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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Date of Report: June 17, 1999
QUANTA SERVICES, INC.
(Exact name of registrant as specified in its charter)
COMMISSION FILE NUMBER: 1-13831
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<S> <C>
DELAWARE 74-2851603
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
</TABLE>
1360 POST OAK BLVD., SUITE 2100
HOUSTON, TEXAS 77056
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 629-7600
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Quanta Services, Inc., a Delaware Corporation (the "Company"), is a leading
provider of specialty contracting and maintenance services primarily related to
electric utility and telecommunications infrastructure in North America. In the
first quarter of 1999, the Company completed a business combination accounted
for as a pooling-of-interests. Included herein are the Selected Financial Data,
Management's Discussion and Analysis of Financial Condition and Results of
Operations and Consolidated Financial Statements as restated for the pooling
transaction. Additionally, in order to comply with the disclosure requirements
of the Securities and Exchange Commission regarding the financial statements of
businesses acquired, the Company is filing this current report containing
certain audited financial statements of the businesses acquired and the pro
forma financial statements of Quanta Services, Inc. and Subsidiaries.
ITEM 5. OTHER ITEMS
a. Selected Financial Data
b. Management's Discussion and Analysis of Financial Condition and Results
of Operations
c. Consolidated Financial Statements of Quanta Services, Inc. and
Subsidiaries
d. Financial Statements of Businesses Acquired:
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(i) The Ryan Company
Independent Accountant's Report
Balance Sheet
Statement of Income
Statement of Stockholders' Equity
Statement of Cash Flows
Notes to Financial Statements
(ii) Dillard Smith Construction Company
Report of Independent Accountants
Balance Sheets
Statements of Income
Statement of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(iii) Tom Allen Construction Company
Report of Independent Public Accountants
Balance Sheets
Statements of Income
Statements of Stockholders' Equity (Deficit)
Statements of Cash Flows
Notes to Financial Statements
(iv) Seaward Corporation and Subsidiaries
Independent Auditor's Report
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
(v) Driftwood Electrical Contractors, Inc.
Report of Independent Public Accountants
Combined Balance Sheets
Combined Statements of Operations
Combined Statements of Stockholder's Equity
Combined Statements of Cash Flows
Notes to Combined Financial Statements
</TABLE>
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<TABLE>
<S> <C>
(vi) H. L. Chapman Construction Group
Report of Independent Public Accountants
Combined Balance Sheets
Combined Statements of Operations
Combined Statements of Stockholders' Equity
Combined Statements of Cash Flows
Notes to Combined Financial Statements
</TABLE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
a. Pro forma financial information
The following Unaudited Pro Forma Combined Financial Statements of Quanta
Services, Inc. and Subsidiaries are attached hereto and made a part hereof:
<TABLE>
<S> <C>
(i) Basis of Presentation
Unaudited Pro Forma Combined Balance Sheet as of March 31,
(ii) 1999
Notes to Unaudited Pro Forma Combined Balance Sheet as of
(iii) March 31, 1999
(iv) Unaudited Pro Forma Combined Statements of Operations
Notes to Unaudited Pro Forma Combined Statements of
(v) Operations
</TABLE>
b. Exhibits:
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Kirkland Albrecht and Company P.C.
23.3 Consent of Joseph Decosimo and Company, LLP
23.4 Consent of Ganim, Meder, Childers & Hoering, P.C.
23.5 Consent of Nathan Wechsler & Company
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INDEX TO FINANCIAL STATEMENTS
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PAGE
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ITEM 5. OTHER ITEMS
Selected Financial Data................................... 5
Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 9
Quanta Services, Inc. and Subsidiaries
Report of Independent Public Accountants............... 16
Consolidated Balance Sheets............................ 17
Consolidated Statements of Operations.................. 18
Consolidated Statements of Cash Flows.................. 19
Consolidated Statements of Stockholders' Equity........ 20
Notes to Consolidated Financial Statements............. 21
Financial Statements of Business Acquired:
The Ryan Company
Independent Accountant's Report........................ 38
Balance Sheet.......................................... 39
Statement of Income.................................... 40
Statement of Stockholders' Equity...................... 41
Statement of Cash Flows................................ 42
Notes to Financial Statements.......................... 43
Dillard Smith Construction Company
Report of Independent Accountants...................... 47
Balance Sheets......................................... 48
Statements of Income................................... 49
Statement of Stockholders' Equity...................... 50
Statements of Cash Flows............................... 51
Notes to Financial Statements.......................... 52
Tom Allen Construction Company
Report of Independent Public Accountants............... 60
Balance Sheets......................................... 61
Statements of Income................................... 62
Statements of Stockholder's Equity (Deficit)........... 63
Statements of Cash Flows............................... 64
Notes to Financial Statements.......................... 65
Seaward Corporation and Subsidiaries
Independent Auditor's Report........................... 70
Consolidated Balance Sheets............................ 71
Consolidated Statements of Income...................... 72
Consolidated Statements of Changes in Stockholders'
Equity................................................ 73
Consolidated Statements of Cash Flows.................. 74
Notes to Consolidated Financial Statements............. 75
Driftwood Electrical Contractors, Inc.
Report of Independent Public Accountants............... 82
Combined Balance Sheets................................ 83
Combined Statements of Operations...................... 84
Combined Statements of Stockholder's Equity............ 85
Combined Statements of Cash Flows...................... 86
Notes to Combined Financial Statements................. 87
</TABLE>
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<TABLE>
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PAGE
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H. L. Chapman Construction Group
Report of Independent Public Accountants............... 91
Combined Balance Sheets................................ 92
Combined Statements of Operations...................... 93
Combined Statements of Stockholders' Equity............ 94
Combined Statements of Cash Flows...................... 95
Notes to Combined Financial Statements................. 96
</TABLE>
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
a. Pro forma financial information:
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(i) Basis of Presentation....................................... 102
(ii) Unaudited Pro Forma Combined Balance Sheet as of March 31,
1999........................................................ 103
(iii) Notes to Unaudited Pro Forma Combined Balance Sheet as of
March 31, 1999.............................................. 104
(iv) Unaudited Pro Forma Combined Statements of Operations....... 105
(v) Notes to Unaudited Pro Forma Combined Statements of
Operations.................................................. 107
</TABLE>
b. Exhibits................................................. 109
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ITEM 5. OTHER ITEMS
A. SELECTED FINANCIAL DATA
For financial statement presentation purposes, PAR Electrical Contractors,
Inc. ("PAR") has been identified as the "accounting acquiror." Between our
initial public offering ("IPO") in February 1998 and June 14, 1999, we acquired
27 specialty contracting businesses. Of these 27 acquired businesses, 25 were
accounted for using the purchase method of accounting (the "Purchased
Companies") and two were accounted for using the pooling-of-interests method of
accounting (the "Pooled Companies"). Quanta's consolidated historical financial
statements as of December 31, 1996, 1997 and 1998, and for each of the four
years in the period ended December 31, 1998, and the related selected historical
financial data have been derived from audited financial statements of Quanta and
represent the financial position and results of operations of PAR as restated to
include the financial position and results of operations of the Pooled
Companies. The following selected historical financial data for Quanta as of
December 31, 1994 and 1995 and for the year ended December 31, 1994 have been
derived from the unaudited financial statements of PAR as restated for the
Pooled Companies, which have been prepared on the same basis as the audited
financial statements and in our opinion reflect all adjustments, consisting only
of normal recurring adjustments, necessary for a fair presentation of such data.
The remaining three specialty electrical contracting businesses we acquired
concurrently with our IPO (collectively with PAR, the "Founding Companies") and
the Purchased Companies are reflected in the financial statements beginning on
their respective dates of acquisition. The Founding Companies, the Purchased
Companies and the Pooled Companies are collectively referred to as the "Acquired
Businesses."
The following selected unaudited pro forma combined financial data present
certain data for Quanta, adjusted for (1) the Founding Companies, (2) the
effects of certain other pro forma adjustments to the historical financial
statements and (3) the consummation of our IPO in February 1998 and the
application of the net proceeds therefrom. The pro forma combined results do not
include the pre-acquisition results of the Purchased Companies which are
reflected in the financial statements beginning on their respective dates of
acquisition. The unaudited pro forma combined statements of operations data
assume that the acquisition of the Founding Companies, the IPO and related
transactions occurred on January 1, 1997 and are not necessarily indicative of
the results that we would have obtained had these events actually then occurred
or of our future results. During the pro forma periods presented below, the
Founding Companies were not under common control or management. Therefore, the
data presented may not be comparable to or indicative of post combination
results to be achieved by us. The unaudited pro forma combined statements of
operations should be read in conjunction with the audited financial statements
included elsewhere in this Report.
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<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------------ -------------------
1994 1995 1996 1997 1998 1998 1999
------- ------- ------- ------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C>
HISTORICAL STATEMENTS OF
OPERATIONS DATA:
Revenues....................... $60,062 $56,482 $78,230 $80,010 $319,259 $ 32,230 $127,779
Cost of services (including
depreciation)................ 49,799 47,266 62,772 62,599 257,270 26,996 104,871
------- ------- ------- ------- -------- -------- --------
Gross profit................... 10,263 9,216 15,458 17,411 61,989 5,234 22,908
Selling, general and
administrative expenses...... 7,010 6,787 10,445 12,354 27,160 3,522 11,982
Merger expenses -- pooling..... -- -- -- -- 231 -- 137
Goodwill amortization.......... 184 50 55 56 2,513 196 1,498
------- ------- ------- ------- -------- -------- --------
Income from operations......... 3,069 2,379 4,958 5,001 32,085 1,516 9,291
Other income (expense), net.... (680) (785) (1,127) (1,421) (4,214) (343) (1,904)
------- ------- ------- ------- -------- -------- --------
Income before income tax
provision.................... 2,389 1,594 3,831 3,580 27,871 1,173 7,387
Provision for income taxes..... 867 353 1,389 1,786 11,683 356 3,964(a)
------- ------- ------- ------- -------- -------- --------
Net income..................... $ 1,522 $ 1,241 $ 2,442 $ 1,794 $ 16,188 $ 817 $ 3,423
======= ======= ======= ======= ======== ======== ========
Basic earnings per share....... $ 0.37 $ 0.30 $ 0.59 $ 0.43 $ 0.91 $ 0.08 $ 0.13
======= ======= ======= ======= ======== ======== ========
Diluted earnings per
share(1)..................... $ 0.37 $ 0.30 $ 0.59 $ 0.43 $ 0.88 $ 0.08 $ 0.13
======= ======= ======= ======= ======== ======== ========
Diluted earnings per share
before merger expenses(1).... $ 0.37 $ 0.30 $ 0.59 $ 0.43 $ 0.90 $ 0.08 $ 0.16(b)
======= ======= ======= ======= ======== ======== ========
Shares used in computing
earnings per share(2)
Basic........................ 4,163 4,163 4,163 4,163 17,857 10,518 26,024
======= ======= ======= ======= ======== ======== ========
Diluted...................... 4,163 4,163 4,163 4,163 18,877 10,580 30,139
======= ======= ======= ======= ======== ======== ========
</TABLE>
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(a) Includes a non-cash, non-recurring deferred tax charge of $677,000 as a
result of a change in the tax status from an S corporation to a C
corporation of a company acquired in a pooling transaction during the first
quarter of 1999.
(b) Excludes a non-cash, non-recurring deferred tax charge of $677,000 as a
result of a change in the tax status from an S corporation to a C
corporation of a company acquired in a pooling transaction during the first
quarter of 1999. In addition, it excludes non-recurring merger expenses of
$137,000 related to this transaction.
See notes on following page.
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<CAPTION>
YEAR ENDED
DECEMBER 31,
--------------------
1997 1998
-------- --------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA:
Revenues.................................................. $183,180 $333,795
Cost of services (including depreciation)................. 148,177 269,443
-------- --------
Gross profit.............................................. 35,003 64,352
Selling, general and administrative expenses(3)........... 15,629 28,116
Merger expenses -- pooling................................ -- 231
Goodwill amortization(4).................................. 1,696 2,731
-------- --------
Income from operations.................................... 17,678 33,274
Other income (expense), net(5)............................ (1,161) (4,131)
-------- --------
Income before income tax provision........................ 16,517 29,143
Provision for income taxes(6)............................. 7,426 12,260
-------- --------
Net income................................................ $ 9,091 $ 16,883
======== ========
Basic earnings per share.................................. $ 0.53 $ 0.86
======== ========
Diluted earnings per share(1)............................. $ 0.53 $ 0.85
======== ========
Diluted earnings per share before merger expenses(1)...... $ 0.53 $ 0.86
======== ========
Shares used in computing pro forma earnings per share(2)
Basic............................................. 17,206 19,525
======== ========
Diluted........................................... 17,206 20,545
======== ========
</TABLE>
<TABLE>
<CAPTION>
HISTORICAL
------------------------------------------------
DECEMBER 31, THREE MONTHS
------------------------------------------------ ENDED
1994 1995 1996 1997 1998 MARCH 31, 1999
------- ------- ------- ------- -------- --------------
(IN THOUSANDS) (UNAUDITED)
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BALANCE SHEET DATA:
Working capital............. $ 1,991 $ 1,117 $ 2,797 $ 2,381 $ 57,106 $ 90,209
Total assets................ 23,370 26,191 31,607 37,561 339,081 554,204
Long-term debt, net of
current maturities....... 4,821 4,430 6,665 7,638 60,281 85,434
Convertible Subordinated
Notes.................... -- -- -- -- 49,350 49,350
Total stockholders'
equity................... 8,017 8,982 9,385 11,402 171,503 329,770
</TABLE>
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(1) For purposes of computing historical and pro forma diluted earnings per
share, net income has been increased by $506,000 due to reduced interest
expense from the assumed conversion of the Convertible Subordinated Notes.
(2) The shares used in computing earnings per share for the following periods
include:
(a)Four years ended December 31, 1997 (historical) -- the 3,000,000 shares
issued to the stockholders of PAR Electrical Contractors, Inc. and the
1,162,572 shares issued in connection with the acquisition of the Pooled
Companies.
(b)Year ended December 31, 1997 (pro forma) -- shares used in the
calculation of basic and diluted earnings per share include (1) the
shares described above in (a), (2) 5,750,000 shares of common stock sold
in our initial public offering, (3) 4,527,000 shares issued to the
owners of the other Founding Companies and (4) 3,345,333 shares of
Limited Vote Common Stock issued to the initial stockholders and
management personnel of Quanta. The 579,222 shares excluded reflect net
cash to Quanta.
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(c)Year ended December 31, 1998 (historical) -- shares used in the
calculation of basic earnings per share include the weighted average
portion of (1) the shares described above in (a) and (b), (2) 4,058,376
shares issued in acquisitions accounted for as purchases and (3) shares
issued upon exercise of stock options.
Shares used in the calculation of the diluted earnings per share include
(1) the shares described above, (2) the dilution attributable to the
assumed conversion of the Convertible Subordinated Notes and (3) the
dilution attributable to outstanding options to purchase common stock
using the treasury stock method.
(d)Year ended December 31, 1998 (pro forma) -- shares used in the
calculation of basic earnings per share include the shares used in the
calculation of historical basic earnings per share described in (c)
above computed as if those shares had been issued as of January 1, 1998,
except for the shares issued in acquisitions accounted for as purchases,
which are considered to be issued on their respective dates of
acquisition.
Shares used in the calculation of pro forma diluted earnings per share
include (1) the shares described above, (2) the dilution attributable to
the assumed conversion of the Convertible Subordinated Notes, and (3)
the dilution attributable to outstanding options to purchase common
stock using the treasury stock method.
(3) 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 salaries, bonuses and benefits of the previous
owners and management of the Founding Companies. These amounts are intended
to show you the difference between the historical compensation costs for
these owners and management and the amounts to which they have agreed with
us on a prospective basis.
(4) Reflects amortization of goodwill over a 40-year period as a result of our
acquisition of the Founding Companies as if they had been acquired on
January 1, 1997 and the Purchased Companies beginning on their respective
dates of acquisition, using the purchase method of accounting.
(5) Reflects additional interest expense related to borrowings required to fund
certain S Corporation Distributions of the Founding Companies, net of
interest savings on the Founding Companies' debt assumed to be repaid using
proceeds from the IPO.
(6) Assumes all pretax pro forma combined income before non-deductible goodwill
and other permanent items is subject to an estimated 39.0% combined tax
rate.
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ITEM 5B. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and related notes thereto included elsewhere
in this Report. Except for the historical financial information contained
herein, the matters discussed in this Report may be considered "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such statements include
declarations regarding our intent, belief or current expectations, statements
regarding the future results of acquired companies, our gross margins and our
expectations regarding Year 2000 issues. Any such forward-looking statements are
not guarantees of future performance and involve a number of risks and
uncertainties. Actual results could differ materially from those indicated by
such forward-looking statements. Among the important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements are those discussed in "Business -- Risk Factors" as disclosed in our
1998 Annual Report on Form 10-K.
INTRODUCTION
Quanta derives its revenues from one reportable segment by providing
specialty contracting and maintenance services related to electric and
telecommunications infrastructure, installing transportation control and
lighting systems, and providing specialty contracting services to the commercial
and industrial markets. Our services include the installation, repair and
maintenance of electric power transmission and distribution lines,
telecommunication lines and cable television lines, the construction of electric
substations, the erection of cellular telephone, PCS(R) and microwave towers,
the installation of highway lighting and traffic control systems, specialized
underground construction including underground fueling systems, design and
engineering services, as well as the provision of specialty contracting services
for electric, video, security, fire, voice and data systems. Our customers
include electric utilities, telecommunication and cable television system
operators, governmental entities, general contractors and owners and managers of
commercial and industrial properties. Including all companies we acquired prior
to December 31, 1998, as restated for a "pooling-of-interests" transaction
completed in the first quarter of 1999, we had pro forma combined revenues for
the year ended December 31, 1998 of $433.6 million, of which 44.2% was
attributable to electric utility infrastructure services, 39.3% was attributable
to telecommunications infrastructure services, 9.3% was attributable to
transportation control and lighting systems services and 7.2% was attributable
to commercial and industrial services.
Quanta enters into contracts principally on the basis of competitive bids,
the final terms and prices of which we frequently negotiate with the customer.
Although the terms of our contracts vary considerably, the contracts are usually
on either a lump sum or unit price basis in which we agree to do the work for a
fixed amount for the entire project (lump sum) or for units of work performed
(unit price). We complete most installation projects within one year, while we
frequently provide maintenance and repair work under open-ended, unit price
master service agreements which are renewable annually. We generally record
revenues from lump sum contracts on a percentage-of-completion basis, using the
cost-to-cost method based on the percentage of total costs incurred to date in
proportion to total estimated costs to complete the contract. Quanta recognizes
revenue when services are performed except when work is being performed under a
fixed price or cost-plus-fee contract. Such contracts generally provide that the
customer accept completion of progress to date and compensate us for services
rendered, measured typically in terms of units installed, hours expended or some
other measure of progress. Some of our customers require us to post performance
and payment bonds upon execution of the contract, depending upon the nature of
the work to be performed. Our fixed price contracts often include payment
provisions pursuant to which the customer withholds a 5% to 10% retainage from
each progress payment and forwards the retainage to us upon completion and
approval of the work.
Costs of services consist primarily of salaries and benefits to employees,
depreciation, fuel and other vehicle expenses, equipment rentals, subcontracted
services, materials, insurance, parts and supplies. Quanta's gross margin, which
is gross profit expressed as a percentage of revenues, is typically higher on
projects where labor, rather than materials, constitutes a greater portion of
the cost of services. Labor costs can be predicted with relatively less accuracy
than materials costs. Therefore, to compensate for the potential variability of
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labor costs, we seek to maintain higher margins on labor-intensive projects.
Certain of our subsidiaries were previously subject to deductibles ranging from
$100,000 to $1,000,000 for workers' compensation insurance. Fluctuations in
insurance accruals related to this deductible could have an impact on gross
margins in the period in which such adjustments are made. Selling, general and
administrative expenses consist primarily of compensation and related benefits
to management, administrative salaries and benefits, marketing, office rent and
utilities, communications and professional fees.
The Acquired Businesses have operated throughout the pre-acquisition
periods presented as independent, privately-owned entities, and their results of
operations reflect varying tax structures (S corporations or C corporations)
which have influenced the historical level of owners' compensation. Gross
profits and selling, general and administrative expenses as a percentage of
revenues may not be comparable among the individual Acquired Businesses. In
connection with Quanta's acquisitions, certain owners of the businesses we have
acquired through December 31, 1998 have agreed to reductions in their
compensation and related benefits totaling $8.4 million and $2.5 million lower
than 1997 and 1998 levels, respectively. Such reductions have been reflected in
the terms of the employment agreements entered into between us and these
persons.
Quanta believes that it will realize savings from:
- consolidation of insurance and bonding programs,
- reduction in other selling, general and administrative expenses such as
training, marketing, communications and professional fees,
- our ability to borrow at lower interest rates than most, if not all, of
the Acquired Businesses,
- consolidation of operations in certain locations, and
- greater volume discounts from suppliers of materials, parts and supplies.
We anticipate that additional costs related to our new corporate
infrastructure, operating as a public company and integrating the Acquired
Businesses will partially offset these savings. We believe that neither these
savings nor the costs associated therewith can be quantified at this time as
there have been limited combined operating results upon which to base any
assumptions. As a result, these savings and associated costs have not been
included in the pro forma financial information included herein.
The acquisition of the Founding Companies (excluding PAR) and the Purchased
Companies have been accounted for using the purchase method of accounting.
Accordingly, the excess amount we paid, including liabilities assumed, for such
businesses acquired prior to December 31, 1998, over the fair value of the
tangible and intangible assets of these businesses of $127.7 million has been
recorded as goodwill. In addition, goodwill of $25.6 million has been recorded
attributable to the 3,345,333 shares of Limited Vote Common Stock issued to
initial stockholders and management. Together, this goodwill, totaling $153.3
million as of December 31, 1998, will be amortized over its estimated useful
life of 40 years as a non-cash charge to operating income. The pro forma effect
of this amortization expense, the majority of which is not deductible for tax
purposes, is expected to be approximately $3.8 million per year.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
Quanta's results of operations can be subject to seasonal variations.
During the winter months, demand for new projects and maintenance services may
be lower due to reduced construction activity. However, demand for repair and
maintenance services attributable to damage caused by inclement weather during
the winter months may partially offset the loss of revenues from lower demand
for new projects and maintenance services. Additionally, the industry can be
highly cyclical. As a result, our volume of business may be adversely affected
by declines in new projects in various geographic regions in the U.S. Typically,
we experience lower gross margins and operating margins during the winter
months. The timing of acquisitions, variations in the margins of projects
performed during any particular quarter, the timing and magnitude of acquisition
assimilation costs and regional economic conditions may also materially affect
quarterly results. Accordingly,
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our operating results in any particular quarter may not be indicative of the
results that can be expected for any other quarter or for the entire year.
LIQUIDITY AND CAPITAL RESOURCES
In February 1998, Quanta completed its IPO, which involved the issuance of
5,000,000 shares of common stock at a price of $9.00 per share (before deducting
underwriting discounts and commissions). In March 1998, Quanta sold an
additional 750,000 shares of common stock at a price of $9.00 per share (before
deducting underwriting discounts and commissions) pursuant to the underwriters'
overallotment option. We realized proceeds from these transactions, net of the
discounts and after deducting the expenses of the IPO, of approximately $44.9
million. Of this amount, we used $21.0 million to fund the cash portion of the
purchase price relating to the acquisition of the Founding Companies.
As of December 31, 1998, Quanta had cash and cash equivalents of $3.2
million, working capital of $57.1 million and long-term debt of $60.3 million,
net of current maturities, including borrowings of $56.0 million under the
Credit Facility, and the Company had $2.5 million of letters of credit
outstanding under the Credit Facility. In addition, the Company had $49.4
million of Convertible Subordinated Notes.
During the year ended December 31, 1998, operating activities provided a
net cash flow of $8.2 million. Changes in working capital accounts are driven
predominantly by the acquisitions throughout the year and as such are not
comparable to prior periods. We used net cash in investing activities of $109.1
million, including $89.2 million used for the purchase of businesses, net of
cash acquired. Financing activities provided a net cash flow of $103.7 million,
resulting primarily from $44.9 million of net proceeds from the IPO, $52.5
million from net borrowings under our Credit Facility, $49.4 million of net
proceeds from issuance of the Convertible Subordinated Notes, partially offset
by $36.1 million in repayments of debt assumed in connection with acquisitions
and cash payments of $8.4 million representing cash consideration paid to the
stockholders of PAR.
In August 1998, we amended our $50.0 million Credit Facility to increase it
to $125.0 million. In November 1998, we expanded our bank group from two banks
to nine banks and amended the Credit Facility to increase it to $175.0 million.
In June 1999, we expanded our bank group to 14 banks, and again amended the
Credit Facility to increase it to $350 million. We pledged all of the capital
stock of our material operating subsidiaries and the majority of our assets to
secure the Credit Facility. The purpose of the Credit Facility is to provide
funds to be used for working capital, to finance acquisitions and for other
general corporate purposes. Amounts borrowed under the Credit Facility bear
interest at a rate equal to either (a) the London Interbank Offered Rate
("LIBOR" which was 5.63% at December 31, 1998) plus 1.00% to 2.00%, as
determined by the ratio of our total funded debt to EBITDA (as defined in the
Credit Facility) or (b) the bank's prime rate (which was 7.75% at December 31,
1998) plus up to 0.25%, as determined by the ratio of our total funded debt to
EBITDA. We incur commitment fees of 0.25% to 0.50% (based on certain financial
ratios) on any unused borrowing capacity under the Credit Facility. Quanta's
existing and future subsidiaries will guarantee the repayment of all amounts due
under the Credit Facility, and the Credit Facility restricts pledges of all
material assets. The Credit Facility contains usual and customary covenants for
a credit facility of this nature including the prohibition of the payment of
dividends, certain financial ratios and indebtedness covenants and a requirement
to obtain the consent of the lenders for acquisitions exceeding a certain level
of cash consideration. As of June 14, 1999, we had approximately $163.3 million
outstanding under the Credit Facility and $4.1 million of letters of credit
outstanding, resulting in a borrowing availability of $182.6 million under the
revolving Credit Facility.
Additionally, on October 5, 1998, we issued and sold $49.4 million of
Convertible Subordinated Notes bearing interest at 6 7/8% to Enron Capital and
one of its affiliates. We used the proceeds of the Convertible Subordinated
Notes to reduce outstanding borrowings under the Credit Facility. The
Convertible Subordinated Notes include restrictive covenants substantially
similar to those included in the Credit Facility. The Convertible Subordinated
Notes are convertible into common stock at any time at the option of the holder
at a conversion price of $13.75 per share, subject to adjustment. The
Convertible Subordinated Notes are nonredeemable for four years and are
redeemable thereafter at our option at a redemption price which is
11
<PAGE> 13
initially $103.50 per $100.00 principal amount, with such premium declining
ratably over the succeeding four years. The Convertible Subordinated Notes are
mandatorily redeemable in nine semi-annual installments beginning in June 2006.
Upon a change in control, the Convertible Subordinated Notes are mandatorily
redeemable at a redemption price which is initially $107.00 per $100.00
principal amount, with such premium declining ratably over eight years following
the date of issuance.
The Company issued shares of common stock to an Employee Stock Ownership
Plan (the "ESOP") in connection with the acquisition of one of the Pooled
Companies. The ESOP was terminated on July 31, 1998. A favorable determination
letter from the Internal Revenue Service has been received and pending final
distribution, a portion of the shares of the Company's common stock held by the
ESOP will be sold to repay debt owed by the ESOP to the Company and the
remaining portion of the unallocated shares will be distributed to its
participants. The cost of the unallocated ESOP shares is reflected as a
reduction in the Company's stockholders' equity. Upon distribution from the
ESOP, the Company will owe an excise tax equal to 10% of the value of the
Company's common stock distributed. In addition, the Company will eliminate the
remaining balance reflected as Unearned ESOP Shares on the Company's balance
sheet and will have to recognize a non-cash non-recurring compensation charge
equal to the value of the unallocated shares held by the ESOP at the time it
allocates and distributes such shares. We currently cannot determine the amount
of the excise tax that will be owed or the non-cash, non-recurring compensation
charge that will be recognized. However, based on the closing price of our
common stock of $25.44 on March 31, 1999, the amount of such charges would be
approximately $772,000 and $3,209,000, respectively.
In January 1999, we completed our second public offering of common stock,
which included the issuance of 4,600,000 shares of common stock (including
600,000 shares pursuant to the underwriters' over-allotment option) at a price
of $23.25 per share (before deducting underwriting discounts and commissions).
We realized proceeds from this transaction, net of the discounts and after
deducting the expenses of the offering, of approximately $101.3 million. Of this
amount, we used $57.8 million to repay outstanding indebtedness under the Credit
Facility and the remainder to acquire additional businesses.
As of March 31, 1999, Quanta had cash and cash equivalents of $5.3 million,
working capital of $90.2 million and long-term debt of $85.4 million, net of
current maturities, including borrowings of $81.0 million under the Credit
Facility, and the Company had $3.5 million of letters of credit outstanding
under the Credit Facility. In addition, the Company had $49.4 million of
Convertible Subordinated Notes.
During the three months ended March 31, 1999, operating activities used net
cash of $4.4 million. Changes in working capital accounts are driven
predominantly by the acquisitions throughout the period and as such are not
comparable to prior periods. We used net cash in investing activities of $105.9
million, including $97.6 million used for the purchase of businesses, net of
cash acquired. Financing activities provided a net cash flow of $112.3 million,
resulting primarily from $101.1 million of net proceeds from the follow-on
public offering and $24.4 million from net borrowings under our Credit Facility,
partially offset by $15.7 million in repayments of debt assumed in connection
with acquisitions.
In addition to the Founding Companies, through June 14, 1999, we have
acquired 27 companies for an aggregate consideration of 9.3 million shares of
common stock and $256.2 million in cash and notes. The cash portion of such
consideration was provided by borrowings under the Credit Facility and proceeds
from the IPO and our follow-on public offering of common stock. The timing, size
or success of any acquisition effort and the associated potential capital
commitments cannot be predicted.
We intend to continue our aggressive acquisition program, and to continue
to use a combination of cash and common stock to finance the principal part of
the consideration payable in acquisitions. We anticipate that our cash flow from
operations and the Credit Facility will provide sufficient cash to enable us to
meet our working capital needs, debt service requirements and planned capital
expenditures for property and equipment for at least the next 12 months.
12
<PAGE> 14
INFLATION
Due to relatively low levels of inflation experienced during the years
ended December 31, 1996, 1997 and 1998, inflation did not have a significant
effect on the results of Quanta or any of the Acquired Businesses.
YEAR 2000
Impact of Year 2000. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates. As
a result, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists concerning the potential effects associated with such compliance, but
systems that do not properly recognize such information could generate erroneous
data or cause a system to fail.
State of Readiness. We have assessed our Year 2000 issues and have
developed a plan to address both the information technology ("IT") and non-IT
systems issues. We have not developed any of the systems we use in our business;
consequently, we believe our Year 2000 issues relate to systems that different
vendors have developed and sold to us. We assess Year 2000 issues relating to
the operating and other systems of all business we may acquire. Since our
acquisition program is ongoing, our assessment of potential Year 2000 issues is
not complete.
We have circulated a formal questionnaire to all of our significant
suppliers, customers and service providers to determine the extent to which
Quanta is vulnerable to those third parties' failure to remediate the Year 2000
problem. We have received assurances of Year 2000 compliance from many of our
suppliers, customers and service providers, including the providers of most of
our computer systems and the providers of financial services to us. Because of
the nature of our business and the number of vendors available to us, we believe
that our operations will not be significantly disrupted even if third parties
with whom we have relationships are not Year 2000 compliant.
Costs to Address the Year 2000 Issue. We have not identified any material
systems which are not Year 2000 compliant, although four of our Acquired
Businesses have systems which are not Year 2000 compliant. We plan to have
replacements for these systems operational by December 31, 1999, at an estimated
cost of $350,000, as part of our previously planned systems integration program
which will be funded from cash flows from operations. To date, costs incurred to
address Year 2000 compliance have been internal in nature and have been charged
to income as incurred. We have not delayed any IT projects due to our Year 2000
compliance program.
Risks to the Company and Contingency Plan. In the worst case scenario, if
the replacements and modifications are not completed, our operating subsidiaries
may experience temporary problems with certain computer systems that contain
date critical functions. We believe that any temporary disruptions from the
failures of our own systems would not be material to our overall business or
results of operations. However, should our customers experience a sustained
period of unanticipated disruption because of Year 2000 problems, our customers
may delay the award of new contracts or payment for work already completed, and
our business, results of operations and financial condition may be materially
and adversely affected. As a contingency plan, immediately prior to January 1,
2000, we intend to maintain an adequate supply of fuel and spare parts so that
we can continue to operate normally until such time as any temporary Year 2000
problems related to our operations are remedied. The Company will continue
throughout 1999 to consider the likelihood of a material business interruption
due to the Year 2000 issue.
While we have made a careful assessment of both our own internal operating
systems and the Year 2000 compliance of our suppliers, customer and service
providers, because of the complexity of the problem, we cannot be certain that
all of our own systems and those of third parties with whom we operate will be
made Year 2000 compliant in a timely manner or that any such failure to be Year
2000 compliant will not materially and adversely affect our business, results of
operations or financial condition.
13
<PAGE> 15
RESULTS OF OPERATIONS
For financial statement presentation purposes, as required by the rules and
regulations of the Securities Act, PAR has been identified as the accounting
acquiror. As such, the financial statements of Quanta for periods prior to
February 18, 1998 are the financial statements of PAR as restated for the
acquisitions of the Pooled Companies. The operations of the other Founding
Companies have been included in our historical financial statements beginning
February 19, 1998 and the operations of the Purchased Companies have been
included from their respective acquisition dates.
The following table sets forth selected statements of operations data and
such data as a percentage of revenues for the years indicated:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, THREE MONTHS ENDED MARCH 31,
---------------------------------------------------- ----------------------------------
1996 1997 1998 1998 1999
--------------- --------------- ---------------- --------------- ----------------
(DOLLARS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $78,230 100.0% $80,010 100.0% $319,259 100.0% $32,230 100.0% $127,779 100.0%
Cost of services (including
depreciation)................... 62,772 80.2 62,599 78.2 257,270 80.6 26,996 83.8 104,871 82.1
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Gross Profit...................... 15,458 19.8 17,411 21.8 61,989 19.4 5,234 16.2 22,908 17.9
Selling, general and
administrative expenses......... 10,445 13.4 12,354 15.4 27,160 8.5 3,522 10.9 11,982 9.4
Merger expenses -- pooling........ -- -- -- -- 231 0.1 -- -- 137 0.1
Goodwill amortization............. 55 0.1 56 0.1 2,513 0.8 196 0.6 1,498 1.2
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Income from operations............ 4,958 6.3 5,001 6.3 32,085 10.0 1,516 4.7 9,291 7.2
Other income (expense), net....... (1,127) 1.4 (1,421) 1.8 (4,214) 1.3 (343) 1.1 (1,904) 1.4
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Income before income tax
provision....................... 3,831 4.9 3,580 4.5 27,871 8.7 1,173 3.6 7,387 5.8
Provision for income taxes........ 1,389 1.8 1,786 2.3 11,683 3.6 356 1.1 3,964 3.1
------- ----- ------- ----- -------- ----- ------- ----- -------- -----
Net income........................ $ 2,442 3.1% $ 1,794 2.2% $ 16,188 5.1% $ 817 2.5% $ 3,423 2.7%
======= ===== ======= ===== ======== ===== ======= ===== ======== =====
</TABLE>
QUANTA RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 1999 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 1998
Revenues. Revenues increased $95.5 million, or 296.5 percent, to $127.8
million for the three months ended March 31, 1999. This increase in revenues was
primarily attributable to the contribution of $72.1 million of revenues in 1999
from companies purchased subsequent to March 31, 1998, inclusion of revenues of
the Founding Companies for the full quarter and increased demand for the
Company's services in 1999.
Gross profit. Gross profit increased $17.7 million, or 337.7 percent, to
$22.9 million for the three months ended March 31, 1999. Gross margin increased
from 16.2 percent for the three months ended March 31, 1998 to 17.9 percent for
the three months ended March 31, 1999. This increase was due to a higher mix of
higher margin telecommunications contracts in 1999 compared to 1998 and slightly
improved margins from electric utility infrastructure services.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $8.5 million, or 240.2 percent, to $12.0
million for the three months ended March 31, 1999. This increase was due to the
acquisition of the Purchased Companies, increases in selling and administrative
salaries required to support the higher level of revenues generated from an
increased volume of projects, and the increased costs related to the Company's
corporate infrastructure.
Other income (expense) net. Other income (expense) net increased $1.6
million, or 455.1%, to $1.9 million for the three months ended March 31, 1999.
This increase in interest expense is attributable to higher levels of debt
resulting from cash paid and debt assumed with the acquisition of certain
Purchased Companies. In addition, the Company borrowed funds under the Credit
Facility for equipment purchases and other operating activities in connection
with the addition of the Purchased Companies through the first quarter of 1999.
Also, interest expense increased due to the issuance of the Convertible
Subordinated Notes, partially offset by lower overall effective borrowing rates
in 1999 versus 1998.
14
<PAGE> 16
QUANTA RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1997
Revenues. Historical revenues increased $239.2 million, or 299.0%, to
$319.3 million for the year ended December 31, 1998. This increase in revenues
was primarily attributable to revenues from Purchased Companies acquired in 1998
of $93.6 million and revenues attributable to the Founding Companies acquired on
February 18, 1998 of $131.4 million.
Gross profit. Gross profit increased $44.6 million, or 256.0%, to $62.0
million for the year ended December 31, 1998. Gross margin decreased from 21.8%
for the year ended December 31, 1997 to 19.4% for the year ended December 31,
1998. This decrease in gross margin was primarily due to a larger amount of high
margin storm and emergency work performed by PAR in 1997 compared to 1998, and
the acquisition of the Founding and Purchased Companies which earned lower
margins than those experienced by PAR and one of the Pooled Companies in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $14.8 million, or 119.8%, to $27.2 million for
the year ended December 31, 1998, due to the acquisition of the Founding
Companies on February 18, 1998, the acquisition of the Purchased Companies,
increases in selling and administrative salaries required to support the higher
level of revenues generated from an increased volume of projects, and the
establishment of a corporate office and administrative infrastructure during
1998. As a percentage of revenues, selling, general and administrative expenses
decreased due to excess compensation paid to the owners of PAR in 1997 as
compared to agreed upon salary levels at the date of the IPO and due to one of
the Pooled Companies having a higher sales commission structure than the other
companies.
Other income (expense), net. Other income (expense), net increased $2.8
million, or 196.6%, to $4.2 million for the year ended December 31, 1998 due to
interest expense attributable to higher levels of debt resulting from cash paid
and debt assumed in connection with the acquisition of certain Acquired
Businesses. In addition, the Company borrowed funds under the Credit Facility
for equipment purchases and other operating activities in connection with the
addition of the Purchased Companies during 1998. Also, interest expense
increased due to the addition of the Convertible Subordinated Notes, partially
offset by lower overall effective borrowing rates in 1998 versus 1997.
QUANTA RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996
Revenues. Revenues increased $1.8 million, or 2.3%, to $80.0 million for
the year ended December 31, 1997, primarily as a result of an increased demand
for our services in Missouri, California and Colorado, partially offset by a
decrease in activity in Oregon.
Gross profit. Gross profit increased $2.0 million, or 12.6% to $17.4
million for the year ended December 31, 1997. As a percentage of revenues, gross
profit increased from 19.8% to 21.8%. The increase in gross profit and gross
margin is primarily due to increased labor productivity, renegotiated unit
pricing on certain long-term contracts and lower equipment rental expense as PAR
replaced rental equipment on certain projects with company-owned equipment,
partially offset by lower gross profit from operations in Oregon due to the
completion of a significant telecommunications contract in 1997 at a lower gross
margin.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.9 million, or 18.3%, to $12.4 million for
the year ended December 31, 1997, primarily due to increased administrative
support required by the higher level of revenues and increases in owner
compensation, partially offset by decreased commissions paid to salesmen. As a
percentage of revenues, selling, general and administrative expenses increased
from 13.4% to 15.4%.
Other income (expense), net. Other income (expense), net increased $0.3
million, or 26.1%, to $1.4 million for the year ended December 31, 1997 due to
interest expense incurred on higher levels of debt required in 1997 to fund
additional equipment purchases.
15
<PAGE> 17
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quanta Services, Inc.:
We have audited the accompanying consolidated balance sheets of Quanta Services,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1998. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quanta Services,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting principles.
As discussed in Note 1, the accompanying consolidated financial statements
reflect the Company on a historical basis as restated for the effect of a
pooling-of-interests transaction completed in the first quarter of 1999.
ARTHUR ANDERSEN LLP
Houston, Texas
June 7, 1999
16
<PAGE> 18
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ MARCH 31,
1997 1998 1999
------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 489 $ 3,246 $ 5,257
Accounts receivable, net of allowance of $400, $1,616 and
$1,889................................................. 14,571 76,040 114,085
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 1,746 22,620 41,662
Inventories............................................... 865 2,534 6,141
Prepaid expenses and other current assets................. 752 4,352 5,214
------- -------- --------
Total current assets.............................. 18,423 108,792 172,359
PROPERTY AND EQUIPMENT, net................................. 18,368 74,212 93,219
OTHER ASSETS, net........................................... 656 5,190 5,543
GOODWILL, net............................................... 114 150,887 283,083
------- -------- --------
Total assets...................................... $37,561 $339,081 $554,204
======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 7,599 $ 4,357 $ 3,392
Accounts payable and accrued expenses..................... 7,705 40,298 68,778
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 738 7,031 9,980
------- -------- --------
Total current liabilities......................... 16,042 51,686 82,150
LONG-TERM DEBT, net of current maturities................... 7,638 60,281 85,434
CONVERTIBLE SUBORDINATED NOTES.............................. -- 49,350 49,350
DEFERRED INCOME TAXES AND OTHER NON-CURRENT LIABILITIES..... 2,479 6,261 7,500
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.00001 par value, 10,000,000 shares
authorized, none issued and outstanding................ -- -- --
Common Stock, $.00001 par value, 36,654,667 shares
authorized, 4,162,572, 18,557,949 and, 25,677,410
shares issued and outstanding, respectively............ -- -- --
Limited Vote Common Stock, $.00001 par value, 3,345,333
shares authorized, none, 3,345,333, and 3,341,451
shares issued and outstanding, respectively............ -- -- --
Unearned ESOP shares...................................... (1,831) (1,831) (1,831)
Additional paid-in capital................................ 1,281 145,194 300,038
Retained earnings......................................... 11,952 28,140 31,563
------- -------- --------
Total stockholders' equity........................ 11,402 171,503 329,770
------- -------- --------
Total liabilities and stockholders' equity........ $37,561 $339,081 $554,204
======= ======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
17
<PAGE> 19
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
---------------------------- ------------------
1996 1997 1998 1998 1999
------- ------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES........................................ $78,230 $80,010 $319,259 $32,230 $127,779
COST OF SERVICES (including depreciation)....... 62,772 62,599 257,270 26,996 104,871
------- ------- -------- ------- --------
Gross profit.................................. 15,458 17,411 61,989 5,234 22,908
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 10,445 12,354 27,160 3,522 11,982
MERGER EXPENSES -- Poolings..................... -- -- 231 -- 137
GOODWILL AMORTIZATION........................... 55 56 2,513 196 1,498
------- ------- -------- ------- --------
Income from operations........................ 4,958 5,001 32,085 1,516 9,291
OTHER INCOME (EXPENSE):
Interest expense.............................. (1,096) (1,290) (4,855) (416) (2,224)
Other, net.................................... (31) (131) 641 73 320
------- ------- -------- ------- --------
Other income (expense), net................ (1,127) (1,421) (4,214) (343) (1,904)
------- ------- -------- ------- --------
INCOME BEFORE INCOME TAX PROVISION.............. 3,831 3,580 27,871 1,173 7,387
PROVISION FOR INCOME TAXES...................... 1,389 1,786 11,683 356 3,964(a)
------- ------- -------- ------- --------
NET INCOME...................................... $ 2,442 $ 1,794 $ 16,188 $ 817 $ 3,423
======= ======= ======== ======= ========
BASIC EARNINGS PER SHARE........................ $ 0.59 $ 0.43 $ 0.91 $ 0.08 $ 0.13
======= ======= ======== ======= ========
DILUTED EARNINGS PER SHARE...................... $ 0.59 $ 0.43 $ 0.88 $ 0.08 $ 0.13
======= ======= ======== ======= ========
DILUTED EARNINGS PER SHARE BEFORE MERGER
EXPENSES...................................... $ 0.59 $ 0.43 $ 0.90 $ 0.08 $ 0.16(b)
======= ======= ======== ======= ========
SHARES USED IN COMPUTING EARNINGS PER SHARE:
Basic......................................... 4,163 4,163 17,857 10,518 26,024
======= ======= ======== ======= ========
Diluted....................................... 4,163 4,163 18,877 10,580 30,139
======= ======= ======== ======= ========
</TABLE>
- ---------------
(a) Includes a non-cash, non-recurring deferred tax charge of $677,000 as a
result of a change in the tax status from an S corporation to a C
corporation of a company acquired in a pooling transaction during the first
quarter of 1999.
(b) Excludes a non-cash, non-recurring deferred tax charge of $677,000 as a
result of a change in the tax status from an S corporation to a C
corporation of a company acquired in a pooling transaction during the first
quarter of 1999. In addition, it excludes non-recurring merger expenses of
$137,000 related to this transaction.
The accompanying notes are an integral part of these consolidated financial
statements.
18
<PAGE> 20
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------- --------------------
1996 1997 1998 1998 1999
-------- ------- -------- -------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 2,442 $ 1,794 $ 16,188 $ 817 $ 3,423
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization................. 2,896 3,361 10,666 1,159 5,350
Loss (gain) on sale of property and
equipment................................... (96) 49 (91) (49) (34)
Non-cash compensation charge for issuance of
Common Stock (ESOP)......................... 720 254 -- -- --
Deferred income tax provision (benefit)....... 364 5 (370) 105 690
Changes in operating assets and liabilities,
net of non-cash transactions --
(Increase) decrease in --
Accounts receivable...................... (3,035) (1,010) (9,649) (3,910) (11,998)
Inventories.............................. (579) (286) (904) (606) (822)
Costs and estimated earnings in excess of
billings on uncompleted contracts...... (233) (947) (2,286) (949) (10,875)
Prepaid expenses and other current
assets................................. (63) 14 (2,784) 6 (676)
Other, net............................... (101) (56) (93) 32 154
Increase (decrease) in --
Accounts payable and accrued expenses.... 734 2,621 (4,672) 5,117 7,905
Billings in excess of costs and estimated
earnings on uncompleted contracts...... 1,026 (478) 2,185 (1,585) 2,476
-------- ------- -------- -------- ---------
Net cash provided by (used in)
operating activities................. 4,075 5,321 8,190 137 (4,407)
-------- ------- -------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.... 172 268 1,394 816 287
Additions of property and equipment and other
assets........................................ (4,002) (6,456) (22,667) (2,951) (8,580)
Cash paid for acquisitions, net of cash
acquired...................................... -- -- (89,176) (12,057) (97,584)
Proceeds from sale of investments............... -- -- 1,342 -- --
-------- ------- -------- -------- ---------
Net cash used in investing
activities........................... (3,830) (6,188) (109,107) (14,192) (105,877)
-------- ------- -------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.................... 12,295 6,867 3,722 2,579 2,428
Payments on long-term debt...................... (10,336) (6,487) (36,111) (18,157) (15,657)
Redemptions of Common Stock..................... (2,805) (31) -- -- --
Issuances of Common Stock, net of offering
costs......................................... -- -- 44,914 45,109 101,119
Net borrowings under bank lines of credit....... 843 495 52,522 -- 24,405
Distributions to accounting acquiror............ -- -- (8,370) (8,370) --
Proceeds from Convertible Subordinated Notes.... -- -- 49,350 -- --
Debt issuance costs............................. -- -- (3,066) -- --
Exercise of stock options....................... -- -- 713 -- --
Other........................................... (95) -- -- (2,526) --
-------- ------- -------- -------- ---------
Net cash provided by (used in)
financing activities................. (98) 844 103,674 18,635 112,295
-------- ------- -------- -------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS..................................... 147 (23) 2,757 4,580 2,011
CASH AND CASH EQUIVALENTS, beginning of period.... 365 512 489 489 3,246
-------- ------- -------- -------- ---------
CASH AND CASH EQUIVALENTS, end of
period.......................................... $ 512 $ 489 $ 3,246 $ 5,069 $ 5,257
======== ======= ======== ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest...................................... $ 744 $ 750 $ 4,690 $ 380 $ 1,940
Income taxes, net of refunds.................. 870 1,518 10,800 263 5,438
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
19
<PAGE> 21
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
LIMITED VOTE
COMMON STOCK COMMON STOCK UNEARNED ADDITIONAL
------------------- ------------------ ESOP PAID-IN RETAINED TOTAL
SHARES AMOUNT SHARES AMOUNT SHARES CAPITAL EARNINGS EQUITY
---------- ------ --------- ------ -------- ---------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995.... 4,162,572 $-- -- $-- $ -- $ 891 $ 8,091 $ 8,982
Distribution to
stockholders.............. -- -- -- -- -- -- (375) (375)
Purchase of stock from
stockholders.............. -- -- -- -- (2,805) -- -- (2,805)
Distribution of stock
through ESOP.............. -- -- -- -- 720 -- -- 720
Other....................... -- -- -- -- -- 421 -- 421
Net income.................. -- -- -- -- -- -- 2,442 2,442
---------- --- --------- --- ------- -------- ------- --------
Balance, December 31, 1996.... 4,162,572 -- -- -- (2,085) 1,312 10,158 9,385
Distribution of stock
through ESOP.............. -- -- -- -- 254 -- -- 254
Other....................... -- -- -- -- -- (31) -- (31)
Net income.................. -- -- -- -- -- -- 1,794 1,794
---------- --- --------- --- ------- -------- ------- --------
Balance, December 31, 1997.... 4,162,572 -- -- -- (1,831) 1,281 11,952 11,402
Issuances of stock.......... -- -- 3,345,333 -- -- -- -- --
Stock options exercised..... 60,000 -- -- -- -- 1,125 -- 1,125
Initial public offering, net
of offering costs......... 5,750,000 -- -- -- -- 44,914 -- 44,914
Acquisition of Founding
Companies................. 4,527,000 -- -- -- -- 53,890 -- 53,890
Acquisition of Purchased
Companies................. 4,058,377 -- -- -- -- 43,984 -- 43,984
Net income.................. -- -- -- -- -- -- 16,188 16,188
---------- --- --------- --- ------- -------- ------- --------
Balance, December 31, 1998.... 18,557,949 -- 3,345,333 -- (1,831) 145,194 28,140 171,503
Stock options exercised
(unaudited)................. 13,185 -- -- -- -- 120 -- 120
Conversion of Limited Vote
Stock to Common Stock
(unaudited)................. 3,882 -- (3,882) -- -- -- -- --
Follow-on offering, net of
offering costs
(unaudited)................. 4,600,000 -- -- -- -- 101,119 -- 101,119
Acquisition of Purchased
Companies (unaudited)....... 2,502,394 -- -- -- -- 53,605 -- 53,605
Net income (unaudited)........ -- -- -- -- -- -- 3,423 3,423
---------- --- --------- --- ------- -------- ------- --------
Balance, March 31, 1999
(unaudited)................. 25,677,410 $-- 3,341,451 $-- $(1,831) $300,038 $31,563 $329,770
========== === ========= === ======= ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
20
<PAGE> 22
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Quanta Services, Inc., a Delaware corporation ("Quanta"), was founded in
August 1997 to create a leading provider of specialty contracting and
maintenance services primarily related to electric, utility and
telecommunications infrastructure in North America.
In February 1998, Quanta completed its initial public offering (the
"Offering" or "IPO"), concurrent with which Quanta acquired, in separate
transactions, four entities (the "Founding Companies"). Quanta acquired twelve
additional businesses in 1998 and fifteen additional businesses through June 7,
1999. Of these additional acquired businesses, two were accounted for as
poolings-of-interests and are referred to herein as the "Pooled Companies" (see
Note 4). The remaining acquired businesses were accounted for as purchases and
are referred to herein as the "Purchased Companies." Quanta intends to continue
to acquire through merger or purchase similar companies to expand its national
and regional operations.
The financial statements of Quanta for periods prior to February 18, 1998
(the effective closing date of the acquisitions of the Founding Companies), are
the financial statements of PAR Electrical Contractors, Inc. ("PAR" or the
"Accounting Acquiror") as restated for the acquisitions of the Pooled Companies.
The operations of the other Founding Companies and Quanta, acquired by the
Accounting Acquiror, have been included in the Company's historical financial
statements beginning February 19, 1998, and the Purchased Companies beginning on
their respective dates of acquisition. References herein to the "Company"
include Quanta and its subsidiaries.
In the course of its operations, the Company is subject to certain risk
factors, including but not limited to: limited combined operating history, risks
related to acquisition strategy, recoverability of goodwill, risks related to
acquisition financing, risks related to operating and internal growth
strategies, management of growth, availability of qualified employees, unionized
workforce, competition, risks associated with contracts, potential exposure to
environmental liabilities, dependence on key personnel and Year 2000 risks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of the Company, include the accounts
of Quanta and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Interim Consolidated Financial Information
The unaudited interim consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures, normally included in annual financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim consolidated financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
21
<PAGE> 23
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Supplemental Cash Flow Information
The Company had non-cash investing and financing activities related to
capital leases of approximately $111,000, $692,000 and $1,218,000 during the
years ended December 31, 1996, 1997 and 1998, respectively.
In addition, pursuant to its acquisition program, the Company acquired
assets through purchase acquisitions with an estimated fair market value, net of
cash acquired, of approximately $116,022,000 and liabilities of approximately
$71,598,000 resulting in the recording of approximately $127,654,000 in
goodwill.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts when collection is
considered doubtful.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued by the Company at the lower of cost or market
using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation and
amortization expense related to property and equipment, was approximately
$2,841,000, $3,305,000 and $8,153,000 for the years ended December 31, 1996,
1997 and 1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Debt Issue Costs
Debt issue costs related to the Company's credit facility and the
Convertible Subordinated Notes are included in other assets and are amortized to
interest expense over the scheduled maturity periods of the related debt. As of
December 31, 1997 and 1998, accumulated amortization was approximately $0 and
$178,000, respectively.
Goodwill
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. Management continually evaluates whether
events or circumstances have occurred that indicate that the remaining estimated
useful lives of property and equipment, other identifiable intangible assets and
goodwill may warrant revision or that the remaining balances may not be
recoverable.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a fixed price or cost-plus-fee contract. Such contracts
generally provide that the customer accept completion of progress to date and
compensate the Company for services rendered, measured typically in terms of
units installed, hours expended or some other measure of progress. Revenues from
fixed price or cost-plus-fee contracts are recognized on the
percentage-of-completion method measured by the percentage of
22
<PAGE> 24
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
costs incurred to date to total estimated costs for each contract. Contract
costs typically include all direct material, labor and subcontract costs and
those indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation costs. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to costs
and income and their effects are recognized in the period in which the revisions
are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in fixed price or cost-plus-fee contacts will be due upon completion
of the contracts and acceptance by the customer. Based on the Company's
experience with similar contracts in recent years, the retention balance at each
balance sheet date will be collected within the subsequent fiscal year.
Retainage balances as of December 31, 1997 and 1998 were approximately $400,000
and $11,704,000, respectively, and are included in accounts receivable.
The current asset "Cost and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The current liability "Billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company generally warrants labor for new
installations and construction and servicing of existing infrastructure. 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.
Certain of the Purchased Companies were S corporations for income tax
purposes and, accordingly, any income tax liabilities for the periods prior to
the acquisitions are the responsibility of the respective stockholders. In
addition, one of the Pooled Companies was an S corporation prior to its merger
with Quanta and therefore, income taxes have not been provided for in the
historical financial statements. Effective with the acquisitions, the S
corporations converted to C corporations. Accordingly, at the date of
acquisition an estimated deferred tax liability has been recorded to provide for
the estimated future income tax liability resulting from the difference between
the book and tax bases of the net assets of these former S corporations. For
purposes of these consolidated financial statements, federal and state income
taxes have been provided for the post-acquisition periods.
Earnings per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," which requires
restatement of all comparative per share amounts. Under the provisions of SFAS
No. 128, the presentation of primary earnings per share has been replaced with
earnings per share for potentially dilutive securities such as outstanding
options. All prior period earnings per share data have been restated.
For financial statement purposes, as required by the rules and regulations
of the Securities Act, PAR has been identified as the accounting acquiror in the
transaction with Quanta and its initial public offering. As such, the shares of
Quanta common stock beneficially owned by the stockholders of PAR and the shares
issued in connection with the acquisition of the Pooled Companies have been used
in the calculation of basic and diluted earnings per share of the Company for
all periods prior to the IPO.
23
<PAGE> 25
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Collective Bargaining Agreements
Certain of the subsidiaries are party to various collective bargaining
agreements with certain of its employees. The agreements require the Company to
pay specified wages and provide certain benefits to its union employees. These
agreements expire at various times.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 12 for discussion of
certain estimates reflected in the Company's financial statements.
New Accounting Pronouncements
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires the display of comprehensive income and
its components in the financial statements. Comprehensive income represents all
non-stockholder related changes in equity of an entity during the reporting
period, including net income and charges directly to equity, which are excluded
from net income. For the three years ended December 31, 1998, there are no
material differences between the Company's "traditional" and "comprehensive" net
income.
The Company has complied with the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for reporting certain information about operating segments in annual
financial statements and, to a lesser extent, reporting of selected information
about operating segments in interim financial reports issued to stockholders.
SFAS No. 131 also establishes standards for specific disclosures about products
and services, geographic areas, and major customers.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which becomes effective for
financial statements for the year ended December 31, 1998. SFAS No. 132 requires
revised disclosures about pension and other postretirement benefit plans. The
Company has adopted the provisions of SFAS No. 132.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for financial
statements beginning January 1, 2000. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. In May 1999, the FASB issued an exposure
draft that would amend SFAS No. 133 to defer its effective date to all fiscal
quarters of all fiscal years beginning after June 15, 2000. The Company is
evaluating SFAS No. 133 and the impact on existing accounting policies and
financial reporting disclosures. However, the Company has not historically
engaged in activities or entered into arrangements normally associated with
derivative instruments.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP provides
guidance with respect to accounting for the various types of costs incurred for
computer software developed or obtained for the Company's use. The Company
adopted SOP 98-1 in the first quarter of fiscal 1999 and adoption had no effect
on its consolidated financial statements.
24
<PAGE> 26
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred, and upon adoption, previously deferred costs should be charged as a
cumulative effect of a change in accounting principle. The Company adopted the
new standard in January 1999 and the adoption of this standard had no effect on
the Company's financial position or result of operations.
3. PER SHARE INFORMATION:
The computation of basic and diluted earnings per share for the two years
ended December 31, 1997 is based upon the 3,000,000 shares of common stock
issued in connection with PAR and 1,162,572 shares issued in connection with the
acquisition of the Pooled Companies.
The computation of basic earnings per share for the year ended December 31,
1998 is based upon 17,856,876 weighted average shares of common stock
outstanding which includes the weighted average portion of (i) 7,527,000 shares
of common stock issued to the owners of the Founding Companies, (ii) 3,345,333
shares of Limited Vote Common Stock issued to the initial stockholders and
certain management personnel of the Company, (iii) 5,750,000 shares of common
stock sold in the Offering to pay the cash portion of the consideration for the
Founding Companies, to repay expenses incurred in connection with the Offering
and to retire debt, (iv) 1,162,572 shares issued for the acquisitions of the
Pooled Companies, (v) the 4,058,376 shares issued in acquisitions accounted for
as purchases, and (vi) shares issued upon exercise of stock options.
Shares used in the calculation of the diluted earnings per share for the
year ended December 31, 1998 include (i) the shares described above, (ii) the
dilution attributable to the assumed conversion of the Convertible Subordinated
Notes, and (iii) the dilution attributable to outstanding options to purchase
common stock, using the treasury stock method. Included in net income used in
computing diluted earnings per share is approximately $506,000 in reduced
interest expense, net of tax, attributable to the assumed conversion of the
Convertible Subordinated Notes.
4. BUSINESS COMBINATIONS:
Poolings
During the second quarter of 1998, Quanta completed the acquisition of all
the common stock of NorAm Telecommunications, Inc. ("NorAm"), in a business
combination accounted for as a "pooling-of-interests" transaction in accordance
with the requirements of APB No. 16. NorAm, headquartered in Oregon, provides
outside and inside network and technical support for the telecommunications
industry. Quanta issued 951,945 shares of common stock in exchange for all the
common stock of NorAm.
In the first quarter of 1999, Quanta completed the acquisition of all the
common stock of Fiber Technology, Inc. ("Fiber Tech") in a business combination
accounted for as a "pooling-of-interests" transaction. Fiber Tech, headquartered
in Houston, Texas, provides specialty contracting services to the cable
television and telecommunications industries. Quanta issued 210,627 shares of
common stock in exchange for all the common stock of Fiber Tech.
There were no transactions between Quanta and the Pooled Companies during
the periods prior to the business combination. The financial statements of the
Company have been previously restated to reflect the impact of the NorAm pooling
as reported in the Company's Annual Report on Form 10-K for the year ended
December 31, 1998.
25
<PAGE> 27
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the audited restated revenues, net income
and per share data of the Company after giving effect to the Fiber Tech pooling
transaction (in thousands, except per share data).
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1996 1997 1998
----------------- ----------------- ------------------
NET NET NET
REVENUES INCOME REVENUES INCOME REVENUES INCOME
-------- ------ -------- ------ -------- -------
<S> <C> <C> <C> <C> <C> <C>
Revenues and net income --
As previously reported in 1998 Form
10-K................................. $71,294 $1,790 $76,204 $2,527 $309,209 $15,175
Fiber Tech.............................. 6,936 652 3,806 (733) 10,050 1,013
------- ------ ------- ------ -------- -------
As restated..................... $78,230 $2,442 $80,010 $1,794 $319,259 $16,188
======= ====== ======= ====== ======== =======
Basic earnings per share --
As previously reported in 1998 Form
10-K................................. $ 0.45 $ 0.64 $ 0.86
Fiber Tech.............................. 0.14 (0.21) 0.05
------ ------ -------
As restated..................... $ 0.59 $ 0.43 $ 0.91
====== ====== =======
Diluted earnings per share --
As previously reported in 1998 Form
10-K................................. $ 0.45 $ 0.64 $ 0.84
Fiber Tech.............................. 0.14 (0.21) 0.04
------ ------ -------
As restated..................... $ 0.59 $ 0.43 $ 0.88
====== ====== =======
</TABLE>
Purchases
Through the year ended December 31, 1998, in addition to the Founding
Companies, the Company completed eleven acquisitions accounted for as purchases.
The aggregate consideration paid in these transactions consisted of $84.6
million in cash and notes and 4.1 million shares of common stock. The
accompanying balance sheet as of December 31, 1998 includes preliminary
allocations of the respective purchase prices and is subject to final
adjustment. The following summarized unaudited pro forma financial information
adjusts the historical financial information by assuming the acquisition of the
Founding Companies, the Purchased Companies and the issuance of the Convertible
Subordinated Notes (as defined in Note 7) occurred on January 1, 1997 (dollars
in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
---------------------------
1997 1998
------------ ------------
(UNAUDITED)
<S> <C> <C>
Revenues.................................................... $343,130 $433,622
Net income.................................................. $ 16,966 $ 20,465
Basic earnings per share.................................... $ 0.78 $ 0.94
Diluted earnings per share.................................. $ 0.75 $ 0.89
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to:
(a) contractually agreed reductions in salaries and benefits for former owners,
and certain key employees; (b) adjustment to depreciation and amortization
expense due to the purchase price allocations; (c) the assumed reductions in
interest expense due to unassumed debt and the refinancing of the outstanding
indebtedness in conjunction with the acquisition of the Founding Companies and
Purchased Companies, offset by an assumed increase in interest expense incurred
in connection with financing the acquisitions; (d) elimination of non-recurring
acquisition costs associated with one of the Pooled Companies; (e) the
incremental interest expense and amortization of deferred financing costs
incurred as a result of the issuance of the Convertible Subordinated Notes (as
defined in Note 7), net of the repayment of outstanding indebtedness of the
Company; (f) adjustment to the federal and state income tax provisions based on
the combined operations; and (g) the
26
<PAGE> 28
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
elimination of merger expenses related to the Pooled Companies. The pro forma
financial data does not purport to represent what the Company's combined
financial position or results of operations would actually have been if such
transactions had in fact occurred on those dates and are not necessarily
representative of the Company's financial position or results of operations for
any future period.
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
<TABLE>
<CAPTION>
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------------
IN YEARS 1997 1998
------------ -------- --------
<S> <C> <C> <C>
Land................................................ -- $ 1,861 $ 1,947
Buildings and leasehold improvements................ 5-31 1,927 4,232
Operating equipment and vehicles.................... 5-25 33,034 90,831
Office equipment, furniture and fixtures............ 3-7 972 2,845
-------- --------
37,794 99,855
Less -- Accumulated depreciation and amortization... (19,426) (25,643)
-------- --------
Property and equipment, net....................... $ 18,368 $ 74,212
======== ========
</TABLE>
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1997 1998
---- ------
<S> <C> <C>
Balance at beginning of period.............................. 200 400
Beginning balance of Purchased Companies.................. -- 984
Charged to expense........................................ 226 292
Deductions for uncollectible receivables written off and
recoveries............................................. (26) (60)
---- ------
Balance at end of period.................................... $400 $1,616
==== ======
</TABLE>
Accounts payable and accrued expenses consist of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------
1997 1998
------ -------
<S> <C> <C>
Accounts payable, trade..................................... $3,576 $18,805
Accrued compensation and other related expenses............. 897 9,209
Other expenses.............................................. 3,232 12,284
------ -------
$7,705 $40,298
====== =======
</TABLE>
27
<PAGE> 29
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Contracts in progress are as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1997 1998
-------- ---------
<S> <C> <C>
Costs incurred on contracts in progress..................... $ 11,578 $ 231,526
Estimated earnings, net of losses........................... 3,017 44,405
-------- ---------
14,595 275,931
Less -- Billings to date.................................... (13,587) (260,342)
-------- ---------
$ 1,008 $ 15,589
======== =========
Costs and estimated earnings recognized in excess of
billings.................................................. $ 1,746 $ 22,620
Less -- Billings in excess of costs and estimated earnings
recognized................................................ (738) (7,031)
-------- ---------
$ 1,008 $ 15,589
======== =========
</TABLE>
7. DEBT:
The Company's long-term debt obligations consisted of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
----------------- THREE MONTHS ENDED
1997 1998 MARCH 31, 1999
------- ------- ------------------
(UNAUDITED)
<S> <C> <C> <C>
Revolving credit facility............................... $ -- $56,000 $80,990
Bank lines of credit, with total borrowing capacity of
$2,000,000, interest at bank's prime rate plus 1%,
secured by accounts receivable and guaranteed by
NorAm's stockholders.................................. 968 -- --
Bank lines of credit, with total borrowing capacity of
$8,000,000, interest at bank's prime rate, secured by
equipment, receivables and other assets............... 2,510 -- --
Notes payable to bank, interest ranging from 9.08% to
10%, payments due monthly from $9,313 to $36,613
including interest, secured by equipment.............. 1,578 -- --
Note payable to bank, prime interest rate, due $250,000
annually including interest, secured by stock......... 1,831 -- --
Notes payable to various banks, interest ranging from
4.8% to 15.35%, secured by certain equipment,
receivables and other assets.......................... 7,771 2,819 3,062
Notes payable to certain previous owners of the
Purchased Companies bearing interest at 7.0% due
2001.................................................. -- 2,145 1,580
Capital lease obligations............................... 579 3,674 3,194
------- ------- -------
15,237 64,638 88,826
Less -- Current maturities.............................. (7,599) (4,357) (3,392)
------- ------- -------
Total long-term debt.......................... $ 7,638 $60,281 $85,434
======= ======= =======
</TABLE>
Credit Facility
In August 1998, the Company amended its $50.0 million revolving credit
facility (the "Credit Facility") to increase it to $125 million. In November
1998, the Company expanded its bank group from two banks to nine banks and
amended its Credit Facility to increase it to $175 million. The Credit Facility
is secured by a pledge of all of the capital stock of the Company's material
operating subsidiaries and the majority of the Company's assets and is to
provide funds to be used for working capital, to finance acquisitions and for
other
28
<PAGE> 30
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
general corporate purposes. Amounts borrowed under the Credit Facility bear
interest at a rate equal to either (a) the London Interbank Offered Rate
("LIBOR" which was 5.63% at December 31, 1998) plus 1.00% to 2.00%, 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 (which was 7.75% at
December 31, 1998) 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 Credit Facility matures August 2, 2003. The Company's
existing and future subsidiaries will guarantee the repayment of all amounts due
under the facility and the facility restricts pledges on all material assets.
The Credit Facility contains usual and customary covenants for a credit facility
of this nature including the prohibition of the payment of dividends, certain
financial ratio covenants and the consent of the lenders for acquisitions
exceeding a certain level of cash consideration. As of December 31, 1998, $56.0
million was borrowed under the Credit Facility, and the Company had $2.5 million
of letters of credit outstanding, resulting in a borrowing availability of
$116.5 million under the Credit Facility.
The maturities of long-term debt (excluding capital leases) as of December
31, 1998, are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31 --
- --------------------------
<S> <C>
1999.............................................. $ 2,603
2000.............................................. 1,304
2001.............................................. 881
2002.............................................. 154
2003.............................................. 56,022
-------
$60,964
=======
</TABLE>
The Company leases certain buildings and equipment under non-cancellable
lease agreements. The following schedule shows the future minimum lease payments
under these leases as of December 31, 1998 (in thousands):
<TABLE>
<CAPTION>
CAPITAL OPERATING
YEAR ENDING DECEMBER 31 -- LEASES LEASES
- -------------------------- ------- ---------
<S> <C> <C>
1999.............................................. $ 1,879 $2,947
2000.............................................. 1,177 2,723
2001.............................................. 893 2,318
2002.............................................. 24 1,338
2003.............................................. 1 288
------- ------
Total minimum lease payments............ 3,974 $9,614
======
Less -- Amounts representing interest............. (300)
-------
Present value of minimum lease payments......... 3,674
Less -- Current portion........................... (1,754)
-------
Long-term obligation............................ $ 1,920
=======
</TABLE>
Rent expense related to operating leases was approximately $258,000,
$519,000 and $1,816,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. Assets under capital leases are included as part of property and
equipment.
Certain of the Company's subsidiaries have entered into a number of related
party lease arrangements for operational facilities. These lease agreements
generally have a term of 5 years. There were no such related-
29
<PAGE> 31
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
party lease payments during the years ended December 31, 1996 and 1997. Lease
payments for the year ended 1998 were approximately $315,000. Future commitments
with respect to these leases are included above.
Strategic Investment
In October 1998, the Company entered into a strategic investment agreement
with Enron Capital & Trade Resources Corp. ("Enron Capital"), a subsidiary of
Enron Corp., pursuant to which Enron Capital and an affiliate made an investment
of $49.4 million in Quanta. The investment is in the form of Convertible
Subordinated Notes bearing interest at 6 7/8 percent and convertible into Quanta
common stock at a price of $13.75 per share. Additionally, Quanta and Enron
Capital entered into a strategic alliance under which Enron Capital and Quanta
will exchange information regarding the design, construction and maintenance of
electric power transmission and distribution systems and fiber optic
communications systems. The Convertible Subordinated Notes require quarterly
interest payments and equal semi-annual principal payments beginning in 2006
until the notes are paid in full in 2010. The Company has the option to redeem
the notes at a premium beginning in 2002.
8. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Federal --
Current................................................. $ 840 $1,475 $10,214
Deferred................................................ 299 10 (262)
State --
Current................................................. 185 306 1,839
Deferred................................................ 65 (5) (108)
------ ------ -------
$1,389 $1,786 $11,683
====== ====== =======
</TABLE>
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate to income (loss) before
provision for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------ ------ -------
<S> <C> <C> <C>
Provision at the statutory rate........................... $1,093 $1,504 $ 9,400
Increase resulting from --
State income tax, net of related tax effect............. 166 187 1,125
Goodwill................................................ -- -- 899
Nondeductible and other expenses........................ 130 95 259
------ ------ -------
$1,389 $1,786 $11,683
====== ====== =======
</TABLE>
30
<PAGE> 32
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED 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>
DECEMBER 31,
-----------------
1997 1998
------- -------
<S> <C> <C>
Deferred income tax liabilities --
Property and equipment.................................... $(2,500) $(5,461)
Book/tax accounting method difference..................... -- (684)
Other..................................................... (162) (132)
------- -------
Total deferred income tax liabilities............. (2,662) (6,277)
------- -------
Deferred income tax assets --
Allowance for doubtful accounts and other reserves........ 42 1,222
Accounts receivable....................................... 35 --
Goodwill.................................................. 41 47
Inventory................................................. 29 176
State taxes............................................... (29) --
Other accruals not currently deductible................... 473 1,317
------- -------
Total deferred income tax assets.................. 591 2,762
------- -------
Total net deferred income tax liabilities......... $(2,071) $(3,515)
======= =======
</TABLE>
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets --
Current................................................... $ 591 $ 2,714
Long-term................................................. -- 48
------- -------
Total............................................. 591 2,762
------- -------
Deferred tax liabilities --
Current................................................... (183) (816)
Long-term................................................. (2,479) (5,461)
------- -------
Total............................................. (2,662) (6,277)
------- -------
Net deferred income tax liabilities............... $(2,071) $(3,515)
======= =======
</TABLE>
Current deferred tax assets are included in prepaid expenses and other
current assets.
In the first quarter of 1999, a non-cash, non-recurring tax charge of
$677,000 (unaudited) was recorded as a result of a change in the tax status from
an S corporation to a C corporation of a company acquired in a
pooling-of-interests transaction.
9. STOCKHOLDERS' EQUITY:
Limited Vote Common Stock
The shares of Limited Vote Common Stock have rights similar to shares of
common stock, except that such shares are entitled to elect one member of the
board of directors and are entitled to one-tenth of one vote for each share held
on all other matters. Each share of Limited Vote Common Stock will convert into
31
<PAGE> 33
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock upon disposition by the holder of such shares in accordance with
the transfer restrictions applicable to such shares.
Stock Options
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 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).
32
<PAGE> 34
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes activity under the 1997 Stock Option Plan
for the year ended December 31, 1998:
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
--------- -------------- --------
<S> <C> <C> <C>
Granted........................................... 1,674,500 $9.00 - $21.13 $ 12.00
Exercised......................................... (60,000) $11.875 $11.875
Forfeited and canceled............................ (36,520) $9.00 - $16.68 $ 12.84
---------
Outstanding at December 31, 1998.................. 1,577,980
=========
Weighted average fair value per share of options
granted during 1998............................. $ 5.17
Weighted average remaining contractual life in
years........................................... 9.43
</TABLE>
At December 31, 1998, there were options to purchase 40,000 shares of
Common Stock that were exercisable.
The Company accounts for its stock-based compensation under Accounting
Principles Board Statement No. 25 "Accounting for Stock Issued to Employees."
Under this accounting method, no compensation expense is recognized in the
consolidated statements of income if no intrinsic value of the option exists at
the date of grant. In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock Based Compensation." SFAS No. 123
encourages companies to account for stock based compensation awards based on the
fair value of the awards at the date they are granted. The resulting
compensation cost would be shown as an expense in the statement of income.
Companies can choose not to apply the new accounting method and continue to
apply current accounting requirements; however, disclosure is required as to
what net income and earnings per share would have been had the new accounting
method been followed. Had compensation costs for this plan been determined
consistent with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts (in thousands, except
per share data):
<TABLE>
<CAPTION>
1998
-------
<S> <C> <C>
Net Earnings........................ As reported......................... $16,188
Pro forma........................... $11,405
Diluted Earnings Per Share.......... As reported......................... $ 0.88
Pro forma........................... $ 0.63
</TABLE>
The effects of applying SFAS No. 123 in the pro forma disclosure may not be
indicative of future amounts as additional awards in future years are
anticipated. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for 1998: (i) risk-free interest rates ranging from 4.17% to 5.80%,
(ii) expected life of 6 years, (iii) average volatility of 24.85%, and (iv)
dividend yield of 0%.
Initial Public Offering
In February, 1998, Quanta completed its initial public offering, which
involved the issuance of 5.0 million shares of its common stock at a price of
$9.00 per share, resulting in net proceeds to the Company of $38.6 million after
deducting underwriting discounts and commissions and expenses related to the
IPO. In March 1998, the Company sold 750,000 shares of common stock resulting in
net proceeds of $6.3 million pursuant to an over-allotment granted to the
underwriters.
33
<PAGE> 35
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Ownership Plan.
The Company issued shares of common stock to an Employee Stock Ownership
Plan (the "ESOP") in connection with the acquisition of the Pooled Company. The
ESOP was terminated on July 31, 1998. A favorable determination letter from the
Internal Revenue Service has been received and pending final distribution, a
portion of the shares of the Company's common stock held by the ESOP will be
sold to repay debt owed by the ESOP to the Company and the remaining portion of
the unallocated shares will be distributed to its participants. The cost of the
unallocated ESOP shares is reflected as a reduction in the Company's
stockholders' equity. Upon distribution from the ESOP, the Company will owe an
excise tax equal to 10% of the value of the Company's common stock distributed.
In addition, the Company will eliminate the remaining balance reflected as
Unearned ESOP Shares on the Company's balance sheet and will have to recognize a
non-cash non-recurring compensation charge equal to the value of the unallocated
shares held by the ESOP at the time it allocates and distributes such shares.
The Company currently cannot determine the amount of the excise tax that will be
owed or the non-cash, non-recurring compensation charge that will be recognized.
However, based on the closing price of the Company's common stock of $25.44 on
March 31, 1999, the amount of such charges would be approximately $772,000 and
$3,209,000, respectively.
10. EMPLOYEE BENEFIT PLAN:
In connection with its collective bargaining agreements with various
unions, the Company participates with other companies in the unions'
multi-employer pension plans. These plans cover all of the Company's employees
who are members of such unions. The Employee Retirement Income Security Act of
1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980,
imposes certain liabilities upon employers who are contributors to a
multi-employer plan in the event of the employer's withdrawal from, or upon
termination of such plan. The Company has no plans to withdraw from these plans.
The plans do not maintain information on net assets and actuarial present value
of the accumulated share of the plans' unfunded vested benefits allocable to the
Company, and amounts, if any, for which the Company may be contingently liable
is not ascertainable at this time.
Certain subsidiaries of the Company provide various defined contribution
plans to their employees. The plans cover substantially all full-time employees
of the Company. Contributions to the plans by the Company vary from plan to
plan. Contributions to the plans were approximately $214,000, $217,000 and
$1,434,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, lines of credit, accounts payable, notes payable and debt.
The Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
12. COMMITMENTS AND CONTINGENCIES:
Litigation
Certain subsidiaries of the Company are involved in disputes or legal
actions arising in the ordinary course of business. Management does not believe
the outcome of such legal actions will have a material adverse effect on the
Company's financial position or results of operations.
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
34
<PAGE> 36
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998. The accrual is based on known facts and historical trends,
and management believes such accrual to be adequate.
In August 1998, the Company consolidated the casualty insurance program for
all subsidiaries of Quanta. This program has no self-insurance provisions.
Self-insured claims under previous policies are monitored to ensure that such
remaining accruals are adequate.
Performance Bonds
In certain circumstances, the Company is required to provide performance
bonds in connection with its contract commitments.
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
The table below sets forth the unaudited consolidated operating results by
quarter for the years ended December 31, 1997 and 1998. All quarters presented
have been restated for the operations of the Pooled Companies (in thousands,
except per share data).
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED,
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
1997:
Revenues........................................... $15,408 $21,428 $ 22,294 $ 20,880
Gross profit....................................... 1,621 4,547 6,469 4,774
Net income (loss).................................. (727) 814 1,187 520
Basic earnings per share .......................... $ (0.17) $ 0.20 $ 0.29 $ 0.12
Diluted earnings per share ........................ $ (0.17) $ 0.20 $ 0.29 $ 0.12
1998:
Revenues........................................... $32,230 $65,045 $103,737 $118,247
Gross profit....................................... 5,234 12,796 20,814 23,145
Net income......................................... 817 3,139 6,360 5,872
Basic earnings per share .......................... $ 0.08 $ 0.17 $ 0.31 $ 0.27
Diluted earnings per share ........................ $ 0.08 $ 0.17 $ 0.31 $ 0.25
</TABLE>
The sum of the individual quarterly earnings per share amounts may not
agree with year-to-date earnings per share as each period's computation is based
on the weighted average number of shares outstanding during the period.
14. RISK CONCENTRATION:
The Company grants credit, generally without collateral, to its customers,
which include utility companies, telecommunications providers, municipalities
and commercial companies located primarily in the United States. Consequently,
the Company is subject to potential credit risk related to changes in business
and economic factors throughout the United States. However, the Company
generally is entitled to payment for work performed and has certain lien rights
in that work and concentrations of credit risk are limited due to the diversity
of the Company's customer base. Further, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
35
<PAGE> 37
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. SEGMENT INFORMATION:
The Company operates in one reportable segment as a specialty contractor.
The Company provides contracting and maintenance services including services for
electric utility infrastructure, telecommunications, transportation control and
lighting systems and commercial and industrial services. Each of these services
is provided by various of the Company's subsidiaries and discrete financial
information is not provided to management at the service level. The following
table presents information regarding revenues derived from the services noted
above.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Electric utility infrastructure............................. $41,830 $48,149 $159,243
Telecommunications.......................................... 34,974 30,337 110,234
Transportation control and lighting systems................. 427 491 27,520
Commercial and industrial................................... 999 1,033 22,262
------- ------- --------
$78,230 $80,010 $319,259
======= ======= ========
</TABLE>
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
16. SUBSEQUENT EVENTS
Purchases Subsequent to December 31, 1998
Subsequent to December 31, 1998 and through June 7, 1999, Quanta completed
14 acquisitions accounted for as purchases. The aggregate consideration paid in
these transactions consisted of $171.7 million in cash and 4.1 million shares of
common stock. These acquisitions produced 1998 pro forma combined revenues of
$280.5 million (unaudited). The cash portion of such consideration was provided
by borrowings under the Company's credit facility and cash on-hand.
Follow-on Common Stock Offering
On January 27, 1999, Quanta completed a follow-on public offering, which
involved the issuance of 4.6 million shares of its common stock at a price of
$23.25 per share, resulting in net proceeds to Quanta of $101.1 million after
deducting underwriting discounts and commissions and expenses related to the
offering.
401(k) Plan
Effective February 1, 1999, Quanta adopted a 401(k) plan pursuant to which
employees who are not provided retirement benefits through a collective
bargaining agreement may make contributions through a payroll deduction. Quanta
will make a matching contribution of 100% of each employee's contribution up to
3% of that employee's salary and 50% of each employee's contribution between 3%
and 6% of such employee's salary.
Employee Stock Purchase Plan
An Employee Stock Purchase Plan has been adopted by the board of directors
of the Company (the "Board" or "Board of Directors") and has been approved by
the stockholders of the Company in May 1999. The purpose of the Plan is to
provide an incentive for employees of the Company and any Participating Company
(as defined in the Plan) to acquire or increase a proprietary interest in the
Company through the purchase of shares of the Company's Common Stock. At the
date hereof, all of the existing subsidiaries of the
36
<PAGE> 38
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company have been designated as Participating Companies. The Plan is intended to
qualify as an "Employee Stock Purchase Plan" under Section 423 of the Internal
Revenue Code of 1986, as amended (the "Code"). The provisions of the Plan will
be construed in a manner consistent with the requirements of that section of the
Code. The Plan will be administered by a committee appointed from time to time
by the Board (the "Committee"). The Plan is not subject to any of the provisions
of the Employee Retirement Income Security Act of 1974, as amended.
Common Stock Shares Authorized
Effective May 1999, the Company amended its Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock to 100.0 million shares.
17. SUBSEQUENT EVENT TO AUDITORS' REPORT DATE (UNAUDITED):
In June 1999, the Company expanded its bank group from nine to 14 banks and
amended the Credit Facility to increase it to $350.0 million.
37
<PAGE> 39
INDEPENDENT ACCOUNTANTS' REPORT
Board of Directors and Stockholders
The Ryan Company, Inc.
Rockland, Massachusetts:
We have audited the accompanying balance sheet of The Ryan Company, Inc. at
December 31, 1998 and the related statements of income, stockholders' equity and
cash flows for the year then ended. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of The Ryan Company, Inc. at
December 31, 1998, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
KIRKLAND ALBRECHT AND COMPANY
February 3, 1999
Braintree, Massachusetts
38
<PAGE> 40
THE RYAN COMPANY, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<S> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,983,787
Accounts receivable....................................... 6,226,564
Costs and estimated gross profit on uncompleted contracts
in excess of related billings.......................... 2,722,872
Other current assets...................................... 86,586
-----------
Total current assets.............................. 12,019,809
-----------
PROPERTY AND EQUIPMENT, AT COST:
Motor vehicles............................................ 891,821
Tools and equipment....................................... 469,142
Office equipment.......................................... 150,663
-----------
1,511,626
Less accumulated depreciation............................. (994,970)
-----------
Property and equipment, net.......................... 516,656
-----------
CASH SURRENDER VALUE OF OFFICERS' LIFE INSURANCE............ 9,257
-----------
Total assets...................................... $12,545,722
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable, trade................................... $ 3,394,302
Billings on uncompleted contracts in excess of related
costs and estimated gross profit....................... 31,617
Accrued payroll........................................... 562,465
Loans payable, stockholders............................... 2,307,027
Other liabilities......................................... 260,311
-----------
Total current liabilities......................... 6,555,722
-----------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, no par value: authorized, 1,000 shares;
issued and outstanding, 700 shares..................... 50,500
Additional paid-in capital................................ 41,009
Retained earnings......................................... 5,898,491
-----------
Total stockholders' equity........................ 5,990,000
-----------
Total liabilities and stockholders' equity........ $12,545,722
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
39
<PAGE> 41
THE RYAN COMPANY, INC.
STATEMENT OF INCOME
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CONTRACT REVENUES........................................... $35,288,692
COST OF CONTRACT REVENUES, including depreciation........... 26,641,131
-----------
Gross Profit.............................................. 8,647,561
GENERAL AND ADMINISTRATIVE EXPENSES......................... 5,926,559
-----------
Operating income............................................ 2,721,002
-----------
OTHER INCOME (EXPENSE), net:
Interest expense.......................................... (1,236)
Interest income........................................... 228,770
Gain on sale of property and equipment.................... 15,577
-----------
Total other income, net................................ 243,111
-----------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 2,964,113
PROVISION FOR INCOME TAXES.................................. 152,485
-----------
NET INCOME.................................................. $ 2,811,628
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
40
<PAGE> 42
THE RYAN COMPANY, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN RETAINED
STOCK CAPITAL EARNINGS TOTAL
------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Balance, December 31, 1997..................... $50,500 $41,009 $ 5,893,890 $ 5,985,399
Net income..................................... -- -- 2,811,628 2,811,628
Distributions.................................. -- -- (2,807,027) (2,807,027)
------- ------- ----------- -----------
Balance, December 31, 1998..................... $50,500 $41,009 $ 5,898,491 $ 5,990,000
======= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
41
<PAGE> 43
THE RYAN COMPANY, INC.
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 2,811,628
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 149,818
Net change in cash surrender value of officers' life
insurance............................................. 203,865
Gain on sale of property and equipment................. (15,577)
Net change in certain current assets and certain
current liabilities................................... (646,506)
-----------
Total adjustments................................. (308,400)
-----------
Net cash provided by operating activities......... 2,503,228
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment..................... (352,587)
Proceeds from sale of property and equipment.............. 15,900
-----------
Net cash used in investing activities............. (336,687)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Advances on note payable, bank............................ 1,116,049
Repayment on note payable, bank........................... (1,116,049)
Payments from stockholders................................ 2,307,027
Payments to stockholders.................................. (1,020,000)
Distributions............................................. (2,807,027)
-----------
Net cash used in financing activities............. (1,520,000)
-----------
NET INCREASE IN CASH........................................ 646,541
CASH AND CASH EQUIVALENTS, beginning of year................ 2,337,246
-----------
CASH AND CASH EQUIVALENTS, end of year...................... $ 2,983,787
===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
42
<PAGE> 44
THE RYAN COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Organization -- The Company, a Subchapter S Corporation, was organized on
January 12, 1966 under the general laws of the Commonwealth of Massachusetts.
Its principal business activity is general contracting, specializing in
electrical construction primarily on contracts with the federal government at
locations throughout the United States.
Recognition of Income -- For financial and tax reporting, profits on
construction contracts are recognized according to the Company's estimate of the
percentage of completion on individual contracts commencing when progress
reaches a point where experience is sufficient to estimate results with
reasonable accuracy. Under this method, income is recognized in the ratio that
accumulated costs to date bear to estimated total costs. Losses expected to be
incurred on contracts in process are charged to operations in the period such
losses are determined. Contracts generally provide that the customer accept
completion of progress to date and compensate the Company for services rendered
in terms of units installed, hours expended, or some other measure of progress.
Because of the inherent uncertainties in estimating costs, it is at least
reasonably possible that the Company's estimates of costs and revenues will
change in the near term.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities 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.
These differences could be significant.
Cash -- The Company routinely has cash deposits in excess of federally
insured limits with its financial institutions. The excess deposits are invested
daily in government securities.
Accounts Receivable -- Accounts receivable include amounts retained on
contracts which are due contingent upon approval and acceptance of the completed
construction. Accounts receivable billed but not paid by customers pursuant to
contract retainage provisions are due upon completion of the contract and
acceptance by the customer. The retainage balance as of December 31, 1998 will
be collected within the subsequent year.
Bad Debts -- Accounts receivable are periodically reviewed by management.
Current earnings are charged and an allowance is credited with a provision for
doubtful accounts based on experience. Accounts deemed to be uncollectible are
charged against the allowance. Accounts receivable are reported on the balance
sheets net of the allowance. Bad debts are written off using the direct
write-off method for income tax reporting.
Property and Equipment -- Items capitalized as property and equipment are
recorded at cost. Maintenance, routine repairs and minor replacements are
charged against operations, while those items which materially improve or extend
the lives of existing assets are capitalized.
Depreciation has been computed using straight-line and accelerated methods
calculated to amortize the costs of the assets over their estimated useful lives
as follows:
<TABLE>
<CAPTION>
ASSETS YEARS
- ------ -----
<S> <C>
Motor vehicles.............................................. 5
Tools and equipment......................................... 3-5
Office equipment............................................ 3-7
</TABLE>
Statement of Cash Flows -- For purposes of the statement of cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents.
43
<PAGE> 45
THE RYAN COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes -- On March 9, 1992, the Company, with the consent of its
stockholders, filed an election with the Internal Revenue Service to be
classified as an S Corporation. In lieu of federal corporate income taxes, the
stockholders are taxed on their proportionate share of the Company's taxable
income. The Company may be required to pay state corporate income taxes
depending on whether the states in which the Company operates recognize S
Corporations.
2. CASH AND CASH EQUIVALENTS:
Cash and cash equivalents consist of the following:
<TABLE>
<S> <C>
Cash..................................................... $2,533,787
Short-term securities.................................... 450,000
----------
$2,983,787
==========
</TABLE>
3. ACCOUNTS RECEIVABLE:
Accounts receivable consist of the following:
<TABLE>
<S> <C>
On contracts in process:
Current................................................ $4,004,379
Retained............................................... 398,827
----------
4,403,206
----------
On contracts completed:
Current................................................ 1,339,415
Retained............................................... 507,575
----------
1,846,990
----------
Miscellaneous receivables................................ 34,368
----------
Less allowance for doubtful accounts..................... (58,000)
----------
$6,226,564
==========
</TABLE>
4. CONTRACTS IN PROCESS:
A summary of contracts in process is as follows:
<TABLE>
<S> <C>
Accumulated costs on contracts......................... $ 35,157,914
Estimated gross profit recognized...................... 8,536,989
------------
43,694,903
Less related accumulated billings...................... (41,003,648)
------------
$ 2,691,255
============
</TABLE>
This amount is included in the accompanying balance sheet under the
following captions:
<TABLE>
<S> <C>
Costs and estimated gross profit on uncompleted contracts
in excess of related billings.......................... $2,722,872
Billings on uncompleted contracts in excess of related
costs and estimated gross profit....................... (31,617)
----------
$2,691,255
==========
</TABLE>
44
<PAGE> 46
THE RYAN COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. RELATED PARTY TRANSACTIONS:
Loans Payable, Stockholders -- During the year ended December 31, 1998, the
stockholders made loans to the Company which amounted to $2,307,027. These loans
are being repaid subsequent to December 31, 1998.
Facility Rental -- The Company leases its office facilities from a related
realty trust in which both of the beneficiaries are also stockholders of the
Company under a five-year lease expiring March 31, 2003. Rent expense amounted
to $71,880 during the year ended December 31, 1998.
Future minimum rental commitment under the lease exclusive of condominium
fees is as follows:
<TABLE>
<CAPTION>
YEARS AMOUNT
- ----- --------
<S> <C>
1999...................................................... $ 69,660
2000...................................................... 72,060
2001...................................................... 74,460
2002...................................................... 76,860
2003...................................................... 19,365
--------
$312,405
========
</TABLE>
6. NOTE PAYABLE, BANK:
The Company has an unsecured line of credit at December 31, 1998 of
$3,000,000. Interest is computed at the bank's base lending rate and is payable
in arrears at the end of each month. The note is payable on demand and is
personally guaranteed by the stockholders of the Company. At December 31, 1998,
no balance was outstanding on this line of credit.
7. PROVISION FOR INCOME TAXES:
As previously mentioned in Note 1, on March 9, 1992, the Company, with the
consent of its stockholders, filed an election with the Internal Revenue Service
to be classified as an Subchapter S Corporation. In lieu of federal corporate
income taxes, the stockholders are taxed on their proportionate share of the
Company's taxable income. The Company may be required to pay state corporate
income taxes depending on whether the states in which the Company operates
recognize Subchapter S Corporations.
The provision for income taxes consists of the following:
<TABLE>
<S> <C>
Current:
State................................................... $152,485
Deferred:
State................................................... --
--------
$152,485
========
</TABLE>
The Company does not plan to make additional distributions if the
stockholders owe additional income taxes.
8. 401(k) PLAN:
The Company has in effect a 401(k) plan covering all employees as defined
in the plan document. Contributions to the plan are at the discretion of the
Board of Directors. Contributions of $106,750 were made for the year ended
December 31, 1998.
45
<PAGE> 47
THE RYAN COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
9. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, a line of credit, and accounts payable. The Company
believes the carrying value of these instruments on the accompanying balance
sheet approximates their fair value.
10. MAJOR CUSTOMER AND RISK CONCENTRATION:
The Company earns substantially all its contract revenues from the Federal
Government on construction contracts performed at various locations throughout
the United States.
The Company grants credit, without collateral, to the Federal Government.
However, management believes that its contract acceptance, billing and
collection policies are adequate to minimize any potential credit risk.
11. SUBSEQUENT EVENT TO DATE OF ACCOUNTANTS' REPORT (UNAUDITED):
On February 12, 1999, the Company was acquired by Quanta Services, Inc.
46
<PAGE> 48
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Stockholders
Dillard Smith Construction Company
Chattanooga, Tennessee
We have audited the accompanying balance sheet of Dillard Smith Construction
Company (formerly Southeast Energy Services, Inc. and subsidiaries) as of June
30, 1998, and the related statements of income, stockholders' equity and cash
flows for the year ended June 30, 1998. 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 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 Dillard Smith Construction
Company as of June 30, 1998, and the results of its operations and its cash
flows for the year ended June 30, 1998, in conformity with generally accepted
accounting principles.
JOSEPH DECOSIMO AND COMPANY, LLP
Chattanooga, Tennessee
August 24, 1998
47
<PAGE> 49
DILLARD SMITH CONSTRUCTION COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1998
----------- ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and Cash Equivalents................................. $ 2,001,709 $ 991,582
Investment Securities..................................... 1,203,608 2,931,931
Receivables --
Trade................................................... 7,461,146 7,802,832
Notes................................................... 103,410 109,983
Officers and Employees.................................. 176,699 400,833
Other................................................... 124,587 18,077
Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts................................... 52,570 428,853
Inventories............................................... 516,809 380,956
Deferred Income Taxes..................................... 106,700 126,400
----------- -----------
Total current assets............................... 11,747,238 13,191,447
----------- -----------
PROPERTY AND EQUIPMENT, net................................. 7,040,427 6,577,922
----------- -----------
OTHER ASSETS
Cash Surrender Value of Life Insurance.................... 147,779 147,779
Long-Term Note Receivable................................. 209,312 196,764
Deposits.................................................. 128,575 134,543
Loan Costs -- net of amortization of $50,657 for June 1998
and $55,890 for December 1998........................... 29,654 24,421
----------- -----------
Total other assets................................. 515,320 503,507
----------- -----------
Total assets....................................... $19,302,985 $20,272,876
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Bank Overdraft............................................ $ 591,945 $ 1,059,625
Notes Payable --
Short-Term Bank Loan.................................... 1,503,500 348,500
Current Portion of Long-Term Debt....................... 318,168 334,931
Accounts Payable.......................................... 864,610 1,300,813
Accrued Expenses.......................................... 2,969,684 2,609,119
Income Taxes Payable...................................... 122,753 102,007
----------- -----------
Total current liabilities.......................... 6,370,660 5,754,995
----------- -----------
LONG-TERM DEBT.............................................. 4,158,747 3,989,060
----------- -----------
DEFERRED INCOME TAXES....................................... 116,500 112,300
----------- -----------
STOCKHOLDERS' EQUITY
Common Stock -- no par value --
Class A -- voting -- 3,000 shares authorized; 75 shares
issued................................................. 29,448 29,448
Class B -- nonvoting -- 7,000 shares authorized; 3,827
shares issued.......................................... 219,175 219,175]
Additional Paid-In Capital................................ 205,880 205,880
Retained Earnings......................................... 8,202,575 9,962,018
----------- -----------
Total stockholders' equity......................... 8,657,078 10,416,521
----------- -----------
Total liabilities and stockholders' equity......... $19,302,985 $20,272,876
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
48
<PAGE> 50
DILLARD SMITH CONSTRUCTION COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS
TWELVE MONTHS ENDED DECEMBER 31,
ENDED JUNE 30, -------------------------
1998 1997 1998
-------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CONSTRUCTION REVENUE................................. $42,844,378 $19,968,311 $27,773,118
COST OF CONSTRUCTION CONTRACTS....................... 38,054,295 17,553,295 24,162,624
----------- ----------- -----------
Gross Profit....................................... 4,790,083 2,415,016 3,610,494
OPERATING EXPENSES................................... 4,003,181 2,026,550 2,412,013
----------- ----------- -----------
OPERATING INCOME..................................... 786,902 388,466 1,198,481
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Interest Income.................................... 162,863 44,029 86,772
Interest Expense................................... (520,497) (275,251) (221,473)
Gain on Sale of Assets............................. 367,470 65,704 790,551
Rental Income...................................... 17,360 15,175 --
Other Income....................................... 18,611 14,432 8,212
----------- ----------- -----------
45,807 (135,911) 664,062
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS BEFORE PROVISION
FOR INCOME TAXES................................... 832,709 252,555 1,862,543
Provision for Income Taxes......................... 57,000 85,900 103,100
----------- ----------- -----------
INCOME FROM CONTINUING OPERATIONS.................... 775,709 166,655 1,759,443
----------- ----------- -----------
DISCONTINUED OPERATIONS
Loss from Operations of Discontinued Fabrication
Segment......................................... (294,054) (85,996) --
Loss on Disposal of Discontinued Fabrication
Segment......................................... (149,499) -- --
----------- ----------- -----------
(443,553) (85,996) --
----------- ----------- -----------
NET INCOME........................................... $ 332,156 $ 80,659 $ 1,759,443
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
49
<PAGE> 51
DILLARD SMITH CONSTRUCTION COMPANY
STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------------------
CLASS A CLASS B ADDITIONAL
----------------- ------------------ PAID-IN RETAINED
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS
------ -------- ------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE -- June 30, 1997............ 750 $ 29,448 38,272 $219,175 $205,880 $7,870,419
Exchange of Stock................. (675) -- (34,445) -- -- --
Net Income........................ -- -- -- -- -- 332,156
------ -------- ------- -------- -------- ----------
BALANCE -- June 30, 1998............ 75 29,448 3,827 219,175 205,880 8,202,575
Net Income (unaudited)............ -- -- -- -- -- 1,759,443
------ -------- ------- -------- -------- ----------
BALANCE -- December 31, 1998
(unaudited)....................... 75 $ 29,448 3,827 $219,175 $205,880 $9,962,018
====== ======== ======= ======== ======== ==========
</TABLE>
The accompanying notes are an integral part of the financial statements.
50
<PAGE> 52
DILLARD SMITH CONSTRUCTION COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
TWELVE MONTHS DECEMBER 31,
ENDED JUNE 30, -------------------------
1998 1997 1998
-------------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income................................................ $ 332,156 $ 80,659 $ 1,759,443
Adjustments to Reconcile Net Income to Net Cash Provided
by Operating Activities Depreciation.................... 1,595,901 707,332 1,127,240
Bad Debt Expense (Recoveries)........................... 76,526 (581) 43,887
Gain on Sale of Property and Equipment.................. (452,068) (37,519) (595,065)
Gain on Sale of Investment Securities................... (15,570) -- --
Unrealized Gain on Investment Securities................ (10,355) (30,366) (195,486)
Deferred Income Taxes................................... (22,300) -- (23,900)
Amortization of Loan Costs.............................. 10,466 18,000 5,233
Amortization of Bond Premium............................ 377 176 492
Purchase of Investment Securities....................... (1,193,278) -- (1,533,329)
Changes in Operating Assets and Liabilities --
Decrease (Increase) in --
Receivables........................................ (2,084,514) (351,932) (279,063)
Costs and Estimated Earnings in Excess of Billings
on Uncompleted Contracts......................... (52,570) (415,273) (376,283)
Inventories........................................ 1,118,352 282,763 135,853
Income Taxes Refundable............................ 133,766 58,807 --
Deposits........................................... (30,782) 511 (5,968)
Increase (Decrease) in --
Accounts Payable and Accrued Expenses.............. 296,291 1,280,944 75,638
Billings in Excess of Costs and Estimated Earnings
on Uncompleted Contracts......................... (99,396) (99,396) --
Income Taxes Payable............................... 104,955 (17,798) (20,746)
----------- ----------- -----------
Net Cash Provided by (Used in) Operating
Activities..................................... (292,043) 1,476,327 117,946
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sale of Investment Securities............... 1,846,141 180,000 --
Purchase of Property and Equipment........................ (1,252,458) (399,371) (1,601,708)
Proceeds from Sale of Property and Equipment.............. 1,371,187 326,845 1,532,038
Cash (Advanced to) Received from Officers and Employees... (165,816) 10,883 (224,134)
Cash Received on Notes Receivable......................... 104,464 4,777 5,975
Decrease in Cash Surrender Value of Life Insurance........ 105,752 -- --
----------- ----------- -----------
Net Cash Provided (Used) by Investing
Activities..................................... 2,009,270 123,134 (287,829)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Decrease in Bank Overdraft................................ (872) (592,817) 467,680
Net Short-Term Borrowings (Repayments).................... (13,955) (256,500) (1,155,000)
Repayment of Long-Term Debt............................... (719,530) (200,046) (152,924)
----------- ----------- -----------
Net Cash Provided (Used in) by Financing
Activities..................................... (734,357) (1,049,363) (840,244)
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 982,870 550,098 (1,010,127)
CASH AND CASH EQUIVALENTS -- beginning of period............ 1,018,839 1,018,839 2,001,709
----------- ----------- -----------
CASH AND CASH EQUIVALENTS -- end of period.................. $ 2,001,709 $ 1,568,937 $ 991,582
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid (Received) During the period for --
Interest................................................ $ 561,562 $ 296,339 $ 235,927
Income Taxes............................................ $ 12,960 $ (47,182) $ 152,746
</TABLE>
The accompanying notes are an integral part of the financial statements.
51
<PAGE> 53
DILLARD SMITH CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
The significant accounting policies and practices followed by the company
are as follows:
Merger -- Effective June 30, 1998, Dillard Smith Construction Company
merged with the company's former parent, Southeast Energy Services, Inc. and its
wholly-owned subsidiary, Lake Mirror Land Co. with the exchange of one share of
stock in Dillard Smith Construction Company for every ten shares of Southeast
Energy Services, Inc. Also during the current year, another wholly-owned
subsidiary of Southeast Energy Services, Inc., Utility Supply & Equipment
Corporation, ceased operations and all assets and liabilities of the subsidiary
were liquidated. Accordingly, the operations of Utility Supply & Equipment
Corporation are classified as discontinued operations in the statements of
income. The financial statements for 1997 and thereafter consolidate the four
companies with all material intercompany accounts and transactions eliminated.
Description of Business -- Dillard Smith Construction Company's principal
business consists of utility construction and maintenance in the southeastern
United States. The former Utility Supply & Equipment Corporation was a
fabricator of equipment used in utility construction and maintenance. The former
Lake Mirror Land Co.'s principal function was to hold title to the real property
owned and used by the consolidated group.
Interim Consolidated Financial Information
The unaudited interim consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures, normally included in annual financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim consolidated financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
Revenue Recognition -- The company performs under various types of
contracts: cost-plus, time and materials, unit price and fixed price.
Performance on contracts is generally less than one year. Revenues on cost-plus,
time and materials and unit price contracts are recognized as earned.
Revenues from fixed price contracts are recognized on the percentage of
completion method, measured by the percentage of costs incurred to date to
estimated total costs to complete each contract. That method is used because
management considers total cost to be the best available measure of progress on
the contracts. Because of inherent uncertainties in estimating costs, it is at
least reasonably possible that the estimates used will change within the near
term.
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. Selling, general and administrative
costs are charged to expense as incurred. Provisions for estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions and estimated
profitability may result in revisions to costs and income, which are recognized
in the period in which the revisions are determined. Changes in estimated job
profitability resulting from job performance, job conditions, contract penalty
provisions, claims, change orders and settlements are accounted for as changes
in estimates in the current period.
52
<PAGE> 54
DILLARD SMITH CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The asset, "Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts," represents revenues recognized in excess of amounts
billed. The liability, "Billings in Excess of Costs and Estimated Earnings on
Uncompleted Contracts," represents billings in excess of revenues recognized.
Cash and Cash Equivalents -- The company considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents. The company maintains at various financial institutions cash and
cash equivalent accounts which may exceed federally insured amounts at times and
which may at times significantly exceed balance sheet amounts due to outstanding
checks.
Investment Securities -- Investment securities are classified into three
categories: held-to-maturity, available-for-sale and trading. For securities to
be classified as held-to-maturity, the company must demonstrate the positive
intent and ability to hold the securities to maturity. Trading securities are
securities bought and held principally for the purpose of selling them in the
near future. Available-for-sale securities are those securities not classified
as held-to-maturity or trading. Investment securities considered available-for-
sale are adjusted for unrealized holding gains and losses and recorded at fair
value. The difference in fair value and cost adjusted for amortization and
accretion for securities available-for-sale is shown as a separate component of
stockholders' equity net of income tax effects. Gains or losses on disposition
are based on the net proceeds and the adjusted carrying amount of the securities
sold, using the specific identification method.
Inventories -- Inventories are stated at the lower of cost or market using
the first-in, first-out (FIFO) method. Inventories consist of construction
equipment, materials and supplies, and work-in-progress on construction
equipment.
Property and Equipment -- Property and equipment are stated at cost.
Expenditures for repairs and maintenance are charged to expense as incurred and
additions and improvements that significantly extend the lives of depreciable
assets are capitalized. Upon sale or retirement of depreciable property, the
cost and accumulated depreciation are removed from the related accounts and any
gain or loss is reflected in operations.
Depreciation is provided on accelerated and straight-line methods based on
the estimated useful lives of the depreciable assets.
Loan Costs -- Debt financing costs are deferred and amortized using the
straight-line method over the term of the related debt.
Income Taxes -- Income taxes are computed based on the provisions of
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes." Deferred tax assets and liabilities, if significant, are recognized for
the estimated future tax effects attributed to temporary differences between the
book and tax bases of assets and liabilities and for carryforward items. The
measurement of current and deferred tax assets and liabilities is based on
enacted law. Deferred tax assets are reduced, if necessary, by a valuation
allowance for the amount of tax benefits that may not be realized.
Estimates and Uncertainties -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities 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.
53
<PAGE> 55
DILLARD SMITH CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
2. INVESTMENT SECURITIES:
Investment securities consisted of trading securities summarized as
follows:
<TABLE>
<CAPTION>
JUNE 30, 1998
-----------------------
MARKET
COST VALUE
---------- ----------
<S> <C> <C>
Equity Securities.................................... $ 792,216 $ 800,982
U.S. Treasury Notes.................................. 401,037 402,626
---------- ----------
$1,193,253 $1,203,608
========== ==========
</TABLE>
Proceeds from sales of securities available-for-sale totaled $1,846,141 for
the year ended June 30, 1998. Gross gains realized on those sales totaled
$15,570.
3. TRADE RECEIVABLES:
Trade receivables consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998
----------
<S> <C>
Contract Receivables........................................ $7,512,556
Allowance for Doubtful Accounts............................. (51,410)
----------
$7,461,146
==========
</TABLE>
4. NOTES RECEIVABLE:
Notes receivable consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998
---------
<S> <C>
6.187% Installment Note Receivable from Former
Stockholder -- due in monthly installments of $1,000
including interest, due April, 2001....................... $ 30,952
5% Installment Note Receivable -- due in annual installments
of $93,923 plus interest through June, 2001............... 281,770
---------
312,722
Less Current Portion........................................ (103,410)
---------
$ 209,312
=========
</TABLE>
5. CONTRACTS IN PROGRESS:
Information with respect to contracts in progress is summarized as follows:
<TABLE>
<CAPTION>
JUNE 30,
1998
---------
<S> <C>
Costs Incurred on Uncompleted Contracts..................... $ 433,988
Estimated Earnings on Uncompleted Contracts................. 48,952
---------
482,940
Amounts Billed.............................................. (430,370)
---------
Excess of Costs and Estimated Earnings...................... $ 52,570
=========
</TABLE>
54
<PAGE> 56
DILLARD SMITH CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Excess of Costs and Estimated Earnings are included in the balance sheets
as follows:
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts..................................... $52,570
Billings in Excess of Costs and Estimated Earnings on
Uncompleted Contracts..................................... --
-------
$52,570
=======
</TABLE>
6. INVENTORIES:
Inventories consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Equipment and Parts......................................... $408,251
Construction Supplies....................................... 108,558
--------
$516,809
========
</TABLE>
7. PROPERTY AND EQUIPMENT:
Property and equipment consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998
------------
<S> <C>
Land........................................................ $ 936,070
Building and Improvements................................... 2,036,722
Heavy Duty Vehicles......................................... 5,690,639
Machinery, Equipment and Tools.............................. 10,742,306
Automobiles and Light Trucks................................ 390,064
Office Furniture and Fixtures............................... 251,469
------------
20,047,270
Accumulated Depreciation.................................... (13,006,843)
------------
$ 7,040,427
============
</TABLE>
55
<PAGE> 57
DILLARD SMITH CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. NOTES PAYABLE:
Long-term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998
----------
<S> <C>
Note Payable to Bank -- payable $50,034 monthly including
interest at LIBOR plus 3%, remaining principal due May,
2001, collateralized by receivables, equipment,
inventories and investment securities and personal
guarantees of the stockholders............................ $4,027,261
Note Payable to Former Stockholder -- payable $5,000 monthly
including interest at 6.187% through March, 2007,
collateralized by company stock........................... 408,009
7.8% Installment Note -- payable $1,398 monthly including
interest through March, 2001, collateralized by rental
equipment................................................. 41,645
----------
4,476,915
Less Current Portion........................................ (318,168)
----------
$4,158,747
==========
</TABLE>
Aggregate maturities of long-term debt for the five years subsequent to
June 30, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
- -----------
<S> <C>
June 30, 1999............................................ $ 318,168
June 30, 2000............................................ $ 346,443
June 30, 2001............................................ $3,518,546
June 30, 2002............................................ $ 43,032
June 30, 2003............................................ $ 45,771
</TABLE>
Covenants related to loan agreements establish borrowing limitations,
working capital, net worth and cash flow requirements and impose restrictions on
the disposition and purchase of assets and the creation of additional debt.
The short-term bank loan consists of a $3,000,000 revolving loan from a
financial institution with interest at LIBOR plus 2.5% and is collateralized by
receivables, equipment, inventories, investment securities and personal
guarantees of the stockholders.
The company has a $1,000,000 advised guidance line of credit agreement with
interest at LIBOR plus 2.5%. There were no amounts outstanding as of June 30,
1998.
The company also has a $2,000,000 standby letter of credit which provides
collateral for the insurance company that administers the company's high
deductible insurance program.
9. RETIREMENT PLAN:
The company has a discretionary, contributory 401(k) retirement plan
covering substantially all non-bargaining employees. Contributions to the plan
totaled $33,453 for the year ended June 30, 1998.
10. LEASES:
The company leases certain real estate, vehicles and equipment under
noncancelable operating leases and under short-term lease agreements.
56
<PAGE> 58
DILLARD SMITH CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Future minimum lease payments under operating leases with initial or
remaining noncancelable terms in excess of one year as of June 30, 1998, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
- -----------
<S> <C>
June 30, 1999............................................... $ 786,909
June 30, 2000............................................... 581,651
June 30, 2001............................................... 338,453
June 30, 2002............................................... 277,713
June 30, 2003............................................... 151,751
----------
$2,136,477
==========
</TABLE>
Rent expense was charged for 1998 as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
Charged to Construction Contracts........................... $1,933,508
Charged to Operating Expenses............................... 84,409
----------
$2,017,917
==========
</TABLE>
11. INCOME TAXES:
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
Current Provision
Federal Income Tax........................................ $212,100
State Income Tax.......................................... 36,200
State Net Operating Loss Carryforward..................... (25,000)
--------
223,300
Deferred Provision.......................................... (22,300)
--------
$201,000
========
</TABLE>
The provision for income taxes is included in the income statements as
follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
Continuing Operations....................................... $ 57,000
Discontinued Fabrication Segment............................ 144,000
--------
$201,000
========
</TABLE>
Effective July 1, 1998, the company, with the consent of its stockholders,
has elected to be taxed as an S corporation under the provisions of Section 1362
of the Internal Revenue Code. The stockholders will be personally liable for
their proportionate share of the company's federal taxable income; therefore, no
liability for future federal income taxes is reflected in these financial
statements.
57
<PAGE> 59
DILLARD SMITH CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of components of net deferred tax assets and liabilities is
as follows:
<TABLE>
<CAPTION>
JUNE 30,
1998
--------
<S> <C>
Deferred Tax Assets
Allowance for Doubtful Accounts........................... $ 6,100
Accrued Expenses.......................................... 101,600
--------
107,700
--------
Deferred Tax Liabilities
Depreciation.............................................. 114,400
Deferred Gain............................................. 3,100
--------
117,500
--------
Net Deferred Tax Assets (Liabilities)....................... $ (9,800)
========
</TABLE>
The provision for income taxes differs from the amount that would result
from applying statutory tax rates due primarily to nondeductible officers' life
insurance and meals and entertainment expense.
12. MAJOR CUSTOMERS:
Revenues from major customers are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
Construction Revenues from Major Customers.................. $7,786,000
Percentage of Construction Revenues......................... 18%
Number of Customers......................................... 1
</TABLE>
Accounts receivable from major customers represented 19% of contract
receivables as of June 30, 1998. The company performs ongoing credit evaluations
of its customers and does not require collateral for its accounts receivable.
13. DISCONTINUED OPERATIONS:
During the current year, Utility Supply & Equipment Corporation, a
wholly-owned subsidiary of Southeast Energy Services, Inc., ceased operations
and liquidated all assets and liabilities. The losses from operations of the
company are classified as discontinued operations and summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED
JUNE 30,
1998
----------
<S> <C>
NET SALES................................................... $5,818,610
COST OF SALES............................................... 5,108,709
----------
Gross Profit.............................................. 709,901
OPERATING EXPENSES.......................................... 816,149
----------
LOSS FROM OPERATIONS........................................ (106,248)
OTHER EXPENSE............................................... (43,806)
----------
LOSS BEFORE PROVISION FOR INCOME TAXES...................... (150,054)
Provision for Income Taxes................................ 144,000
----------
NET LOSS.................................................... $ (294,054)
==========
</TABLE>
58
<PAGE> 60
DILLARD SMITH CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
14. SUBSEQUENT EVENT (UNAUDITED):
On February 12, 1999, the Company was acquired by Quanta Services, Inc.
59
<PAGE> 61
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Tom Allen Construction Company:
We have audited the accompanying balance sheet of Tom Allen Construction Company
as of April 30, 1998, and the related statements of income, stockholder's
deficit and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Tom Allen Construction Company
as of April 30, 1998, and the results of its operations and its cash flows for
the year then ended in conformity with generally accepted accounting principles.
GANIM, MEDER, CHILDERS & HOERING, P.C.
Belleville, Illinois
September 15, 1998
60
<PAGE> 62
TOM ALLEN CONSTRUCTION COMPANY
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
APRIL 30, 1998 JANUARY 31, 1999
-------------- ----------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents................................. $ 44,795 $ 299,135
Contracts receivable, net................................. 1,837,238 3,182,226
Other receivables......................................... 104,199 171,639
Inventory................................................. 112,832 227,377
Deferred tax asset........................................ 310,919 --
Costs and estimated earnings in excess of billings........ 36,006 964,817
Prepaid expenses and other assets......................... 2,398 238,206
---------- ----------
Total current assets.............................. 2,448,387 5,083,400
DEFERRED TAX ASSET.......................................... 158,710 158,710
PROPERTY AND EQUIPMENT, net................................. 1,210,250 1,824,056
---------- ----------
Total assets...................................... $3,817,347 $7,066,166
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY (DEFICIT)
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 370,900 $1,292,231
Operating notes payable................................... 400,000 --
Accounts payable and accrued expenses..................... 1,491,743 2,347,308
Income taxes payable...................................... -- 821,467
Billings in excess of costs and estimated earnings........ 10,909 64,274
Deferred tax liability.................................... -- 368,903
---------- ----------
Total current liabilities......................... 2,273,552 4,894,183
LONG-TERM DEBT, net of current maturities................... 1,543,745 --
NOTES PAYABLE -- Stockholder................................ 703,489 623,489
---------- ----------
Total liabilities................................. 4,520,786 5,517,672
---------- ----------
STOCKHOLDER'S EQUITY (DEFICIT):
Common stock -- no par value, 1,000 shares authorized, 100
shares issued and outstanding.......................... 1,000 1,000
Retained earnings (deficit)............................... (704,439) 1,547,494
---------- ----------
Total stockholder's equity (deficit).............. (703,439) 1,548,494
---------- ----------
Total liabilities and stockholder's equity
(deficit)...................................... $3,817,347 $7,066,166
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
61
<PAGE> 63
TOM ALLEN CONSTRUCTION COMPANY
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED JANUARY 31,
APRIL 30, ------------------------
1998 1998 1999
-------------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CONTRACT REVENUES...................................... $8,650,097 $6,008,415 $14,642,523
COST OF CONTRACT REVENUES.............................. 7,093,907 5,226,720 9,804,049
---------- ---------- -----------
Gross Profit......................................... 1,556,190 781,695 4,838,474
OPERATING EXPENSES (including depreciation)............ 879,393 776,056 906,655
---------- ---------- -----------
Income from Operations............................... 676,797 5,639 3,931,819
---------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest expense..................................... (309,033) (234,264) (196,093)
Interest income...................................... 28,399 27,800 10,680
Other, net........................................... 3,037 1,382 6,816
---------- ---------- -----------
Other Expense, net........................... (277,597) (205,082) (178,597)
---------- ---------- -----------
NET INCOME (LOSS) BEFORE INCOME TAXES.................. 399,200 (199,443) 3,753,222
INCOME TAX BENEFIT (EXPENSE)........................... 469,629 709,084 (1,501,289)
---------- ---------- -----------
NET INCOME............................................. $ 868,829 $ 509,641 $ 2,251,933
========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
62
<PAGE> 64
TOM ALLEN CONSTRUCTION COMPANY
STATEMENTS OF STOCKHOLDER'S EQUITY (DEFICIT)
<TABLE>
<CAPTION>
COMMON STOCK RETAINED
--------------- EARNINGS
SHARES AMOUNT (DEFICIT) TOTAL
------ ------ ----------- -----------
<S> <C> <C> <C> <C>
Balance -- April 30, 1997.......................... 100 $1,000 $(1,573,268) $(1,572,268)
Net Income....................................... -- -- 868,829 868,829
--- ------ ----------- -----------
Balance -- April 30, 1998.......................... 100 1,000 (704,439) (703,439)
Net Income (unaudited)........................... -- -- 2,251,933 2,251,933
--- ------ ----------- -----------
Balance -- January 31, 1999 (unaudited)............ 100 $1,000 $ 1,547,494 $ 1,548,494
=== ====== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
63
<PAGE> 65
TOM ALLEN CONSTRUCTION COMPANY
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED JANUARY 31,
YEAR ENDED -----------------------------
APRIL 30, 1998 1998 1999
-------------- ----------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income......................................... $ 868,829 $ 509,641 $ 2,251,933
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Depreciation.................................. 516,059 383,338 423,409
Change in deferred taxes...................... (469,629) (709,084) 679,822
Gain on sale of property and equipment........ (1,337) (1,337) (250)
(Increase) decrease in:
Contracts receivable.......................... (639,006) 454,936 (1,344,988)
Other receivables............................. 140,749 118,850 (67,440)
Inventory..................................... (75,354) (56,516) (114,545)
Costs and estimated earnings in excess of
billings.................................... 371,509 (744,965) (928,811)
Prepaid expenses and other assets............. 850 -- (235,808)
Increase (decrease) in:
Accounts payable and accrued expenses......... (558,593) (290,621) 855,565
Income taxes payable.......................... -- -- 821,467
Billings in excess of costs and estimated
earnings.................................... 5,754 430,888 53,365
--------- --------- -----------
Net Cash Provided by Operating Activities.......... 159,831 95,130 2,393,719
--------- --------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment............... (529,804) (482,978) (1,037,215)
Proceeds from sale of property and equipment..... 6,900 6,900 250
--------- --------- -----------
Net Cash Used in Investing Activities.............. (522,904) (476,078) (1,036,965)
--------- --------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) on operating notes
payable....................................... 100,000 100,000 (400,000)
Borrowings (payments) on notes payable --
stockholder................................... 101,499 75,265 (80,000)
Proceeds from long-term debt..................... 661,555 571,555 105,190
Payments on long-term debt....................... (460,721) (359,510) (727,604)
--------- --------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES....................................... 402,333 387,310 (1,102,414)
--------- --------- -----------
NET INCREASE IN CASH AND CASH EQUIVALENTS.......... 39,260 6,362 254,340
CASH AND CASH EQUIVALENTS -- Beginning of Period... 5,535 5,535 44,795
--------- --------- -----------
CASH AND CASH EQUIVALENTS -- End of Period......... $ 44,795 $ 11,897 $ 299,135
========= ========= ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest...................................... $ 251,074 $ 234,593 $ 204,253
Income taxes, net of refunds.................. -- -- --
</TABLE>
The accompanying notes are an integral part of these financial statements.
64
<PAGE> 66
TOM ALLEN CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Tom Allen Construction Company (the Company) is engaged in the construction
of industrial and commercial fiber-optic telecommunication lines. In addition,
the Company specializes in trenchless methods of directional boring such as
subaqueous and wetland crossings. The majority of the Company's work is
performed throughout the United States. Contract revenues to one customer
approximated 38% of the Company's total contract revenues for the year ended
April 30, 1998. In addition, contracts receivable from this customer
approximated 60% of total contracts receivable at April 30, 1998.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The financial statements of the Company have been prepared on the accrual
basis of accounting. In preparing the financial statements, management is
required to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from those
estimates. The significant estimate that is particularly susceptible to change
in a short time period relates to the determination of the estimated cost to
complete the contracts in progress at year end.
Interim Consolidated Financial Information
The unaudited interim consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures, normally included in annual financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim consolidated financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
Revenue and Cost Recognition
Revenues earned on construction contracts are recognized on the percentage
of completion method of accounting, measured by the percentage of costs incurred
to date to estimated total costs for each contract. Contract costs include all
direct material, labor, equipment rental, subcontracts and those other costs
related to job performance. General and administrative costs are expensed as
incurred. Provisions for estimated losses on uncompleted contracts are made in
the period in which such losses are determined. Changes in job performance,
estimated profitability and contract settlements may result in revisions to
costs and income and are recognized in the period in which the revisions are
determined.
The asset, costs and estimated earnings in excess of billings, represents
revenues recognized in excess of amounts billed. The liability, billings in
excess of costs and estimated earnings, represents billings in excess of
revenues recognized.
Cash and Cash Equivalents
For statement of cash flow purposes, the Company considers all short-term
investments with a maturity of three months or less to be cash equivalents.
65
<PAGE> 67
TOM ALLEN CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cash Overdrafts
As a result of the Company's cash management system, on occasion cash
overdrafts exist and are included in accounts payable and accrued expenses on
the accompanying balance sheet. Cash overdrafts totaled $65,348 at April 30,
1998.
Inventory
Inventory is stated at the lower of cost or market with cost being
determined on the first-in, first-out (FIFO) basis. At April 30, 1998, inventory
primarily consisted of pipe and other spare parts used in connection with
directional boring.
Property and Equipment
Property and equipment is recorded at cost. Depreciation is computed using
the straight-line method over the estimated useful lives of the assets which
range from three to thirty years.
Income Taxes
Income taxes are recorded in accordance with the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109, Accounting for Income Taxes.
Accordingly, deferred tax assets and liabilities are recognized for future tax
consequences attributable to differences between the financial statement
carrying amounts of assets and liabilities and their respective tax bases,
measured at enacted tax rates expected to apply to taxable income in the years
the tax consequences are projected to be recovered or settled.
3. CONTRACTS RECEIVABLE:
Contracts receivable are aged as follows at April 30, 1998:
<TABLE>
<S> <C>
0-30 days past billing date.............................. $1,589,708
30-60 days past billing date............................. 87,095
60-90 days past billing date............................. --
Retainage receivables.................................... 185,435
Allowance for doubtful accounts.......................... (25,000)
----------
Contracts receivable, net................................ $1,837,238
==========
</TABLE>
4. COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS:
A summary of the costs incurred on uncompleted contracts is as follows at
April 30, 1998:
<TABLE>
<S> <C>
Cumulative costs incurred on uncompleted contracts...... $ 308,584
Estimated earnings...................................... 794,749
-----------
1,103,333
Less -- Billings to date on uncompleted contracts....... (1,078,236)
-----------
$ 25,097
===========
</TABLE>
The above amounts are included in the accompanying balance sheet under the
following captions:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings........ $ 36,006
Billings in excess of costs and estimated earnings........ (10,909)
--------
$ 25,097
========
</TABLE>
66
<PAGE> 68
TOM ALLEN CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following at April 30, 1998:
<TABLE>
<S> <C>
Building improvements................................... $ 84,772
Machinery and equipment................................. 3,241,457
Automotive equipment.................................... 520,244
Office equipment........................................ 113,032
-----------
Property and Equipment, at cost......................... 3,959,505
Less -- Accumulated Depreciation........................ (2,749,255)
-----------
Property and Equipment, net............................. $ 1,210,250
===========
</TABLE>
6. RELATED PARTY TRANSACTIONS:
The Company rents its office and warehouse facilities from the Company's
stockholder. The lease expires in April 1999 and is renewable annually by the
Company. Annual rent expense was $43,200 for the year ended April 30, 1998.
Future committed lease payments are $43,200 for the year ending April 30, 1999.
In addition, the Company had a note payable to the stockholder totaling $703,489
at April 30, 1998. The note bears interest at 9.00% and matures in May 1999. No
rent or interest was paid to the Company's stockholder during the year ended
April 30, 1998 and the amounts were included as part of the notes payable to the
stockholder at April 30, 1998.
The Company has a working relationship with an affiliated company. The
affiliated company involved is owned 100% by a family member of the stockholder.
The Company provided $28,500 of subcontract services to the affiliated company
during the year ended April 30, 1998. At April 30, 1998, the Company has a
receivable of $99,004 related to the subcontract services and other operating
advances, which is included in other receivables on the accompanying balance
sheet.
7. OPERATING NOTES PAYABLE:
The Company has an agreement with a bank to provide up to $400,000 of
short-term operating notes payable. The borrowings are secured by contracts
receivable and work in process balances associated with specific contracts. The
operating notes payable bear interest at 9.75% and have maturity dates that
range from two to three months. Total outstanding operating notes payable was
$400,00 at April 30, 1998.
67
<PAGE> 69
TOM ALLEN CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
8. LONG-TERM DEBT:
Long-term debt consists of the following at April 30, 1998:
<TABLE>
<S> <C>
Debt payable to bank, due May 1999, interest at 9.50%,
principal and interest due monthly, secured by certain
machinery and equipment and a personal guarantee from
the stockholder........................................ $ 878,997
Debt payable to bank, due June 1999, interest at 10.00%,
principal and interest due monthly, secured by certain
machinery and equipment and a personal guarantee from
the stockholder........................................ 477,223
Debt payable to bank, due May 1999, interest at 9.50%,
principal and interest due monthly, secured by certain
machinery and equipment and a personal guarantee from
the stockholder........................................ 395,457
Debt payable to a Company, due October 2000, interest at
8.00%, principal and interest due monthly,
unsecured.............................................. 89,000
Debt payable to a finance company, due March 2001,
interest at 10.00%, principal and interest due monthly,
secured by certain automotive equipment................ 23,741
Debt payable to a finance company, due August 1999,
interest at 16.95%, principal and interest due monthly,
secured by certain automotive equipment................ 23,496
Other debt with maturity dates and interest rates ranging
from September 1998 to June 2001 and 7.90% and 9.30%,
respectively........................................... 26,731
----------
Total Debt............................................... 1,914,645
Less -- Current maturities of long-term debt............. (370,900)
----------
Long-Term Debt, net...................................... $1,543,745
==========
</TABLE>
Future maturities of long-term debt are $370,900, $1,515,353 and $28,392
for the years ending April 30, 1999, 2000 and 2001, respectively. Cash interest
paid was $251,074 for the year ended April 30, 1998.
9. INCOME TAXES:
The income tax benefit consists of the following for the year ended April
30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Current Income Tax Provision............................. $ --
Deferred Income Tax Provision............................ (159,278)
Change in Valuation Allowance............................ 628,907
---------
Income Tax Benefit....................................... $ 469,629
=========
</TABLE>
68
<PAGE> 70
TOM ALLEN CONSTRUCTION COMPANY
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income taxes consist of the following at April 30, 1998:
<TABLE>
<CAPTION>
<S> <C>
Current Deferred Tax Asset............................... $ 756,615
Current Deferred Tax Liability........................... (445,696)
---------
Current Deferred Tax Asset, net.......................... $ 310,919
---------
Long-Term Deferred Tax Asset............................. $ 158,710
Long-Term Deferred Tax Liability......................... --
---------
Long-Term Deferred Tax Asset, net........................ $ 158,710
=========
</TABLE>
The income tax benefit differs from the amount computed by applying the
Federal statutory rate to net income before income taxes primarily due to the
change in the valuation allowance and State income taxes. Deferred income taxes
are primarily related to differences between the financial statement carrying
amounts of current assets and liabilities and their respective tax basis, net
operating loss carryforwards, book verses tax differences in depreciation and
book verses tax differences in accounting for unpaid stockholder rent and
interest.
There was no valuation allowance recorded as of April 30, 1998. The change
in the beginning of the year balance of the valuation allowance was due to the
favorable current year operating results and based on future estimated taxable
income. Cumulative net operating loss carryforwards for tax reporting purposes
were approximately $1,425,000 at April 30, 1998. The net operating loss
carryforwards expire at various dates ranging from April 2004 to April 2012.
There were no income taxes paid for the year ended April 30, 1998.
10. LEASES:
The Company leases certain automotive equipment under operating lease
agreements which expire at various dates ranging from December 1999 to January
2002. Total lease expense for these operating leases was $67,504 for the year
ended April 30, 1998. Future committed lease payments are $67,504, $60,032,
$35,864 and $8,252 for the years ending April 30, 1999, 2000, 2001 and 2002,
respectively.
11. PROFIT SHARING PLAN:
The Company has a 401(k) defined contribution plan covering substantially
all employees not covered under union-sponsored pension plans. Subject to
certain eligibility requirements, participants may elect to defer a portion of
their compensation subject to certain IRS limitations. The Company contributes
3% of the participants compensation into the 401(k) plan on an annual basis. In
addition, the Company has the option to contribute an additional discretionary
amount to the 401(k) plan. The 401(k) plan expense was $16,297 for the year
ended April 30, 1998, none of which was additional discretionary contributions.
The Company also makes plan contributions for union employees under negotiated
agreements with the various local unions, as required.
12. SUBSEQUENT EVENT TO DATE OF ACCOUNTANTS' REPORT (UNAUDITED):
On April 15, 1999, the Company was acquired by Quanta Services, Inc.
69
<PAGE> 71
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors
Seaward Corporation
Kittery, Maine 03904
We have audited the accompanying consolidated balance sheet of Seaward
Corporation and subsidiaries as of December 31, 1998, and the related
consolidated statements of income, stockholders' equity, and cash flows for the
year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Seaward Corporation
and subsidiaries as of December 31, 1998, and the results of their operations
and their cash flows for the year then ended in conformity with generally
accepted accounting principles.
/s/ NATHAN WECHSLER & COMPANY
Concord, New Hampshire
January 27, 1999
70
<PAGE> 72
SEAWARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
PRO FORMA
DECEMBER 31, MARCH 31, MARCH 31,
1998 1999 1999
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash.............................................. $10,295,372 $10,299,505 $10,299,505
Accounts receivable, including retainage 1998
$3,968; 1999 $130,447.......................... 2,428,738 2,051,761 2,051,761
Accounts receivable, stockholders................. 407,084 468,871 468,871
Notes receivable, stockholders.................... 434,000 434,000 434,000
Costs and estimated earnings in excess of billings
on contracts................................... 244,001 241,883 241,883
Inventories....................................... 249,344 305,735 305,735
Prepaid expenses.................................. 65,539 24,834 24,834
Available for sale securities..................... 1,458,532 1,494,558 1,494,558
Income taxes receivable........................... -- 5,782 5,782
Deferred income taxes............................. 3,086 3,086 3,086
----------- ----------- -----------
Total current assets...................... 15,585,696 15,330,015 15,330,015
----------- ----------- -----------
PROPERTY, PLANT AND EQUIPMENT, net.................. 1,192,407 1,541,029 534,529
----------- ----------- -----------
OTHER ASSETS
Other assets...................................... 429,456 429,456 429,456
----------- ----------- -----------
429,456 429,456 429,456
----------- ----------- -----------
Total Assets.............................. $17,207,559 $17,300,500 $16,294,000
=========== =========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable, including retainage 1998 $6,947;
1999 $7,311.................................... $ 414,765 $ 206,448 $ 206,448
Billings in excess of costs and estimated earnings
on contracts................................... 159,488 113,660 113,660
Accrued expenses.................................. 870,909 423,100 5,483,100
Income taxes payable.............................. 45,022 -- --
----------- ----------- -----------
Total current liabilities................. 1,490,184 743,208 5,803,208
----------- ----------- -----------
ACCRUED EXPENSES.................................... 15,586 15,586 15,586
----------- ----------- -----------
DEFERRED INCOME TAXES............................... 18,013 18,013 18,013
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES (See Notes)
STOCKHOLDERS' EQUITY
Common stock, no par value; authorized 100,000
shares; issued 88,988 shares................... 295,975 295,975 295,975
Retained earnings................................. 19,502,904 20,306,795 14,240,295
Accumulated other comprehensive income:
Unrealized holding gains on securities......... 40,211 76,237 76,237
Treasury stock, 61,356 shares, at cost............ (4,155,314) (4,155,314) (4,155,314)
----------- ----------- -----------
Total stockholders' equity................ 15,683,776 16,523,693 10,457,193
----------- ----------- -----------
Total liabilities and stockholders'
equity.................................. $17,207,559 $17,300,500 $16,294,000
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
71
<PAGE> 73
SEAWARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, -----------------------
1998 1998 1999
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CONTRACT REVENUES EARNED................................ $12,354,696 $2,026,561 $2,914,035
COST OF CONTRACT REVENUES EARNED (including
depreciation)......................................... 6,419,130 1,275,635 2,199,736
----------- ---------- ----------
5,935,566 750,926 714,299
----------- ---------- ----------
REVENUES FROM HYDROELECTRIC FACILITY.................... 517,140 372,150 --
COST OF REVENUES EARNED................................. 266,481 172,557 --
----------- ---------- ----------
250,659 199,593 --
----------- ---------- ----------
Gross profit.................................. 6,186,225 950,519 714,299
GENERAL AND ADMINISTRATIVE EXPENSES..................... 1,872,880 286,349 410,126
----------- ---------- ----------
Operating income.............................. 4,313,345 664,170 304,173
----------- ---------- ----------
NONOPERATING INCOME (EXPENSE):
Other income.......................................... 268,750 26,880 490,942
Interest and dividend income.......................... 335,011 77,918 82,938
Interest expense...................................... -- -- --
Gain (loss) on disposal of property, plant and
equipment.......................................... (184,753) 105,984 1,001
Realized loss on sale of securities................... (32,325) -- --
----------- ---------- ----------
386,683 210,782 574,881
----------- ---------- ----------
Income before income taxes.................... 4,700,028 874,952 879,054
----------- ---------- ----------
FEDERAL AND STATE INCOME TAXES:
Current taxes......................................... 365,288 105,679 75,163
Deferred tax benefits................................. (235,246) -- --
----------- ---------- ----------
130,042 105,679 75,163
----------- ---------- ----------
NET INCOME.................................... $ 4,569,986 $ 769,273 $ 803,891
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
72
<PAGE> 74
SEAWARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMMON TREASURY RETAINED COMPREHENSIVE
STOCK STOCK EARNINGS INCOME TOTAL
-------- ----------- ----------- ------------- -----------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1997....... $295,975 $(4,155,314) $15,082,960 $ -- $11,223,621
Comprehensive Income
Net Income..................... -- -- 4,569,986 -- 4,569,986
Other comprehensive income, net
of tax:
Unrealized gains on
securities arising during
the period................ -- -- -- 40,211 40,211
-----------
Comprehensive income... 4,610,197
Cash dividends, $5.43 per
share.......................... -- -- (150,042) -- (150,042)
-------- ----------- ----------- ------- -----------
Balance, December 31, 1998....... 295,975 (4,155,314) 19,502,904 40,211 15,683,776
Net Income (unaudited)......... -- -- 803,891 -- 803,891
Other comprehensive income, net
of tax:
Unrealized gains on
securities arising during
the period (unaudited).... -- -- -- 36,026 36,026
-----------
Comprehensive income
(unaudited).......... 839,917
-------- ----------- ----------- ------- -----------
Balance, March 31, 1999
(unaudited).................... $295,975 $(4,155,314) $20,306,795 $76,237 $16,523,693
======== =========== =========== ======= ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
73
<PAGE> 75
SEAWARD CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, ------------------------
1998 1998 1999
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 4,569,986 $ 769,273 $ 803,891
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization........................... 512,087 179,502 100,990
Deferred income tax benefit............................. (235,246) -- --
Realized loss on securities............................. 32,325 -- --
(Gain) loss on disposal of property, plant and
equipment............................................. 184,753 (105,984) (1,001)
(Increase) decrease in accounts receivable and accounts
receivable, stockholders.............................. 572,960 2,544,526 315,190
(Increase) decrease in costs and estimated earnings in
excess of billings on contracts....................... (228,602) (46,779) 2,118
Increase in inventories................................. (60,668) (20,798) (56,391)
(Increase) decrease in prepaid expenses................. 33,494 (26,205) 40,705
(Increase) decrease in income taxes receivable.......... -- -- (5,782)
Increase (decrease) in accounts payable................. 218,045 (88,512) (208,317)
Decrease in billings in excess of costs and estimated
earnings on contracts................................. (162,058) (217,410) (45,828)
Increase (decrease) in accrued expenses................. (114,338) (648,808) (447,809)
Increase (decrease) in income taxes payable............. (303,996) (302,699) (45,022)
----------- ---------- -----------
Net cash provided by operating activities.......... 5,018,742 2,036,106 452,744
----------- ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment.............. (751,049) (455,758) (449,612)
Proceeds from disposal of property, plant and equipment... 413,750 122,250 1,001
Purchase of securities.................................... (1,467,439) -- --
Proceeds from sale of securities.......................... 18,037 -- --
Loans made to stockholders................................ (350,000) (50,000) --
Collections on notes receivable, stockholders............. 24,000 -- --
Increase in other assets.................................. (39,644) (6,250) --
----------- ---------- -----------
Net cash provided by (used in) investing
activities....................................... (2,152,345) (389,758) (448,611)
----------- ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on bank notes payable............................ -- -- --
Purchase of common stock for the treasury................. -- -- --
Cash dividend payments.................................... (150,042) -- --
----------- ---------- -----------
Net cash used in financing activities.............. (150,042) -- --
----------- ---------- -----------
Net increase in cash............................... 2,716,355 1,646,348 4,133
Cash, beginning of year..................................... 7,579,017 7,579,017 10,295,372
----------- ---------- -----------
Cash, end of year.................................. $10,295,372 $9,225,365 $10,299,505
=========== ========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest................................................ $ -- $ -- $ --
Income taxes............................................ 668,040 180,182 125,967
</TABLE>
The accompanying notes are an integral part of these financial statements.
74
<PAGE> 76
SEAWARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. NATURE OF BUSINESS:
The Company is primarily in the business of providing utility and other
construction services to customers throughout the United States, on credit terms
that the Company establishes for individual customers. The Company, through one
of its wholly-owned subsidiaries, also owned and operated a hydroelectric
facility until 1998.
2. SIGNIFICANT ACCOUNTING POLICIES:
Principles of consolidation: The consolidated financial statements of the
Company include the financial statements of Seaward Corporation and its
wholly-owned subsidiaries, Interstate Equipment Corp. ("Interstate") and Clement
Dam Development, Inc. ("Clement"). All significant intercompany transactions and
balances have been eliminated.
Estimates and assumptions: Management uses estimates and assumptions in
preparing financial statements. Those estimates and assumptions affect the
reported amounts of assets and liabilities, the disclosure of contingent assets
and liabilities, and the reported revenues and expenses. Accordingly, actual
results may differ from those estimates.
Comprehensive income: Other comprehensive income refers to revenues,
expenses, gains and losses that under generally accepted accounting principles
are included in comprehensive income but are excluded from net income as these
amounts are recorded directly as an adjustment to stockholders' equity. The
Company's other comprehensive income is comprised of unrealized holding gains
for available-for-sale securities.
Revenue and cost recognition: Revenues from long-term construction
contracts are recognized under the percentage-of-completion method of
accounting. In accordance with this method, income is accrued based on that
percentage of estimated total income that incurred costs to date bear to total
estimated costs. Estimated contract losses are provided for in their entirety
without reference to the particular percentage of completion. An amount equal to
contract costs attributable to claims is included in revenues when realization
is probable and the amounts can be reliably estimated.
Changes is job performance, job conditions and estimated profitability may
result in revisions to costs and income and are recognized in the period in
which the revisions are determined.
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. Selling, general and
administrative costs are charged to expense as incurred.
The asset, "Costs and estimated earnings in excess of billings on
contracts," represents revenues recognized in excess of amounts billed. The
liability, "Billings in excess of costs and estimated earnings on contracts,"
represents billings in excess of revenues recognized.
Operating cycle: The current operating cycle with respect to long-term
construction contracts is considered to be the term of the contracts, and,
accordingly, all assets and liabilities directly related to such contracts are
classified as current in the accompanying balance sheets. The operating cycle
for all other assets and liabilities classified as current is considered to be
one year.
Inventories: Inventories are stated at the lower of cost or market using
the first-in, first-out method.
Marketable securities: All securities are classified as available-for-sale.
These securities may be sold in response to changes in interest rates, liquidity
needs and for other purposes. Securities are recorded at market value.
Unrealized holding gains and losses for available-for-sale securities are
excluded from earnings and reported, net of any income tax effect, as a separate
component of stockholders' equity. Realized gains and
75
<PAGE> 77
SEAWARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
losses for securities classified as available-for-sale are reported in earnings
based on the adjusted cost of the specific security sold.
Property, plant and equipment: Property, plant and equipment, as well as
capitalized betterments, are stated at cost. Capitalized betterments are
expenditures which enhance the expected future benefits of an existing
depreciable asset by either expanding its utility or extending its useful life.
Expenditures for maintenance and minor repairs and replacements are charged to
operations as incurred. The costs and related accumulated depreciation and
amortization applicable to assets retired, sold or otherwise disposed of are
eliminated from the respective accounts, and any gain or loss on disposal is
reflected in income.
Depreciation: Depreciation is computed on a straight-line basis over the
following useful lives:
<TABLE>
<CAPTION>
YEARS
-----
<S> <C>
Buildings................................................... 18-20
Construction equipment...................................... 5-10
Office equipment............................................ 5-7
Hydroelectric facility...................................... 15
</TABLE>
Leasehold improvements are amortized over the lesser of the life of the
lease or the estimated useful life of the improvement.
Income taxes: Income taxes are provided for the tax effects of transactions
reported in the financial statements and consist of taxes currently due and
deferred taxes related primarily to the differences between depreciation expense
and state net operating loss carryforwards recognized for financial reporting
and income tax reporting. The deferred tax assets and liabilities represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the related assets and liabilities are recovered or
settled.
Deferred tax assets arising from future deductible items are reduced by a
valuation allowance when, in the opinion of management, it is more likely than
not that some portion or all of the deferred tax assets will not be realized.
Cash and cash equivalents: For purposes of reporting cash flows, the
Company considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents. At December 31, 1998, the
Company had no cash equivalents.
3. INTERIM CONSOLIDATED FINANCIAL INFORMATION:
The unaudited interim consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures, normally included in annual financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim consolidated financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
4. UNINSURED CASH AND CASH EQUIVALENT BALANCES:
The Company maintains cash balances at several banks. Cash accounts at
banks are insured by the FDIC for up to $100,000. Amounts in excess of insured
limits were $373,000 at December 31, 1998.
76
<PAGE> 78
SEAWARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company maintains cash balances with investment companies which are not
insured. Uninsured amounts were approximately $10,200,000 at December 31, 1998.
5. ACCOUNTS RECEIVABLE:
Accounts receivable includes retainage due from customers pursuant to
provisions of the construction contracts. These amounts will be collected upon
completion of the contracts and acceptance by the owner, which is expected to be
in 1999.
6. ACCOUNTS RECEIVABLE, STOCKHOLDERS:
As of December 31, 1998, the Company was owed $407,084 from its
stockholders for short term advances. These amounts are non-interest bearing and
relate primarily to estimated income tax payments made on behalf of the
stockholders.
The stockholders have made arrangements to repay the advances during 1999.
Accordingly, the accounts receivable have been classified as current assets in
the financial statements as of December 31, 1998.
7. NOTES RECEIVABLE, STOCKHOLDERS:
Details of the Company's current and long-term notes receivable,
stockholders are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Note receivable, stockholder, at 6%, unsecured, due on
demand................................................ $ 42,000
Notes receivable, stockholder, at 6%, unsecured, no
stated maturity....................................... 92,000
Notes receivable, stockholders, at 5.74%, unsecured, due
September 2008........................................ 300,000
---------
434,000
Portion payable within one year......................... (434,000)
---------
Long-term assets.............................. $ --
=========
</TABLE>
The note holders have made arrangements to repay the notes during 1999.
Accordingly, the notes receivable have been classified as current assets in the
financial statements as of December 31, 1998.
Interest income on the Company's income statement included $11,701 of
interest earned on stockholder loans for the year ended December 31, 1998.
77
<PAGE> 79
SEAWARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. COSTS AND ESTIMATED EARNINGS ON CONTRACTS:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Costs incurred on uncompleted contracts................ $ 4,570,039
Estimated earnings on uncompleted contracts............ 6,114,943
------------
10,684,982
Less billed to date on uncompleted contracts........... (10,600,469)
------------
Total........................................ $ 84,513
============
Included in accompanying balance sheets under the
following captions:
Costs and estimated earnings in excess of billings on
contracts............................................ $ 244,001
Billings in excess of costs and estimated earnings on
contracts............................................ (159,488)
------------
Total........................................ $ 84,513
============
</TABLE>
9. MARKETABLE SECURITIES:
The following table reflects the costs and fair-market values of securities
available-for-sale held at December 31, 1998.
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-------------------------------------------------------------
FAIR- INCOME UNREALIZED
MARKET UNREALIZED TAX GAIN (LOSS)
COST VALUE GAIN (LOSS) EFFECT (NET OF TAX)
---------- ---------- ----------- ------ ------------
<S> <C> <C> <C> <C> <C>
Investment securities............... $1,367,527 $1,409,063 $41,536 $1,246 $40,290
U.S. treasury note.................. 49,550 49,469 (81) (2) (79)
---------- ---------- ------- ------ -------
$1,417,077 $1,458,532 $41,455 $1,244 $40,211
========== ========== ======= ====== =======
</TABLE>
Proceeds from sales of securities available-for-sale during 1998 amounted
to $18,037. Gross losses of $32,325 were realized on those sales in 1998.
10. PROPERTY, PLANT AND EQUIPMENT:
<TABLE>
<CAPTION>
DECEMBER 31,
PROPERTY, PLANT AND EQUIPMENT, AT COST 1998
- -------------------------------------- -------------
<S> <C>
Land................................................... $ 138,334
Buildings.............................................. 487,224
Construction equipment................................. 7,810,398
Office equipment....................................... 177,708
Leasehold improvements................................. 206,339
Hydroelectric facility................................. --
-----------
Total property, plant and equipment.......... 8,820,003
Less accumulated depreciation and amortization......... (7,627,596)
-----------
Total property, plant and equipment, net..... $ 1,192,407
===========
</TABLE>
78
<PAGE> 80
SEAWARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. NOTES PAYABLE AND PLEDGED ASSETS:
The Company has arrangements for the following bank lines of credit, both
of which are subject to review in June 1999:
<TABLE>
<CAPTION>
INTEREST TOTAL AMOUNT UNUSED AT
PURPOSE COLLATERAL RATE AMOUNT DECEMBER 31, 1998
- ------- ----------- -------- ---------- -----------------
<S> <C> <C> <C> <C>
Seaward Corporation:
General.................................... Unsecured Prime $1,000,000 $1,000,000
Interstate Equipment Corp.:
Equipment.................................. Guaranteed
by Seaward
Corporation Prime $2,000,000 $2,000,000
</TABLE>
12. INCOME TAX MATTERS:
Effective January 1, 1998, Seaward Corporation, with the consent of its
stockholders, elected to be taxed as an S Corporation under Section 1362 of the
Internal Revenue Code, which provides that, in lieu of federal corporate income
taxes, the stockholders are taxed on their proportionate share of the Company's
items of income, deduction, losses and credits. State income taxes for an S
Corporation are imposed at the corporate versus stockholder level on a
state-by-state basis depending on whether the state recognizes federal status.
Income tax expense for Seaward Corporation for the year ended December 31, 1998
only includes corporate level state income taxes.
The company's wholly-owned subsidiaries, Interstate Equipment Corp. and
Clement Dam Development, Inc. have not elected to be taxed as S Corporations
under Section 1362 of the Internal Revenue Code. Federal and state income taxes
for these entities continue to be imposed at the corporate level.
Deferred tax assets, arising from temporary differences relating primarily
to state net operating loss carryforwards, amounting to $3,086 have been
included in the Company's balance sheet as of December 31, 1998, and have not
been reduced by a valuation reserve.
Deferred tax liabilities, arising from temporary differences relating
primarily to depreciation, amounting to $18,013, have been included in the
Company's balance sheet as of December 31, 1998.
For tax purposes, Interstate Equipment Corp. has state net operating loss
carryforwards of approximately $37,000 available to offset future state taxable
income through 2000.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Current provision:
Federal............................................... $ 177,026
State................................................. 188,262
---------
365,288
---------
Deferred provision (benefit):
Federal............................................... (214,488)
State................................................. (20,758)
---------
(235,246)
---------
Total......................................... $ 130,042
=========
</TABLE>
79
<PAGE> 81
SEAWARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. LEASE COMMITMENTS, RELATED PARTY TRANSACTIONS AND TOTAL RENTAL EXPENSE:
The Company leases its office facility from a related party under an annual
operating lease agreement which provides for minimum rent of $4,000 per month
and real estate tax cost escalation adjustments. Rent expense amounted to
$56,455 for the year ended December 31, 1998.
As of December 31, 1998, future minimum rental payments under the office
facility operating lease with a related party are $20,000 for five months in
1999.
The Company leased the site on which the hydroelectric facility owned by
Clement Dam Development, Inc. was located until the landlord purchased the
facility in May 1998. Rent expense amounted to $100,747 for the year ended
December 31, 1998.
14. CONTINGENCIES:
In August 1992, the Company was notified by the Maine Department of
Environmental Protection that it is a Potential Responsible Party relating to an
uncontrolled hazardous substance site in Wells, Maine. In October 1995, the
Company, along with several other parties, received a "Notice of Potential
Liability and Request for Participation in Clean-Up Activities" relating to this
site. Responsible Parties are jointly and severally liable for all clean-up
costs by the state.
Based on preliminary studies performed during 1997, the Company's own share
of potential liability was estimated to be between $20,000 and $60,000. No
accrual for this liability was included in the financial statements for the year
ended December 31, 1997 since the amount was not material. In December 1998, a
settlement was proposed, which would relieve the Company of its financial
obligation for a payment of $40,304. This liability has been included in the
Company's financial statements for the year ended December 31, 1998. Final
settlement is contingent on adequate participation in the settlement by other
Potential Responsible Parties.
15. HYDROELECTRIC FACILITY:
Clement Dam Development, Inc., a wholly-owned subsidiary, owned and
operated by a hydroelectric facility. In May 1998, the hydroelectric facility
was sold for $200,000.
16. RETIREMENT PLAN:
The Company has a 401(k) plan for all eligible employees. The plan covers
substantially all employees who have attained age 21 and have at least 40 weeks
of continuous service. The employees make discretionary contributions to the
plan from their individual earnings, and the Company's Board of Directors has
the option to make matching contributions for the first 6% of participating
employees' wages. In addition, the Company's Board of Directors may make
discretionary contributions to the plan. Discretionary contributions were made
for the year ended December 31, 1998, amounting to $69,000.
17. OTHER COMPREHENSIVE INCOME:
<TABLE>
<CAPTION>
1998
---------------------------------
BEFORE TAX NET OF
TAX AMOUNT EXPENSE TAX AMOUNT
---------- ------- ----------
<S> <C> <C> <C>
Unrealized gains on securities:
Unrealized holding gain arising during the period......... $41,455 $1,244 $40,211
======= ====== =======
</TABLE>
80
<PAGE> 82
SEAWARD CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
18. SUBSEQUENT EVENT (UNAUDITED):
On May 14, 1999, the Company was acquired by Quanta Services, Inc.
In May 1999, the Company made cash distributions to stockholders of
approximately $5,060,000 funded through its operations and property
distributions of $1,006,500. Had these transactions been recorded at March 31,
1999, the effect on the accompanying balance sheet would be an increase in
accrued liabilities of $5,060,000, a decrease in property and equipment of
$1,006,500 and a decrease in stockholders' equity of $6,066,500.
81
<PAGE> 83
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Driftwood Electrical Contractors, Inc.:
We have audited the accompanying combined balance sheet of Driftwood Electrical
Contractors, Inc., a Kentucky corporation, as of December 31, 1998, and the
related combined statements of operations, stockholder's equity and cash flows
for the year then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Driftwood Electrical
Contractors, Inc., as of December 31, 1998, 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 7, 1999
82
<PAGE> 84
DRIFTWOOD ELECTRICAL CONTRACTORS, INC.
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $2,731,445 $2,919,740
Accounts receivable --
Trade.................................................. 445,975 979,247
Retainage, net of reserve of $8,000.................... 76,242 68,979
Other receivables...................................... 10,049 --
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 47,253 --
Other current assets...................................... 6,850 6,850
---------- ----------
Total current assets.............................. 3,317,814 3,974,816
PROPERTY AND EQUIPMENT, net................................. 485,414 568,760
OTHER ASSETS, net........................................... 25,500 24,000
---------- ----------
Total assets...................................... $3,828,728 $4,567,576
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued liabilities.................. $ 231,276 $ 369,594
---------- ----------
Total current liabilities......................... 231,276 369,594
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, no par value, 2,000 shares authorized, 200
shares issued and outstanding.......................... -- --
Additional paid-in capital................................ 12,250 12,250
Retained earnings......................................... 3,585,202 4,185,732
---------- ----------
Total stockholder's equity........................ 3,597,452 4,197,982
---------- ----------
Total liabilities and stockholder's equity........ $3,828,728 $4,567,576
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
83
<PAGE> 85
DRIFTWOOD ELECTRICAL CONTRACTORS, INC.
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------
1998 1998 1999
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES................................................ $11,819,525 $1,935,151 $2,890,399
COSTS OF SERVICES (Including depreciation).............. 8,210,164 1,631,733 1,718,704
----------- ---------- ----------
Gross profit.................................. 3,609,361 303,418 1,171,695
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............ 985,956 191,166 331,040
----------- ---------- ----------
Income from operations........................ 2,623,405 112,252 840,655
OTHER INCOME, net....................................... 116,767 45,534 13,640
----------- ---------- ----------
INCOME BEFORE INCOME TAXES.............................. 2,740,172 157,786 854,295
PROVISION FOR INCOME TAXES.............................. 27,369 -- --
----------- ---------- ----------
NET INCOME.............................................. $ 2,712,803 $ 157,786 $ 854,295
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
84
<PAGE> 86
DRIFTWOOD ELECTRICAL CONTRACTORS, INC.
COMBINED STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997............... 200 $-- $12,250 $ 2,609,613 $ 2,621,863
Distributions.......................... -- -- -- (1,737,214) (1,737,214)
Net income............................. -- -- -- 2,712,803 2,712,803
--- --- ------- ----------- -----------
BALANCE, December 31, 1998............... 200 -- 12,250 3,585,202 3,597,452
Distributions (unaudited).............. -- -- -- (253,765) (253,765)
Net income (unaudited)................. -- -- -- 854,295 854,295
--- --- ------- ----------- -----------
BALANCE, March 31, 1999 (unaudited)...... 200 $-- $12,250 $ 4,185,732 $ 4,197,982
=== === ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
85
<PAGE> 87
DRIFTWOOD ELECTRICAL CONTRACTORS, INC.
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE MONTHS ENDED
YEAR ENDED MARCH 31,
DECEMBER 31, -----------------------
1998 1998 1999
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income............................................ $ 2,712,803 $ 157,786 $ 854,295
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization expense.............. 122,214 35,791 30,927
Gain on sale of equipment.......................... (9,436) (1,250) --
Other.............................................. (53,869) -- 37,767
Changes in operating assets and liabilities, net of
noncash transactions --
Accounts receivable................................ 235,747 216,629 (515,960)
Other assets, net.................................. 4,740 (6,010) 1,500
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... 59,270 14,818 47,253
Accounts payable and accrued liabilities........... (18,667) 19,864 138,318
----------- ---------- ----------
Net cash provided by operating activities.......... 3,052,802 437,628 594,100
----------- ---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of equipment....................... 14,992 1,250 --
Purchases of property and equipment................... (269,408) (140,263) (152,040)
----------- ---------- ----------
Net cash used in investing activities.............. (254,416) (139,013) (152,040)
----------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to stockholder.......................... (1,737,214) (70,875) (253,765)
----------- ---------- ----------
Net cash used in financing activities.............. (1,737,214) (70,875) (253,765)
----------- ---------- ----------
NET INCREASE IN CASH.................................... 1,061,172 227,740 188,295
CASH, beginning of period............................... 1,670,273 1,670,273 2,731,445
----------- ---------- ----------
CASH, ending of period.................................. $ 2,731,445 $1,898,013 $2,919,740
=========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
86
<PAGE> 88
DRIFTWOOD ELECTRICAL CONTRACTORS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Driftwood Electrical Contractors, Inc. (Driftwood), a Kentucky corporation,
is primarily engaged in the installation and maintenance of outside plant,
aerial and underground telecommunications equipment in the continental United
States. Driftwood performs a majority of its contract work under fixed-price and
unit-price contracts.
The 27 Digging Company (27 Digging), a Kentucky corporation, is composed
primarily of assets leased to Driftwood for use in its business and associated
liabilities. Both Driftwood and 27 Digging are under common control and
ownership.
Hereinafter, Driftwood and 27 Digging will be referred to as "the Company."
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Combination
The accompanying financial statements include the combined accounts and
results of operations of Driftwood, 27 Digging and certain assets which are
personally owned by the sole stockholder of Driftwood and 27 Digging and used in
the operations of the Company. All significant intercompany accounts and
transactions have been eliminated.
Interim Consolidated Financial Information
The unaudited interim consolidated financial statements have been prepared
pursuant to the rules of the Securities and Exchange Commission ("SEC"). Certain
information and footnote disclosures, normally included in annual financial
statements prepared in accordance with generally accepted accounting principles,
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments, consisting only of normal recurring adjustments, necessary to
fairly present the financial position, results of operations and cash flows with
respect to the interim consolidated financial statements, have been included.
The results of operations for the interim periods are not necessarily indicative
of the results for the entire fiscal year.
Accounts Receivable and Allowance for Doubtful Accounts
The Company provides an allowance for doubtful trade receivable accounts
based upon the specific identification of trade accounts receivable where
collection is no longer deemed probable. The Company's clients include large
utility companies from which the Company has generally had a favorable
collection history. At December 31, 1998, all of the Company's trade accounts
receivable were deemed to be collectable. As a result, no allowance for
uncollectable trade accounts receivable has been provided.
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.
Depreciation expense was $122,214 for the year ended December 31, 1998.
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 combined statement of operations.
87
<PAGE> 89
DRIFTWOOD ELECTRICAL CONTRACTORS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue when services are performed, except when
work is being performed under a fixed-price contract. These fixed-price
contracts generally provide that the customer accept completion of progress to
date and compensate the Company for services which have been rendered, measured
typically in terms of units installed, hours expended or some other measure of
progress. Revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to total estimated costs for each contract. Contract costs include all
direct material, labor and subcontract costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are identified. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to estimated costs and revenues. The effects
of these revisions are recognized in the period in which the changes occur.
The balances billed but not paid by customers pursuant to retainage
provisions in customer contracts will be due upon completion of the contracts
and acceptance by the customer. The Company believes that the retention balance
shown on the accompanying combined balance sheet will be collected within the
next fiscal year.
The current asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable
and accounts payable. The Company believes that the carrying value of these
instruments on the accompanying combined balance sheet approximates their fair
value.
Income Taxes
Driftwood 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 Company's sole stockholder reports the
Company's taxable earnings or losses in his personal tax return.
Income taxes are accounted for by 27 Digging, which is subject to taxation
for federal purposes, in accordance with Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes." Under SFAS No. 109,
deferred income taxes are recognized for the tax consequences in future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts at each year-end based on enacted tax laws and statutory tax
rates applicable to the periods in which the differences are expected to affect
taxable income. Valuation allowances are established when necessary to reduce
deferred tax assets to the amount to be realized. The provision for income taxes
is the tax expense for the current year and the change during the year in the
deferred tax assets and liabilities.
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 certain
estimates reflected in the Company's financial statements.
88
<PAGE> 90
DRIFTWOOD ELECTRICAL CONTRACTORS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Property and equipment at December 31, 1998, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS
------------
<S> <C> <C>
Machinery and equipment..................................... 3-8 $ 295,558
Transportation equipment.................................... 3-5 2,576,916
Office furniture and equipment.............................. 5-10 153,273
-----------
3,025,747
Less -- Accumulated depreciation and amortization........... (2,540,333)
-----------
Property and equipment, net....................... $ 485,414
===========
</TABLE>
Accounts payable and accrued liabilities December 31, 1998, consist of the
following:
<TABLE>
<S> <C>
Accounts payable, trade..................................... $ 49,013
Accrued compensation and benefits........................... 175,460
Other accrued liabilities................................... 6,803
--------
$231,276
========
</TABLE>
Contracts in progress at December 31, 1998, are as follows:
<TABLE>
<S> <C>
Costs incurred on contracts in progress..................... $ 1,320,411
Estimated earnings, net of losses........................... 395,104
-----------
1,715,515
Less -- Billings to date.................................. (1,668,262)
-----------
$ 47,253
===========
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 47,253
===========
</TABLE>
4. INCOME TAXES:
At December 31, 1998, the difference between the tax bases and financial
reporting amounts of 27 Digging assets and liabilities was not material. As a
result, 27 Digging has recognized no deferred tax assets or liabilities and no
deferred tax provision.
The current income tax provision of 27 Digging a subchapter C corporation
for the year ended December 31, 1998, differs from an amount computed at the
statutory rate as follows:
<TABLE>
<S> <C>
Federal income tax at statutory rates..................... $24,939
State and local taxes and other........................... 2,430
-------
Tax provision, as reported................................ $27,369
=======
</TABLE>
5. EMPLOYEE BENEFIT PLAN:
The Company established a 401(k) tax-deferred savings plan which covers
substantially all qualifying employees. Through the plan, employees may
contribute up to the maximum dollar amount as determined by the Internal Revenue
Service of their earnings through payroll deductions. The Company contributes,
on behalf of the employees, 20 percent of each employee's contributions up to 10
percent of the employee's
89
<PAGE> 91
DRIFTWOOD ELECTRICAL CONTRACTORS, INC.
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
salary. An employee is eligible to participate in the plan after one year of
credited service and is 100 percent vested in the employer matching
contributions after five years. For the year ended December 31, 1998, the
Company contributed $4,479.
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
During 1998, the Company had greater than 10 percent of total sales to one
customer, which accounted for 71 percent of the Company's revenues.
Approximately 43 percent of trade and retainage receivables at December 31,
1998, is due from this customer. This customer has historically accounted for a
significant portion of the Company's business. Management anticipates the
Company's relationship with this customer to continue.
The Company grants credit, generally without collateral, to its customers,
which include telecommunication utilities located throughout the continental
United States. Consequently, the Company is subject to potential credit risk
related to changes in business and economic factors in the United States
telecommunications industry. However, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
7. RELATED-PARTY TRANSACTIONS:
The Company leases buildings, land and other equipment from the Company's
sole stockholder. Related-party rent expense for the year ended December 31,
1998, was $72,000.
In exchange for services received, the Company pays certain compensation
and benefits to its stockholder and certain of his family members. During 1998,
the Company paid $194,353 to its stockholder and his family members for
compensation and benefits.
8. 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 premium-based insurance coverage,
including workers' compensation, business auto liability, general liability and
an umbrella policy.
Performance Bonds
In certain circumstances, the Company is required to provide performance
bonds in connection with its contract commitments.
9. SUBSEQUENT EVENT TO AUDITOR'S REPORT (UNAUDITED):
On May 14, 1999, the Company was acquired by Quanta Services, Inc. The
Company intends to lease certain property from the Company's shareholder
subsequent to the sale.
90
<PAGE> 92
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To H. L. Chapman Construction Group:
We have audited the accompanying combined balance sheet of H. L. Chapman
Construction Group (the Group), as defined in Note 1 to the combined financial
statements, as of October 31, 1998, and the related combined statements of
operations, stockholders' equity and cash flows for the year then ended. These
combined financial statements are the responsibility of the Group's management.
Our responsibility is to express an opinion on these combined 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 combined financial statements referred to above present
fairly, in all material respects, the combined financial position of H. L.
Chapman Construction Group as of October 31, 1998, and the results of their
combined operations and their combined cash flows for the year then ended in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 3, 1999
91
<PAGE> 93
H. L. CHAPMAN CONSTRUCTION GROUP
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
OCTOBER 31, APRIL 30,
1998 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 989,336 $ 1,619,033
Accounts receivable....................................... 5,344,650 6,245,736
Inventories............................................... 1,147,772 1,192,176
Prepaid expenses and other................................ 71,272 65,620
Employee advances......................................... 53,088 44,534
----------- -----------
Total current assets.............................. 7,606,118 9,167,099
PROPERTY AND EQUIPMENT, net................................. 14,552,841 18,302,658
OTHER ASSETS................................................ 72,125 89,047
----------- -----------
Total assets...................................... $22,231,084 $27,558,804
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 1,471,330 $ 2,229,097
Accounts payable and accrued liabilities.................. 3,971,935 2,052,493
Deferred tax liability.................................... 329,782 329,782
----------- -----------
Total current liabilities......................... 5,773,047 4,611,372
LONG-TERM DEBT, net of current maturities................... 3,123,816 7,209,839
DEFERRED TAX LIABILITY...................................... 1,186,428 1,507,078
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock.............................................. 52,000 52,000
Additional paid-in capital................................ 15,000 15,000
Retained earnings......................................... 12,080,793 14,163,515
----------- -----------
Total stockholders' equity........................ 12,147,793 14,230,515
----------- -----------
Total liabilities and stockholders' equity........ $22,231,084 $27,558,804
=========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
92
<PAGE> 94
H. L. CHAPMAN CONSTRUCTION GROUP
COMBINED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED APRIL 30,
OCTOBER 31, --------------------------
1998 1998 1999
----------- ----------- ------------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES............................................... $24,092,900 $8,591,484 $13,214,473
COSTS OF SERVICES, including depreciation.............. 15,468,447 5,660,935 8,286,697
----------- ---------- -----------
Gross profit................................. 8,624,453 2,930,549 4,927,776
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 2,785,906 1,204,983 2,023,040
----------- ---------- -----------
Income from operations....................... 5,838,547 1,725,566 2,904,736
OTHER INCOME (EXPENSE):
Interest expense..................................... (428,394) (142,264) (242,136)
Interest income and other, net....................... 913,375 241,715 459,651
----------- ---------- -----------
Income before provision for income taxes..... 6,323,528 1,825,017 3,122,251
PROVISION FOR INCOME TAXES............................. 1,963,430 492,755 989,800
----------- ---------- -----------
NET INCOME............................................. $ 4,360,098 $1,332,262 $ 2,132,451
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
93
<PAGE> 95
H. L. CHAPMAN CONSTRUCTION GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
---------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C>
BALANCE, October 31, 1997.............. 51,000 $51,000 $15,000 $ 7,896,471 $ 7,962,471
Net income........................... -- -- -- 4,360,098 4,360,098
Distributions to stockholders........ -- -- -- (175,776) (175,776)
Issuance of common stock,
H. L. Chapman Leasing Co., Inc.... 1,000 1,000 -- -- 1,000
------ ------- ------- ----------- -----------
BALANCE, October 31, 1998.............. 52,000 52,000 15,000 12,080,793 12,147,793
Net income (unaudited)............... -- -- -- 2,132,451 2,132,451
Distributions to stockholders
(unaudited)....................... -- -- -- (49,729) (49,729)
------ ------- ------- ----------- -----------
BALANCE, April 30, 1999 (unaudited).... 52,000 $52,000 $15,000 $14,163,515 $14,230,515
====== ======= ======= =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
94
<PAGE> 96
H. L. CHAPMAN CONSTRUCTION GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS ENDED APRIL 30,
OCTOBER 31, --------------------------
1998 1998 1999
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................ $ 4,360,098 $ 1,332,262 $ 2,132,451
Adjustments to reconcile net income to net cash
provided by operating activities --
Deferred income tax provision.................. 793,962 171,828 320,650
Depreciation................................... 1,939,205 787,641 1,402,219
Gains on sale of property and equipment........ (662,331) -- (282,736)
Changes in operating assets and liabilities, net
of noncash transactions --
Accounts receivable............................ (984,185) (755,698) (901,086)
Inventories.................................... (542,772) (762,412) (44,404)
Prepaid expenses and other..................... 168,524 55,025 5,652
Employee advances.............................. (19,733) (62,690) 8,554
Other assets................................... (34,046) (15,562) (16,922)
Accounts payable and accrued liabilities....... 1,246,405 393,449 (1,919,442)
----------- ----------- -----------
Net cash provided by operating
activities.............................. 6,265,127 1,143,843 704,936
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment............... (7,979,393) (1,997,254) (5,869,113)
Proceeds from disposition of property and
equipment...................................... 726,300 -- 999,813
----------- ----------- -----------
Net cash used in investing activities..... (7,253,093) (1,997,254) (4,869,300)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Issuance of common stock.......................... 1,000 1,000 --
Proceeds from issuance of long-term debt.......... 2,825,399 1,400,750 5,029,611
Principal payments on long-term debt.............. (1,013,587) (483,361) (185,821)
Distributions to stockholders..................... (175,776) (100,997) (49,729)
----------- ----------- -----------
Net cash provided by financing
activities.............................. 1,637,036 817,392 4,794,061
----------- ----------- -----------
NET INCREASE (DECREASE) IN CASH..................... 649,070 (36,019) 629,697
CASH, beginning of period........................... 340,266 340,266 989,336
----------- ----------- -----------
CASH, end of period................................. $ 989,336 $ 304,247 $ 1,619,033
=========== =========== ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for --
Interest....................................... $ 428,394 $ 142,264 $ 239,287
=========== =========== ===========
Taxes.......................................... $ 1,170,558 $ 314,014 $ 916,366
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
95
<PAGE> 97
H. L. CHAPMAN CONSTRUCTION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
H. L. Chapman Construction Group (the Group) includes the financial
statements of the following companies under common control and ownership: H. L.
Chapman Pipeline Construction, Inc. (a Texas C Corporation), Austin Trencher,
Inc. (a Texas S Corporation), H. L. Chapman Leasing Co., Inc. (a Texas C
Corporation) and Sullivan Welding, Inc. (a Texas S Corporation). The Group,
composed of the four companies listed above, is a subcontractor that serves a
nationwide market in rock trenching. The Group's services include utility line
trenching, fiber optic line trenching and pipeline trenching. The Group performs
a majority of its contract work under unit-price contracts, with contract terms
generally ranging from one week to three months.
Common Stock
Common stock at October 31, 1998, is composed of the following:
a. H. L. Chapman Pipeline Construction, Inc. -- Founded in 1973, 90,000
Class A shares and 10,000 Class B shares authorized, 35,000 Class A
shares issued and outstanding, no Class B shares issued or outstanding,
no stated par value per share for Class A and Class B
b. H. L. Chapman Leasing Co., Inc. -- Founded in March 1998, 1,000 shares
authorized, issued and outstanding at $1 par value per share
c. Austin Trencher, Inc. -- Founded in 1995, 15,000 shares authorized,
issued and outstanding at $1 par value per share
d. Sullivan Welding, Inc. -- Founded in 1991, 1,000 shares authorized,
issued and outstanding at no stated par value per share
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Combination
The combined financial statements of the Group include the accounts of the
entities listed in Note 1 and the wholly owned subsidiary of H. L. Chapman
Pipeline Construction, Inc., 300 King Air LLC. All significant intercompany
accounts and transactions have been eliminated in combination.
Interim Combined Financial Information
The interim combined financial statements for the six months ended April
30, 1998 and 1999, 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 Group's management, the unaudited interim combined financial
statements contain all adjustments, consisting of normal recurring adjustments,
considered necessary for a fair presentation. The combined results of operations
for the combined interim periods are not necessarily indicative of the results
for the entire fiscal year.
Accounts Receivable and Allowance for Doubtful Accounts
The Group provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
deemed probable and the level of total accounts receivable. As of October 31,
1998, management estimates all accounts to be collectible.
96
<PAGE> 98
H. L. CHAPMAN CONSTRUCTION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued by the Group at the lower of cost or market
using the specific identification method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Depreciation expense was $1,939,205 for the year ended October 31, 1998.
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 combined statement of operations.
For the year ended October 31, 1998 the Company received an insurance
settlement on equipment destroyed by fire and recognized a gain of approximately
$644,000 which is reflected in other income on the accompanying statement of
operations.
Revenue Recognition
The Group recognizes revenue when services are performed under unit-price
contracts. Such contracts generally provide that the customer accept completion
of progress to date and compensate the Group for services which have been
rendered, measured typically in terms of units installed, hours expended or some
other measure of progress. 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 unit-price contracts will be due upon completion of
the contracts and acceptance by the customer. Based on the Group's experience
with similar contracts in recent years, the retention balance, if any, at each
balance sheet date will be collected within the subsequent fiscal year.
Fair Value of Financial Instruments
The Group's financial instruments consist of accounts receivable, accounts
payable and debt. The Group believes that the carrying value of these
instruments on the accompanying combined balance sheet approximates their fair
value due to either the short-term nature of the instrument or the interest
rates on the debt being comparable to rates currently available to the Group.
Income Taxes
Certain entities within the Group have elected S corporation status as
defined by the Internal Revenue Code, whereby certain companies within the Group
are not subject to taxation for federal purposes. Under S corporation status,
the stockholders report their respective share of the Group's taxable earnings
or losses in their personal tax returns.
H. L. Chapman Leasing Co., Inc., and H. L. Chapman Pipeline Construction
Co., Inc., and subsidiary have elected C corporation status as defined by the
Internal Revenue Code and follow the liability method of accounting for income
taxes. Under this method, the respective company records deferred income taxes
based
97
<PAGE> 99
H. L. CHAPMAN CONSTRUCTION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
on temporary differences between the financial reporting and the tax bases of
assets and liabilities and measures these taxes using enacted tax rates and laws
that will be in effect when the company recovers those assets or settles those
liabilities as the case may be.
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.
3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts receivable at October 31, 1998, consists of the following:
<TABLE>
<S> <C>
Trade................................................... $4,585,211
Unbilled receivables.................................... 315,000
Retainage............................................... 444,439
----------
$5,344,650
==========
</TABLE>
Property and equipment at October 31, 1998, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS
------------
<S> <C> <C>
Land........................................................ N/A $ 139,430
Building.................................................... 15 1,053,164
Machinery, vehicles and equipment........................... 5-7 17,687,073
Office furniture and equipment.............................. 5-7 159,684
Airplane.................................................... 6 1,800,000
-----------
20,839,351
Less - Accumulated depreciation............................. (6,286,510)
-----------
Property and equipment, net............................ $14,552,841
===========
</TABLE>
Accounts payable and accrued liabilities at October 31, 1998, consist of
the following:
<TABLE>
<S> <C>
Accounts payable, trade................................. $2,000,767
Accrued compensation and benefits....................... 288,000
Bank overdraft.......................................... 873,738
Other accrued liabilities............................... 809,430
----------
$3,971,935
==========
</TABLE>
4. LINE OF CREDIT AND LONG-TERM DEBT:
The Company maintains a line of credit with a financial institution
providing for maximum borrowings of $4,050,750, which expires on May 19, 2003.
The revolving line of credit is secured by various equipment. Minimum payments
of interest only, at a rate of 8.5 percent, are due for the first 49 months,
with the outstanding principal due in 12 equal monthly installments during the
last year prior to expiration. The balance outstanding under the line of credit
at October 31, 1998, was $804,414.
98
<PAGE> 100
H. L. CHAPMAN CONSTRUCTION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The Group's long-term debt at October 31, 1998, consisted of the following:
<TABLE>
<S> <C>
Notes payable to a financial institution, secured by various
equipment, payable in monthly installments ranging from
$6,005 to $15,875, including interest at 8.5%, maturing
from September 1999 to September 2002..................... $ 2,113,515
Notes payable to a financial institution, secured by
trenchers, payable in monthly installments ranging from
$6,884 to $20,269, including interest at 7.5%, maturing
from February 2000 to June 2003........................... 1,253,859
Notes payable to a financial institution, secured by
excavators, payable in monthly installments from $5,025 to
$6,869, including interest ranging from 5.5% to 6.79%,
maturing from June 1999 to August 2001.................... 423,358
-----------
3,790,732
Less-Current portion........................................ (1,471,330)
-----------
$ 2,319,402
===========
</TABLE>
The line of credit and notes payable to the financial institutions are
subject to certain financial reporting and certain financial ratio requirements.
At October 31, 1998, the Group was in compliance with all debt covenants.
The maturities of long-term obligations, including the line of credit, for
the following five years as of October 31, 1998, are as follows:
<TABLE>
<CAPTION>
YEAR ENDING OCTOBER 31-
- -----------------------
<S> <C>
1999.................................................... $1,471,330
2000.................................................... 1,061,816
2001.................................................... 726,999
2002.................................................... 419,412
2003.................................................... 915,589
----------
$4,595,146
==========
</TABLE>
5. INCOME TAXES:
The components of the provision for income taxes for the year ended October
31, 1998, are as follows:
<TABLE>
<S> <C>
Federal --
Current............................................... $1,064,461
Deferred.............................................. 724,640
----------
1,789,101
----------
State --
Current............................................... 105,007
Deferred.............................................. 69,322
----------
174,329
----------
Total provision............................... $1,963,430
==========
</TABLE>
99
<PAGE> 101
H. L. CHAPMAN CONSTRUCTION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The provision for income taxes differs from an amount computed at the
statutory rate of 34 percent for the year ended October 31, 1998, as follows:
<TABLE>
<S> <C>
Federal income tax at statutory rates................... $2,150,000
State income taxes, net of federal tax benefit.......... 113,314
S corporation income not taxable........................ (305,286)
Other................................................... 5,402
----------
$1,963,430
==========
</TABLE>
Deferred income taxes reflect the impact of temporary differences between
the amount of assets and liabilities recognized for financial reporting purposes
and such amounts recognized for tax purposes. The tax effects of the temporary
differences that give rise to the significant portions of the deferred tax
assets and liabilities at October 31, 1998, are presented below:
<TABLE>
<S> <C>
Deferred tax assets --
Expenses not currently deductible.................... $ 41,556
Other................................................ 63,290
-----------
Total deferred tax assets.................... 104,846
-----------
Deferred tax liabilities --
Deferred revenue..................................... (120,455)
Inventories.......................................... (183,763)
Property and equipment............................... (1,139,660)
Other................................................ (177,178)
-----------
Total deferred tax liabilities............... (1,621,056)
-----------
Net deferred income tax liability............ $(1,516,210)
===========
</TABLE>
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK:
During the year ended October 31, 1998, the Group had sales greater than 10
percent of total sales to three customers, which accounted for 22 percent, 13
percent and 10 percent, respectively, of the Group's revenues.
The Group grants credit, generally without collateral, to its customers,
which include real estate operators, general contractors and state and
regulatory agencies located throughout the continental United States.
Consequently, the Group is subject to potential credit risk related to changes
in business and economic factors within these areas. However, management
believes that its contract acceptance, billing and collection policies are
adequate to minimize the potential credit risk.
7. COMMITMENTS AND CONTINGENCIES:
Litigation
The Group 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 Group's financial position or
results of operations.
Insurance
The Group carries a broad range of premium-based insurance coverage,
including workers' compensation, business auto liability, equipment liability,
general liability and an umbrella policy.
100
<PAGE> 102
H. L. CHAPMAN CONSTRUCTION GROUP
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
8. SUBSEQUENT EVENTS:
In March 1999, the Group purchased approximately $4,000,000 in trenching
equipment and related assets from a company with cash and notes.
In May 1999, the Group was sold to Quanta Services, Inc. (Quanta), for
cash, Quanta stock and notes. Subsequent to the sale, Quanta sold certain
property, equipment and other assets to the previous owners of the Group at an
estimated fair value of approximately $2,500,000 in exchange for forgiveness of
the notes issued by Quanta in connection with their purchase of the Group.
101
<PAGE> 103
ITEM 7. PRO FORMA FINANCIAL INFORMATION
QUANTA SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS
BASIS OF PRESENTATION
The following unaudited pro forma combined financial statements include the
consolidated financial statements included elsewhere herein as of March 31, 1999
and for the three months then ended (unaudited) and for the year ended December
31, 1998 adjusted as follows: (i) the unaudited pro forma combined balance sheet
at March 31, 1999 gives effect to the acquisition of six businesses acquired by
Quanta from April 1, 1999 through June 14, 1999 (the "Subsequent Acquisitions")
as if they occurred on March 31, 1999; (ii) the unaudited pro forma combined
statement of operations for the year ended December 31, 1998 gives effect to the
following events as if they had occurred on January 1, 1998 (a) Quanta's initial
public offering ("IPO"), (b) the pre-acquisition results of the Founding
Companies and eleven additional businesses acquired subsequent to the IPO
through December 31, 1998 which were accounted for using the purchase method of
accounting (together, the "1998 Acquisitions"), (c) the acquisition of 14
businesses accounted for using the purchase method of accounting from January 1,
1999 through June 14, 1999 (the "1999 Acquisitions"), (d) the issuance of the
Convertible Subordinated Notes and (e) the follow-on public offering completed
by Quanta in January of 1999; and (iii) the unaudited pro forma combined
statement of operations for the three months ended March 31, 1999 gives effect
to the follow-on public offering and the pre-acquisition results of the 1999
Acquisitions as if they occurred on January 1, 1999.
Quanta has preliminarily analyzed the savings that it expects to realize
from reductions in salaries, bonuses and certain benefits to the owners. To the
extent the owners of the Companies have contractually agreed to prospective
reductions in salaries, bonuses, benefits and lease payments, these reductions
have been reflected in the unaudited pro forma combined statements of
operations. With respect to other potential cost savings, Quanta has not and
cannot quantify these savings until a period subsequent to the acquisitions. It
is anticipated that these savings will be partially offset by costs related to
Quanta's new corporate infrastructure and by the costs associated with being a
public company. However, because these costs cannot be accurately quantified at
this time, they have not been included in the pro forma financial information of
Quanta.
The pro forma adjustments are based on preliminary estimates, available
information and certain assumptions that Company management deems appropriate
and may be revised as additional information becomes available. The pro forma
financial data do not purport to represent what Quanta's financial position or
results of operations would actually have been if such transactions in fact had
occurred on those dates and are not necessarily representative of Quanta's
financial position or results of operations for any future period. Since the
acquired businesses were not under common control or management during the
entire period covered by the pro forma financial statements, historical combined
results may not be comparable to, or indicative of, future performance. The
unaudited pro forma combined financial statements should be read in conjunction
with the Company's historical consolidated financial statements and notes
thereto included elsewhere in this Current Report on Form 8-K.
102
<PAGE> 104
QUANTA SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
MARCH 31, 1999
(IN THOUSANDS)
ASSETS
<TABLE>
<CAPTION>
QUANTA
SERVICES, INC.
AND SUBSEQUENT PRO FORMA PRO FORMA
SUBSIDIARIES ACQUISITIONS ADJUSTMENTS(A) TOTAL
-------------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........................ $ 5,257 $14,661 $ -- $ 19,918
Accounts receivable, net......................... 114,085 16,758 -- 130,843
Cost and estimated earnings in excess of billings
on uncompleted contracts....................... 41,662 1,527 -- 43,189
Inventories...................................... 6,141 1,839 -- 7,980
Prepaid expenses and other current assets........ 5,214 215 -- 5,429
-------- ------- -------- --------
Total current assets...................... 172,359 35,000 -- 207,359
PROPERTY AND EQUIPMENT, net........................ 93,219 23,445 (3,507) 113,157
OTHER ASSETS....................................... 5,543 3,055 -- 8,598
GOODWILL, net...................................... 283,083 -- 80,790 363,873
-------- ------- -------- --------
Total assets.............................. $554,204 $61,500 $ 77,283 $692,987
======== ======= ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............. $ 3,392 $ 2,664 $ -- $ 6,056
Accounts payable and accrued expenses............ 68,778 8,510 5,810 83,098
Billings in excess of costs and estimated
earnings on uncompleted contracts.............. 9,980 360 -- 10,340
-------- ------- -------- --------
Total current liabilities................. 82,150 11,534 5,810 99,494
LONG-TERM DEBT, net of current maturities.......... 85,434 9,525 69,105 164,064
CONVERTIBLE SUBORDINATED NOTES..................... 49,350 -- -- 49,350
DEFERRED INCOME TAXES AND OTHER NON-CURRENT
LIABILITIES...................................... 7,500 1,536 -- 9,036
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock.................................. -- -- -- --
Common Stock..................................... -- 351 (351) --
Limited Vote Common Stock........................ -- -- -- --
Treasury Stock................................... -- (4,155) 4,155 --
Unearned ESOP shares............................. (1,831) -- -- (1,831)
Additional paid-in capital....................... 300,038 27 41,246 341,311
Retained earnings................................ 31,563 42,682 (42,682) 31,563
-------- ------- -------- --------
Total stockholders' equity................ 329,770 38,905 2,368 371,043
-------- ------- -------- --------
Total liabilities and stockholders'
equity.................................. $554,204 $61,500 $ 77,283 $692,987
======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
103
<PAGE> 105
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) These adjustments reflect the purchase of six additional acquisitions
that were consummated subsequent to March 31, 1999 and through June 14,
1999, including approximately $69.1 million of debt incurred under
Quanta's line of credit to finance the cash portion of the purchase
price paid upon acquisition, approximately 1.6 million shares of common
stock issued, distribution of certain assets not acquired and certain S
corporation distributions which were distributed subsequent to March
31, 1999, resulting in goodwill of approximately $80.8 million.
104
<PAGE> 106
QUANTA SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1999
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
QUANTA
SERVICES, INC.
AND 1999 PRO FORMA PRO FORMA
SUBSIDIARIES ACQUISITIONS ADJUSTMENTS TOTAL
-------------- ------------ ----------- ---------
<S> <C> <C> <C> <C>
REVENUES........................................ $127,779 $40,910 $ -- $168,689
COST OF SERVICES (including depreciation)....... 104,871 30,955 -- 135,826
-------- ------- ------- --------
Gross Profit.................................. 22,908 9,955 -- 32,863
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 11,982 6,569 (673)(a) 17,878
MERGER EXPENSES -- Pooling...................... 137 -- -- 137
GOODWILL AMORTIZATION........................... 1,498 -- 920 (b) 2,418
-------- ------- ------- --------
Income (loss) from Operations................. 9,291 3,386 (247) 12,430
OTHER INCOME (EXPENSE)
Interest Expense.............................. (2,224) (318) (1,794)(c) (4,336)
Other, net.................................... 320 674 -- 994
-------- ------- ------- --------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE......... 7,387 3,742 (2,041) 9,088
PROVISION FOR INCOME TAXES...................... 3,964 418 (383)(d) 3,999
-------- ------- ------- --------
NET INCOME (LOSS)............................... $ 3,423 $ 3,324 $(1,658) $ 5,089
======== ======= ======= ========
BASIC EARNINGS PER SHARE..................................................................... $ 0.17
========
DILUTED EARNINGS PER SHARE................................................................... $ 0.16
========
DILUTED EARNINGS PER SHARE BEFORE MERGER EXPENSES............................................ $ 0.17
========
SHARES USED IN COMPUTING PRO FORMA
COMBINED EARNINGS PER SHARE --
BASIC(e)................................................................................... 30,625
========
DILUTED(e)................................................................................. 34,740
========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
105
<PAGE> 107
QUANTA SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
QUANTA
SERVICES, INC.
AND 1998 1999 PRO FORMA PRO FORMA
SUBSIDIARIES ACQUISITIONS ACQUISITIONS ADJUSTMENTS TOTAL
-------------- ------------ ------------ ----------- ---------
<S> <C> <C> <C> <C> <C>
REVENUES............................ $319,259 $116,179 $280,522 $ (1,816)(a) $714,144
COST OF SERVICES (including
depreciation)..................... 257,270 94,565 202,056 (1,495)(b) 552,396
-------- -------- -------- -------- --------
Gross Profit...................... 61,989 21,614 78,466 (321) 161,748
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 27,160 11,697 38,086 (12,631)(c) 64,312
MERGER EXPENSES -- Pooling.......... 231 -- -- -- 231
GOODWILL AMORTIZATION............... 2,513 2 -- 6,671 (d) 9,186
-------- -------- -------- -------- --------
Income from Operations............ 32,085 9,915 40,380 5,639 88,019
OTHER INCOME (EXPENSE)
Interest Expense.................. (4,855) (622) (1,725) (4,070)(e) (11,272)
Other, net........................ 641 820 2,804 -- 4,265
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAX
PROVISION......................... 27,871 10,113 41,459 1,569 81,012
PROVISION FOR INCOME TAXES.......... 11,683 572 6,948 16,442 (f) 35,645
-------- -------- -------- -------- --------
NET INCOME (LOSS)................... $ 16,188 $ 9,541 $ 34,511 $(14,873) $ 45,367
======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE........................................................................ $ 1.48
========
DILUTED EARNINGS PER SHARE...................................................................... $ 1.38
========
DILUTED EARNINGS PER SHARE BEFORE MERGER EXPENSES............................................... $ 1.39
========
SHARES USED IN COMPUTING PRO FORMA
COMBINED EARNINGS PER SHARE --
BASIC(g)...................................................................................... 30,625
========
DILUTED(g).................................................................................... 34,369
========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
106
<PAGE> 108
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Three Months Ended March 31, 1999
(a) Adjusts compensation expense to the level the previous owners of the
Purchased Companies that were acquired from January 1, 1999 through June
14, 1999 have agreed to receive as employees of the Company subsequent to
their acquisition.
(b) Adjusts goodwill amortization expense to reflect the acquisitions of the
Purchased Companies that were acquired from January 1, 1999 through June
14, 1999, over a 40 year estimated life.
(c) Records incremental interest expense on the debt incurred to fund the cash
portion of the consideration paid for the acquisition of the Purchased
Companies that were acquired from January 1, 1999 through June 14, 1999,
offset by the reduction in interest expense related to the repayment of
debt from proceeds of the follow-on offering of common stock completed in
January 1999. The additional interest expense was calculated utilizing an
annual effective interest rate of approximately 7.0%.
(d) Reflects the incremental provision for federal and state income taxes at an
approximate 44.0 percent overall tax rate.
(e) The computation of pro forma basic and diluted earnings per share for the
three months ended March 31, 1999 is based upon the historical shares of
common stock outstanding at March 31, 1999, adjusted for the issuance of
approximately 1.6 million shares related to the acquisition of six
businesses subsequent to March 31, 1999 and through June 14, 1999. Diluted
earnings per share additionally includes the dilution attributable to the
assumed conversion of the Convertible Subordinated Notes and dilution
attributable to outstanding options to purchase common stock, using the
treasury stock method.
Year Ended December 31, 1998
(a) Reflects the elimination of revenues between certain of the Acquired
Businesses prior to their acquisition by Quanta and the elimination of the
revenues for a division of one of the Purchased Companies because the
Company did not purchase that division.
(b) Reflects the elimination of expenses between certain of the Acquired
Businesses prior to their acquisition by Quanta and the elimination of the
expenses for a division of one of the Purchased Companies because the
Company did not purchase that division.
(c) Adjusts compensation expense to the level the previous owners of the
Acquired Businesses have agreed to receive as employees of the Company
subsequent to their acquisition.
(d) Adjusts goodwill amortization expense to reflect the acquisitions of the
Founding Companies and the Purchased Companies, over a 40 year estimated
life.
(e) Records incremental interest expense on the debt incurred to fund the cash
portion of the consideration paid for the acquisition of the Purchased
Companies, the incremental interest expense and amortization of deferred
financing costs incurred as a result of the issuance of the Convertible
Subordinated Notes, offset by the reduction in interest expense related to
the repayment of debt from proceeds of the follow-on offering of common
stock completed in January 1999. The additional interest expense was
calculated utilizing an annual effective interest rate of approximately
7.0%.
(f) Reflects the incremental provision for federal and state income taxes at an
approximate 44.0 percent overall tax rate.
(g) The computation of pro forma basic and diluted earnings per share for the
year ended December 31, 1998 is based upon the historical shares of common
stock outstanding at December 31, 1998, adjusted for the issuance of
approximately 4.1 million shares related to the acquisition of fourteen
businesses from January 1, 1999 through June 14, 1999 and the issuance of
4.6 million shares of common stock from the follow-on offering completed in
January, 1999. Diluted earnings per share additionally includes the
dilution attributable to the assumed conversion of the Convertible
Subordinated Notes and dilution attributable to outstanding options to
purchase common stock, using the treasury stock method.
107
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
QUANTA SERVICES, INC.
Date: June 17, 1999
By: /s/ DERRICK JENSEN
----------------------------------
Derrick Jensen
Vice President, Controller and
Chief Accounting Officer
108
<PAGE> 110
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- -----------
<C> <S>
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Kirkland Albrecht and Company P.C.
23.3 -- Consent of Joseph Decosimo and Company, LLP
23.4 -- Consent of Ganim, Meder, Childers & Hoering, P.C.
23.5 -- Consent of Nathan Wechsler & Company
</TABLE>
- ---------------
Filed herewith
109
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
reports on the financial statements of the following businesses included in
or made a part of this Current Report on Form 8-K; report dated June 7, 1999
on the consolidated financial statements of Quanta Services, Inc. and
Subsidiaries; our report dated May 7, 1999 on the combined financial
statements of Driftwood Electrical Contractors, Inc.; and our report dated June
3, 1999 on H.L. Chapman Construction Group and to the incorporation by
reference of said reports into Quanta Services, Inc.'s previously filed
Registration Statements on Form S-8 (File Nos. 333-47069 and 333-56849).
ARTHUR ANDERSEN LLP
Houston, Texas
June 15, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated February 3, 1999, on the financial statements of The Ryan Co., Inc.,
included in this Current Form 8-K of Quanta Services, Inc. and to the
incorporation by reference of said report into Quanta Services, Inc.'s
previously filed Registration Statements on Form S-8 (FILE NOS. 339-47069 and
333-56849).
/s/ KIRKLAND ALBRECHT AND COMPANY
Kirkland Albrecht and Company
Braintree, Massachusetts
June 16, 1999
<PAGE> 1
EXHIBIT 23.3
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated August 24, 1998, on the financial statements of Dillard Smith
Construction Company included in this Current Form 8-K of Quanta Services, Inc.
and to the incorporation by reference of said report into Quanta Services,
Inc.'s previously filed Registration Statements on Form S-8 (FILE NOS.
333-47069 and 333-56849).
/s/ JOSEPH DECOSIMO AND COMPANY, LLP
JOSEPH DECOSIMO AND COMPANY, LLP
Chattanooga, Tennessee
June 16, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated September 15, 1998, on the financial statements of Tom Allen Construction
Company included in the Current Form 8-K of Quanta Services, Inc. and to the
incorporation by reference of said report into Quanta Services, Inc.'s
previously filed Registration Statements on Form S-8 (FILE NOS. 333-47069 and
333-56849).
/s/ GANIM, MEDER, CHILDERS & HOERING, P.C.
GANIM, MEDER, CHILDERS & HOERING, P.C.
Belleville, Illinois
June 14, 1999
<PAGE> 1
EXHIBIT 23.5
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report,
dated January 27, 1999, on the financial statements of Seaward Corporation and
subsidiaries included in this Current Form 8-K of Quanta Services, Inc. and to
the incorporation by reference of said report into Quanta Services, Inc.'s
previously filed Registration Statements on Form S-8 (FILE NOS. 333-47069 and
333-56849).
/s/ NATHAN WECHSLER & COMPANY
Nathan Wechsler & Company
Concord, New Hampshire
June 15, 1999
