meaning set forth in Section 5.5.
"Interim Financial Statements" has the meaning set forth in Section 5.5.
"Interim Tax Period" has the meaning set forth in Section 7.6.
"Knowledge" means, in the case of the Company or the Employee Stockholders,
the actual knowledge, whenever obtained and after due inquiry, of any of (i) the
Employee Stockholders and (ii) Doug Odegaard, the Company's Chief Financial
Officer.
"Law" or "Laws" means any and all federal, state, local or foreign
statutes, laws, ordinances, proclamations, code, regulations, licenses, permits,
authorizations, approvals, consents, legal doctrine, published requirements,
orders, decrees, judgments, injunctions and rules of any Governmental Authority,
including, without limitation, those covering environmental, Tax, energy,
safety, health, transportation, bribery, recordkeeping, zoning, discrimination,
antitrust and wage and hour matters, in each case as amended and in effect from
time to time.
"Lockup Period" has the meaning set forth in Section 12.5.
"Lockup Shares" has the meaning set forth in Section 12.5.
"Loss" or "Losses" means all liabilities, losses, claims, damages, actions,
suits, proceedings, demands, assessments, adjustments, fees, costs and expenses
(including specifically, but without limitation, reasonable attorneys' fees and
costs and expenses of investigation), net of income Tax effects with respect
thereto (including, without limitation, income Tax benefits recognized in
connection therewith and income Taxes upon any indemnification recovery thereof)
and net of any insurance proceeds, and any indemnity, contribution or similar
payment, collected by Newco or any Affiliate of Newco from any third party with
respect thereto.
"Material Customers" has the meaning set forth in Section 5.9.
"Merger Consideration" has the meaning set forth in Section 3.1.
"Merger Filings" has the meaning set forth in Section 22.
"Merger" has the meaning set forth in the second paragraph of this
Agreement.
"MBC Act" means the Minnesota Business Corporation Act, as amended.
"Newco" has the meaning set forth in the first paragraph of this Agreement.
"Noncompete Term" has the meaning set forth in Section 9.1(a).
"1933 Act" means the Securities Act of 1933, as amended.
4
<PAGE>
"1934 Act" means the Securities Exchange Act of 1934, as amended.
"Option Plan" has the meaning set forth in Section 7.8.
"Permits" has the meaning set forth in Section 5.10.
"Permitted Encumbrances" means (a) any Encumbrances reserved against in the
Interim Balance Sheet, (b) Encumbrances for property or ad valorem Taxes not yet
due and payable or which are being contested in good faith and by appropriate
proceedings if adequate reserves with respect thereto are maintained on the
Company's books in accordance with GAAP, and (c) obligations under operating and
capital leases described in Schedule 5.9.
"Plan" has the meaning set forth in Section 5.16.
"Qualified Plans" has the meaning set forth in Section 5.16.
"Quanta" has the meaning set forth in the first paragraph of this
Agreement.
"Quanta Common Stock" means Quanta's Common Stock, par value $.00001 per
share.
"Registrable Shares" has the meaning set forth in Section 7.10(b).
"Registration Statement" has the meaning set forth in Section 6.7.
"Restricted Shares" has the meaning set forth in Section 12.1.
"Rule 144" means Rule 144 as promulgated under the 1933 Act.
"SEC" means the Securities and Exchange Commission.
"Stockholders" has the meaning set forth in the first paragraph of this
Agreement.
"Surviving Corporation" has the meaning set forth in Section 2.1.
"Taxes" has the meaning set forth in Section 5.18.
"Territory" has the meaning set forth in Section 9.1.
"Third Person" has the meaning set forth in Section 8.3.
"Year-End Financial Statements has the meaning set forth in Section 5.5.
1.2 INTERPRETATION. For all purposes of this Agreement, except as
otherwise expressly provided or unless the context otherwise requires:
5
<PAGE>
(a) the terms defined in Section 1.1 and elsewhere in this Agreement
include the plural as well as the singular;
(b) all accounting terms not otherwise defined herein have the
meanings ascribed to them in accordance with GAAP; and
(c) the words "herein," "hereof," and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision.
ARTICLE II
THE MERGER AND THE SURVIVING CORPORATION
2.1 THE MERGER. Upon the terms and subject to the conditions of this
Agreement, at the Effective Time in accordance with the MBC Act and the GCL, the
Company shall be merged with and into Newco and the separate existence of the
Company shall thereupon cease. Newco shall be the surviving corporation in the
Merger (hereinafter sometimes referred to as the "Surviving Corporation").
2.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective at
such time (the "Effective Time") as (a) holders of all the Company Common Stock
approve the Merger, and (b) certificates of merger and articles of merger, in
forms mutually acceptable to Quanta and the Company, are filed with the
Secretaries of State of the States of Delaware and Minnesota, respectively (the
"Merger Filings"). The Merger Filings shall be made simultaneously with or as
soon as practicable after the execution of this Agreement and the Closing.
2.3 ARTICLES OF INCORPORATION, BY-LAWS AND BOARD OF DIRECTORS OF SURVIVING
CORPORATION. As a result of the Merger and at the Effective Time, the
following shall occur:
(a) The Certificate of Incorporation of Newco shall be amended as
follows:
"FIRST. The name of the corporation is Spalj Construction Company."
(b) The Certificate of Incorporation of Newco in effect immediately
prior to the Effective Time, as so amended hereby, shall become the
Certificate of Incorporation of the Surviving Corporation. After the
Effective Time, the Certificate of Incorporation of the Surviving
Corporation may be amended in accordance with their terms and as provided
in the GCL.
(c) The Bylaws of Newco in effect immediately prior to the Effective
Time shall become the Bylaws of the Surviving Corporation, and thereafter
may be amended in accordance with their terms and as provided by the
Articles of Incorporation of the Surviving Corporation and GCL.
(d) The Board of Directors of Newco as constituted immediately prior
to the Effective Time shall be the Board of Directors of the Surviving
Corporation.
6
<PAGE>
ARTICLE III
CONVERSION OF SHARES
3.1 CONVERSION OF SHARES. At the Effective Time, by virtue of the Merger,
and without any action on the part of any holder of any capital stock of the
Company the issued and outstanding shares of common stock, no par value per
share, of the Company as of the Effective Time (the "Company Common Stock")
shall be converted into the right to receive, and become exchangeable for
$16,792,557 in cash and an aggregate of 920,282 shares of Quanta Common Stock,
which cash and shares of Quanta Common Stock shall be exchangeable for all the
Company Common Stock outstanding at the Effective Time and issued to the
Stockholders as set forth in Schedule 3.1 (the Quanta Common Stock and cash paid
in exchange for the Company Common Stock being herein collectively referred to
as the "Merger Consideration").
3.2 NEWCO SHARES. The outstanding shares of common stock, par value $.01
per share, of Newco shall remain outstanding following the Merger.
3.3 DELIVERY OF MERGER CONSIDERATION. At the Closing, (a) each
Stockholder shall furnish to Quanta the certificates representing its Company
Common Stock, duly endorsed in blank by such Stockholder or accompanied by duly
executed blank stock powers, and (b) Quanta shall deliver to each Stockholder
cash (by wire transfer in accordance with the wiring instructions for each
Stockholder set forth on Schedule 3.1) and certificates representing the shares
of Quanta Common Stock to be delivered to such Stockholder pursuant to Section
3.1. Each Stockholder agrees promptly to cure any deficiencies with respect to
the endorsement of the certificates or other documents of conveyance with
respect to the Company Common Stock or with respect to the stock powers
accompanying such stock.
ARTICLE IV
CLOSING
4.1 CLOSING. The consummation of the Merger and delivery of the
consideration described in Section 3.3 hereof and the other transactions
contemplated by this Agreement (the "Closing") shall take place at the offices
of Quanta, 1360 Post Oak Blvd., Suite 800, Houston, Texas, concurrently with the
execution of this Agreement or at such other time and date as Quanta, the
Company and the Stockholders may mutually agree, which date is herein referred
to as the "Closing Date."
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDERS
The Employee Stockholders jointly and severally represent and warrant to
Quanta as follows:
5.1 DUE ORGANIZATION AND QUALIFICATION. The Company is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
Minnesota and is duly authorized and qualified to do business under all
applicable Laws and to carry on its business in the places and in the manner as
now conducted. The Company has the requisite power and authority to own, lease
and operate its assets and properties and to carry on its business as such
business is currently being conducted. Schedule 5.1 contains a list of all
jurisdictions in which the Company is authorized or qualified to do business.
True, complete and
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correct copies of the Articles of Incorporation and By-laws, each as amended, of
the Company are attached hereto as Schedule 5.1. Correct and complete copies of
all stock records and minute books of the Company have been provided to Quanta,
and correct and complete copies of all other stock records and minute books of
the Company have been delivered to Quanta.
5.2 AUTHORIZATION; NON-CONTRAVENTION; APPROVALS.
(a) The Company has the requisite power and authority to enter into
this Agreement and to effect the Merger. Each Stockholder has the full
legal right, power and authority to enter into this Agreement. The
execution, delivery and performance of this Agreement have been approved by
the board of directors or partners, as the case may be, of the Company and
by the Stockholders. No additional corporate or partnership proceedings on
the part of the Company is necessary to authorize the execution and
delivery of this Agreement and the consummation by the Company of the
transactions contemplated hereby. This Agreement has been duly and validly
executed and delivered by the Company and the Stockholders, and, assuming
the due authorization, execution and delivery hereof by Quanta and Newco,
constitutes a valid and binding agreement of the Company and each
Stockholder, enforceable against each of them in accordance with its terms.
(b) The execution and delivery of this Agreement by the Company and
the Stockholders do not, and the consummation by the Company and the
Stockholders of the transactions contemplated hereby will not, violate or
result in a breach of any provision of, or constitute a default (or an
event which, with notice or lapse of time or both, would constitute a
default) under, or result in the termination of, or accelerate the
performance required by, or result in a right of termination or
acceleration under, or result in the creation of any Encumbrance upon any
of the properties or assets of the Company under any of the terms,
conditions or provisions of, (i) the Articles of Incorporation or Bylaws of
the Company, (ii) any Laws applicable to the Stockholders or the Company or
any of its properties or assets, or (iii) except as set forth in Schedule
5.2, any note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, lease or other instrument, obligation or
agreement of any kind to which any Stockholder or the Company is now a
party or by which the Company or any of its properties or assets may be
bound or affected.
(c) Except for the Merger Filings and as set forth in Schedule 5.2, no
declaration, filing or registration with, or notice to, or authorization,
consent or approval of, any Governmental Authority or third party is
necessary for the execution and delivery of this Agreement by the Company
and the Stockholders or the consummation by the Company and the
Stockholders of the transactions contemplated hereby. Except as set forth
in Schedule 5.2, none of the contracts or agreements with Material
Customers or contracts providing for purchases or services individually in
excess of $25,000, or in the aggregate in excess of $50,000, or other
material agreements, licenses or permits to which the Company is a party
requires notice to, or the consent or approval of, any third party for the
execution and delivery of this Agreement by the Company and the
Stockholders and the consummation of the transactions contemplated hereby.
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5.3 CAPITALIZATION AND OWNERSHIP.
(a) The authorized capital stock of the Company consists solely of 400
shares of Company Common Stock, of which 61.54 shares are issued and
outstanding. All of the issued and outstanding shares of the Company
Common Stock are owned beneficially and of record by the Stockholders as
set forth in Schedule 5.3. All of the issued and outstanding shares of the
Company Common Stock have been duly authorized and validly issued, are
fully paid and nonassessable, and were offered, issued, sold and delivered
by the Company in compliance with all applicable Laws, including, without
limitation, those Laws concerning the issuance of securities. None of such
shares were issued in violation of the preemptive rights of any past or
present stockholder. At the Effective Time, by virtue of the Merger Filing
in Minnesota, the Merger will become effective in Minnesota. Except as set
forth in Schedule 5.3, no subscription, option, warrant, call, convertible
or exchangeable security, other conversion right or commitment of any kind
exists which obligates the Company to issue any of its capital stock or the
Stockholders to transfer any of the capital stock of the Company.
(b) Jane M. Spalj severally represents and warrants to Quanta that she
owns beneficially and of record the number of shares of Company Common
Stock set forth on Schedule 5.3.
5.4 SUBSIDIARIES. Except as set forth in Schedule 54, the Company owns,
of record or beneficially, or controls, directly or indirectly, no capital
stock, securities convertible into or exchangeable for capital stock or any
other equity interest in any corporation, association or other business entity.
Except as set forth in Schedule 5.4, the Company is not, directly or indirectly,
a participant in any joint venture, limited liability company, partnership or
other noncorporate entity.
5.5 FINANCIAL STATEMENTS.
(a) The Company has delivered to Quanta complete and correct copies of
the following financial statements:
(i) the audited balance sheets of the Company as of December 31,
1996 and 1997 and the related audited statements of income,
stockholders' equity and cash flows for the two-year period
ended December 31, 1997, together with the related notes,
schedules and audit report of the Company's independent
accountants (such balance sheets and the related statements
of income and the related notes and schedules are referred
to herein as the "Year-End Financial Statements");
(ii) the compiled balance sheets of the Company as of September
30, 1997 and the related compiled statements of income,
stockholders' equity and cash flows for the nine-month
period ended September 30, 1997, together with the related
notes, schedules and compilation report of the Company's
independent accountants;
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(iii) the unaudited balance sheets (the "Interim Balance Sheet")
of the Company as of March 31, 1998 (the "Balance Sheet
Date") and the related unaudited statements of income for
the interim period ended on the Balance Sheet Date, together
with the related notes and schedules (such balance sheets,
the related statements of income and the related notes and
schedules are referred to herein as the "Interim Financial
Statements"). The Year-End Financial Statements, the
financial statements described in clause (ii) above and the
Interim Financial Statements (collectively, the "Financial
Statements") are attached as Schedule 5.5 to this Agreement.
(b) Except as set forth in Schedule 5.5, the Financial Statements have
been prepared from the books and records of the Company in conformity with
GAAP (except for the absence of notes in the Interim Financial Statements)
and present fairly the financial position and results of operations of the
Company as of the dates of such statements and for the periods covered
thereby. The books of account of the Company have been kept accurately in
all material respects in the ordinary course of business, the transactions
entered therein represent bona fide transactions, and the revenues,
expenses, assets and liabilities of the Company have been properly recorded
therein in all material respects.
5.6 LIABILITIES AND OBLIGATIONS. Except as set forth in Schedule 5.6, as
of the Balance Sheet Date the Company did not have, nor has it incurred since
that date, any liabilities or obligations (whether absolute, accrued, contingent
or otherwise) of any nature, except (a) liabilities, obligations or
contingencies (i) that are accrued or reserved against in the Financial
Statements or reflected in the notes thereto or (ii) that were incurred after
the Balance Sheet Date and were incurred in the ordinary course of business,
consistent with past practices, and (b) liabilities and obligations that are of
a nature not required to be reflected in the Financial Statements prepared in
accordance with GAAP and that were incurred in the normal course of business and
are described in Schedule 5.6. Schedule 5.6 contains a reasonable estimate by
the Stockholders of the maximum amount that may be payable with respect to
liabilities which are not fixed. For each such liability for which the amount is
not fixed or is contested, the Company has provided a summary description of the
liability together with copies of all relevant documentation relating thereto.
Schedule 5.6 sets forth the Company's outstanding principal amount of
indebtedness for borrowed money (including overdrafts) as of the date hereof.
5.7 ACCOUNTS AND NOTES RECEIVABLE. Schedule 5.7 sets forth an accurate
list of the accounts and notes receivable of the Company as of the Balance Sheet
Date and of those invoiced between the Balance Sheet Date and the second
business day preceding the Closing Date, including any such amounts which are
not reflected in the Interim Balance Sheet. Receivables from and advances to
employees, the Stockholders and any entities or persons related to or Affiliates
of the Stockholders are separately identified in Schedule 5.7. Schedule 5.7 also
sets forth an accurate aging of all accounts and notes receivable as of the
Balance Sheet Date, showing amounts due in 30-day aging categories. The trade
and other accounts receivable of the Company, including without limitation those
classified as current assets on the Interim Balance Sheet, are bona fide
receivables, were acquired in the ordinary course of business, are stated in
accordance with GAAP and are collectible in the amounts shown on Schedule 5.7,
net of reserves reflected in the Interim Financial Statements with respect to
the accounts receivable as of the Balance Sheet Date, and net of reserves
reflected in the books and records of the Company (consistent with the methods
used in the Interim
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Financial Statements) with respect to receivables of the Company after the
Balance Sheet Date. The preceding sentence shall not be deemed or construed as a
guarantee by the Company or the Employee Stockholders of the collection of any
such trade or account receivable.
5.8 ASSETS.
(a) Schedule 5.8 sets forth an accurate list of all real and personal
property included in "property and equipment" on the Interim Balance Sheet
and all other tangible assets of the Company with a book value in excess of
$10,000 (i) owned by the Company as of the Balance Sheet Date and (ii)
acquired since the Balance Sheet Date, including in each case true,
complete and correct copies of leases for significant equipment and for all
real property leased by the Company and descriptions of all real property
on which buildings, warehouses, workshops, garages and other structures
used in the operation of the business of the Company are situated.
Schedule 5.8 indicates which assets used in the operation of the business
of the Company are currently owned by the Stockholders or Affiliates of the
Company or the Stockholders. Except as specifically identified in Schedule
5.8, all of the tangible assets, vehicles and other significant machinery
and equipment of the Company listed in Schedule 5.8 are materially in good
working order and condition, ordinary wear and tear excepted. Except as
specifically described in Schedule 5.8, all fixed assets used by the
Company in its business are either owned by the Company or leased under
agreements identified in Schedule 5.8. All leases set forth in Schedule 5.8
are in full force and effect and constitute valid and binding agreements of
the Company that is a party thereto, and to the Knowledge of the Company
and the Employee Stockholders, the other parties thereto in accordance with
their respective terms. Schedule 5.8 contains true, complete and correct
copies of all title reports and title insurance policies received or owned
by the Company.
(b) The Company has good and indefeasible title to the tangible and
intangible personal property and the real property owned and used in its
business, including the properties identified in Schedule 5.8 as owned real
property, free and clear of all Encumbrances other than Permitted
Encumbrances and those set forth in Schedule 5.8.
(c) Except as specifically described in Schedule 5.8, the tangible and
intangible assets of the Company include all the assets used in the
operation of the business of the Company as conducted at the Balance Sheet
Date, except for dispositions of such assets since such date in the
ordinary course of business, consistent with past practices.
5.9 MATERIAL CUSTOMERS AND CONTRACTS.
(a) Schedule 5.9 sets forth an accurate list of (i) all customers
representing 5% or more of the Company's revenues for the fiscal year ended
in 1997 or the interim period ended on the Balance Sheet Date (the
"Material Customers"), and (ii) all material executory contracts,
warranties, commitments and similar agreements to which the Company is
currently a party or by which it or any of its properties is bound,
including, but not limited to, (A) all customer contracts in excess of
$10,000, individually, or $25,000 in the aggregate, including, without
limitation, consignment contracts, (B) contracts with any labor
organizations, (C) leases providing for annual rental payments in excess of
$5,000, individually, or $10,000 in the aggregate, (D) loan agreements, (E)
pledge and
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security agreements, (F) indemnity or guaranty agreements or obligations ,
(G) bonds, (H) notes, (I) mortgages, (J) joint venture or partnership
agreements, (K) options to purchase real or personal property, and (L)
agreements relating to the purchase or sale by the Company of assets (other
than oral agreements relating to sales of inventory or services in the
ordinary course of business, consistent with past practices) or securities
for more than $5,000, individually, or $10,000 in the aggregate. Prior to
the date hereof, the Company has made available to Quanta complete and
correct copies of all such agreements. To the extent applicable, the
contracts and agreements set forth in Schedule 5.9 are separately
identified as lump sum, unit price, cost plus or maintenance agreements.
(b) Except to the extent set forth in Schedule 5.9, (i) no Material
Customer has canceled or substantially reduced or, to the Knowledge of the
Company and the Employee Stockholders, is threatening to cancel or
substantially reduce its purchases of the Company's products or services,
and (ii) the Company is in compliance with all material commitments and
obligations pertaining to it under such agreements and is not in default
under any of the agreements described in subsection (a), no notice of
default has been received by the Company, and the Stockholders and the
Company are aware of no basis therefor.
(c) Except to the extent set forth in Schedule 5.9, the Company is not
a party to any governmental contracts subject to price redetermination or
renegotiation. Schedule 5.9 sets forth the Company's material bonding or
other financial security requirements or arrangements in connection with
any transactions with any of its customers or suppliers.
(d) Schedule 5.9 sets forth a summary of each outstanding bid or
proposal by the Company that, if awarded to the Company, contemplates
payments to the Company in excess of $100,000 and that is subject to
acceptance or award by a third party.
(e) Schedule 5.9 sets forth a summary of the Company's open jobs and a
job cost schedule supporting the Interim Balance Sheet, which Schedule
includes the Company good faith estimate of each such job's profit or loss
as of the Balance Sheet Date and the Closing Date.
5.10 PERMITS. Schedule 5.10 contains an accurate list of all material
licenses, franchises, permits, transportation authorities and other governmental
authorizations and intangible assets held by the Company, including, without
limitation, permits, licenses and operating authorizations, titles (including
motor vehicle titles and current registrations), fuel permits, franchises,
certificates, trademarks, trade names, patents, patent applications and
copyrights owned or held by the Company (the "Permits"). The Permits are valid,
and the Company has not received any written notice that any Governmental
Authority intends to cancel, terminate or not renew any such license, operating
authorization, franchise, permit or other governmental authorization. The
Permits are all the permits that are required by Law for the operation of the
business of the Company as conducted at the Balance Sheet Date and the ownership
of the assets of the Company. The Company has conducted and is conducting its
business in substantial compliance with the requirements, standards, criteria
and conditions set forth in the Permits, as well as the applicable orders,
approvals and variances related thereto, and is not in violation of any of the
foregoing. Except as specifically provided in Schedule 5.10, the transactions
contemplated by this Agreement will not result in a default under or a breach or
violation of, or adversely affect the rights and benefits afforded to the
Company by, any Permits.
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5.11 ENVIRONMENTAL MATTERS. Except as set forth in Schedule 5.11, (a) the
Company has complied with and is in compliance, in all material respects, with
all Environmental Laws, including, without limitation, Environmental Laws
relating to air, water, land and the generation, storage, use, handling,
transportation, treatment or disposal of Hazardous Substances; (b) the Company
has obtained and complied, in all material respects, with all necessary permits
and other approvals necessary to treat, transport, store, dispose of and
otherwise handle Hazardous Substances and has reported, to the extent required
by all Environmental Laws, all past and present sites owned or operated by the
Company where Hazardous Substances have been treated, stored, disposed of or
otherwise handled; (c) there have been no "releases" or threats of "releases"
(as defined in any Environmental Laws) at, from, in or on any property owned or
operated by the Company; (d) there is no on-site or off-site location to which
the Company has transported or disposed of Hazardous Substances or arranged for
the transportation or disposal Hazardous Substances which is the subject of any
federal, state, local or foreign enforcement action or any other investigation
which could lead to any claim against the Surviving Corporation, Quanta or Newco
for any clean-up cost, remedial work, damage to natural resources or personal
injury, including, but not limited to, any claim under (i) the Comprehensive
Environmental Response, Compensation and Liability Act of 1980, as amended, (ii)
the Resource Conservation and Recovery Act, (iii) the Hazardous Materials
Transportation Act, or (iv) comparable state and local statutes and regulations;
and (e) the Company has no contingent liability in connection with any release
or disposal of any Hazardous Substance into the environment. None of the past
or present sites owned or operated by the Company is currently or has ever been
designated as a treatment, storage and/or disposal facility, nor has any such
facility ever applied for a Permit designating it as a treatment, storage and/or
disposal facility, under any Environmental Law.
5.12 LABOR AND EMPLOYEE RELATIONS. Except as set forth in Schedule 5.12,
the Company is not bound by or subject to any arrangement with any labor union.
Except as set forth in Schedule 5.12, no employees of the Company are
represented by any labor union or covered by any collective bargaining agreement
nor, to the Company's or the Employee Stockholders' Knowledge, is any campaign
to establish such representation in progress. There is no pending or, to the
Company's or the Employee Stockholders' Knowledge, threatened labor dispute
involving the Company and any group of its employees nor has the Company
experienced any significant labor interruptions over the past five years.
Neither the Company nor any Employee Stockholder has any Knowledge of any
significant issues or problems in connection with the relationship of the
Company with its employees.
5.13 INSURANCE. Schedule 5.13 sets forth an accurate list as of the Balance
Sheet Date of all insurance policies carried by the Company and of insurance
loss runs and workmen's compensation claims for the past five policy years.
Except as set forth in Schedule 5.13, all of such policies are "claims made"
policies. The policies described in such Schedule for the current policy year
are currently in full force and effect.
5.14 COMPENSATION; EMPLOYMENT AGREEMENTS. Schedule 5.14 sets forth an
accurate schedule of all officers, directors and employees of the Company with
annual salaries of $70,000 or more, listing the rate of compensation (and the
portions thereof attributable to salary, bonus, benefits and other compensation,
respectively) of each of such persons as of (a) the Balance Sheet Date and (b)
the date hereof. Attached to Schedule 5.14 are true, complete and correct copies
of each employment or consulting agreement with any employee of the Company or
any Stockholder.
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5.15 NONCOMPETITION, CONFIDENTIALITY AND NONSOLICITATION AGREEMENTS.
Schedule 5.15 sets forth all agreements containing covenants not to compete or
solicit employees or to maintain the confidentiality of information to which the
Company is bound or under which the Company has any rights or obligations.
5.16 EMPLOYEE BENEFIT PLANS.
(a) Schedule 5.16 sets forth an accurate schedule of each "employee
benefit plan," as defined in Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), and all nonqualified deferred
compensation arrangements, whether formal or informal and whether legally
binding or not, under which the Company or an ERISA Affiliate has any
current or future obligation or liability or under which any present or
former employee of the Company or an ERISA Affiliate, or such present or
former employee's dependents or beneficiaries, has any current or future
right to benefits (each such plan and arrangement referred to hereinafter
as a "Plan"), together with true and complete copies of such Plans,
arrangements and any trusts related thereto, and classifications of
employees covered thereby as of December 31, 1997. Except as set forth in
Schedule 5.16, neither the Company nor any ERISA Affiliate sponsors,
maintains or contributes currently, or at any time during the preceding
five years, to any plan, program, fund or arrangement that constitutes an
employee pension benefit plan. Each Plan may be terminated by the
respective Company, or if applicable, by an ERISA Affiliate at any time
without any liability, cost or expense, other than costs and expenses that
are customary in connection with the termination of a Plan. For purposes
of this Agreement, the term "employee pension benefit plan" shall have the
meaning given that term in Section 3(2) of ERISA, and the term "ERISA
Affiliate" means any corporation or trade or business under common control
with a Company as determined under Section 4.14(b), (c), (m) or (o) of the
Code.
(b) Each Plan listed in Schedule 5.16 is in compliance in all material
respects with the applicable provisions of ERISA, the Code, and any other
applicable Law. Except as set forth in Schedule 5.16, with respect to each
Plan of the Company and each ERISA Affiliate (other than a "multiemployer
plan," as defined in Section 4001(a)(3) of ERISA), all reports and other
documents required under ERISA or other applicable Law to be filed with any
Governmental Authority, the failure of which to file could reasonably be
expected to result in a material liability to the Company or any ERISA
Affiliate, including all Forms 5500, or required to be distributed to
participants or beneficiaries, have been duly and timely filed or
distributed. True and complete copies of all such reports and other
documents with respect to the past three years for each Plan have been
provided to Quanta. No "accumulated funding deficiency" (as defined in
Section 4.12(a) of the Code) with respect to any Plan has been incurred
(without regard to any waiver granted under Section 4.12 of the Code), nor
has any funding waiver from the Internal Revenue Service been received or
requested. Except as set forth in Schedule 5.16, each Plan that is intended
to be "qualified" within the meaning of Section 40.1(a) of the Code (a
"Qualified Plan") is, and has been during the period from its adoption to
the date hereof, so qualified, both as to form and operation and all
necessary approvals of Governmental Authorities, including a favorable
determination as to the qualification under the Code of each of such
Qualified Plans and each amendment thereto, have been timely obtained.
Except as set forth in Schedule 5.16, all accrued contribution obligations
of the Company with respect to any Plan have either been fulfilled in their
entirety or are fully reflected in the Financial Statements.
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(c) No Plan has incurred or will incur, and neither the Company nor
any ERISA Affiliate has incurred or will incur with respect to any Plan,
any liability for excise tax or penalty due to the Internal Revenue
Service. There have been no terminations, partial terminations or
discontinuances of contributions to any Qualified Plan during the preceding
five years without notice to and approval by the Internal Revenue Service
and payment of all obligations and liabilities attributable to such
Qualified Plan.
(d) Except as set forth in Schedule 5.16, neither the Company nor any
ERISA Affiliate has made any promises of retirement or other benefits to
employees, except as set forth in the Plans, and neither the Company nor
any ERISA Affiliate maintains or has established any Plan that is a
"welfare benefit plan" within the meaning of Section 3(1) of ERISA that
provides for continuing benefits or coverage for any participant or any
beneficiary of a participant after such participant's termination of
employment, except as may be required by Part 6 of Subtitle B of Title I of
ERISA and Section 4980B of the Code and similar state Law provisions, and
at the expense of the participant or the beneficiary of the participant, or
retiree medical liabilities. Neither the Company nor any ERISA Affiliate
maintains, has established or has ever participated in a multiple employer
welfare benefit arrangement as described in Section 3(40)(A) of ERISA.
Except as set forth in Schedule 5.16, neither the Company nor any ERISA
Affiliate has any current or future obligation or liability with respect to
a Plan pursuant to the provisions of a collective bargaining agreement.
(e) Neither the Company nor any ERISA Affiliate has incurred any
material liability to the Pension Benefit Guaranty Corporation in
connection with any Plan. The assets of each Plan that are subject to
Title IV of ERISA are sufficient to provide the benefits under such Plan,
the payment of which the Pension Benefit Guaranty Corporation would
guarantee if such Plan were terminated, and such assets are also sufficient
to provide all other "benefits liabilities" (as defined in ERISA Section
4001(a)(16)) due under such Plan upon termination.
(f) No "reportable event" (as defined in Section 4043 of ERISA) has
occurred and is continuing with respect to any Plan. There are no pending,
or to the Company's and the Employee Stockholders' Knowledge, threatened
claims, lawsuits or actions (other than routine claims for benefits in the
ordinary course) asserted or instituted against, and neither the Company
nor any ERISA Affiliate has Knowledge of any threatened litigation or
claims against, the assets of any Plan or its related trust or against any
fiduciary of a Plan with respect to the operation of such Plan. To the
Company's and the Employee Stockholders' Knowledge, there are no
investigations or audits of any Plan by any Governmental Authority
currently pending and there have been no such investigations or audits that
have been concluded that resulted in any liability to the Company or any
ERISA Affiliate that has not been fully discharged. Neither the Company
nor any ERISA Affiliate has participated in any voluntary compliance or
closing agreement programs established with respect to the form or
operation of a Plan.
(g) Neither the Company nor any ERISA Affiliate has engaged in any
prohibited transaction, within the meaning of Section 406 of ERISA or
Section 4975 of the Code, in connection with any Plan for which exemption
was not available. Except as set forth in Schedule 5.16, neither the
Company nor any ERISA Affiliate is, or ever has been, a participant in or
is obligated to make
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any payment to a multiemployer plan. No person or entity that was engaged
by the Company or an ERISA Affiliate as an independent contractor within
the last five years reasonably can or will be characterized or deemed to be
an employee of the Company or an ERISA Affiliate under applicable Laws for
any purpose whatsoever, including, without limitation, for purposes of
federal, state and local income taxation, workers' compensation and
unemployment insurance and Plan eligibility.
5.17 LITIGATION AND COMPLIANCE WITH LAW. Except as set forth in Schedule
5.17, there are no claims, actions, suits or proceedings, pending or, to the
Knowledge of the Company and the Employee Stockholders, threatened against or
affecting the Company, at law or in equity, or before or by any Governmental
Authority having jurisdiction over the Company. No written notice of any claim,
action, suit or proceeding, whether pending or threatened, has been received by
the Company and, to the Employee Stockholders' and the Company's Knowledge,
there is no basis therefor. Except to the extent set forth in Schedule 5.17, the
Company has conducted and is conducting its business in compliance with all Laws
applicable to the Company, its assets or the operation of its business.
5.18 TAXES. For purposes of this Agreement, the term "Taxes" shall mean
all taxes, charges, fees, levies or other assessments including, without
limitation, income, gross receipts, excise, property, sales, withholding, social
security, unemployment, occupation, use, service, service use, license, payroll,
franchise, transfer and recording taxes, fees and charges, imposed by the United
States or any state, local or foreign government or subdivision or agency
thereof, whether computed on a separate, consolidated, unitary, combined or any
other basis; and such term shall include any interest, fines, penalties or
additional amounts attributable to or imposed with respect to any such taxes,
charges, fees, levies or other assessments. The Company has timely filed all
requisite federal, state, local and other tax returns for all fiscal periods
ended on or before the Closing, and has duly paid in full or made adequate
provision in the Financial Statements for the payment of all Taxes for all
periods ending at or prior to the Closing Date. The Company has duly withheld
and paid or remitted all Taxes required to have been withheld and paid in
connection with amounts paid or owing to any employee, independent contractor,
creditor, shareholder or other person or entity that required withholding under
any applicable Law, including, without limitation, any amounts required to be
withheld or collected with respect to social security, unemployment
compensation, sales or use taxes or workers' compensation. Except as set forth
in Schedule 518, there are no examinations in progress or claims against the
Company relating to Taxes for any period or periods prior to and including the
Balance Sheet Date and no written notice of any claim for Taxes, whether pending
or threatened, has been received. The Company has not granted or been requested
to grant any extension of the limitation period applicable to any claim for
Taxes or assessments with respect to Taxes. The Company is not a party to any
Tax allocation or sharing agreement and is not otherwise liable or obligated to
indemnify any person or entity with respect to any Taxes. The amounts shown as
accruals for Taxes on the Interim Financial Statements as of the Balance Sheet
Date are sufficient for the payment of all Taxes for all fiscal periods ended on
or before that date. True and complete copies of (a) any tax examinations, (b)
extensions of statutory limitations and (c) the federal, state and local Tax
returns of the Company for the last three fiscal years have been previously
provided to Quanta. There are no requests for ruling in respect of any Tax
pending between the Company and any Taxing authority. The Company has been taxed
under the provisions of Subchapter S of the Code since April 1, 1994. The
Company currently utilizes the accrual method of accounting for income tax
purposes. Such method of accounting has not changed in the past five years.
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5.19 ABSENCE OF CHANGES. Since the Balance Sheet Date, except as set forth
in Schedule 5.19, the Company has conducted its operations in the ordinary
course and there has not been:
(a) any material adverse change in the business, operations,
properties, condition (financial or other), assets, liabilities (contingent
or otherwise), results or prospects of the Company;
(b) any damage, destruction or loss (whether or not covered by
insurance) materially adversely affecting the properties or business of the
Company, individually or in the aggregate;
(c) any change in the authorized capital stock of the Company or in
its outstanding securities or any change in the respective Stockholders'
ownership interests in the Company or any grant of any options, warrants,
calls, conversion rights or commitments;
(d) any declaration or payment of any dividend or distribution in
respect of the capital stock or any direct or indirect redemption, purchase
or other acquisition of any of the capital stock of the Company;
(e) any increase in the compensation payable or to become payable by
the Company to the Stockholders or any of its officers, directors,
employees, consultants or agents, except for ordinary and customary bonuses
and salary increases for employees in accordance with past practice, which
bonuses and salary increases are set forth in Schedule 5.19;
(f) any significant work interruptions, labor grievances or claims
filed;
(g) any sale or transfer, or any agreement to sell or transfer, any
material assets, properties or rights of the Company to any person,
including, without limitation, the Stockholders and their Affiliates;
(h) any cancellation, or agreement to cancel, any indebtedness or
other obligation owing to the Company;
(i) any increase in the Company's indebtedness, other than accounts
payable incurred in the ordinary course of business, consistent with past
practices or incurred in connection with the transactions contemplated by
this Agreement;
(j) any plan, agreement or arrangement granting any preferential
rights to purchase or acquire any interest in any of the assets, property
or rights of the Company or requiring consent of any party to the transfer
and assignment of any such assets, property or rights;
(k) any purchase or acquisition of, or agreement, plan or arrangement
to purchase or acquire, any property, rights or assets outside of the
ordinary course of the Company's business;
(l) any waiver of any material rights or claims of the Company;
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(m) any material breach, amendment or termination of any material
contract, agreement, Permit or other right to which the Company is a party
or any of its property is subject; or
(n) any other material transaction by the Company outside the ordinary
course of business.
5.20 ACCOUNTS WITH BANKS AND BROKERAGES; POWERS OF ATTORNEY. Schedule 5.20
sets forth an accurate schedule, as of the date of this Agreement, of (a) the
name of each financial institution or brokerage firm in which the Company has
accounts or safe deposit boxes; (b) the names in which the accounts or boxes are
held; (c) the type of account and the cash, cash equivalents and securities held
in such account as of the second business day prior to the Closing, none of
which assets have been withdrawn from such accounts since such date except for
bona fide business purposes in the ordinary course of the business of the
Company; and (d) the name of each person authorized to draw thereon or have
access thereto. Schedule 5.20 also sets forth the name of each person,
corporation, firm or other entity holding a general or special power of attorney
from the Company and a description of the terms thereof.
5.21 ABSENCE OF CERTAIN BUSINESS PRACTICES. Neither the Company nor any of
its affiliates has given or offered to give anything of value to any
governmental official, political party or candidate for government office nor
has it otherwise taken any action which would constitute a violation of the
Foreign Corrupt Practices Act of 1977, as amended, or any similar Law.
5.22 COMPETING LINES OF BUSINESS; RELATED-PARTY TRANSACTIONS. Except as
set forth in Schedule 5.22, neither the Stockholders nor any other Affiliate of
the Company owns, directly or indirectly, any interest in, or is an officer,
director, employee or consultant of or otherwise receives remuneration from, any
business which is in a Competitive Business or is a competitor, lessor, lessee,
customer or supplier of the Company. Except as set forth in Schedule 5.22, no
officer or director of the Company nor any Stockholder has any interest in any
property, real or personal, tangible or intangible, used in or pertaining to the
business of the Company.
5.23 INTANGIBLE PROPERTY. Schedule 5.23 sets forth an accurate list of all
patents, patent applications, trademarks, service marks, technology, licenses,
trade names, copyrights and other intellectual property or proprietary property
rights owned or used by the Company. The Company owns or possesses, and the
assets of the Company include, sufficient legal rights to use all of such items
without conflict with or infringement of the rights of others.
5.24 TAX REORGANIZATION REPRESENTATION. The Surviving Corporation will
acquire substantially all of the properties of the Company within the meaning of
Section 368(a)(2)(D) of the Code.
5.25 TOTAL ASSETS. The Company has delivered to Quanta a complete and
correct copy of the regularly prepared balance sheet of the Company as of April
30, 1998, which is attached as Schedule 5.25. Such balance sheet has been
prepared from the books and records of the Company and presents fairly the
financial position of the Company as of such date. Such balance sheet reflects
total assets of the Company of less than $10,000,000 as of such date.
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5.26 DISCLOSURE. The Stockholders and the Company have provided Quanta or
its representatives all the information that Quanta has requested in analyzing
whether to consummate the Merger and the other transactions contemplated by this
Agreement. None of the information so provided nor any representation or
warranty of the Stockholders to Quanta or Newco in this Agreement contains any
untrue statement of a material fact or omits to state a material fact necessary
in order to make the statements herein, in light of the circumstances under
which they were made, not misleading. It is understood by the parties hereto
that any estimates, projections or other predictions that may have been provided
to Quanta are not and shall not be deemed to be representations or warranties of
the Stockholders, but shall be deemed to be good faith estimates and assumptions
of the Stockholders, which are intended to be reasonable at the time made
concerning the most likely course of the Company and its business.
Notwithstanding the foregoing or anything to the contrary contained herein,
nothing in this Agreement shall be deemed or construed to imply that the Company
or the Stockholders have provided Quanta with any projections or other
predictions regarding the Company or its business on which Quanta has relied,
and Quanta and Newco expressly waive any right to make any claim based on any
such projections or predictions.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF QUANTA AND NEWCO
Quanta and Newco jointly and severally represent and warrant to the
Stockholders as follows:
6.1 ORGANIZATION. Each of Quanta and Newco is a corporation duly
organized, validly existing and in good standing under the Laws of the State of
Delaware, and is duly authorized and qualified under all applicable Laws to
carry on its business in the places and in the manner now conducted. Each of
Quanta and Newco has the requisite power and authority to own, lease and operate
its assets and properties and to carry on its business as such business is
currently being conducted. Correct and complete copies of Quanta's minute books
have been made available to the Stockholders.
6.2 AUTHORIZATION; NON-CONTRAVENTION; APPROVALS.
(a) Each of Quanta and Newco has the full legal right, power and
authority to enter into this Agreement and to consummate the transactions
contemplated hereby. The execution, delivery and performance of this
Agreement has been approved by the boards of directors of Quanta and Newco
and Quanta, as the sole stockholder of Newco. No additional corporate
proceedings on the part of Quanta or Newco are necessary to authorize the
execution and delivery of this Agreement and the consummation by Quanta and
Newco of the transactions contemplated hereby. This Agreement has been
duly and validly executed and delivered by Quanta and Newco, and, assuming
the due authorization, execution and delivery by the Company and the
Stockholders, constitutes valid and binding agreements of Quanta and Newco,
enforceable against Quanta and Newco in accordance with its terms.
(b) The execution and delivery of this Agreement by Quanta and Newco
do not, and the consummation by Quanta and Newco of the transactions
contemplated hereby will not, violate or result in a breach of any
provision of, or constitute a default (or an event which, with notice or
lapse of time or both, would constitute a default) under, or result in the
termination of, or accelerate the
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performance required by, or result in a right of termination or
acceleration under any of the terms, conditions or provisions of (i) the
Certificate of Incorporation or By-Laws of Quanta or Newco, (ii) any Law
applicable to either Quanta or Newco or any of its properties or assets or
(iii) any material note, bond, mortgage, indenture, deed of trust, license,
franchise, permit, concession, contract, lease or other instrument,
obligation or agreement of any kind to which Quanta or Newco is now a party
or by which either Quanta or Newco or any of its properties or assets may
be bound or affected.
(c) Except for the Merger Filings and such filings as may be required
under federal or state securities Laws, no declaration, filing or
registration with, or notice to, or authorization, consent or approval of,
any Governmental Authority is necessary for the execution and delivery of
this Agreement by Quanta and Newco or the consummation by Quanta and Newco
of the transactions contemplated hereby.
6.3 QUANTA COMMON STOCK. The shares of Quanta Common Stock to be issued
to the Stockholders pursuant to the Merger are duly authorized and, when issued
in accordance with the terms of this Agreement, will be validly issued, fully
paid and nonassessable. The issuance of Quanta Common Stock pursuant to the
Merger will transfer to the Stockholders valid title to such shares of Quanta
Common Stock, free and clear of all Encumbrances, except for any Encumbrances
created by the Stockholders.
6.4 TAX REORGANIZATION REPRESENTATIONS.
(a) Prior to the Merger, Quanta will be in control of Newco within the
meaning of Section 368(c) of the Code.
(b) Quanta has no plan or intention to cause the Surviving Corporation
to issue additional shares of its stock that would result in Quanta losing
control of the Surviving Corporation within the meaning of Section 368(c)
of the Code.
(c) Quanta has no plan or intention to reacquire any of its stock
issued in the Merger.
(d) Quanta has no plan or intention to liquidate the Surviving
Corporation; to merge the Surviving Corporation with or into another
corporation; to sell or otherwise dispose of the stock of the Surviving
Corporation except for transfers of stock to another corporation controlled
by Quanta; or to cause the Surviving Corporation to sell or otherwise
dispose of any of its assets, except for dispositions made in the ordinary
course of business or transfers of assets to a corporation controlled by
Quanta.
(e) Following the Closing, Quanta's intention is that the Surviving
Corporation will continue the historic business of the Company or use a
significant portion of the historic business assets of the Company in a
business, all as required to satisfy the "continuity of business
enterprise" requirement under Section 368 of the Code.
(f) Quanta does not own, nor has it owned during the past five years,
any shares of the stock of the Company.
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(g) Each of Quanta and Newco is undertaking the Merger for a bona fide
business purpose and not merely for the avoidance of federal income tax.
(h) Neither Quanta nor Newco is an investment company as defined in
Section 368(a)(2)(F)(iii) and (iv) of the Code.
(i) As of the Closing Date, the fair market value of the assets of
Newco will exceed the sum of Newco's liabilities plus the amount of other
liabilities, if any, to which Newco's assets are subject.
6.5 SEC FILINGS; DISCLOSURE. Quanta has filed with the SEC all material
forms, statements, reports and documents required to be filed by it prior to the
date hereof under each of the1933 Act, the 1934 Act, and the respective rules
and regulations thereunder, (a) all of which, as amended, if applicable,
complied when filed in all material respects with all applicable requirements of
the appropriate Act and the rules and regulations thereunder, and (b) none of
which, as amended, if applicable, contains any untrue statement of material fact
or omits to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in the light of the circumstances
under which they were made, not misleading.
6.6 DISCLOSURE. Quanta has fully provided the Stockholders or their
representatives with all the information that the Stockholders have requested in
analyzing whether to consummate the Merger. None of the information so provided
nor any representation or warranty of Quanta contained in this Agreement
contains any untrue statement of a material fact or omits to state a material
fact necessary in order to make the statements herein or therein, in light of
the circumstances under which they were made, not misleading.
6.7 REGISTRATION STATEMENT. Quanta has filed with the SEC a registration
statement on Form S-4 (File No. 333-47083) (the "Registration Statement").
ARTICLE VII
CERTAIN COVENANTS
7.1 RELEASE FROM GUARANTEES. Quanta shall use its commercially reasonable
best efforts to have the Stockholders released from the personal guarantees of
the Company indebtedness identified in Schedule 7.1 within 90 days after the
Closing Date. Quanta hereby agrees to indemnify and defend each Stockholder and
hold such Stockholder harmless for any amounts that such Stockholder is required
to pay in connection with the enforcement of any obligations under such personal
guarantees after the Closing, including without limitation any reasonable
attorneys' fees and expenses incurred in connection therewith.
7.2 FUTURE COOPERATION; TAX MATTERS. The Stockholders and Quanta shall
each deliver or cause to be delivered to the other following the Closing such
additional instruments as the other may reasonably request for the purpose of
fully carrying out this Agreement. The Stockholders will cooperate and use
their commercially reasonable best efforts to have the present officers,
directors and employees of the Company cooperate with Quanta and the Surviving
Corporation at and after the Closing in furnishing information, evidence,
testimony and other assistance in connection with any actions, proceedings,
arrangements or disputes of any nature with respect to matters pertaining to all
periods prior to the Closing. The
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Stockholders will cooperate with the Surviving Corporation in the preparation of
all tax returns covering the period from the beginning of the Company current
tax year through the Closing. In addition, Quanta will provide the Stockholders
with access to such of its books and records as may be reasonably requested by
the Stockholders in connection with federal, state and local tax matters
relating to periods prior to the Closing. The party requesting cooperation,
information or actions under this Section 7.2 shall reimburse the other party
for all reasonable out-of-pocket costs and expenses paid or incurred in
connection therewith, which costs and expenses shall not, however, include per
diem charges for employees or allocations of overhead charges.
7.3 EXPENSES. Quanta will pay the fees, expenses and disbursements of
Quanta and its agents, representatives, accountants and counsel incurred in
connection with the execution, delivery and performance of this Agreement and
any amendments thereto. The Surviving Corporation following the Closing will pay
any expenses of Arthur Andersen LLP's audit or audit related procedures in
connection with the transactions contemplated hereby. The Stockholders will pay
their fees, expenses and disburse ments and those of their and the Company's
agents, representatives, financial advisors, accountants and counsel incurred in
connection with the execution, delivery and performance of this Agreement and
any amendments hereto and the consummation of the transactions contemplated
hereby.
7.4 LEGAL OPINION. At the Closing, the Company and the Stockholders shall
cause their legal counsel, Winthrop & Weinstine, to deliver to Quanta a legal
opinion in form and substance acceptable to Quanta.
7.5 EMPLOYMENT AGREEMENTS. Concurrently with the execution of this
Agreement, the Surviving Corporation shall enter into a mutually acceptable
Employment Agreement with each of the individuals identified on Schedule 7.5
(collectively, the "Employment Agreements").
7.6 PRE-CLOSING DISTRIBUTIONS.
(a) Prior to the Closing, the Company shall have distributed to the
Stockholders an aggregate amount equal to the sum of (a) $1,250,000 and (b)
an amount equal to the income taxes payable by the Stockholders in
accordance with Subchapter S of the Code on the Company's taxable income
for the period from January 1, 1998 through the Closing Date (the "Interim
Tax Period"), which income taxes shall be calculated based on an assumed
combined state and federal income tax rate of 45.9% (the "Assumed Tax
Rate"). At the Closing, the Stockholders and Quanta shall in good faith
estimate the Company's taxable income for the Interim Tax Period (the
"Estimated Income") and calculate and distribute to each Stockholder the
income taxes payable by such Stockholder at the Assumed Tax Rate (the
"Estimated Amount") with respect to an amount equal to the Estimated Income
less $750,000. As promptly as practicable after the Closing, but in any
event within 30 days after the Closing, the Stockholders and Quanta shall
in good faith calculate the Company's taxable income for the Interim Tax
Period (the "Actual Income") and the Stockholders shall certify in writing
to Quanta the highest actual combined and federal income tax rate among the
Stockholders (the "Actual Tax Rate"). The Stockholders and Quanta shall
calculate with respect to each Stockholder the income taxes payable by such
Stockholder at the Actual Tax Rate (the "Actual Amount") with respect to an
amount equal to the Actual Income less $750,000. If, with respect to any
Stockholder, the Actual Amount is greater than the Estimated Amount, the
Surviving Corporation shall promptly
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pay an amount equal to the difference to such Stockholder as additional
Merger Consideration. If, with respect to any Stockholder, the Actual
Amount is less than the Estimated Amount, such Stockholder shall pay the
Surviving Corporation an amount equal to the difference as a reduction in
the Merger Consideration.
(b) If the Stockholders and Quanta are unable to mutually agree upon
the amount of the distributions by the Company under Section 7.6(a), then
either the Stockholders or Quanta may notify the other party in writing of
the submission of the calculation of the amount of such distributions to
Arthur Andersen LLP for final determination, which determination shall be
final, conclusive and binding.
(c) Any such distributions pursuant to Section 7.6(a) prior to the
Closing shall be made, first, with the Company's available cash and,
second, either through the distribution of accounts receivable of the
Company (without any discount) or the Company's issuance of demand
promissory notes to the respective Stockholders. The Stockholders agree to
take no collection actions with respect to any distributed accounts
receivable except through the Surviving Corporation. Newco agrees to use
to take actions in good faith to collect such accounts receivable on behalf
of the Stockholders, but the method and type of any collection efforts
shall be determined by the Surviving Corporation. Quanta and Newco agree
to cause any such demand promissory notes to be paid immediately following
the Closing.
7.7 REPAYMENT OF RELATED PARTY INDEBTEDNESS. Concurrently with the
execution of this Agreement, (a) the Stockholders shall repay to the Company all
amounts outstanding as advances to or receivables from the Stockholders, each of
which advances or receivables is specifically reflected in Schedule 5.7, and (b)
the Company shall repay all amounts outstanding under loans to the Company from
any Stockholder, each of which loans to the Company is specifically reflected in
Schedule 5.6.
7.8 STOCK OPTIONS. Quanta shall cause the Compensation Committee of its
Board of Directors to grant nonqualified options to purchase an aggregate of
150,000 shares of Quanta Common Stock under Quanta's 1997 Stock Option Plan (the
"Option Plan") to the individuals, and in the respective amounts, set forth on
Schedule 7.8, with options to purchase (a) 75,000 of such shares to be granted
as of the Closing, (b) 37,500 of such shares to be granted on January 1, 1999
(subject to the respective individuals being employed by the Surviving
Corporation at the time of such option grant), and (c) 37,500 of such shares to
be granted upon the achievement of certain performance objectives to be mutually
determined by Quanta and J.R. Spalj as promptly as practicable after the Closing
(subject to the respective individuals being employed by the Surviving
Corporation at the time of the option grant), which options, in each case, shall
vest in equal annual increments for four years, commencing one year after the
date of grant.
7.9 STOCK PURCHASE PROGRAM. After the Closing, Quanta will endeavor to
establish an employee stock purchase program to facilitate employee purchases of
Quanta Common Stock directly from Quanta without paying third party brokerage
commissions. Notwithstanding anything to the contrary contained herein, neither
this Section 7.9 nor anything in this Agreement, or any other agreement of
Quanta and its Affiliates entered into in connection with the consummation of
the transactions contemplated hereby, shall be deemed or construed to make any
employee of the Company or Quanta or its Affiliates or potential
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participants in any such employee stock purchase program a third party
beneficiary or create any right in any such persons to cause Quanta or its
Affiliates to establish any such employee stock purchase program.
7.10 REGISTRATION RIGHTS.
(a) If at any time after the Closing Date, Quanta shall determine to
register any Quanta Common Stock (for itself or for any holder of
securities of Quanta) under the 1933 Act or any successor legislation
(other than a registration relating to stock option plans, employee benefit
plans or a transaction pursuant to Rule 145 under the 1933 Act), and in
connection therewith Quanta may lawfully register the Registrable
Securities (as hereinafter defined) held by the Stockholders, Quanta will
promptly give written notice thereof to the Stockholders and will include
in such registration and effect the registration under the 1933 Act of all
Registrable Securities that the Stockholders may request in writing by
notice delivered to Quanta within 20 days after receipt by the Stockholders
of the notice given by Quanta; provided, however, that in connection with
any such offering by Quanta of any of its securities, no such registration
of Registrable Securities shall be required if the managing underwriter, if
any, for Quanta advises it in writing that including all or part of the
Registrable Securities in such offering will materially adversely affect
the proposed offering and jeopardize Quanta's ability to sell its own
securities in such offering. If such managing underwriter advises Quanta
that, in its opinion, part of the Registrable Securities may be included in
such offering without materially adversely affecting the proposed offering,
then Quanta shall be obligated to include such lesser number of Registrable
Securities in such offering, which shares shall be taken from those owned
and held by a group consisting of the Stockholders and the other holders of
Quanta Common Stock having registration rights that are pari passu with
those of the Stockholders, and such limitation shall be imposed upon the
Stockholders and such other holders pro rata on the basis of the total
number of shares of Registrable Securities Shares held by the Stockholders
and the shares of Quanta Common Stock held by such other holders or
obtainable by them upon the exercise of rights with respect to other
securities owned by them. All expenses of such registration and offering
shall be borne by Quanta, except that each Stockholder shall bear
underwriting commissions and discounts attributable to its Registrable
Securities being registered and the fees and expenses of separate counsel,
if any, for the Stockholder. The Stockholders shall be entitled to an
unlimited number of registrations under this Section 7.10 during the term
set forth in the first sentence of this Section 7.10(a).
(b) For the purposes of this Section 7.10, the term "Registrable
Securities" shall mean (i) from and after the Effective Time and until the
first anniversary of the Closing Date, an aggregate of 52.5% of the
Restricted Shares, (ii) from and after the first anniversary of the Closing
Date until the second anniversary of the Closing Date, with respect to each
Stockholder, the number of Restricted Shares held by such Stockholder, at
the time of registration, in excess of 1% of the outstanding shares of
Quanta Common Stock and (ii) any Quanta Common Stock issued or issuable
with respect to such Restricted Shares by way of a stock dividend or stock
split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization.
(c) Whenever, under the preceding paragraphs of this Section 7.10,
Quanta is required to hereunder to register Registrable Securities, Quanta
shall as expeditiously as possible:
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(i) prepare and file with the SEC a registration statement with
respect to the Registrable Securities that complies with all
requirements of the 1933 Act;
(ii) prepare and file with the SEC such amendments and
supplements to such registration statement and the
prospectuses used in connection therewith as may be
necessary to keep such registration statement effective and
to comply with the provisions of the 1933 Act with respect
to the sale of securities covered by such registration
statement for the period necessary to complete the proposed
public offering (but in no event for a period in excess of
90 days);
(iii) furnish to the Stockholders such copies of each preliminary
and final prospectus and such other documents as the
Stockholders may reasonably request to facilitate the
disposition of the Registrable Securities;
(iv) enter into an underwriting agreement with customary terms
and provisions as reasonably agreed by Quanta and the
proposed underwriter, if any, of the offering;
(v) use its commercially reasonable best efforts to register and
qualify the Registrable Securities covered by such
registration statement under applicable state securities or
"blue-sky" laws, provided that Quanta shall not be required
in connection therewith or as a condition thereto to qualify
to do business as a foreign corporation in any such
jurisdiction wherein it is not so qualified;
(vi) furnish to each Stockholder, if it is a selling stockholder,
a signed counterpart, addressed to the Stockholder, of
(A) an opinion of counsel to Quanta, and
(B) comfort letter(s) signed by the independent public
accountants who have certified Quanta's financial
statements included in the registration statement,
in each case, covering substantially the same matters
with respect to the registration statement (and the
prospectus included therein) and (in the case of the
accountant's letter) with respect to events subsequent
to the date of the financial statements, as are
customarily covered in opinions of issuer's counsel and
in accountant's letters delivered to the underwriters
in underwritten public offerings of securities.
(d) Quanta shall have the right to select the managing underwriter or
underwriters for any underwritten offering made pursuant to a registration
under this Section 7.10.
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(e) In connection with any underwritten offering by Quanta in which a
Stockholder participates, the Stockholder shall, if requested by the
managing underwriter or underwriters thereof, agree not to sell any of its
Registrable Securities or any other securities of Quanta owned by the
Stockholder in any transaction other than pursuant to such underwritten
offering for a period beginning 60 days prior to the date Quanta and the
underwriter reasonably expect the registration statement to become
effective, and for such period after the effective date of the registration
statement as is agreed upon by the underwriters and Quanta (not to exceed
180 days), provided that the Quanta officers and directors and each holder
of 5% or more of Quanta's issued and outstanding Quanta Common Stock also
agree to such limitations.
(f) Quanta may delay any underwritten offering pursuant to this
Section 7.10 when a condition or pending transaction exists the disclosure
of which would reasonably be expected to have a material adverse effect on
the proposed offering.
(g) Quanta will indemnify the Stockholders against any losses, claims,
damages, expenses, or liabilities to which such persons may become subject
under the 1933 Act or otherwise, insofar as such losses, claims, damages or
liabilities (or action in respect thereof) arise out of or are based upon
any untrue statement or alleged untrue statement of any material fact
contained in any registration statement or any preliminary prospectus or
final prospectus or amendment or supplement thereto on the effective date
thereof, or arise out of or are based upon 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 such
persons for any legal or other expenses reasonably incurred by them in
connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that Quanta 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 such registration
statement, or any preliminary prospectus or final prospectus or amendment
or supplement thereto, in reliance upon and in conformity with written
information furnished to Quanta through an instrument duly executed by such
person specifically for use in the preparation thereof.
It shall be a condition precedent to the obligation of Quanta to
include in any registration statement any Registrable Securities then held
by the Stockholders that Quanta shall have received an undertaking,
satisfactory to it and the managing underwriter or underwriters, from the
each Stockholder who is a selling stockholder to indemnify and hold
harmless (in the same manner and to the same extent as set forth in the
preceding paragraph) Quanta, each director of Quanta, each officer of
Quanta who shall sign such registration statement and the managing
underwriter or underwriters and any person who controls such underwriters
or Quanta within the meaning of the 1933 Act, with respect to any statement
or omission from such registration statement, any preliminary prospectus or
final prospectus contained therein, or any amendment or supplement thereto,
if such statement or omission was made in reliance upon and in conformity
with written information furnished to Quanta through an instrument duly
executed by such Stockholder specifically for use in the preparation of
such registration statement, preliminary prospectus or final prospectus or
such amendment or supplement thereto.
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Promptly after receipt by an indemnified party of notice of the
commencement of any action involving a claim referred to in the preceding
paragraphs in this Section 7.10, such indemnified party will, if a claim in
respect thereof is to be made against an indemnifying party, give written
notice to the latter of the commencement of such action. In any case such
action is brought against an indemnified party, the indemnifying party will
be entitled to participate in and to assumed the defense thereof, with
counsel reasonably satisfactory to such indemnified party, and after notice
from the indemnifying party to such indemnified party of its election so to
assume the defense thereof, the indemnifying party will not be liable to
such indemnified party for any legal or other expenses incurred by the
latter in connection with the defense thereof.
7.11 TRANSACTIONS WITH AFFILIATES; EQUIPMENT. Any equipment maintenance
provided by the Surviving Corporation to, or any of the Surviving Corporation's
equipment used by, an Affiliate of the Company or a Stockholder shall be
provided pursuant to an arms-length agreement and at arms-length prices as
determined by the Surviving Corporation and such Affiliate.
ARTICLE VIII
INDEMNIFICATION
The Employee Stockholders, Quanta and Newco each make the following
covenants:
8.1 GENERAL INDEMNIFICATION BY THE EMPLOYEE STOCKHOLDERS. Subject to
Sections 8.4 and 8.5, the Employee Stockholders covenant and agree that they
will jointly and severally indemnify, defend, protect and hold harmless Quanta,
Newco and the Surviving Corporation, and their respective officers, directors,
employees, stockholders, agents, representatives and Affiliates, at all times
from and after the date of this Agreement until the Expiration Date from and
against all Losses incurred by any of such indemnified persons as a result of or
arising from (a) any breach of the representations and warranties of the
Employee Stockholders set forth herein or in the Schedules or certificates
delivered in connection herewith, (b) any breach or nonfulfillment of any
covenant or agreement on the part of the Employee Stockholders or the Company
under this Agreement, (c) all income Taxes payable by the Company for all
periods prior to and including the Closing Date, (d) all transfer and other
Taxes arising from the transactions contemplated by this Agreement, and (e) the
failure to duly and timely file or distribute any return, report or other
document required under the Code or ERISA with respect to periods prior to and
including the Closing Date.
8.2 INDEMNIFICATION BY QUANTA. Quanta covenants and agrees that it will
indemnify, defend, protect and hold harmless the Stockholders and their
respective agents, representatives, Affiliates, beneficiaries and heirs and
employees at all times from and after the date of this Agreement until the
Expiration Date from and against all Losses incurred by any of such indemnified
persons as a result of or arising from (a) any breach of the representations and
warranties of Quanta or Newco set forth herein or in the Schedules or
certificates attached hereto, and (b) any breach or nonfulfillment of any
covenant or agree ment on the part of Quanta or Newco under this Agreement.
8.3 THIRD PERSON CLAIMS. Promptly after any party hereto (hereinafter the
"Indemnified Party") has received notice of or has knowledge of any claim by a
person not a party to this Agreement ("Third Person"), of the commencement of
any action or proceeding by a Third Person, which the Indemnified Party
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believes in good faith is an indemnifiable claim under this Agreement, the
Indemnified Party shall give to the party obligated to provide indemnification
pursuant to Section 8.1, or 8.2 hereof (hereinafter the "Indemnifying Party")
written notice of such claim or the commencement of such action or proceeding.
Such notice shall state the nature and the basis of such claim and a reasonable
estimate of the amount thereof. The Indemnifying Party shall have the right to
defend and settle, at its own expense and by its own counsel, any such matter so
long as the Indemnifying Party pursues the same diligently and in good faith. If
the Indemnifying Party undertakes to defend or settle, it shall promptly notify
the Indemnified Party of its intention to do so, and the Indemnified Party shall
cooperate with the Indemnifying Party and its counsel in all commercially
reasonable respects in the defense thereof and in any settlement thereof. Such
cooperation shall include, but shall not be limited to, furnishing the
Indemnifying Party with any books, records and other information reasonably
requested by the Indemnifying Party and in the Indemnified Party's possession or
control. After the Indemnifying Party has notified the Indemnified Party of its
intention to undertake to defend or settle any such asserted liability, and for
so long as the Indemnifying Party diligently pursues such defense, the
Indemnifying Party shall not be liable for any additional legal expenses
incurred by the Indemnified Party in connection with any defense or settlement
of such asserted liability; provided, however, that the Indemnified Party shall
be entitled, at its expense, to participate in the defense of such asserted
liability and the negotiations of the settlement thereof. The Indemnifying Party
shall not settle any such Third Person claim without the consent of the
Indemnified Party, unless the settlement thereof imposes no liability or
obligation on, and includes a complete release from liability of, the
Indemnified Party. If the Indemnifying Party desires to accept a final and
complete settlement of any such Third Person claim and the Indemnified Party
refuses to consent to such settlement, then the Indemnifying Party's liability
under this Section with respect to such Third Person claim shall be limited to
the amount so offered in settlement by said Third Person; provided, however,
that notwithstanding the foregoing, the Indemnified Party shall be entitled to
refuse to consent to any such proposed settlement and the Indemnifying Party's
liability hereunder shall not be limited by the amount of the proposed
settlement if such settlement does not provide for the complete release of the
Indemnified Party. If, upon receiving notice, the Indemnifying Party does not
timely undertake to defend such matter to which the Indemnified Party is
entitled to indemnification hereunder, or fails diligently to pursue such
defense, the Indemnified Party may undertake such defense through counsel of its
choice, at the cost and expense of the Indemnifying Party, and the Indemnified
Party may settle such matter, in its discretion, and the Indemnifying Party
shall reimburse the Indemnified Party for the amount paid in such settlement and
any other liabilities or expenses incurred by the Indemnified Party in
connection therewith.
8.4 INDEMNIFICATION DEDUCTIBLE. Neither the Employee Stockholders, on the
one hand, nor Quanta, Newco and the Surviving Corporation, on the other hand,
shall be entitled to indemnification from the other under the provisions of
Section 8.1(a) or Section 8.2(a), as the case may be, until such time as, and
only to the extent that, the claims subject to indemnification by such other
party exceed, in the aggregate, $200,000. Notwithstanding the foregoing, the
limitations set forth in this Section 8.4 shall not apply to fraudulent
misrepresentations.
8.5 INDEMNIFICATION LIMITATION. Subject to Section 8.4, the aggregate
indemnification obligation of the Employee Stockholders under Section 8.1(a)
shall be limited to the amount set forth on Schedule 8.5. Notwithstanding the
foregoing, the limitations set forth in this Section 8.5 shall not apply to
fraudulent misrepresentations.
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8.6 EXCLUSIVE REMEDY. Subject to Section 8.4 and in the absence of fraud by
any of the Employee Stockholders, the exclusive remedy of Quanta, Newco and the
Surviving Corporation for Losses that are indemnifiable pursuant to Section
8.1(a) shall be pursuant to this ARTICLE VIII.
8.7 INDEMNIFICATION FOR NEGLIGENCE OF INDEMNIFIED PARTY. THE RIGHTS TO
INDEMNIFICATION UNDER THIS ARTICLE VIII INCLUDE RIGHTS TO INDEMNIFICATION FOR
THE RESULTS OF AN INDEMNIFIED PARTY'S ACTUAL OR ALLEGED NEGLIGENCE, IF SUCH
INDEMNIFIED PARTY WOULD OTHERWISE BE ENTITLED TO INDEMNIFICATION HEREUNDER.
ARTICLE IX
NONCOMPETITION COVENANTS
9.1 PROHIBITED ACTIVITIES.
(a) For no additional consideration, the Stockholders will not for
five years following the Closing Date and, as to Stockholders who are
parties to Employment Agreements, if longer, one year following such
Stockholder's voluntary termination of his employment with the Surviving
Corporation or its Affiliates or the termination of such individual's
employment with the Surviving Corporation or its Affiliates "for cause,"
in each case as determined in accordance with such individual's Employment
Agreement (with the applicable period being herein referred to as the
"Noncompete Term"), directly or indirectly, for himself or on behalf of or
in conjunction with any other person, company, partnership, corporation or
business of whatever nature:
(i) engage, as an officer, director, shareholder, owner,
partner, joint venturer, or in a managerial or advisory
capacity, whether as an employee, independent contractor,
consultant or advisor, or as a sales representative, in any
Competitive Business within 150 miles of (A) where the
Company or any of its subsidiaries conducts business, or has
conducted business within the past three years or (B) where
the Quanta or the Surviving Corporation or an Affiliate of
Quanta or the Surviving Corporation conducts business after
the Closing that is, within six months prior to the date of
termination of such Stockholder's employment, business under
his supervision or managerial authority (such areas being
herein referred to as the "Territory");
(ii) call upon any person, who is, at that time, an employee or
consultant of Quanta or the Surviving Corporation or any of
their respective subsidiaries, for the purpose or with the
intent or effect of enticing such employee or consultant
away from or out of the employ or contract with Quanta or
the Surviving Corporation or any of their respective
subsidiaries; or
(iii) call upon any person or entity which is, at that time, or
which has been, within one year prior to that time, a
customer of the Company, Quanta or the Surviving Corporation
or any of the subsidiaries of such parties within the
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Territory for the purpose of soliciting or selling services
or products in a Competitive Business within the Territory.
(b) Notwithstanding the above, (i) if the employment of a Stockholder
identified in Section 9.1(a) is terminated by the Surviving Corporation
other than "for cause," as determined under such individual's Employment
Agreement or Consulting Agreement, if applicable, then the Noncompete Term
shall be five years following the Closing Date, and (ii) Section 9.1(a)
shall not be deemed to prohibit (A) any Stockholder from acquiring, as a
passive investor with no involvement in the operations of the business, not
more than one percent of the capital stock of a Competitive Business whose
stock is publicly traded on a national securities exchange, the Nasdaq
Stock Market or over-the-counter, (B) the ownership of J.R. Spalj, Luke
Spalj or Jane M. Spalj of equity interests in Rice Lake Contracting or
Deerwood Bancshares, Inc. ("Deerwood"), (C) the financing, in the ordinary
course of business, of any Competitive Business or any subcontractor of the
Company or the Surviving Corporation by Deerwood or an Affiliate of
Deerwood, or (D) the financing of Gulfshore Telecom by J.R. Spalj.
9.2 EQUITABLE RELIEF. Because of the difficulty of measuring economic
losses to Quanta and the Surviving Corporation as a result of a breach of the
foregoing covenant, because a breach of such covenant would diminish the value
of the assets and business of the Company being sold pursuant to this Agreement,
and because of the immediate and irreparable damage that could be caused to
Quanta and the Surviving Corporation for which it would have no other adequate
remedy, each Stockholder agrees that the foregoing covenant may be enforced
against such individual by injunctions, restraining orders and other equitable
actions.
9.3 REASONABLE RESTRAINT. It is agreed by the parties hereto that the
foregoing covenants in this ARTICLE IX are necessary in terms of time, activity
and territory to protect Quanta's and the Surviving Corporation's interest in
the assets and business being acquired pursuant to the terms of this Agreement
and impose a reasonable restraint on each Stockholder in light of the activities
and businesses of the Company on the date of the execution of this Agreement and
the current plans of the Company.
9.4 SEVERABILITY; REFORMATION. The covenants in this ARTICLE IX are
severable and separate, and the unenforceability of any specific covenant shall
not affect the continuing validity and enforceability of any other covenant. In
the event any court of competent jurisdiction shall determine that the scope,
time or territorial restrictions set forth in this ARTICLE IX are unreasonable
and therefore unenforceable, then it is the intention of the parties that such
restrictions be enforced to the fullest extent which the court deems reasonable
and this Agreement shall thereby be reformed.
9.5 MATERIAL AND INDEPENDENT COVENANT. Each Stockholder acknowledges that
his agreements and the covenants set forth in this ARTICLE IX are material
conditions to Quanta's and Newco's agreements to execute and deliver this
Agreement and to consummate the transactions contemplated hereby and that Quanta
and Newco would not have entered into this Agreement without such covenants. All
of the covenants in this ARTICLE IX shall be construed as an agreement
independent of any other provision in this Agreement.
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ARTICLE X
NONDISCLOSURE OF CONFIDENTIAL INFORMATION
10.1 GENERAL. Each Stockholder recognizes and acknowledges that he had in
the past, currently has, and in the future will have, access to certain
confidential information relating to the businesses of the Company, such as
lists of customers, operational policies, and pricing and cost policies that
are, and following the Closing will be, valuable, special and unique assets of
the Surviving Corporation. Each Stockholder agrees that he will not use or
disclose such confidential information to any person, firm, corporation,
association or other entity for any purpose whatsoever, except as is required in
the course of performing his duties, if any, to the Surviving Corporation and/or
Quanta, unless (a) such information becomes known to the public generally
through no fault of such Stockholder, or (b) disclosure is required by Law,
provided that prior to disclosing any information pursuant to this clause (b)
such Stockholder shall, if possible, give prior written notice thereof to Quanta
and the Surviving Corporation and provide Quanta with the opportunity to contest
such disclosure. In the event of a breach or threatened breach by any
Stockholder of the provisions of this Section, Quanta shall be entitled to an
injunction restraining such Stockholder from disclosing, in whole or in part,
such confidential information. Nothing herein shall be construed as prohibiting
Quanta from pursuing any other available remedy for such breach or threatened
breach, including, without limitation, the recovery of damages.
10.2 EQUITABLE RELIEF. Because of the difficulty of measuring economic
losses as a result of the breach of the foregoing covenants, because a breach of
such covenant would diminish the value of the assets and business of the Company
being sold pursuant to this Agreement, and because of the immediate and
irreparable damage that would be caused for which the Surviving Corporation
and/or Quanta would have no other adequate remedy, each Stockholder agrees that
the foregoing covenants may be enforced against him by injunctions, restraining
orders and other equitable actions.
ARTICLE XI
INTENDED TAX TREATMENT
11.1 TAX-FREE REORGANIZATION. Quanta and the Stockholders are entering
into this Agreement with the intention that the Merger qualify as a tax-free
reorganization for federal income tax purposes, except to the extent of any
"boot" received, and neither Quanta nor the Stockholders will take any actions
that disqualify the Merger for such treatment.
ARTICLE XII
FEDERAL SECURITIES ACT AND CONTRACTUAL RESTRICTIONS
ON QUANTA COMMON STOCK
12.1 COMPLIANCE WITH LAW. The Stockholders acknowledge the shares of
Quanta Common Stock issued at the Closing in accordance with the terms of this
Agreement (the "Restricted Shares") will not be registered under the 1933 Act
and therefore may not be resold without compliance with the 1933 Act. The
Restricted Shares are being or will be acquired by the Stockholders solely for
their own account, for investment purposes only, and with no present intention
of distributing, selling or otherwise disposing of
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them in connection with a distribution. The Stockholders covenant, warrant and
represent that none of the Restricted Shares will be, directly or indirectly,
offered, sold, assigned, pledged, hypothecated, transferred or otherwise
disposed of except after full compliance with all of the applicable provisions
of the Act and the rules and regulations of the SEC. Certificates representing
the Restricted Shares shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE WERE NOT ISSUED IN A TRANSACTION
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("SECURITIES ACT"),
OR ANY APPLICABLE STATE SECURITIES LAWS. THE SHARES REPRESENTED HEREBY
HAVE BEEN ACQUIRED FOR INVESTMENT AND MAY NOT BE SOLD OR TRANSFERRED UNLESS
SUCH SALE OR TRANSFER IS COVERED BY AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS OR, IN THE
OPINION OF COUNSEL TO THE ISSUER, IS EXEMPT FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND SUCH LAWS.
12.2 ECONOMIC RISK; SOPHISTICATION. Each Stockholder is able to bear the
economic risk of an investment in the Restricted Shares and can afford to
sustain a total loss of such investment. Each Stockholder has such knowledge
and experience in financial and business matters that it or he is capable of
evaluating the merits and risks of the proposed investment and therefore has the
capacity to protect its or his own interests in connection with the acquisition
of the Restricted Shares. Each Stockholder represents to Quanta and Newco that
it or he is an "accredited investor," as that term is defined in Regulation D
under the 1933 Act. Each Stockholder or its or his representatives have had an
adequate opportunity to ask questions and receive answers from the officers of
Quanta and Newco concerning, among other matters, Quanta, its management, its
plans for the operation of its business and potential additional acquisitions.
12.3 RULE 144 REPORTING. With a view to making available the benefits of
certain rules and regulations of the SEC that may permit the resale of Quanta
Common Stock to the public without registration, for a period of one year after
the Closing, Quanta agrees to use its commercially reasonable efforts to:
(a) make and keep public information (as such terms are defined in
Rule 144) regarding Quanta available;
(b) file with the SEC in a timely manner all reports and other
documents required of Quanta under the 1933 Act and the 1934 Act; and
(c) furnish to each Stockholder upon written request a written
statement by Quanta as to its compliance with the reporting requirements of
Rule 144, the 1933 Act and the 1934 Act, a copy of the most recent annual
or quarterly report of Quanta, and such other reports and documents so
filed as such Stockholder may reasonably request in availing himself of any
rule or regulation of the SEC allowing such Stockholder to resell any such
shares without registration.
12.4 CONSENT TO RESELL SHARES UNDER PROSPECTUS. Quanta hereby consents to
the Stockholders publicly reselling the Registrable Securities pursuant to the
prospectus contained in the Registration Statement, as such prospectus may be
amended or supplemented from time to time, following (a) the SEC's declaration
of the effectiveness of the Registration Statement and (b) Quanta's filing of a
prospectus
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supplement or a post-effective amendment to the Registration Statement with
respect to the resale of shares of Quanta Common Stock by the Stockholders.
After the Closing, Quanta shall use its commercially reasonable best efforts to
(x) have the Registration Statement declared effective by the SEC, (y)
thereafter file, as Quanta shall determine may be required under the 1933 Act
and the rules and regulations thereunder, a prospectus supplement or supplements
to such prospectus or a post-effective amendment or amendments to the
Registration Statement and, with respect to any post-effective amendment, cause
such post-effective amendment to be declared effective by the SEC, (z) maintain
the effectiveness of the Registration Statement until the earlier of (i) two
years after the Effective Time and (ii) any date after the first anniversary of
the Closing Date, as to any Stockholder who holds less than 1% of the
outstanding shares of Quanta Common Stock; provided, however, that the
Stockholders acknowledge and agree that Quanta will be required in accordance
with the 1933 Act and the rules and regulations thereunder to file with the SEC
amendments and supplements to the Registration Statement from time to time to
maintain the effectiveness of the Registration Statement, which amendments and
supplements Quanta agrees to file as promptly as commercially practicable after
the Registration Statement becomes stale or as may otherwise be required
pursuant to the 1933 Act and the rules and regulations thereunder. If any
Stockholder desires to sell its Registrable Securities in accordance with this
Section 12.4, such Stockholder and Quanta shall endeavor in good faith to
facilitate the orderly disposition of such shares.
12.5 CONTRACTUAL RESTRICTIONS ON TRANSFERS OF QUANTA COMMON STOCK. Each
Stockholder covenants, warrants and represents that 47.5% of the Restricted
Shares (the "Lockup Shares") will not be offered, sold, assigned, pledged,
hypothecated, transferred or otherwise disposed of during the one-year period
commencing on the Closing Date (the "Lockup Period") and thereafter only after
full compliance with all of the applicable provisions of the 1933 Act and the
rules and regulations of the SEC, and, during the Lockup Period, no Stockholder
shall engage in put, call, short-sale, straddle or similar transactions intended
to reduce such Stockholder's risk of owning the Lockup Shares. Certificates
representing Lockup Shares shall bear the following legend in addition to the
legend under Section 12.1:
THE SHARES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO A
CONTRACTUAL RESTRICTION ON TRANSFER AND MAY NOT BE OFFERED, SOLD,
ASSIGNED, PLEDGED, HYPOTHECATED, TRANSFERRED OR OTHERWISE DISPOSED OF
DURING THE PERIOD OF SUCH CONTRACTUAL RESTRICTION WITHOUT THE PRIOR
WRITTEN CONSENT OF QUANTA SERVICES, INC.
12.6 SATISFACTION OF INDEMNIFICATION OBLIGATIONS. Subject to compliance
with all applicable laws, rules and regulations, and notwithstanding the
provisions of Section 12.5, each Stockholder shall have the right to (i) tender
his Restricted Shares in a tender offer to all holders of Quanta Common Stock in
accordance with Regulation 14D under the 1934 Act; and (ii) transfer the
Restricted Shares during the Lockup Period for the purpose of satisfying his
indemnification obligations and liabilities for Losses under ARTICLE VIII to
the extent such Losses exceed $100,000; provided, however, that prior to any
such transfer of Restricted Shares, each Stockholder shall notify Quanta in
writing of his intention to make such a transfer, and for five business days
thereafter, Quanta shall have the option of acquiring Restricted Shares from
such Stockholder (free and clear of all liens, claims and encumbrances) in
satisfaction of all or any part of such Losses in excess of $100,000. If Quanta
exercises such option of acquiring Restricted Shares, then such Stockholder's
liability for Losses in excess of $100,000 shall be deemed to be satisfied to
the extent of (A) such number Restricted Shares transferred to Quanta,
multiplied by (B) the average closing price per share of Quanta Common Stock for
the 10 trading days, with the last such trading day being the third trading
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day before the date such Losses become payable by such Stockholder (either by
agreement or pursuant to a judgment or binding determination by an arbitrator),
as reported on The New York Stock Exchange or such other national securities
exchange on which the Quanta Common Stock is principally traded.
ARTICLE XIII
MISCELLANEOUS
13.1 SUCCESSORS AND ASSIGNS. This Agreement and the rights of the parties
hereunder may not be assigned (except by operation of Law) and shall be binding
upon and shall inure to the benefit of the parties hereto, the successors of
Quanta, Newco, the Surviving Corporation and the Company, and the heirs and
legal representatives of the Stockholders.
13.2 ENTIRE AGREEMENT. This Agreement (including the Schedules, exhibits
and annexes attached hereto) and the documents delivered pursuant hereto
constitute the entire agreement and understanding among the Stockholders, the
Company, Newco and Quanta and supersede any prior agreement and understanding
relating to the subject matter of this Agreement. This Agreement may be
modified or amended only by a written instrument executed by the Stockholders,
the Company, Newco and Quanta, acting through their respective officers, duly
authorized by their respective Boards of Directors.
13.3 COUNTERPARTS. This Agreement may be executed simultaneously in two or
more counterparts, each of which shall be deemed an original and all of which
together shall constitute but one and the same instrument.
13.4 BROKERS AND AGENTS. Except for the Company's engagement of Goldsmith,
Agio, Helms and Company ("Broker"), each party hereto represents and warrants
that it employed no broker or agent in connection with the transactions
contemplated by this Agreement. Quanta and Newco agree to pay the fees and
expenses of Broker upon the Closing by wire transfer of funds to Broker in an
amount equal to $880,393 and issuance to Broker of 48,169 shares of Quanta
Common Stock. The payment of any other amounts to Broker shall be the liability
and obligation of the Stockholders. Each party agrees to indemnify each other
party against all loss, cost, damages or expense arising out of claims for fees
or commissions of brokers employed or alleged to have been employed by such
indemnifying party.
13.5 NOTICES. All notices and communications required or permitted
hereunder shall be in writing and may be given by depositing the same in the
United States mail, addressed to the party to be notified, postage prepaid and
registered or certified with return receipt requested, or by delivering the same
in person to an officer or agent of such party, as follows:
(a) If to Quanta, Newco or the Surviving Corporation, addressed to
them at:
Quanta Services, Inc.
1360 Post Oak Blvd., Suite 800
Houston, Texas 77056
Attn: President and General Counsel
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(b) If to any Stockholder, respectively addressed as follows:
J. R. Spalj
Jane Spalj
P. O. Box 398
Deerwood, Minnesota 56444
Luke Spalj
P. O. Box 27
Deerwood, Minnesota 56444
Mark Anderson
Route 3, Box 2455
Aitkin, Minnesota 56431
With a copy (which shall not constitute notice) to:
Winthrop & Weinstine, P.A.
Richard A. Hoel, Esq.
3000 Dain Rauscher Plaza
60 South Sixth Street
Minneapolis, Minnesota 55402
or such other address as any party hereto shall specify pursuant to this Section
13.5 from time to time.
13.6. SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties set forth in ARTICLE V and ARTICLE VI shall survive the Closing for a
period of two years from the Closing Date (the "Expiration Date"), except that
the representations and warranties set forth in Sections 5.16 and 5.18 hereof
shall survive until such time as the limitations period has run for all tax
periods ended on or prior to the Closing Date, which shall be deemed to be the
Expiration Date for Sections 5.16 and 5.18.
13.7 EXERCISE OF RIGHTS AND REMEDIES. Except as otherwise provided herein,
no delay of or omission in the exercise of any right, power or remedy accruing
to any party as a result of any breach or default by any other party under this
Agreement shall impair any such right, power or remedy, nor shall it be
construed as a waiver of or acquiescence in any such breach or default, or of
any similar breach or default occurring later; nor shall any waiver of any
single breach or default be deemed a waiver of any other breach or default
occurring before or after that waiver.
13.8 REFORMATION AND SEVERABILITY. In case any provision of this Agreement
shall be invalid, illegal or unenforceable, it shall, to the extent possible, be
modified in such manner as to be valid, legal and unenforceable, but so as to
most nearly retain the intent of the parties, and if such modification is not
possible, such provision shall be severed from this Agreement, and in either
case, the validity, legality and enforceability of the remaining provisions of
this Agreement shall not in any way be affected or impaired thereby.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK.]
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
QUANTA SERVICES, INC.
By: _____________________________________
Its: _____________________________________
SPALJ ACQUISITION, INC.
By: _____________________________________
Its: _____________________________________
SPALJ CONSTRUCTION COMPANY
By: _____________________________________
Its: _____________________________________
__________________________________________
J.R. Spalj, Individually
__________________________________________
Mark Anderson, Individually
__________________________________________
Mark Anderson, Individually
__________________________________________
Jane M. Spalj, Individually
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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.; PAR Electrical Contractors, 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.
ARTHUR ANDERSEN LLP
Houston, Texas
May 4, 1998
