<PAGE> 1
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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: November 15, 1999
QUANTA SERVICES, INC.
(Exact name of registrant as specified in its charter)
COMMISSION FILE NUMBER: 1-13831
<TABLE>
<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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<PAGE> 2
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
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 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS
a. Financial Statements of Businesses Acquired:
<TABLE>
<S> <C>
(i) Western Directional, Inc.
Independent Auditor's Report
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(ii) GEM Engineering Co., Inc.
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(iii) W.C. Communications, Inc.
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Stockholder's Equity
Statements of Cash Flows
Notes to Financial Statements
(iv) North Sky Communications
Independent Accountant's Report
Balance Sheets
Statements of Income
Statements of Stockholders' Equity
Statements of Cash Flows
Notes to Financial Statements
(v) Crown Fiber Communications, Inc.
Report of Independent Public Accountants
Balance Sheets
Statements of Income
Statements of Stockholder's Equity
Statements of Cash Flows
Notes to Financial Statements
(vi) Edwards Pipeline Company LLC
Report of Independent Public Accountants
Balance Sheets
Statements of Operations
Statements of Members' Equity
Statements of Cash Flows
Notes to Financial Statements
</TABLE>
<TABLE>
<S> <C>
</TABLE>
1
<PAGE> 3
<TABLE>
<S> <C>
(vii) Haines Construction Company
Independent Auditor's Report
Balance Sheets
Statements of Income
Statements of Stockholder's Equity
Statements of Cash Flows
Notes to Financial Statements
(viii) Bonneville Construction Company
Independent Accountant's Report
Balance Sheets
Statements of Operations
Statements of Stockholder's Equity
Statements of Cash Flows
Notes to Financial Statements
(ix) Trawick Construction Co.
Report of Independent Accountants
Combined Balance Sheets
Combined Statements of Income
Combined Statements of Stockholders' Equity
Combined Statements of Cash Flows
Notes to Combined Financial Statements
(x) Telecommunications Division of Conti Enterprises, Inc.
Report of Independent Public Accountants
Statements of Assets, Liabilities and Divisional Equity
Statements of Divisional Operating Profit
Statements of Cash Flows
Notes to Financial Statements
</TABLE>
b. 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 September
(ii) 30, 1999
Notes to Unaudited Pro Forma Combined Balance Sheet as of
(iii) September 30, 1999
(iv) Unaudited Pro Forma Combined Statements of Operations
Notes to Unaudited Pro Forma Combined Statements of
(v) Operations
</TABLE>
c. Exhibits:
<TABLE>
<C> <S>
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Arthur Andersen LLP
23.3 -- Consent of S. J. Gallina & Co., LLP
23.4 -- Consent of Jerry T. Paul, CPA
23.5 -- Consent of McGladrey & Pullen, LLP
23.6 -- Consent of Paul B. Leathers, Inc.
23.7 -- Consent of Babush, Neiman, Kornman & Johnson LLP
23.8 -- Consent of McDaniel & Associates, P.C.
23.9 -- Consent of J.H. Cohn LLP
</TABLE>
2
<PAGE> 4
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL
INFORMATION AND EXHIBITS
a. Financial Statements of Businesses Acquired:
Western Directional, Inc.
Independent Auditor's Report........................... 5
Balance Sheets......................................... 6
Statements of Operations............................... 7
Statements of Stockholders' Equity..................... 8
Statements of Cash Flows............................... 9
Notes to Financial Statements.......................... 10
GEM Engineering Co., Inc.
Report of Independent Public Accountants............... 15
Balance Sheets......................................... 16
Statements of Operations............................... 17
Statements of Stockholders' Equity..................... 18
Statements of Cash Flows............................... 19
Notes to Financial Statements.......................... 20
W.C. Communications, Inc.
Report of Independent Public Accountants............... 26
Balance Sheets......................................... 27
Statements of Operations............................... 28
Statements of Stockholder's Equity..................... 29
Statements of Cash Flows............................... 30
Notes to Financial Statements.......................... 31
North Sky Communications and Affiliates
Report of Independent Public Accountants............... 35
Combined Balance Sheets................................ 36
Combined Statements of Income.......................... 37
Combined Statements of Stockholders' Equity............ 38
Combined Statements of Cash Flows...................... 39
Notes to Combined Financial Statements................. 40
Crown Fiber Communications, Inc.
Report of Independent Public Accountants............... 44
Balance Sheets......................................... 45
Statements of Income................................... 46
Statements of Shareholder's Equity..................... 47
Statements of Cash Flows............................... 48
Notes to Financial Statements.......................... 49
Edwards Pipeline Company LLC
Report of Independent Public Accountants............... 53
Balance Sheets......................................... 54
Statements of Operations............................... 55
Statements of Members' Equity.......................... 56
Statements of Cash Flows............................... 57
Notes to Financial Statements.......................... 58
</TABLE>
3
<PAGE> 5
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Haines Construction Co.
Independent Auditor's Report........................... 62
Balance Sheets......................................... 63
Statements of Income................................... 64
Statements of Stockholder's Equity..................... 65
Statements of Cash Flows............................... 66
Notes to Financial Statements.......................... 67
Bonneville Construction Company, Inc.
Independent Accountant's Report........................ 71
Balance Sheets......................................... 72
Statements of Operations............................... 73
Statements of Stockholder's Equity..................... 74
Statements of Cash Flows............................... 75
Notes to Financial Statements.......................... 76
Trawick Construction Co.
Report of Independent Public Accountants............... 82
Combined Balance Sheets................................ 83
Combined Statements of Income.......................... 84
Combined Statements of Stockholders' Equity............ 85
Combined Statements of Cash Flows...................... 86
Notes to Combined Financial Statements................. 87
Telecommunications Division of Conti Enterprises, Inc.
Report of Independent Public Accountants............... 92
Statements of Assets, Liabilities, and Divisional
Equity................................................ 93
Statements of Divisional Operating Profit.............. 94
Statements of Cash Flows............................... 95
Notes to Financial Statements.......................... 96
</TABLE>
b. Pro forma financial information:
<TABLE>
<S> <C> <C>
(i) Basis of Presentation....................................... 98
Unaudited Pro Forma Combined Balance Sheet as of September
(ii) 30, 1999.................................................... 99
Notes to Unaudited Pro Forma Combined Balance Sheet as of
(iii) September 30, 1999.......................................... 100
Unaudited Pro Forma Combined Statements of Operations....... 101
(iv)
Notes to Unaudited Pro Forma Combined Statements of
(v) Operations.................................................. 103
</TABLE>
<TABLE>
<S> <C>
c. Exhibits................................................. 106
</TABLE>
4
<PAGE> 6
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Western Directional, Inc.:
We have audited the accompanying balance sheet of WESTERN DIRECTIONAL, INC.
as of December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of WESTERN DIRECTIONAL, INC. as
of December 31, 1998, and the results of its operations and cash flows for the
year then ended, in conformity with generally accepted accounting principles.
S. J. Gallina & Co., LLP
Sacramento, California
October 14, 1999
5
<PAGE> 7
WESTERN DIRECTIONAL, INC.
BALANCE SHEET
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
CURRENT ASSETS:
Cash...................................................... $ 503
Accounts receivable:
Trade.................................................. 47
Other.................................................. 13
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 1,177
Prepaid expenses and other current assets................. 5
------
Total current assets.............................. 1,745
PROPERTY AND EQUIPMENT, net................................. 1,264
------
Total assets...................................... $3,009
======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 122
Accounts payable and accrued expenses..................... 93
Income taxes payable...................................... 6
Deferred income taxes..................................... 20
------
Total current liabilities......................... 241
LONG-TERM DEBT, net of current maturities................... 288
DEFERRED INCOME TAXES....................................... 7
------
Total liabilities................................. 536
STOCKHOLDERS' EQUITY:
Common stock, no par value, 100,000 shares authorized,
10,000 shares issued and outstanding................... 50
Retained earnings......................................... 2,423
------
Total stockholders' equity........................ 2,473
------
Total liabilities and stockholders' equity........ $3,009
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
6
<PAGE> 8
WESTERN DIRECTIONAL, INC.
STATEMENT OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
REVENUES.................................................... $5,160
COST OF SERVICES, including depreciation.................... 2,858
------
Gross profit...................................... 2,302
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 640
------
Income from operations............................ 1,662
OTHER INCOME (EXPENSE), net:
Interest expense.......................................... (28)
Interest income and other, net............................ 1
------
Other income (expense), net....................... (27)
------
INCOME BEFORE PROVISION FOR INCOME TAXES.................... 1,635
PROVISION FOR INCOME TAXES.................................. 25
------
Net income........................................ $1,610
======
</TABLE>
The accompanying notes are an integral part of the financial statements.
7
<PAGE> 9
WESTERN DIRECTIONAL, INC.
STATEMENT OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK TOTAL
--------------- RETAINED STOCKHOLDERS'
SHARES AMOUNT EARNINGS EQUITY
------ ------ -------- -------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1998.............................. 10,000 $50 $ 1,941 $ 1,991
Net income.......................................... -- -- 1,610 1,610
Dividends........................................... -- -- (1,128) (1,128)
------ --- ------- -------
BALANCE, December 31, 1998............................ 10,000 $50 $ 2,423 $ 2,473
====== === ======= =======
</TABLE>
The accompanying notes are an integral part of the financial statements.
8
<PAGE> 10
WESTERN DIRECTIONAL, INC.
STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,610
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation........................................... 221
Loss on sale of property and equipment................. 3
Change in deferred income taxes........................ 6
Changes in operating assets and liabilities:
Decrease (increase) in:
Accounts receivable............................... 703
Costs and estimated earnings in excess of billings
on uncompleted contracts.......................... (445)
Prepaid expenses and other current assets......... 9
Increase (decrease) in:
Accounts payable and accrued expenses............. (52)
Income taxes payable.............................. 6
-------
Net cash provided by operating activities......... 2,061
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 104
Additions of property and equipment....................... (452)
Advances on notes receivable.............................. (13)
-------
Net cash used for investing activities............ (361)
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt................................ (103)
Dividends................................................. (1,128)
-------
Net cash used for financing activities............ (1,231)
-------
Net increase in cash.............................. 469
CASH, beginning of period................................... 34
-------
CASH, end of period......................................... $ 503
=======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Income taxes paid......................................... $ 13
Interest paid............................................. $ 28
</TABLE>
The accompanying notes are an integral part of the financial statements.
9
<PAGE> 11
WESTERN DIRECTIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
WESTERN DIRECTIONAL, INC. (the Company) located in Elk Grove, California,
is engaged in heavy engineering construction which includes installation of
underground communications cable, and various types of sewer, water, and natural
gas pipelines. The Company performs its contract work substantially under
unit-price contracts with various contracts being modified by incentive and
penalty provisions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Supplemental Cash Flow Information
The Company had noncash investing activities of approximately $513,000
related to the purchase of approximately $965,000 in property and equipment
during the year ended December 31, 1998.
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 $221,259 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 over its
estimated life. Upon retirement or disposition of property and equipment, the
cost and related accumulated depreciation are removed from the accounts and any
resulting gain or loss is recognized in the statement of operations.
Revenue Recognition
The Company generally recognizes revenue as services are performed. The
Company's contracts, however, generally provide that the customer compensate the
Company only upon full completion of all contract services. Revenues are
recognized using the percentage-of-completion method measured by the percentage
of costs incurred to date to the total estimated costs for each contract.
Contract costs include all direct material, direct labor, subcontract cost and
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs, interest, and depreciation. Provisions for the total
estimated losses on uncompleted contracts are made in the period in which such
losses are determined. Changes in job performance, job conditions, estimated
profitability and final contract settlements may result in revisions to contract
costs and income. The resulting effects are recognized in the period in which
the revisions are determined.
The current asset "Costs and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed.
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.
For income tax purposes, the Company reports income on the accrual method
of accounting.
The Company has elected to be taxed under the provisions of subchapter S of
the Internal Revenue Code and the Revenue and Taxation Code of the State of
California. Under those provisions, the Company did not
10
<PAGE> 12
WESTERN DIRECTIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
pay federal corporate income taxes on its taxable income for the year ended
December 31, 1998. However, the Company did pay a California franchise tax at a
reduced rate of 1.5% on the taxable income it earned within California.
The stockholders are liable for individual federal and California taxes on
the Company's taxable income. In order for the stockholders to be able to pay
these taxes, the board of directors of the Company has resolved that the
stockholders may take minimum annual dividends up to the full tax liability on
the Company's taxable income. The expected federal and California tax liability
on the Company's taxable income for the year ended December 31, 1998 is
approximately $622,000.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the date of financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results may differ from those estimates. Reference is
made to the "Revenue Recognition" section of this footnote for discussion of
certain estimates reflected in the Company's financial statements.
3. PROPERTY AND EQUIPMENT:
Property and equipment at December 31, 1998, consist of the following (in
thousands):
<TABLE>
<CAPTION>
ESTIMATED
USEFUL
LIVES IN
YEARS
---------
<S> <C> <C>
Building.................................................... 40 $ 37
Operating equipment and vehicles............................ 5 1,529
Office equipment, furniture and fixtures.................... 5 - 7 21
------
1,587
Less -- Accumulated depreciation............................ (323)
------
Property and equipment, net................................. $1,264
======
</TABLE>
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Accounts payable and accrued expenses at December 31, 1998, consist of the
following (in thousands):
<TABLE>
<S> <C>
Accounts payable, trade..................................... $85
Accrued compensation and other expenses..................... 8
---
$93
===
</TABLE>
Contracts in progress at December 31, 1998, are as follows (in thousands):
<TABLE>
<S> <C>
Costs incurred on contracts in progress..................... $ 641
Estimated earnings, net of losses........................... 536
------
1,177
Less -- Billings to date.................................... --
------
$1,177
======
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $1,177
======
</TABLE>
11
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WESTERN DIRECTIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
5. DEBT:
The Company's long-term debt obligations at December 31, 1998, consist of
the following (in thousands):
<TABLE>
<S> <C>
Notes payable to third parties due in monthly installments
through May 2008; interest ranging from 8.1% to 8.9%;
collateralized by equipment (See Note 11)................... $ 410
Less -- Current maturities.................................. (122)
-----
Total long-term debt.............................. $ 288
=====
</TABLE>
The maturities of long-term debt at December 31, 1998, are as follows (in
thousands):
<TABLE>
<S> <C>
1999........................................................ $122
2000........................................................ 41
2001........................................................ 25
2002........................................................ 27
2003........................................................ 29
Thereafter.................................................. 166
----
$410
====
</TABLE>
6. OPERATING LEASES:
The Company leases shop and yard space in Santa Clara, California from a
third party under a long-term operating lease. Payments made for the operating
lease were approximately $112,300 for the year ended December 31, 1998. The
original lease term expires November 30, 1999. The Company may, at its option,
extend the term of the lease for two additional one-year periods under
substantially the same conditions.
The Company also leases construction equipment under an operating lease
expiring in June 2000. Payments made for the operating lease were approximately
$40,000 for the year ended December 31, 1998.
Future minimum lease payments under these operating leases are as follows
(in thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1999........................................................ $143
2000........................................................ 20
----
$163
====
</TABLE>
7. INCOME TAXES:
Income tax expense is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
State --
Current................................................... $19
Deferred.................................................. 6
---
$25
===
</TABLE>
12
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WESTERN DIRECTIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
Actual income tax expense differs from income taxes computed by applying
the California reduced tax rate for S corporations of 1.5 percent to income
before provision for income taxes as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1998
------------
<S> <C>
Provision at the reduced rate............................... $25
Increase resulting from --
Permanent differences..................................... 1
Other..................................................... (1)
---
$25
===
</TABLE>
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax liabilities, result principally from the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred income tax liabilities --
Property and equipment.................................... $ 3
Difference in method of accounting for long-term
construction contracts................................. 18
Change in income tax accounting method.................... 6
---
Total net deferred income tax liabilities......... $27
===
</TABLE>
The net deferred income tax liabilities are comprised of the following (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
1998
------------
<S> <C>
Deferred tax liabilities --
Current................................................... $20
Long-term................................................. 7
---
Net deferred income tax liabilities............... $27
===
</TABLE>
8. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and debt. The Company believes that the carrying values of
these instruments on the accompanying balance sheet approximates their fair
values.
9. COMMITMENTS AND CONTINGENCIES:
Litigation
The Company is involved in disputes or legal actions arising in the
ordinary course of business. Management does not believe the outcome of such
legal actions will have a material adverse effect on the Company's financial
position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, business property liability, workers' compensation, general
liability and an umbrella policy.
13
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WESTERN DIRECTIONAL, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)
10. MAJOR CUSTOMERS AND RISK CONCENTRATION:
The Company had sales greater than 10 percent of total sales to two major
customers (comprising approximately 85% and 12% of total sales) during the year
ended December 31, 1998. Approximately 97% of trade receivables are due from one
of the major customers.
The Company grants credit, generally without collateral, to its customers,
which include publicly traded companies and general contractors. Consequently,
the Company is subject to potential credit risk related to changes in business
and economic factors. However, management believes that its contract acceptance,
billing and collection policies are adequate to minimize the potential credit
risk.
11. SUBSEQUENT EVENTS:
Acquisition of Company
On March 3, 1999, the Company was acquired by Quanta Services, Inc. and
operates as a division of Manuel Bros., Inc. (a wholly-owned subsidiary of
Quanta Services, Inc.). In conjunction with this acquisition, third party notes
payable of $409,727 were paid in full.
14
<PAGE> 16
INDEPENDENT AUDITOR'S REPORT
To Gem Engineering Co., Inc.
We have audited the accompanying balance sheet of Gem Engineering Co., Inc.
as of December 31, 1998, and the related statements of operations, stockholders'
equity, and cash flows for the year then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Gem Engineering Co., Inc.
December 31, 1998 and the results of its operations and cash flows for the year
ended in conformity with generally accepted accounting principles.
Jerry T. Paul
Certified Public Accountant
Houston, Texas
April 28, 1999
15
<PAGE> 17
GEM ENGINEERING CO., INC.
BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash and Cash Equivalents................................. $ 384,533 $ 38,253
Accounts Receivable:
Trade..................................................... 2,247,776 2,679,450
Retainage................................................. 5,992 5,984
Employees................................................. 741 35
Other..................................................... 38,978 38,978
Costs and Estimated Earnings in Excess of Billings on
Uncompleted Contracts..................................... 2,207,249 904,453
Prepaid Expenses............................................ 88,152 72,208
---------- ----------
TOTAL CURRENT ASSETS................................ 4,973,421 3,739,361
PROPERTY AND EQUIPMENT:
Transportation Equipment.................................. 122,362 71,807
Leasehold Improvements.................................... 29,944 29,944
Office Furniture and Equipment............................ 286,106 286,106
Shop Equipment and Tools.................................. 114,539 114,539
---------- ----------
552,951 502,396
Less-Accumulated Depreciation............................... 309,939 304,331
---------- ----------
TOTAL PROPERTY AND EQUIPMENT........................ 243,012 198,065
OTHER ASSETS:
Security Deposits......................................... 2,292 2,092
---------- ----------
TOTAL ASSETS........................................ $5,218,725 $3,939,518
========== ==========
LIABILITIES
CURRENT LIABILITIES:
Accounts Payable -- Trade................................. $1,027,222 $ 712,260
Note Payable -- Line of Credit............................ -- 20,477
Current Portion -- Long Term Debt......................... 1,103,986 1,014,111
Payroll Taxes Payable..................................... 3,310 2,363
Accrued Expenses.......................................... 8,825 14,013
Due to Affiliates......................................... 80,468 3,880
Accrued Management Incentives............................. 1,639,427 849,612
State Taxes Payable....................................... 3,983 3,983
Deferred State Tax Provision.............................. 9,400 11,200
Billings in Excess of Costs and Estimated Earnings on
Contracts In Progress................................... 219,523 186,577
---------- ----------
TOTAL CURRENT LIABILITIES........................... 4,096,144 2,818,476
LONG TERM DEBT:
Notes Payable -- Affiliates............................... 1,098,143 1,008,143
Note Payable -- Vehicle................................... 16,129 14,715
---------- ----------
1,114,272 1,022,858
Less -- Current Portion................................... 1,103,986 1,014,111
---------- ----------
TOTAL LONG TERM DEBT................................ 10,286 8,747
OTHER LIABILITIES:
Deferred State Tax Provision.............................. 25,000 25,000
---------- ----------
TOTAL LIABILITIES................................... 4,131,430 2,852,223
---------- ----------
STOCKHOLDERS' EQUITY
Common Stock -- Par Value $1, Authorized 10,000 shares;
Issued and Outstanding 2,000 shares....................... 2,000 2,000
Retained Earnings........................................... 1,085,295 1,085,295
TOTAL STOCKHOLDERS' EQUITY.......................... 1,087,295 1,087,295
---------- ----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY........... $5,218,725 $3,939,518
========== ==========
</TABLE>
See Accompanying Notes to Financial Statements
16
<PAGE> 18
GEM ENGINEERING CO., INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE FOR THE THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, 1998 1998 1999
----------------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CONTRACT REVENUE..................................... $13,662,613 $2,062,638 $4,028,567
COST OF CONSTRUCTION................................. 10,216,186 1,547,849 2,878,247
GROSS PROFIT......................................... 3,446,427 514,789 1,150,320
INDIRECT AND ADMINISTRATIVE
EXPENSES............................................. 3,256,370 533,427 1,125,568
----------- ---------- ----------
INCOME (LOSS) FROM OPERATIONS........................ 190,057 (18,638) 24,752
OTHER INCOME (EXPENSE):
Interest Expense................................... (133,694) (7,393) (25,839)
Interest Income & Other, Net....................... (56,363) 26,031 1,087
INCOME BEFORE INCOME TAXES........................... -- -- --
PROVISION FOR INCOME TAXES........................... -- -- --
----------- ---------- ----------
$ -- $ -- $ --
=========== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements
17
<PAGE> 19
GEM ENGINEERING CO., INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
------ ------ ---------- ----------
<S> <C> <C> <C> <C>
BALANCE -- December 31, 1997......................... 2,000 $2,000 $1,085,295 $1,085,295
Net Income...................................... -- -- -- --
----- ------ ---------- ----------
BALANCE -- December 31, 1998......................... 2,000 2,000 1,085,295 1,087,295
Net Income (Unaudited).......................... -- -- -- --
----- ------ ---------- ----------
BALANCE -- March 31,1999 (Unaudited)................. 2,000 $2,000 $1,085,295 $1,087,295
===== ====== ========== ==========
</TABLE>
See accompanying Notes to Financial Statements
18
<PAGE> 20
GEM ENGINEERING CO., INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS
FOR THE ENDED MARCH 31,
YEAR ENDED ----------------------
DECEMBER 31, 1998 1998 1999
----------------- --------- ----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net Income......................................... $ -- $ -- $ --
Adjustments to Reconcile Net Income to Net Cash
Used In Operating Activities:
Depreciation.................................... 91,772 23,290 21,574
Gain on Sale of Equipment....................... (39,505) 2,293
Changes in Operating Assets and Liabilities:
(Increase) Decrease in Assets:
Accounts Receivable........................... (803,054) 595,545 (430,960)
Underbillings................................. (633,435) (939,437) 1,302,796
Prepaid Expenses.............................. 37,972 29,336 15,944
Other Assets.................................. (202) 200
Increase (Decrease) in Liabilities:
Accounts Payable.............................. (592,845) (210,218) (314,962)
Due to Affiliate.............................. (150,116) 76,358 (76,588)
Overbillings.................................. 108,445 12,860 (32,946)
Accrued Expenses.............................. (12,095) (84,631) 5,188
Provision for State Income Taxes.............. 590 1,800
Accrued Salaries.............................. 1,479,554 252,777 (789,815)
Payroll Taxes Payable......................... 776 57 (947)
---------- --------- ----------
NET CASH USED BY OPERATING ACTIVITIES................ $ (512,143) (244,063) (296,423)
CASH FLOW FROM INVESTING ACTIVITIES:
Purchase of Property and Equipment................. (104,043) (78,056)
Proceeds from Sale of Equipment.................... 56,159 21,080
---------- --------- ----------
NET CASH PROVIDED BY INVESTING ACTIVITIES............ (47,884) (78,056) 21,080
CASH FLOW FROM FINANCIAL ACTIVITIES:
Loans From Affiliates.............................. 1,091,635 (90,000)
Advances on Line of Credit-Net..................... (333,594) 232,306 20,477
Repayments of Vehicle Notes........................ (5,346) (1,299) (1,414)
---------- --------- ----------
NET CASH FLOW PROVIDED BY FINANCIAL ACTIVITIES....... 752,696 231,007 70,937
---------- --------- ----------
INCREASE (DECREASE) IN CASH.......................... $ 192,669 (91,112) (346,280)
CASH AT BEGINNING OF PERIOD.......................... 191,864 191,864 384,533
---------- --------- ----------
CASH AT END OF PERIOD................................ $ 384,533 $ 100,752 $ 38,253
========== ========= ==========
SUPPLEMENTARY INFORMATION:
CASH PAID DURING THE YEAR FOR:
Interest........................................... $ 133,694 $ 7,393 $ 25,838
NONCASH FINANCING ACTIVITIES:
Intercompany Debt Incurred for Equipment
Purchases....................................... 77,000 -- --
</TABLE>
See accompanying Notes to Financial Statements
19
<PAGE> 21
GEM ENGINEERING CO., INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998
1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The following items comprise the significant accounting policies of the
Company. The financial statements and notes are representations of the Company's
management, who is responsible for their integrity and objectivity. The policies
reflect industry practices and conform to generally accepted accounting
principles.
Business Activity
The Company is engaged in the design, engineering, and construction
management of communication towers throughout the United States. The Company is
headquartered in Houston, Texas.
Interim Financial Information
The unaudited interim 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
of the entire fiscal year.
Use of Estimates
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.
Property and Equipment
Property and equipment are carried at cost. Provisions for depreciation are
calculated using the straight-line method. Maintenance and repairs are charged
to operations when incurred. Betterment and renewals are capitalized. When
property and equipment are sold otherwise or disposed of, the asset account and
related accumulated depreciation accounts are reduced, and any gain or loss is
included in operations. Depreciation expense for the year ended December 31,
1998 was $91,772.
Operating Cycle
The Company's "operating cycle" is the length of each individual contract.
Therefore, the accounts and retainage receivable and payable related to
contracts and the future taxes related to income earned on the contracts in
progress are treated as current items.
Comparative Statements
The Company experiences significant changes in timing, size and type of
jobs from year to year. Because of the effect of such differences on the balance
sheet and the statement of operations and changes in financial position,
comparative statements would not be completely valid without additional
explanations which would detract from the clarity of the financial report.
Therefore, comparative statements have not been included in this report.
20
<PAGE> 22
GEM ENGINEERING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenues and Cost
The Company recognizes revenues from fixed-price and modified fixed-price
construction contracts on the percentage-of-completion method, measured by the
percentage of cost incurred to date to estimated total cost for 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 charges 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.
The assets, "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.
Income Taxes
The shareholders of Gem Engineering Co., Inc. have elected to be taxed
under Subchapter S of the Internal Revenue Code. Subchapter S taxes the
shareholders of the corporation individually on their proportionate share of the
corporation's income.
The Company recognizes revenue on lump sum contracts on the percentage of
completion method of accounting for financial statement purposes and federal
income tax purposes. The Company has elected to convert from the cash basis of
accounting to the percentage of completion method as of January 1, 1997. The
Company will recognize the accumulated difference in the accounting methods at
January 1, 1997 of $1,517,598 over the next six years.
Cash and Cash Equivalents
Amounts included in cash and cash equivalents include cash on hand,
unrestricted cash deposits with banks, investments in money market mutual funds,
and short term (three months or less) securities of governmental agencies.
2 -- ACCOUNTS RECEIVABLE
An aging of the accounts receivable of the Company at December 31, 1998 is
as follows:
<TABLE>
<S> <C>
Current................................................. $1,231,919
Over 30 days............................................ 597,546
Over 60 days............................................ 340,425
Over 90 days............................................ 77,886
----------
$2,247,776
==========
</TABLE>
The accounts receivable are pledged as security for the line of credit
loan. In management's opinion, an allowance for doubtful accounts is not deemed
necessary.
21
<PAGE> 23
GEM ENGINEERING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
During the year ended December 31, 1998, management wrote off as bad debts
$122,783 relating to prior year sales. The Company is currently pursuing
collection of these amounts even though they have been written off due to their
current inactivity.
3 -- CONTRACTS IN PROGRESS
Information with respect to contracts in progress at December 31, 1998
follows:
<TABLE>
<S> <C>
Expenditures on uncompleted contract jobs................... $7,623,595
Recognized profits thereon.................................. 1,860,142
----------
9,483,737
Less-Advance billings applicable thereto.................... 7,496,011
----------
$1,987,726
==========
</TABLE>
Included in the accompanying balance sheets at December 31, 1998 under the
following caption:
<TABLE>
<S> <C>
Costs and estimated earnings in excess of billings on
contracts in progress....................................... $2,207,249
Billings in excess of costs and estimated earnings on
contracts in progress..................................... 219,523
----------
$1,987,726
==========
</TABLE>
4 -- INCOME TAXES
As discussed in Note 1, the Company's shareholders elected to be taxed as a
Subchapter S Corporation. Subchapter S taxes the shareholders individually on
their proportionate share of the corporation's net income. Due to various timing
differences, income is recognized in different periods for tax reporting
purposes than for financial statement purposes. The shareholders taxable income
for the year ended December 31, 1998 will be as follows:
<TABLE>
<S> <C> <C>
Income before income tax effects..................................... $ --
Amortization of deferred cash basis adjustment....................... 252,933
---------
252,933
Depreciation Adjustment:
Book depreciation......................................... $91,772
Tax depreciation.......................................... 88,377 $ 3,395
-------
Basis difference on sale of assets................................... 5,251
State tax provision.................................................. 1,400
Management incentives accrued (net).................................. (140,355)
Other reconciling items.............................................. 784
---------
Shareholders' taxable income......................................... $ 123,408
=========
</TABLE>
22
<PAGE> 24
GEM ENGINEERING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company's retained earnings is composed of the following at December
31, 1998:
<TABLE>
<S> <C> <C>
Retained earnings recognized for tax purposes in prior
years:
Pre-election accumulation................................. $ None
Post S election accumulation.............................. (69,860) $ (69,860)
---------
Retained earnings recognized as income in the current year............. 122,627
Distributions to shareholders from current earnings.................... None
Retained earnings representing income not yet recognized for tax
purposes............................................................. 1,032,528
----------
Total retained earnings per financial statements at December 31,
1998................................................................. $1,085,295
==========
Timing differences at year end are composed of the
following:
Deferred "cash basis" income......................................... $1,011,732
Tax depreciation in excess of book depreciation...................... 74,714
Provision for State Income Taxes..................................... (34,400)
Accrued management incentives........................................ (19,518)
----------
$1,032,528
==========
</TABLE>
5 -- REVOLVING LINE OF CREDIT
The Company has a line of credit with Merrill Lynch Business Financial
Services, Inc. in the amount of $2,000,000, with an expiration date of July 31,
2000. The line is secured by a first lien on all of the business assets of the
Company, and a personal guarantee of the shareholders of the company. The line
bears interest at 2.65% above the "30-day Dealer Commercial Paper Rate" reported
in the Wall Street Journal. The Company can borrow up to 80% of its accounts
receivable less than 90 days old, and not due from an affiliated person or
entity, or $2,000,000, whichever is less. At December 31, 1998, the Company did
not have an outstanding loan balance on the line.
The line requires the Company have a "tangible net worth" in excess of
$1,000,000 and that the shareholders of the Company maintain personal liquidity
of cash and unencumbered marketable securities in excess of $1,000,000. The
Company is also required to maintain certain financial ratios during the term of
the loan.
6 -- RELATED PARTY TRANSACTIONS
The shareholders of the Company (Gem) also own two other companies,
Communications Construction Incorporated (CCI) and Tower Erection Construction
Co., Inc. (TEC).
Until 1997, CCI subcontracted tower communication work from Gem. CCI is not
presently performing any construction work and has loaned Gem $894,991 on an
unsecured basis with interest payable at 8.5%. Total interest paid CCI for 1998
was $66,483. In addition, $66,483 was owed to CCI as a result of intercompany
transactions including $34,640 for purchase of CCI's fixed assets during the
year.
TEC also subcontracted with Gem until 1997 for tower erection work. The
Company was inactive until November, 1998 when operations were restarted. For
the period ended December 31, 1998, intercompany subcontracting costs with TEC
were $30,534. TEC also loaned Gem $410,642 during the year on an unsecured basis
with interest payable at 8.5%. The balance on the loan at December 31, 1998 was
$205,152 and interest paid for 1998 was $27,804. In addition, $13,985 was owed
to TEC as a result of intercompany transactions including $43,440 for purchase
of TEC's fixed assets during the year.
23
<PAGE> 25
GEM ENGINEERING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7 -- CONCENTRATION OF CREDIT RISK
The Company maintains cash deposits with a bank and one money market mutual
fund. Funds on deposit with mutual funds are not insured in the case of the
failure of any of the underlying financial instruments. At various times during
the year the company had amounts on deposit with its banks in excess of the
Federal Deposit Insurance Corporation limits of $100,000, such deposits would be
unprotected in the case of a failure of the banking institution.
Accounts receivable of the Company at December 31, 1998 are concentrated in
the following categories:
<TABLE>
<CAPTION>
CATEGORY % OF TOTAL
- -------- ----------
<S> <C>
Agencies of the State of Kansas........................... 22%
National communications companies......................... 72%
</TABLE>
8 -- PROFIT SHARING PLAN
The Company terminated its profit sharing plan during the year. The Company
elected not to make a contribution to the plan for the year ended December 31,
1998.
9 -- NOTE PAYABLE -- INSTALLMENT
The Company was liable for the following notes payable at December 31,
1998:
<TABLE>
<CAPTION>
MATURITY INTEREST MONTHLY
LENDER COLLATERAL DATE RATE PAYMENT AMOUNT
- ------ ---------- -------- -------- ------- ----------
<S> <C> <C> <C> <C> <C>
Frost National Bank....................... Vehicle 7/01 8.50% $582 $ 16,129
Communications Construction, Inc. ........ Unsecured 2/99 8.50% 894,991
Tower Erection Company.................... Unsecured 1/99 8.50% 203,152
----------
$1,114,272
==========
</TABLE>
Maturities of these notes as of December 31, 1998 are as follows:
<TABLE>
<S> <C>
December 31, 1999........................................ $1,103,986
December 31, 2000........................................ 6,359
December 31, 2001........................................ 3,927
----------
$1,114,272
==========
</TABLE>
10 -- LEASE OBLIGATIONS
The Company leases some office facilities from its stockholders at a
monthly rental of $3,000 per month under a year lease that expires February 29,
2000. Lease expense for 1998 was $30,000. The Company also leases some
additional office facilities with a base monthly rental of $2,093 under a
three-year lease that expires March 1, 2000. Rent expense for 1998 was $25,116.
In addition, the Company has entered into a non-cancellable lease agreement for
pickup trucks under a two-year agreement expiring in July, 1999. Rent expense
for 1998 was $15,400.
The following is a schedule by years of future minimum rentals under leases
at December 31, 1998.
<TABLE>
<CAPTION>
YEAR AMOUNT
- ---- -------
<S> <C>
1999....................................................... $70,400
2000....................................................... 10,185
-------
$80,585
=======
</TABLE>
24
<PAGE> 26
GEM ENGINEERING CO., INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
11 -- CONTINGENCIES
The Company generally warrants its work to the owners of its completed work
for a period of one year. No allowance for warranty expense is provided, as
historically, this expense has been immaterial and charged to expense as
incurred.
Contract payments on several jobs for the government have been reduced for
possible assessment of liquidating damages. In the opinion of management, the
government has no basis for the assessment when in fact the Company's claims for
additional reimbursement far exceed the liquidating damages which does not
include claims in revenues until the Company realization is probable and the
amount can be reliably estimated. The attorney representing the Company on these
claims has been engaged on a contingency fee arrangement so the Company should
not incur any legal cost in the pursuit of these claims.
During the year the Company settled its lawsuit with Sherwin-Williams that
was filed on March 17, 1997. The suit alleged that Gem's subcontractor failed to
pay for paint delivered at the Jim Creek Naval Project. The suit was filed as a
Miller Act claim against Gem's bonding company. Gem was not a party, but
contractually agreed to indemnify the bonding company. The Company was
unsuccessful on its defense and incurred legal and settlement costs of $271,214,
which are included in indirect and administrative expenses for the year ended
December 31, 1998.
Gem also incurred $103,170 in costs during the year to correct work
performed by one of its subcontractors, involving a communication tower for the
Kansas Department of Transportation. The tower suffered structural damage as a
result of improper installation, and the Company corrected the problem and
elected to avoid litigation with the subcontractor or its insurance company.
12 -- SUBSEQUENT EVENT TO AUDITOR'S REPORT (UNAUDITED)
On May 28, 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.
25
<PAGE> 27
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To W.C. Communications, Inc.:
We have audited the accompanying balance sheet of W.C. Communications, Inc., a
California Subchapter S Corporation, as of December 31, 1998, and the related
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 financial statements referred to above present fairly, in
all material respects, the financial position of W.C. Communications, 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
October 8, 1999
26
<PAGE> 28
W.C. COMMUNICATIONS, INC.
BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, MARCH 31,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 236 $ 374
Accounts receivable....................................... 2,060 2,360
Due from stockholder...................................... 246 262
Prepaid expenses and other current assets................. 78 135
------ ------
Total current assets.............................. 2,620 3,131
PROPERTY AND EQUIPMENT, net................................. 1,183 1,284
OTHER ASSETS................................................ 13 6
------ ------
Total assets...................................... $3,816 $4,421
====== ======
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations............... $ 344 $ 381
Accounts payable and accrued liabilities.................. 486 632
------ ------
Total current liabilities......................... 830 1,013
LONG-TERM OBLIGATIONS, net of current maturities............ 356 433
COMMITMENTS AND CONTINGENCIES
STOCKHOLDER'S EQUITY:
Common stock, no par value, 2,500 shares authorized, 1,000
shares issued and outstanding.......................... -- --
Additional paid-in capital................................ 10 10
Retained earnings......................................... 2,620 2,965
------ ------
Total stockholder's equity........................ 2,630 2,975
------ ------
Total liabilities and stockholder's equity........ $3,816 $4,421
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
27
<PAGE> 29
W.C. COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED ENDED MARCH 31,
DECEMBER 31, ---------------
1998 1998 1999
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................................... $9,084 $1,412 $2,989
COSTS OF SERVICES, including depreciation................... 6,672 1,156 2,299
------ ------ ------
Gross profit...................................... 2,412 256 690
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 986 142 329
------ ------ ------
Income from operations............................ 1,426 114 361
------ ------ ------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (23) (3) (17)
Interest income and other, net............................ 2 3 1
------ ------ ------
Other expense, net................................ (21) -- (16)
------ ------ ------
NET INCOME.................................................. $1,405 $ 114 $ 345
====== ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
28
<PAGE> 30
W.C. COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED
SHARES AMOUNT CAPITAL EARNINGS TOTAL
------ ------ ---------- -------- ------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997....................... 1,000 $ -- $10 $1,515 $1,525
Net income..................................... -- -- -- 1,405 1,405
Distributions to stockholder................... -- -- -- (300) (300)
----- ---- --- ------ ------
BALANCE, December 31, 1998....................... 1,000 -- 10 2,620 2,630
Net income (unaudited)......................... -- -- -- 345 345
----- ---- --- ------ ------
BALANCE, March 31, 1999 (unaudited).............. 1,000 $ -- $10 $2,965 $2,975
===== ==== === ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
29
<PAGE> 31
W.C. COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<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................................................ $ 1,405 $ 114 $ 345
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 279 71 80
Changes in operating assets and liabilities, net of
noncash transactions --
Accounts receivable.................................... (1,008) (203) (300)
Prepaid expenses and other current assets.............. 11 48 (57)
Other assets........................................... (12) (1) 7
Accounts payable and accrued liabilities............... 176 (17) 146
------- ----- -----
Net cash provided by operating activities......... 851 12 221
------- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (353) (51) (16)
------- ----- -----
Net cash used in investing activities............. (353) (51) (16)
------- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations........... 340 -- 200
Principal payments on long-term obligations............... (199) (8) (251)
Distributions to stockholder.............................. (300) -- --
Due from stockholder...................................... (246) -- (16)
------- ----- -----
Net cash used in financing activities............. (405) (8) (67)
------- ----- -----
NET INCREASE (DECREASE) IN CASH............................. 93 (47) 138
CASH, beginning of period................................... 143 143 236
------- ----- -----
CASH, end of period......................................... $ 236 $ 96 $ 374
======= ===== =====
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 12 $ 3 $ 10
======= ===== =====
SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS:
Property and equipment acquired with notes payable........ $ 478 $ 103 $ 165
======= ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
30
<PAGE> 32
W.C. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
1. BUSINESS AND ORGANIZATION
W.C. Communications, Inc. (W.C. or the Company), a California Subchapter S
Corporation, is primarily engaged in the installation of fiber optic lines and
cables for the broadband industry in the continental United States. The Company
performs a majority of its contract work under unit-price contracts, with
contract terms generally ranging from three to 12 months.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The unaudited interim 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
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 necessary to fairly
present the financial position, results of operations and cash flows with
respect to the interim financial statements have been included. The results of
operations for the interim periods are not necessarily indicative of the results
of the entire year.
Accounts Receivable and Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
deemed probable. As of December 31, 1998, management estimates all accounts to
be collectible.
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 $279 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 statement of operations.
Revenue Recognition
The Company recognizes revenue when services are performed under
unit-priced contracts. Such contracts generally provide that the customer accept
completion of progress to date and compensate the Company for services which
have been rendered, measured typically in terms of units installed, hours
expended or some other measure of progress. 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 customer contracts will be due upon completion of the contracts
and acceptance by the customer. Based on the Company's experience
31
<PAGE> 33
W.C. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
with similar contracts in recent years, the retention balance at each balance
sheet date will be collected within the subsequent fiscal year.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and long-term obligations. The Company believes that the
carrying value of these instruments on the accompanying balance sheets
approximates their fair value.
Warranty Costs
For certain contracts, the Company warrants labor for the first year after
completion of the contract. An accrual for warranty costs is recorded based upon
the historical level of warranty claims and management's estimate of future
costs.
Income Taxes
The Company has elected S Corporation status as defined by the Internal
Revenue Code, whereby the Company is not subject to taxation for federal
purposes. Under S Corporation status, the stockholders report their shares of
the Company's taxable earnings or losses in their personal tax returns. The
Company terminated its S Corporation status concurrently with the effective date
of its acquisition by Quanta Services, Inc. (see Note 8).
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 December 31, 1998, consists of the following:
<TABLE>
<S> <C>
Trade....................................................... $1,709
Retainage................................................... 351
------
$2,060
======
</TABLE>
Property and equipment at December 31, 1998, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS
------------
<S> <C> <C>
Operating equipment and vehicles............................ 5-7 $1,615
Office equipment, furniture and fixtures.................... 5-7 49
------
1,664
Less -- Accumulated depreciation............................ (543)
------
Property and equipment, net....................... $1,121
======
</TABLE>
32
<PAGE> 34
W.C. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Accounts payable and accrued liabilities at December 31, 1998, consist of
the following:
<TABLE>
<S> <C>
Trade accounts payable...................................... $292
Accrued compensation and benefits........................... 170
Other accrued liabilities................................... 24
----
$486
====
</TABLE>
4. LINE OF CREDIT AND LONG-TERM OBLIGATIONS
The Company's line of credit and long-term obligations at December 31,
1998, consisted of the following:
<TABLE>
<S> <C>
Line of credit with a bank with total borrowing capacity of
$200, variable interest at prime rate plus 1.50% (9.25% at
December 31, 1998), interest only payable monthly, maturing
November 1999............................................... $200
Notes payable to various financial institutions, interest
ranging from 11.90% to 19.00%, secured by certain vehicles
and equipment, due in monthly installments, maturing at
various dates through February 2003....................... 436
Capital leases.............................................. 64
----
700
Less -- Current maturities.................................. (344)
----
Total long-term obligations....................... $356
====
</TABLE>
The line of credit and notes payable to various financial institutions are
subject to certain financial reporting and financial ratio requirements. At
December 31, 1998, the Company was in compliance with all debt covenants.
The maturities of long-term obligations, excluding capital leases, for the
following five years as of December 31, 1998, are as follows:
<TABLE>
<S> <C>
Year ending December 31 --
1999...................................................... $317
2000...................................................... 127
2001...................................................... 129
2002...................................................... 60
2003...................................................... 3
----
$636
====
</TABLE>
33
<PAGE> 35
W.C. COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases certain buildings and equipment under noncancelable
lease agreements. The following schedule shows the future minimum lease payments
under these leases as of December 31, 1998:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------- ---------
<S> <C> <C>
Year ending December 31 --
1999...................................................... $ 34 $ 180
2000...................................................... 35 180
2001...................................................... 6 180
2002...................................................... -- 180
2003...................................................... -- 180
Thereafter................................................ -- 540
---- ------
Total minimum lease payments...................... 75 $1,440
======
Less -- Amounts representing interest....................... (11)
----
Present value of minimum lease payments........... 64
Less -- Current portion..................................... (27)
----
Long-term obligation.............................. $ 37
====
</TABLE>
Rent expense for the year ended December 31, 1998, was $309. Assets under
capital leases are included as part of property and equipment.
5. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
During 1998, the Company had sales greater than 10 percent of total sales
to three customers, which accounted for 42 percent, 23 percent and 18 percent,
respectively, of the Company's revenues. Approximately 38 percent, 26 percent
and 2 percent of trade and retainage receivables at December 31, 1998, are due
from each of these customers, respectively.
The Company 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 Company 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.
6. RELATED-PARTY TRANSACTIONS
During 1998, a receivable to the sole stockholder was recorded. The
receivable balance at December 31, 1998, was $246 and was paid off in June 1999.
7. 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.
8. SUBSEQUENT EVENT
In June 1999, the Company was acquired by Quanta Services, Inc.
34
<PAGE> 36
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To North Sky Communications and Affiliates:
We have audited the accompanying combined balance sheet of North Sky
Communications and affiliates (the Company), as of December 31, 1998 and the
related combined statements of income and 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 combined financial position of North Sky
Communications and affiliates 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.
ARTHUR ANDERSEN LLP
Portland, Oregon
July 9, 1999
35
<PAGE> 37
NORTH SKY COMMUNICATIONS AND AFFILIATES
COMBINED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 431,200 $ 827,959
Accounts receivable --
Trade.................................................. 2,552,950 5,020,728
Retainage.............................................. 455,112 360,443
Other current assets...................................... 76,497 145,027
---------- ----------
Total current assets.............................. 3,515,759 6,354,157
PROPERTY AND EQUIPMENT, net................................. 1,679,372 2,218,280
---------- ----------
Total assets...................................... $5,195,131 $8,572,437
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term obligations............... $ 466,237 $ 616,243
Accounts payable.......................................... 626,345 972,592
Accrued payroll and related liabilities................... 289,581 467,306
Accrued liabilities....................................... 42,711 54,860
Notes payable, related party.............................. 1,214,185 1,055,585
---------- ----------
Total current liabilities......................... 2,639,059 3,166,586
LONG-TERM OBLIGATIONS, net of current maturities............ 657,700 882,275
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Sky Antenna Systems, Inc. common stock, $1 par value,
50,000 shares authorized, 14,512 shares issued and
outstanding............................................ 14,512 14,512
North Pacific Utility Contractors, Inc. common stock,
$.001 par value, 100,000 shares authorized, 20,000
shares issued and outstanding.......................... 20 20
Sky Antenna Systems, Inc. additional paid-in capital...... 39,283 39,283
North Pacific Utility Contractors, Inc. additional paid-in
capital................................................ 980 980
Retained earnings......................................... 1,843,577 4,468,781
---------- ----------
Total stockholders' equity........................ 1,898,372 4,523,576
---------- ----------
Total liabilities and stockholders' equity........ $5,195,131 $8,572,437
========== ==========
</TABLE>
The accompanying notes are an integral part of these combined balance sheets.
36
<PAGE> 38
NORTH SKY COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1998 1998 1999
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES............................................... $14,562,355 $6,180,316 $11,183,456
COST OF SERVICES, including depreciation............... 9,876,898 4,069,525 7,899,853
----------- ---------- -----------
Gross profit................................. 4,685,457 2,110,791 3,283,603
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 4,446,666 1,910,451 619,172
----------- ---------- -----------
Income from operations....................... 238,791 200,340 2,664,431
----------- ---------- -----------
OTHER INCOME (EXPENSE):
Interest expense..................................... (107,600) (28,830) (56,578)
Interest income...................................... 151,750 42,844 7,914
Other income (expense), net.......................... (390) 5,752 9,437
----------- ---------- -----------
Other income (expense), net.................. 43,760 19,766 (39,227)
----------- ---------- -----------
NET INCOME............................................. $ 282,551 $ 220,106 $ 2,625,204
=========== ========== ===========
</TABLE>
The accompanying notes are an integral part of these combined statements.
37
<PAGE> 39
NORTH SKY COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
------------------------------------
NORTH PACIFIC ADDITIONAL PAID-IN CAPITAL
SKY ANTENNA UTILITY ---------------------------------
SYSTEMS, INC. CONTRACTORS, INC. NORTH PACIFIC
---------------- ----------------- SKY ANTENNA UTILITY RETAINED
SHARES AMOUNT SHARES AMOUNT SYSTEMS, INC. CONTRACTORS, INC. EARNINGS TOTAL
------ ------- ------- ------- ------------- ----------------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997... 14,512 $14,512 20,000 $20 $39,283 $980 $1,561,026 $1,615,821
Net income................. -- -- -- -- -- -- 282,551 282,551
------ ------- ------ --- ------- ---- ---------- ----------
BALANCE, December 31, 1998... 14,512 14,512 20,000 20 39,283 980 1,843,577 1,898,372
Net income (unaudited)..... -- -- -- -- -- -- 2,625,204 2,625,204
------ ------- ------ --- ------- ---- ---------- ----------
BALANCE, June 30, 1999
(unaudited)................ 14,512 $14,512 20,000 $20 $39,283 $980 $4,468,781 $4,523,576
====== ======= ====== === ======= ==== ========== ==========
</TABLE>
The accompanying notes are an integral part of these combined statements.
38
<PAGE> 40
NORTH SKY COMMUNICATIONS AND AFFILIATES
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
YEAR ENDED ENDED ENDED
DECEMBER 31, JUNE 30, JUNE 30,
1998 1998 1999
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income........................................... $ 282,551 $ 220,106 $ 2,625,204
Adjustments to reconcile net income to net cash
provided by operating activities --
Depreciation and amortization expense............. 512,746 223,500 305,796
Changes in operating assets and liabilities --
Accounts receivable............................... (1,198,719) (334,656) (2,373,109)
Other current assets.............................. 34,747 (29,821) (68,530)
Accounts payable.................................. 415,101 115,883 346,247
Accrued payroll and related liabilities........... 42,860 1,467,340 177,725
Accrued liabilities............................... 10,857 (1,587) 12,149
----------- ---------- -----------
Net cash provided by operating activities.... 100,143 1,660,765 1,025,482
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.................. (842,483) (234,877) (844,704)
----------- ---------- -----------
Net cash used in investing activities........ (842,483) (234,877) (844,704)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term obligations...... 773,630 277,569 656,567
Principal payments on long-term obligations.......... (380,387) (174,967) (281,986)
Increase (decrease) in notes payable, related
party............................................. 548,527 (567,854) (158,600)
----------- ---------- -----------
Net cash provided by (used in) financing
activities................................. 941,770 (465,252) 215,981
----------- ---------- -----------
NET INCREASE IN CASH................................... 199,430 960,636 396,759
CASH, beginning of period.............................. 231,770 231,770 431,200
----------- ---------- -----------
CASH, end of period.................................... $ 431,200 $1,192,406 $ 827,959
=========== ========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid during the period for interest............. $ 107,600 $ 28,830 $ 56,578
NONCASH TRANSACTIONS:
Net book value of property and equipment traded in
for new property and equipment.................... 48,152 -- --
</TABLE>
The accompanying notes are an integral part of these combined statements.
39
<PAGE> 41
NORTH SKY COMMUNICATIONS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1998
1. BUSINESS AND ORGANIZATION
North Sky Communications (North Sky) was established in 1990 as a joint
venture between North Pacific Utility Contractors, Inc. (North Pacific) and Sky
Antenna Systems, Inc. (Sky Antenna), to enter into contracts for the
construction, repair, maintenance and extension of cable, both aerial and
underground. North Sky, North Pacific and Sky Antenna are collectively referred
to as North Sky Communications and affiliates (the Company). The Company
operates in one segment primarily in Oregon, Washington, California and Nevada.
A majority of the Company's contract work is under unit-price contracts.
The allocation of joint venture income or loss and distribution of cash
flow is shared equally between North Pacific and Sky Antenna in accordance with
the Joint Venture Agreement.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The combined financial statements include the accounts of North Sky, North
Pacific and Sky Antenna, which are under common ownership. Because of the common
ownership and significant transactions between North Sky and the two
corporations, combined financial statements are presented. All significant
intercompany accounts and transactions have been eliminated.
Interim Financial Information
The unaudited interim 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
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 adjustment necessary to fairly
present the financial position, results of operations and cash flows with
respect to the interim financial statements have been included. The results of
operations for the interim periods are not necessarily indicative of the results
of the entire year.
Accounts Receivable and Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
deemed probable. As of December 31, 1998, there was no allowance for doubtful
accounts.
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
lease term or the estimated useful life of the asset. Depreciation and
amortization expense was $512,746 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 statement of income.
40
<PAGE> 42
NORTH SKY COMMUNICATIONS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
Generally, the terms of the Company's contracts are on a unit price basis,
whereby payment is made based upon the units of work performed. The Company
recognizes revenue on these contracts when services are performed. Occasionally,
the Company will perform work under a fixed price or cost plus fee contracts.
Revenues from such contracts are recognized under the percentage-of-completion
method, measured by the percentage of costs incurred to date to total estimated
costs for each contract. Contract costs include all direct material, labor and
subcontract costs and those indirect costs related to contract performance, such
as indirect labor, supplies, tools, repairs and depreciation costs. Provisions
for the total estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance, job conditions,
estimated profitability and final contract settlements may result in revisions
to costs and income, and their effects are recognized in the period in which the
revisions are determined.
The balances billed but not paid by customers pursuant to retainage
provisions in certain contracts will be due upon completion of the contracts and
acceptance by the customer. Based on the Company's experience with similar
contracts, the retention balance at the balance sheet date will be collected
within the subsequent fiscal year.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and long-term obligations. The Company believes that the
carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
Income Taxes
North Sky is a joint venture and is taxed as a partnership under the
Internal Revenue Code. North Pacific and Sky Antenna have elected to file U.S.
federal and state taxes pursuant to Subchapter "S" of the Internal Revenue Code.
Thus, U.S. federal and state income taxes become the responsibility of the
shareholders.
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 amount of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
3. PROPERTY AND EQUIPMENT
Property and equipment at December 31, 1998, consists of the following:
<TABLE>
<CAPTION>
ESTIMATED USEFUL
LIVES IN YEARS
----------------
<S> <C> <C>
Transportation equipment.................................. 5 $2,219,802
Machinery and equipment................................... 5-7 1,449,580
Office furniture and computer equipment................... 3-5 59,757
Leasehold improvements.................................... 5 43,108
----------
3,772,247
Less -- Accumulated depreciation and amortization......... (2,092,875)
----------
Property and equipment, net..................... $1,679,372
==========
</TABLE>
41
<PAGE> 43
NORTH SKY COMMUNICATIONS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
4. LONG-TERM OBLIGATIONS
The Company's long-term obligations at December 31, 1998, consisted of the
following:
<TABLE>
<S> <C>
Various notes payable with a bank; interest rates range from
8.28% to 8.90%; each note is payable in 36 equal monthly
installments; maturity dates range from 12/00 to 12/01;
secured by vehicles and equipment........................... $ 846,271
Various notes payable with a financing company; interest
rates range from 6.90% to 9.00%; monthly principal and
interest payments; maturity dates range from 5/99 to
12/01; secured by vehicles and equipment.................. 199,463
Various notes payable with a financing company; interest
rates range from 8.00% to 9.25%; monthly principal and
interest payments; maturity dates range from 1/99 to 7/01;
secured by vehicles....................................... 78,203
----------
1,123,937
Less -- Current maturities.................................. (466,237)
----------
Total long-term obligations....................... $ 657,700
==========
</TABLE>
Maturities of long-term obligations as of December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
------------
<S> <C>
1999..................................................... $ 466,237
2000..................................................... 456,944
2001..................................................... 200,756
----------
$1,123,937
==========
</TABLE>
5. NOTES PAYABLE, RELATED PARTY
Sky Antenna has a note payable to its sole shareholder of $641,685. North
Pacific has a note payable to its sole shareholder of $572,500. These notes bear
no interest, are due on demand and have been classified as current on the
accompanying combined balance sheet as of December 31, 1998. These notes
represent salaries due to the shareholders and were issued on December 31, 1998
(see Note 9).
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The Company's operations vary with the general economic conditions of the
telecommunication and cable industry. Financial instruments which potentially
expose the Company to concentration of credit risk consist primarily of trade
accounts receivable. During 1998, the Company had one customer who accounted for
57% of the Company's revenues. This same customer represented $1,773,686 or 59%
of the Company's accounts receivable as of December 31, 1998.
42
<PAGE> 44
NORTH SKY COMMUNICATIONS AND AFFILIATES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
7. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain equipment under long-term operating lease
agreements, which expire in various years through 2001. Rent expense for the
year ended December 31, 1998, was $217,103. The minimum lease payments for
operating leases in future years are as follows:
<TABLE>
<CAPTION>
YEAR ENDING
DECEMBER 31,
- ------------
<S> <C>
1999.................................................... $144,812
2000.................................................... 98,189
2001.................................................... 33,385
--------
$276,386
========
</TABLE>
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.
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
Occasionally, the Company is required to provide performance bonds in
connection with its contract commitments, which are personally guaranteed by the
partners of the Company.
8. DISTRIBUTIONS/COMPENSATION
During the year ended December 31, 1998, North Sky made cash distributions
of $1,543,633 to Sky Antenna and $1,540,416 to North Pacific. These
distributions were eliminated in the combined financial statements.
Sky Antenna and North Pacific individually expensed $1,800,000 for salaries
to the shareholders for the year ended December 31, 1998.
9. SUBSEQUENT EVENT (UNAUDITED)
Effective July 1, 1999, the Company was acquired by Quanta Services, Inc.
(Quanta). The related party notes payable were paid off by Quanta. After the
acquisition, North Sky, North Pacific and Sky Antenna were dissolved and a new
company was formed under Quanta. There were no material contingencies remaining
from the acquisition.
43
<PAGE> 45
INDEPENDENT AUDITORS' REPORT
To Crown Fiber Communications, Inc.:
We have audited the accompanying balance sheet of Crown Fiber
Communications, Inc. (an S corporation) as of December 31, 1998, and the related
statements of income and shareholder's equity and cash flows for the year then
ended. These financial statements are the responsibility of the management of
Crown Fiber Communications, Inc. 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 Crown Fiber Communications,
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.
Babush, Neiman, Kornman & Johnson, LLP
Atlanta, Georgia
July 30, 1999
44
<PAGE> 46
CROWN FIBER COMMUNICATIONS, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $1,352,389 $ 2,748,774
Accounts receivable -- trade.............................. 2,602,680 6,307,470
Accounts receivable -- other.............................. 23,500 --
Note receivable........................................... 27,499 --
Employee advances......................................... 19,572 27,589
Due from affiliates....................................... 111,232 150,619
---------- -----------
Total Current Assets.............................. 4,136,872 9,234,452
PROPERTY AND EQUIPMENT, NET................................. 1,085,810 1,046,313
DEPOSITS.................................................... 10,849 19,094
---------- -----------
Total Assets...................................... $5,233,531 $10,299,859
========== ===========
LIABILITIES AND SHAREHOLDER'S EQUITY
CURRENT LIABILITIES
Accounts payable -- trade................................. $1,330,500 $ 2,770,221
Accounts payable -- related parties....................... 1,571,923 2,074,769
Accrued expenses.......................................... 78,920 456,205
Current portion of long-term debt......................... 54,471 38,037
---------- -----------
Total Current Liabilities......................... 3,035,814 5,339,232
LONG-TERM DEBT, LESS CURRENT PORTION........................ 325,231 308,931
SHAREHOLDER'S EQUITY........................................ 1,872,486 4,651,696
---------- -----------
Total Liabilities and Shareholder's Equity........ $5,233,531 $10,299,859
========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
45
<PAGE> 47
CROWN FIBER COMMUNICATIONS, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE SIX MONTHS ENDED
ENDED JUNE 30,
DECEMBER 31, -------------------------
1998 1998 1999
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.............................................. $35,624,731 $16,161,544 $24,453,065
----------- ----------- -----------
OPERATING EXPENSES
Direct labor and costs.............................. 27,522,318 12,196,806 18,453,406
General and administrative expense.................. 2,451,027 1,173,116 1,191,565
Depreciation expense................................ 216,667 93,974 103,994
----------- ----------- -----------
Total Operating Expenses.................... 30,190,012 13,463,896 19,748,965
----------- ----------- -----------
OPERATING INCOME...................................... 5,434,719 2,697,648 4,704,100
INTEREST EXPENSE...................................... (22,915) (8,234) (17,551)
INTEREST INCOME....................................... 53,644 13,462 18,974
----------- ----------- -----------
NET INCOME............................................ $ 5,465,448 $ 2,702,876 $ 4,705,523
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
46
<PAGE> 48
CROWN FIBER COMMUNICATIONS, INC.
STATEMENTS OF SHAREHOLDER'S EQUITY
<TABLE>
<CAPTION>
FOR THE FOR THE SIX
YEAR ENDED MONTHS ENDED
DECEMBER 31, JUNE 30,
1998 1999
------------ ------------
(UNAUDITED)
<S> <C> <C>
Common stock, par value $1, 1,000 shares issued and
outstanding................................................. $ 100 $ 100
----------- -----------
Additional paid-in capital.................................. 98,795 98,795
----------- -----------
Retained earnings:
Balance, beginning of period.............................. 1,177,495 1,773,591
Net income for period..................................... 5,465,448 4,705,523
Shareholder distributions................................. (4,869,352) (1,926,313)
----------- -----------
Balance, end of period.................................... 1,773,591 4,552,801
----------- -----------
Total Shareholder's Equity........................ $ 1,872,486 $ 4,651,696
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
47
<PAGE> 49
CROWN FIBER COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE FOR THE SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------------
1998 1998 1999
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income.......................................... $ 5,465,448 $ 2,702,876 $ 4,705,524
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation........................................ 216,667 93,974 103,994
Increase in accounts receivable..................... (425,907) (1,462,089) (3,704,791)
Increase in employee advances....................... (5,188) (8,638) (8,018)
(Increase) decrease in deposits..................... 4,312 3,035 (8,245)
Increase in accounts payable and accrued expenses... 1,394,373 1,625,707 2,319,852
----------- ----------- -----------
Net Cash Provided By Operating Activities... 6,649,705 2,954,865 3,408,316
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
(Increase) decrease in notes receivable............. (18,499) (18,499) 50,999
Purchase of property and equipment.................. (642,803) (187,252) (64,497)
----------- ----------- -----------
Net Cash Used By Investing Activities....... (661,302) (205,751) (13,498)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in due from affiliates..................... (246,485) (201,194) (39,387)
Proceeds from long-term debt........................ 355,150 -- --
Payments on long-term debt.......................... (38,849) (23,422) (32,733)
Shareholder distributions........................... (4,869,352) (1,532,753) (1,926,313)
----------- ----------- -----------
Net Cash Used By Financing Activities....... (4,799,536) (1,757,369) (1,998,433)
----------- ----------- -----------
NET INCREASE IN CASH AND CASH
EQUIVALENTS......................................... 1,188,867 991,745 1,396,385
CASH AND CASH EQUIVALENTS, BEGINNING.................. 163,522 163,522 1,352,389
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, ENDING..................... $ 1,352,389 $ 1,155,267 $ 2,748,774
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
48
<PAGE> 50
CROWN FIBER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Crown Fiber Communications, Inc. ("the Company") incorporated in 1992 under
the laws of the State of Virginia. The Company is engaged in the construction
and installation of fiber optic and coaxial cable television and telephone
systems. The Company does not install headend electronics and equipment. Its
principal markets include Georgia, Virginia, Maryland, Alabama and Florida.
Revenue Recognition
The Company recognizes revenue from contracts on the completed-contract
method. This method is used because contracts are billed weekly on a per foot
basis and are cancelable at will. The results of this method on financial
position and results of operations do not vary significantly from those which
would result from use of the percentage-of-completion method.
Interim Financial Information
The unaudited interim 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
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, necessary to fairly
present the financial position, results of operations and cash flows with
respect to the interim financial statements, have been included. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire year.
Accounts Receivable
Management considers all accounts receivable to be collectible therefore no
allowance for doubtful accounts has been provided.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
instruments with an original maturity of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation is provided by the
use of the straight-line and declining balance methods over the estimated useful
lives of the assets. Maintenance and repairs are charged to expense as incurred;
major renewals and betterments are capitalized. When items of property or
equipment are sold or retired, the related cost and accumulated depreciation are
removed from the accounts and any gain or loss is included in the results of
operations.
Income Taxes
The Company has elected to be taxed under the provisions of Subchapter S of
the Internal Revenue Code. Under those provisions the shareholder is liable for
individual federal and state income taxes on the company's taxable income.
Therefore no provision or liability for federal or state income taxes has been
included in the financial statements.
49
<PAGE> 51
CROWN FIBER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The Company's financial instruments include cash and cash equivalents,
accounts receivable, accounts payable and notes payable. The carrying amount of
these financial instruments have been estimated by management to approximate
fair value.
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. Those estimates and assumptions affect the reported amounts of
assets, liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses.
Deposits in Excess of Federally Insured Limits
The Company maintains cash balances at several financial institutions. If
the financial institutions were not to honor their contractual obligations to
the Company, then the Company could incur losses. Management is of the opinion
that there is no risk because of the financial strength of the financial
institutions. Accounts at each institution are insured by the Federal Deposit
Insurance Corporation up to $100,000. At December 31, 1998, the Company's
uninsured cash bank balances total $2,220,427.
Major Customers and Concentration of Credit Risk
During 1998, the Company had greater than 10 percent of total sales to two
customers, which accounted for 40 and 32 percent of the company's revenues.
Approximately 14 percent of trade receivables at December 31, 1998, is due from
these customers. These customers have historically accounted for a significant
portion of the Company's business. Management anticipates the Company's
relationship with these customers to continue.
The Company grants credit, generally without collateral, to its customers,
which include telecommunication utilities located throughout the southeastern
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.
B. PROPERTY AND EQUIPMENT, NET
Major classifications of property, plant and equipment and their respective
depreciable lives are summarized below:
<TABLE>
<CAPTION>
DEPRECIABLE
LIVES
-----------
<S> <C> <C>
Leasehold improvements...................................... 7-39 years $ 34,561
Construction equipment...................................... 5-7 years 575,426
Transportation equipment.................................... 5 years 1,109,510
Office furniture and equipment.............................. 5-7 years 235,286
----------
1,954,783
Less accumulated depreciation............................... (868,973)
----------
$1,085,810
==========
</TABLE>
50
<PAGE> 52
CROWN FIBER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
C. LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<S> <C>
Note payable $2,852 monthly including interest at 9.7%
through September, 1999. The note is secured by a
vehicle................................................... $ 24,552
Note payable $744 monthly including interest at 9.0%
through July, 2002. The note is secured by a vehicle.... 27,353
Note payable $4,196 monthly including interest at 8.5%
through July, 2008. The note is secured by
transportation equipment and personally guaranteed by
the shareholder......................................... 327,797
--------
379,702
Less Current Portion.................................... 54,471
--------
Total Long-Term Debt............................ $325,231
========
</TABLE>
Maturities on long-term debt are as follows:
<TABLE>
<S> <C>
1999...................................................... $ 54,471
2000...................................................... 32,600
2001...................................................... 35,521
2002...................................................... 34,916
2003...................................................... 32,481
Thereafter................................................ 189,713
--------
$379,702
========
</TABLE>
Interest paid and expense for the year ended December 31, 1998 was $22,915.
D. RELATED PARTY TRANSACTIONS
During 1998, the Company paid subcontractor service costs to an affiliated
company owned by a related party of the shareholder of the Company. During the
year ended December 31, 1998, the Company incurred expenses of $4,541,564 for
these services which are reported in direct labor and costs on the accompanying
statements of income. The amount owed to this subcontractor at December 31, 1998
is $1,103,475 and is included in accounts payable related parties.
In prior periods, the Company incurred subcontractor service costs to a
company owned by a related party to the shareholder. During the year ended
December 31, 1998, the Company incurred no expenses for these services. The
amount owed to this subcontractor at December 31, 1998 is $385,032 and is
included in accounts payable related parties.
During 1998, the Company paid subcontractor service costs and consulting
fees to an affiliated company commonly owned by an officer of the Company.
During the year ended December 31, 1998, the Company incurred expenses of
$458,170 and $187,800, respectively for these services which are reported in
direct labor and costs and general and administrative expense on the
accompanying statements of income. The amount owed to this subcontractor at
December 31, 1998 is $83,416 and is included in accounts payable related
parties.
During 1998, the Company paid consulting fees to an affiliated company
commonly owned by the shareholder of the Company. During the year ended December
31, 1998, the Company incurred expenses of $50,000 for these services which are
reported in direct labor and costs on the accompanying statement of income.
51
<PAGE> 53
CROWN FIBER COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
E. OPERATING LEASE COMMITMENTS
The Company has entered into a lease agreement for the rental of office
space with the shareholder of the Company.
The following is a schedule by year of future minimum rentals under the
lease at December 31, 1998.
<TABLE>
<S> <C>
1999...................................................... $ 31,872
2000...................................................... 31,872
2001...................................................... 31,872
2002...................................................... 10,624
--------
Total........................................... $106,240
========
</TABLE>
The Company has entered into various lease agreements for vehicles.
The following is a schedule by year of minimum rentals under the vehicle
lease agreements at December 31, 1998.
<TABLE>
<S> <C>
1999...................................................... $308,584
2000...................................................... 219,623
2001...................................................... 95,729
2002...................................................... 12,469
--------
Total........................................... $636,405
========
</TABLE>
Rental expense for the year ended December 31, 1998 was $229,080.
F. SUBSEQUENT EVENT
In May 1999, the Company signed a letter of intent to merge with another
company.
52
<PAGE> 54
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Edwards Pipeline Company LLC:
We have audited the accompanying balance sheet of Edwards Pipeline Company LLC,
a North Carolina limited liability company, as of December 31, 1998, and the
related statements of operations, members' 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 Edwards Pipeline Company LLC 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
October 7, 1999
53
<PAGE> 55
EDWARDS PIPELINE COMPANY LLC
BALANCE SHEETS
(IN THOUSANDS OF DOLLARS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1998 1999
------------ -----------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 279 $ 279
Accounts receivable....................................... 1,114 925
Prepaids and other........................................ 15 --
------ ------
Total current assets.............................. 1,408 1,204
PROPERTY AND EQUIPMENT, net................................. 1,428 1,239
OTHER ASSETS, net........................................... 376 366
------ ------
Total assets...................................... $3,212 $2,809
====== ======
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Notes payable............................................. $ 72 $ 30
Accounts payable and accrued liabilities.................. 577 362
------ ------
Total current liabilities......................... 649 392
COMMITMENTS AND CONTINGENCIES
MEMBERS' EQUITY............................................. 2,563 2,417
------ ------
Total members' equity............................. 2,563 2,417
------ ------
Total liabilities and members' equity............. $3,212 $2,809
====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
54
<PAGE> 56
EDWARDS PIPELINE COMPANY LLC
STATEMENTS OF OPERATIONS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ---------------
1998 1998 1999
------------ ------ ------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.................................................... $10,669 $5,963 $4,996
COSTS OF SERVICES, including depreciation................... 6,552 2,815 3,195
------- ------ ------
Gross profit...................................... 4,117 3,148 1,801
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 2,628 1,113 1,100
------- ------ ------
Income from operations............................ 1,489 2,035 701
------- ------ ------
OTHER INCOME (EXPENSE):
Interest expense.......................................... (6) (3) (6)
Interest income and other, net............................ 49 25 11
------- ------ ------
Other income (expense), net....................... 43 22 5
------- ------ ------
NET INCOME.................................................. $ 1,532 $2,057 $ 706
======= ====== ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
55
<PAGE> 57
EDWARDS PIPELINE COMPANY LLC
STATEMENTS OF MEMBERS' EQUITY
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
EDWARDS
UTILITY CO., INC. WCE, INC. TOTAL
----------------- --------- -------
<S> <C> <C> <C>
BALANCE, December 31, 1997............................. $ 1,401 $1,418 $ 2,819
Net income........................................... 996 536 1,532
Distributions to members............................. (1,053) (735) (1,788)
------- ------ -------
BALANCE, December 31, 1998............................. 1,344 1,219 2,563
Net income (unaudited)............................... 459 247 706
Distributions to members (unaudited)................. (472) (380) (852)
------- ------ -------
BALANCE, June 30, 1999 (unaudited)..................... $ 1,331 $1,086 $ 2,417
======= ====== =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
56
<PAGE> 58
EDWARDS PIPELINE COMPANY LLC
STATEMENTS OF CASH FLOWS
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED JUNE 30,
DECEMBER 31, ----------------
1998 1998 1999
------------ ------- ------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,532 $ 2,057 $ 706
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization.......................... 661 329 329
Changes in operating assets and liabilities, net of
noncash transactions --
Accounts receivable.................................... (139) 100 190
Other assets, net...................................... -- 15 15
Accounts payable and accrued liabilities............... 394 192 (216)
------- ------- ------
Net cash provided by operating activities......... 2,448 2,693 1,024
------- ------- ------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment....................... (461) (344) (130)
------- ------- ------
Net cash used in investing activities............. (461) (344) (130)
------- ------- ------
CASH FLOWS FROM FINANCING ACTIVITIES:
Principal payments on notes payable....................... (270) (99) (42)
Distributions to members.................................. (1,788) (1,655) (852)
------- ------- ------
Net cash used in financing activities............. (2,058) (1,754) (894)
------- ------- ------
NET INCREASE (DECREASE) IN CASH............................. (71) 595 --
CASH, beginning of period................................... 350 350 279
------- ------- ------
CASH, end of period......................................... $ 279 $ 945 $ 279
======= ======= ======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest.................. $ 6 $ 3 $ 6
======= ======= ======
</TABLE>
The accompanying notes are an integral part of these financial statements.
57
<PAGE> 59
EDWARDS PIPELINE COMPANY LLC
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS OF DOLLARS)
1. BUSINESS AND ORGANIZATION
Edwards Pipeline Company LLC (Edwards or the Company) is a construction
contractor primarily engaged in pipeline installation for its customers that are
located primarily in North Carolina and South Carolina. Edwards performs a
majority of its contract work under unit-price and fixed-price contracts, with
contract terms generally ranging from six to 18 months.
Edwards is a North Carolina limited liability company that is owned 65
percent by Edwards Utility Co., Inc., and 35 percent by WCE, Inc., and all
profits and losses are allocated ratably among the members.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Financial Information
The unaudited interim 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
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 necessary to fairly
present the financial position, results of operations and cash flows with
respect to the interim financial statements have been included. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire year.
Accounts Receivable and Allowance for Doubtful Accounts
The Company provides an allowance for doubtful accounts based upon the
specific identification of accounts receivable where collection is no longer
deemed probable. As of December 31, 1998, management estimates all accounts to
be collectible.
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 $641 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 statement of operations.
Other Assets, Net
Goodwill, resulting from the acquisition of the Company in March 1995,
represents the excess of the acquisition cost over the fair value of the net
assets acquired and is being amortized on a straight-line basis over 40 years.
The net balance at December 31, 1998, was $364, and amortization expense for the
year ended December 31, 1998, was $10.
In addition, the Company entered into a noncompete agreement with an
individual for $50, which is being amortized over the life of the agreement,
five years. The net balance at December 31, 1998, was $12, and amortization
expense for the year ended December 31, 1998, was $10.
58
<PAGE> 60
EDWARDS PIPELINE COMPANY LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Revenue Recognition
The Company recognizes revenue when services are performed for unit-price
contracts. Unit-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 or some other
measure of progress. Revenues from fixed-price contracts are recognized on the
percentage-of-completion method, measured by the percentage of costs incurred to
date to total estimated costs for each contract. Contract costs include all
direct material, labor and subcontract costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools, repairs and
depreciation costs. Provisions for the total estimated losses on uncompleted
contracts are made in the period in which such losses are determined. Changes in
job performance, job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income, and their effects are
recognized in the period in which the revisions are determined. The balances
billed but not paid by customers pursuant to retainage provisions in customer
contracts will be due upon completion of the contracts and acceptance by the
customer. Based on the Company's experience with similar contracts in recent
years, the retention balance at each balance sheet date will be collected within
the subsequent fiscal year.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts receivable,
accounts payable and long-term obligations. The Company believes that the
carrying value of these instruments on the accompanying balance sheet
approximates their fair value.
Income Taxes
The Company is filing its tax returns as a partnership for federal income
tax purposes. Consequently, federal income taxes are not payable by, or provided
for, the Company. Members are taxed individually on their shares of the
Company's earnings. The Company's net income or loss is allocated among the
members in accordance with an agreement between the members.
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 December 31, 1998, consist of the following:
<TABLE>
<S> <C>
Accounts receivable, trade.................................. $ 380
Unbilled receivable......................................... 623
Retainage................................................... 70
Employee advance............................................ 41
------
$1,114
======
</TABLE>
59
<PAGE> 61
EDWARDS PIPELINE COMPANY LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property and equipment at December 31, 1998, consist of the following:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL LIVES
IN YEARS
------------
<S> <C> <C>
Machinery and equipment..................................... 5-7 $2,923
Transportation equipment.................................... 5-7 277
------
3,200
Less -- Accumulated depreciation and amortization........... (1,772)
------
Property and equipment, net....................... $1,428
======
</TABLE>
Accounts payable and accrued expenses at December 31, 1998, consist of the
following:
<TABLE>
<S> <C>
Accounts payable, trade..................................... $502
Employee retirement plan.................................... 24
Other accrued expenses...................................... 51
----
$577
====
</TABLE>
4. NOTES PAYABLE
The Company's notes payable at December 31, 1998, consist of the following:
<TABLE>
<S> <C>
Note payable to a bank, variable interest rate at the prime
rate (7.75% at December 31, 1998) plus 1%, payable in equal
monthly payments of $1, plus interest, maturing June 1999,
secured by a vehicle........................................ $ 6
Note payable to a bank, 8.5% interest rate, due in
installments of $6 plus interest, maturing in November
1999, secured by equipment................................ 66
---
$72
===
</TABLE>
5. RETIREMENT PLAN
The Company has a deferred contribution profit sharing plan which covers
substantially all employees who have completed six months of service. The
Company follows the policy of funding retirement plan contributions annually as
accrued. The Company's contributions are determined at the discretion of the
members. The Company contributed $20 for 1998.
6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
During 1998, the Company had greater than 10 percent of total sales to
three customers, which accounted for 44 percent, 23 percent and 18 percent,
respectively, of the Company's revenues. Approximately 0 percent, 24 percent and
66 percent of trade and retainage receivables at December 31, 1998, are due from
each of these customers, respectively.
The Company 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 Company 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.
60
<PAGE> 62
EDWARDS PIPELINE COMPANY LLC
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
7. RELATED-PARTY TRANSACTIONS
The Company leases its operating facilities from a member under an
operating lease payable at $3 per month. The lease is renewable on a
month-to-month basis. Rent expense for the year ended December 31, 1998, was
$36.
The Company also paid its members management fees and consulting fees in
the amount of $80 for the year ended December 31, 1998.
8. COMMITMENTS AND CONTINGENCIES
Leases
The Company leases certain equipment under month-to-month operating lease
agreements. Rent expense for the year ended December 31, 1998, was $87.
Performance Bonds
In certain circumstances, the Company is required to provide performance
bonds in connection with its contract commitments which are personally
guaranteed by certain members of the Company.
9. SUBSEQUENT EVENTS
In August 1999, the Company was acquired by Quanta Services, Inc.
61
<PAGE> 63
INDEPENDENT AUDITOR'S REPORT
To Haines Construction Co.:
I have audited the accompanying balance sheet of Haines Construction Co.
(an Oklahoma Corporation) as of March 31, 1999 and the related statements of
income, stockholder's equity and cash flows for the year then ended. These
financial statements are the responsibility of the Company's management. My
responsibility is to express an opinion on these financial statements based on
my audit.
I conducted my audit in accordance with generally accepted auditing
standards. Those standards require that I 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.
I believe that my audit provides a reasonable basis for my opinion.
In my opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Haines Construction Co. as
of March 31, 1999, and the results of operations and its cash flows for the year
then ended in conformity with generally accepted accounting principles.
PAUL B. LEATHERS, INC.
Oklahoma City, Oklahoma
June 18, 1999
62
<PAGE> 64
HAINES CONSTRUCTION CO.
BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, JUNE 30,
1999 1999
----------- -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 1,718,548 $ 1,409,620
Certificates of deposit................................... 800,000 800,000
Accounts receivable (Note 1)
Due on contracts, including amounts retained by
customers in accordance with contract provisions....... 635,750 2,898,557
Other receivable.......................................... 15,452 600,765
Unbilled contract receivable.............................. -- --
Due from employees........................................ 26,386 5,352
Notes receivable.......................................... 630,210 579,508
Accrued interest receivable............................... 3,768 15,048
Prepaid insurance......................................... 89,474 261,708
Prepaid taxes............................................. -- --
Costs and estimated earnings in excess of billings on
uncompleted contracts (Note 1).......................... 3,787 18,523
Due from Haines Pipeline Construction, Inc. .............. 4,942 4,942
----------- -----------
Total current assets............................... 3,928,317 6,594,023
----------- -----------
Property and equipment, at cost (Note 1)
Aircraft.................................................. 725,981 725,981
Heavy equipment........................................... 4,987,240 5,071,240
Light equipment and vehicles.............................. 1,212,385 1,392,269
Office furniture and equipment............................ 134,950 140,464
Tools and small equipment................................. 168,573 188,571
----------- -----------
7,229,129 7,518,525
Less accumulated depreciation............................. (2,691,762) (2,834,162)
----------- -----------
Total property and equipment, net.................. 4,537,367 4,684,363
----------- -----------
Other assets:
Deposits.................................................. 980 8,819
----------- -----------
Total other assets................................. 980 8,819
----------- -----------
Total assets....................................... $ 8,466,664 $11,287,205
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable -- trade................................. $ 179,750 $ 1,265,761
Accrued and withheld payroll taxes........................ 7,651 60,019
Accrued wages payable..................................... 23,797 317,915
Accrued profit sharing payable............................ 59,014 --
Accrued insurance payable................................. 20,066 245,671
Accrued interest payable.................................. -- --
Income taxes payable...................................... 325,148 116,705
Dividends payable......................................... 6,000 6,000
Deferred Income Taxes..................................... 292,199 219,149
Billings in excess of costs and estimated earnings on
uncompleted contracts (Note 1).......................... 1,201,675 1,867,576
Current maturities of long-term debt (Note 2)............. 867,754 1,025,636
Leases payable............................................ -- --
----------- -----------
Total current liabilities.......................... 2,983,054 5,124,432
Long-term liabilities:
Notes payable, net of current maturities (Note 2)......... 2,312,821 2,377,442
Leases payable............................................ -- --
Deferred Income taxes..................................... 903,819 917,653
----------- -----------
Total liabilities.................................. 6,199,694 8,419,527
----------- -----------
Stockholder's equity:
Common stock, authorized 25,000 shares at $1.00 par value,
500 shares issued and 250 shares outstanding............ 500 500
Paid-in capital........................................... 5,500 5,500
Retained earnings......................................... 3,335,970 3,936,678
Treasury stock -- 250 shares, at cost..................... (1,075,000) (1,075,000)
----------- -----------
Total stockholder's equity......................... 2,266,970 2,867,678
----------- -----------
Total liabilities and stockholder's equity......... $ 8,466,664 $11,287,205
=========== ===========
</TABLE>
(See Accompanying Notes)
63
<PAGE> 65
HAINES CONSTRUCTION CO.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE
FOR THE THREE MONTHS ENDED
YEAR ENDED JUNE 30,
MARCH 31, -----------------------
1999 1998 1999
----------- ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Contract revenues....................................... $17,250,665 $4,397,462 $5,437,343
Costs of services, including depreciation............... 14,406,322 3,250,160 4,121,932
----------- ---------- ----------
Gross profits from contracts............................ 2,844,343 1,147,302 1,315,411
Operating expenses...................................... 1,649,466 307,516 314,848
----------- ---------- ----------
Income from operations.................................. 1,194,877 839,786 1,000,563
----------- ---------- ----------
Other income (expense):
Interest income....................................... 138,061 25,868 42,895
Miscellaneous income.................................. 1,001 487 199
Gain (loss) on sale of assets......................... (81,537) (15,232) 8,715
Interest expense...................................... (255,325) (69,581) (85,885)
----------- ---------- ----------
Total other income (expense).................. (197,800) (58,458) (34,076)
----------- ---------- ----------
Net income before income taxes................ 997,077 781,328 966,487
----------- ---------- ----------
Provision for income tax (expense) benefit:
Current............................................... (348,187) (149,327) (429,689)
Deferred.............................................. (32,037) (147,297) 63,910
----------- ---------- ----------
Total provision for income tax................ (380,224) (296,624) (365,779)
----------- ---------- ----------
Net income.................................... $ 616,853 $ 484,704 $ 600,708
=========== ========== ==========
</TABLE>
(See Accompanying Notes)
64
<PAGE> 66
HAINES CONSTRUCTION CO.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
--------------- PAID-IN RETAINED TREASURY
SHARES AMOUNT CAPITAL EARNINGS STOCK, AT COST TOTAL
------ ------ ---------- ---------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, March 31, 1998...................... 500 $500 $5,500 $2,721,117 $(1,075,000) $1,652,117
Distributions.............................. -- -- -- (2,000) -- (2,000)
Net Income................................. -- -- -- 616,853 -- 616,853
--- ---- ------ ---------- ----------- ----------
BALANCE, March 31, 1999...................... 500 500 5,500 3,335,970 (1,075,000) 2,266,970
Net Income (unaudited)..................... -- -- -- 600,708 -- 600,708
--- ---- ------ ---------- ----------- ----------
BALANCE, June 30, 1999 (unaudited)........... 500 $500 $5,500 $3,936,678 $(1,075,000) $2,867,678
=== ==== ====== ========== =========== ==========
</TABLE>
(See Accompanying Notes)
65
<PAGE> 67
HAINES CONSTRUCTION CO.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE THREE MONTHS ENDED
ENDED JUNE 30,
MARCH 31, ---------------------------
1999 1998 1999
------------ ------------ ------------
(UNAUDITED)
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................. $ 616,853 $ 484,704 $ 600,708
----------- ----------- -----------
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization....................... 649,091 164,885 176,915
Receivables......................................... 128,367 (1,476,307) (2,827,086)
Accrued interest receivable......................... (2,703) (1,074) (11,280)
Prepaid expenses.................................... 47,622 (136,036) (172,234)
Costs and estimated earnings in..................... 99,430 (284,016) (14,736)
excess of billings
Deposits............................................ (300) (300) (7,839)
Payables............................................ (267,901) 388,842 1,086,011
Accrued liabilities................................. (61,822) 288,373 513,076
Deferred income taxes............................... 32,037 149,327 (59,215)
Income taxes payable................................ 311,724 147,297 (208,443)
Billings in excess of costs and estimated
earnings.......................................... 1,201,675 191,915 665,901
Loss (gain) on sale of assets....................... 81,537 15,232 (8,715)
----------- ----------- -----------
Total adjustments.............................. 2,218,757 (551,862) (867,645)
----------- ----------- -----------
Net cash provided (used) by operating
activities................................... 2,835,610 (67,158) (266,937)
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures................................... (452,874) (8,874) (348,696)
Proceeds from sale of assets........................... 374,353 248,400 33,500
Due from related companies............................. (1,275) -- --
Notes receivable -- other.............................. (580,511) (20,584) 50,702
----------- ----------- -----------
Net cash provided (used) by investing
activities................................... (660,307) 218,942 (264,494)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
New borrowings:
Short-term.......................................... 1,249,325 -- 103,340
Long-term........................................... 740,186 -- 309,965
Debt reductions:
Short-term.......................................... (2,657,268) (26,147) --
Long-term........................................... (597,949) (183,794) (190,802)
Lease payments...................................... (120,554) (7,340) --
----------- ----------- -----------
Net cash provided (used) in financing
activities................................... (1,386,260) (217,281) 222,503
----------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents.................................. 789,043 (65,497) (308,928)
Cash and cash equivalents at beginning of period......... 1,729,505 1,729,505 2,518,548
----------- ----------- -----------
Cash and cash equivalents at end of period............... $ 2,518,548 $ 1,664,008 $ 2,209,620
=========== =========== ===========
</TABLE>
(See Accompanying Notes)
66
<PAGE> 68
HAINES CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS
MARCH 31, 1999
NOTE 1 -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES
Haines Construction Co. (Haines or the Company) is a construction
contractor primarily engaged in pipeline installation for its customers that are
located primarily in Oklahoma, Texas and Kansas. Haines performs a majority of
its contract work under unit-price and fixed-price contracts, with contract
terms generally ranging from six to 12 months.
A summary of the Company's significant accounting policies consistently
applied in the preparation of the accompanying financial statements follows.
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.
Accounting Basis for Recording Income
Profits on contracts are recorded on the percentage of completion method,
whereby recognition of earnings on contracts in progress is calculated based on
the ratio of cost incurred to date to expected cost to be incurred on each
contract. Contract costs include all direct material supplies, labor,
subcontracts, equipment costs, travel and per diem, and insurance and bonding
expense. Changes in job performance, job conditions, and estimated
profitability, including those arising from contract penalty provisions and
final contract settlements, may result in revisions to costs and income. Any
required adjustments are recognized in the period in which the revisions become
known. At the time a loss on a contract becomes known, the entire amount of the
estimated ultimate loss on the contract is accrued.
Non-contract revenue and expenses are reported on the accrual method of
accounting.
Accounts Receivable
The Company considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required. If amounts become
uncollectible, they will be charged to operations when that determination is
made.
Depreciation
Depreciation is provided for in amounts sufficient to relate the cost of
depreciable assets to operations over their estimated service lives using the
straight-line method. Depreciation of $649,091 was reported for the current
year.
Accounting 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
67
<PAGE> 69
HAINES CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.
NOTE 2 -- INSTALLMENT NOTES PAYABLE
<TABLE>
<CAPTION>
CURRENT LONG-TERM TOTAL
-------- ---------- ----------
<S> <C> <C> <C>
KDC Fin. Corp., installments of $4,352, interest
at 7.85%, sec. by equipment, maturing in November
2001.............................................. $ 43,943 $ 82,039 $ 125,982
KDC Fin. Corp., installments of $5,116, interest
at 6.99%, sec. by equipment, maturing in July
1999............................................ 35,063 -- 35,063
Assoc. Comm. Corp., installments of $43,606,
interest at 7.5%, sec. by equipment, maturing in
May 2001........................................ 457,778 622,514 1,080,292
Assoc. Comm. Corp., installments of $5,044,
interest at 7.35%, sec. by equipment, maturing
in January 2002................................. 46,988 158,473 205,461
SafeCo Credit Co., installments of $25,021,
interest at 7.5%, sec. by equipment, maturing in
September
2000............................................ 159,532 265,184 424,716
SafeCo Credit Co., installments of $13,626,
interest at 7.5% w/lump sum sec. by equipment,
maturing in July 2001........................... 73,425 459,611 533,036
First Capital Bank, line-of-credit, varying
interest at prime (7.75% at March 31, 1999)
secured by accounts receivable, equipment, and
cont. rights, maturing in January 2000.......... 1,025 -- 1,025
Lana Haines, due September 2008, variable payment
schedule........................................ 50,000 725,000 775,000
-------- ---------- ----------
Totals.................................. $867,754 $2,312,821 $3,180,575
======== ========== ==========
</TABLE>
The following summarizes future principal reductions of long-term notes
payable:
<TABLE>
<S> <C>
Year Ending March 31:
2000................................................... $ 867,754
2001................................................... 956,946
2002................................................... 421,951
2003................................................... 239,513
2004................................................... 192,413
Thereafter............................................. 501,998
----------
$3,180,575
==========
</TABLE>
NOTE 3 -- STATEMENTS OF CASH FLOWS
The Company considers all highly liquid debt instruments purchased with a
maturity of three months or less and certificates of deposit to be cash
equivalents.
Noncash investing and financing activities for the year consisted of the
purchase of equipment through long-term debt in the amount of $209,224.
68
<PAGE> 70
HAINES CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Cash paid during the year for:
<TABLE>
<S> <C>
Interest.................................................. $263,842
Taxes..................................................... 6,032
</TABLE>
NOTE 4 -- ACCOUNTS RECEIVABLE AGING
<TABLE>
<CAPTION>
AMOUNT
--------
<S> <C>
Current................................................... $ 29,846
31-60 days................................................ 7,280
61-90 days................................................ 8,758
Over 90 days.............................................. --
Retainage................................................. 589,866
--------
Total........................................... $635,750
========
</TABLE>
NOTE 5 -- LEASES
The Company leases commercial property and equipment from HCC Rental
Services, LLC, a company owned by William B. Haines. The expense for the period
ending March 31, 1999 was $279,173. Future lease expenses cannot be determined
at this time.
The Company also leased several vehicles under cancelable operating leases,
which expired October 31, 1998. The payments were $6,384 per month. Rental
expense that related to these operating leases was $44,687.
NOTE 6 -- INCOME TAXES
Effective April 1, 1993, Haines Construction Co. adopted SFAS No. 109,
Accounting for Income Taxes, which requires an asset and liability approach to
financial accounting and reporting for income taxes. The difference between the
financial statement and tax basis of assets and liabilities is determined
annually.
Deferred income tax assets and liabilities are computed for those
differences that have future tax consequences using the currently enacted tax
laws and rates that apply to the periods in which they are expected to affect
taxable income. Valuation allowances are established, if necessary, to reduce
the deferred tax liability to the amount that will more likely than not be
realized. Income tax expense is the current tax payable or refundable for the
period plus or minus the net change in the deferred tax assets and liabilities.
Since the Company uses the ACRS/MACRS methods of accounting for income tax
purposes, the primary temporary differences between tax and financial statements
are depreciation and deferred revenue related to a change in tax accounting
method.
SFAS 109 requires the following disclosure of the Company's total deferred
tax assets and liabilities:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
---------- -------- ----------
<S> <C> <C> <C>
Deferred short-term liabilities .................. $ 248,369 $ 43,830 $ 292,199
Deferred short-term assets........................ -- -- --
---------- -------- ----------
Net short-term liability ......................... 248,369 43,830 292,199
---------- -------- ----------
Deferred long-term liabilities ................... 768,246 135,573 903,819
Deferred long-term assets......................... -- -- --
---------- -------- ----------
Net long-term liabilities ........................ 768,246 135,573 903,819
---------- -------- ----------
Net deferred tax liability ....................... $1,016,615 $179,403 $1,196,018
========== ======== ==========
</TABLE>
69
<PAGE> 71
HAINES CONSTRUCTION CO.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
After considering all of the evidence, both positive and negative,
management has concluded it is more likely than not that all-future tax benefits
will be realized. Therefore, a valuation allowance is not needed for the
deferred tax liability. There was no prior balance in the valuation allowance
and therefore there was no change in the valuation allowance this period.
NOTE 7 -- CONCENTRATION OF CREDIT RISK
The Company contracts to construct oil and natural gas pipelines primarily
in Oklahoma, Texas, and Kansas. Credit is extended based on an evaluation of
each customer's financial condition. Credit losses, if any, have been provided
for in the financial statements and have been generally within management's
expectations.
The Company has concentrated its credit risk for cash by maintaining
deposits in financial institutions located within the same Oklahoma region,
which at times may exceed insured limits. The maximum loss that would have
resulted from that risk totaled $2,149,470 at March 31, 1999 for the excess of
the deposit liabilities reported by the financial institutions over the amounts
that would have been covered by federal insurance.
NOTE 8 -- EMPLOYEE BENEFIT PLAN
The Company maintains a profit sharing plan covering substantially all
full-time employees. The Board of Directors determines contributions to the
plan. For the year ending March 31, 1999, the total profit sharing plan expense
was $54,235.
NOTE 9 -- CONTINGENT LIABILITIES
The Company has one pending lawsuit in which it is named as the defendant.
Management is of the opinion that the final settlement will be favorable to the
Company. Therefore, no provision has been made in the financial statements for
the outcome of the lawsuit.
NOTE 10 -- NOTES RECEIVABLE
Companies owned by William B. Haines owed the Company $580,029 in the form
of notes receivable and $3,096 accrued interest receivable.
NOTE 11 -- SUBSEQUENT EVENTS
Subsequent to the balance sheet date, the Company incurred a note payable
in the amount of $413,806 for the purchase of equipment. In September 1999, the
Company was acquired by Quanta Services, Inc. and certain installment notes
payable were repaid. (Unaudited).
70
<PAGE> 72
INDEPENDENT AUDITORS' REPORT
TO BONNEVILLE CONSTRUCTION COMPANY, INC.
We have audited the accompanying balance sheet of Bonneville Construction
Company, Inc. as of December 31, 1998, and the related 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 financial statements referred to above present fairly, in
all material respects, the financial position of Bonneville Construction
Company, 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.
McGLADREY & PULLEN, LLP
Las Vegas, Nevada
February 5, 1999
71
<PAGE> 73
BONNEVILLE CONSTRUCTION COMPANY, INC.
BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................. $ 1,499,853 $ 13,732
Accounts receivable....................................... 5,704,628 5,921,738
Advances to related parties............................... 128,471 --
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 279,805 423,023
Other assets.............................................. 112,222 81,675
----------- -----------
Total current assets.............................. 7,724,979 6,440,168
Cash Value of Life Insurance................................ 167,951 --
Furniture and Equipment, net................................ 4,384,158 4,301,333
----------- -----------
$12,277,088 $10,741,501
=========== ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES
Line of credit............................................ $ 35,321 $ 1,918,749
Current maturities of long-term debt...................... 374,980 642,376
Current portion of due to related parties................. 82,885 89,805
Accounts payable.......................................... 2,718,005 1,460,601
Accrued subcontractor expenses............................ 741,547 177,117
Accrued expenses.......................................... 346,359 508,201
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 575,609 487,632
----------- -----------
Total current liabilities......................... 4,874,706 5,284,481
----------- -----------
Long-Term Debt, less current maturities..................... 1,393,904 1,833,862
----------- -----------
Due to Related Parties, less current portion................ 210,179 112,114
----------- -----------
Commitments
Stockholder's Equity
Common stock, $100 par value; authorized 250 shares; 92
shares issued and 60.55 shares outstanding............. 9,200 9,200
Additional paid-in capital................................ 1,447,889 1,447,889
Retained earnings......................................... 5,543,407 3,256,152
----------- -----------
7,000,496 4,713,241
Less cost of 31.45 shares of treasury stock............... 1,202,197 1,202,197
----------- -----------
5,798,299 3,511,044
----------- -----------
$12,277,088 $10,741,501
=========== ===========
</TABLE>
See Notes to Financial Statements.
72
<PAGE> 74
BONNEVILLE CONSTRUCTION COMPANY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE FOR THE NINE
ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1999
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Contract revenue earned.............................. $39,864,996 $28,898,936 $21,885,896
Cost of services, including depreciation............. 33,824,638 24,631,904 19,343,919
----------- ----------- -----------
Gross profit............................... 6,040,358 4,267,032 2,541,977
General and administrative expenses.................. 3,443,578 2,725,404 2,890,552
----------- ----------- -----------
Operating income (loss).................... 2,596,780 1,541,628 (348,575)
----------- ----------- -----------
Nonoperating income (expense):
Interest income.................................... 45,321 38,381 23,514
Interest expense................................... (239,076) (186,289) (193,383)
Other, net......................................... (65,234) (100,090) 106,717
Gain (loss) on sale of equipment................... (273,862) (3,550) 115,877
----------- ----------- -----------
(532,851) (251,548) 52,725
----------- ----------- -----------
Net income (loss).......................... $ 2,063,929 $ 1,290,080 $ (295,850)
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
73
<PAGE> 75
BONNEVILLE CONSTRUCTION COMPANY, INC.
STATEMENTS OF STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
--------------------- ADDITIONAL
SHARES PAID-IN RETAINED TREASURY
OUTSTANDING DOLLARS CAPITAL EARNINGS STOCK TOTAL
----------- ------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997...... 66.54 $9,200 $1,447,889 $ 4,126,039 $ (768,887) $ 4,814,241
Purchase of common stock
through issuance of note
payable..................... (5.99) -- -- -- (433,310) (433,310)
Distributions................. -- -- -- (646,561) -- (646,561)
Net income.................... -- -- -- 2,063,929 -- 2,063,929
----- ------ ---------- ----------- ----------- -----------
BALANCE, December 31, 1998...... 60.55 9,200 1,447,889 5,543,407 (1,202,197) 5,798,299
Distributions (unaudited)..... -- -- -- (1,991,405) -- (1,991,405)
Net loss (unaudited).......... -- -- -- (295,850) -- (295,850)
----- ------ ---------- ----------- ----------- -----------
BALANCE, September 30, 1999
(unaudited)................... 60.55 $9,200 $1,447,889 $ 3,256,152 $(1,202,197) $ 3,511,044
===== ====== ========== =========== =========== ===========
</TABLE>
See Notes to Financial Statements.
74
<PAGE> 76
BONNEVILLE CONSTRUCTION COMPANY, INC.
STATEMENTS OF CASH FLOWS
(NOTE 11)
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE FOR THE NINE
ENDED MONTHS ENDED MONTHS ENDED
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1999
------------ ------------- -------------
(UNAUDITED)
<S> <C> <C> <C>
Cash Flows from Operating Activities
Cash received from customers..................... $ 39,213,039 $ 20,634,318 $ 21,437,591
Cash paid to suppliers and employees............. (35,324,012) (19,247,532) (23,128,886)
Interest received................................ 45,321 38,381 23,514
Interest paid.................................... (239,076) (186,289) (193,383)
Other income (expense)........................... (65,234) (100,090) 106,717
------------ ------------ ------------
Net cash provided by (used in) operating
activities............................. 3,630,038 1,138,788 (1,754,447)
------------ ------------ ------------
Cash Flows from Investing Activities
Increase in cash value of life insurance......... (17,253) (9,768) --
Purchase of equipment............................ (2,044,603) (1,778,774) (732,870)
Proceeds from sale of equipment.................. 187,323 160,624 367,360
Payments from (to) related parties, net.......... 136,896 146,399 (45,483)
------------ ------------ ------------
Net cash (used in) investing
activities............................. (1,737,637) (1,481,519) (410,993)
------------ ------------ ------------
Cash Flows from Financing Activities
Distributions.................................... (646,561) (597,161) (1,465,557)
Payments on related parties notes, net........... (432,184) (399,636) (91,145)
Proceeds on long-term borrowings................. 1,067,279 297,324 1,300,053
Principal payments on long-term borrowings....... (844,282) (326,128) (947,460)
Proceeds on line of credit, net.................. 35,321 1,041,907 1,883,428
------------ ------------ ------------
Net cash provided by (used in) financing
activities............................. (820,427) 16,306 679,319
------------ ------------ ------------
Net increase (decrease) in cash.......... 1,071,974 (326,425) (1,486,121)
Cash and cash equivalents, beginning............... 427,879 427,879 1,499,853
------------ ------------ ------------
Cash and cash equivalents, ending.................. $ 1,499,853 $ 101,454 $ 13,732
============ ============ ============
Reconciliation of Net Income (Loss) to Net Cash
Provided by (Used In) Operating Activities:
Net income (loss)................................ $ 2,063,929 $ 1,290,080 $ (295,850)
Depreciation..................................... 830,099 624,300 735,030
Bad debts........................................ 301,907 145,587 6,228
(Gain) Loss on sale of equipment................. 273,862 3,550 (115,877)
Equity in loss of dissolved limited
partnership................................... 15,232 -- --
Change in assets and liabilities:
(Increase) in accounts receivable............. (1,807,105) (1,738,545) (223,338)
(Increase) decrease in other assets........... (62,519) (53,491) 30,547
Increase (decrease) in accounts payable....... 307,657 532,912 (1,257,404)
Increase (decrease) in accrued expenses....... 127,419 (6,985) 161,842
Increase (decrease) in accrued subcontractor
expenses.................................... 741,547 -- (564,430)
Net increase (decrease) in billings in excess
of costs and estimated earnings on
uncompleted contracts....................... 838,010 341,380 (231,195)
------------ ------------ ------------
Net cash provided by (used in) operating
activities............................. $ 3,630,038 $ 1,138,788 $ (1,754,447)
============ ============ ============
</TABLE>
See Notes to Financial Statements
75
<PAGE> 77
BONNEVILLE CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of business
Bonneville Construction Company, Inc. (the "Company") was organized under
the laws of the State of Idaho on January 1, 1973. The Company leases its
corporate headquarters located in Las Vegas, Nevada, on a month to month basis.
The Company operates in the Western United States and the Pacific Island
regions. The Company is principally engaged in the construction of communication
cable systems. In connection with its normal construction activities, the
Company may be required to acquire performance bonds. The surety issuing the
bonds has recourse against the Company's assets in the event the surety is
required to honor the bonds. The length of the Company's contracts varies but is
typically less than one year. Billings are submitted as work progresses and the
balance and retainages are due upon completion.
(Unaudited) Interim financial statements
The accompanying balance sheet as of September 30, 1999 and the statements
of operations, stockholder's equity and cash flows for the nine months ended
September 30, 1999 and 1998, have not been audited. However, those financial
statements have been prepared in accordance with generally accepted accounting
principles for interim financial information. Accordingly, they do not include
all of the information and footnotes required by generally accepted accounting
principles for complete financial statements. In management's opinion, the
accompanying interim financial statements reflect all material adjustments
(consisting only of normal recurring accruals) necessary for a fair presentation
of the financial results for the interim periods presented. The financial
results for the nine months ended September 30, 1999 and 1998 are not
necessarily indicative of the financial results which will be reported for the
entire year.
A summary of the Company's significant accounting policies follows:
Use of estimates in the preparation of financial statements
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount 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. The Company's method of revenue recognition from construction
contracts is based significantly on estimates. Actual results could differ from
those estimates.
Cash and cash equivalents
For purposes of reporting cash flows, the Company considers investments
held in a bank sweep account to be cash equivalents.
At various times throughout the year, the Company maintained cash balances
at financial institutions in excess of federally insured limits.
Materials and supplies inventory
Materials and supplies inventory are valued at the lower of cost (first-in,
first-out method) or market.
Furniture and equipment
Furniture and equipment are stated at cost, less accumulated depreciation.
Depreciation is provided primarily on the straight-line method over the
estimated lives of the related assets which range from 3 to 10 years.
76
<PAGE> 78
BONNEVILLE CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income taxes
The Company has elected, with the consent of its stockholders, to be taxed
under the provisions of Subchapter "S" of the Internal Revenue Code. Under those
provisions, the Company does not pay federal corporation income taxes on its
taxable income. Instead the stockholders account for their pro rata share of the
Company's income, losses, deductions and credits. As a result of this election,
no provision for income tax for the Company has been made in the accompanying
financial statements. The Company's tax basis in its assets and liabilities do
not differ materially from the basis for financial reporting.
Revenue and cost recognition
Revenues from fixed-price and unit-based construction contracts are
recognized on the percentage-of-completion method measured by the percentage of
costs incurred to date to estimated total costs for each contract. These
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 or some other measure of progress. This method is used
because management considers the cost-to-cost method to be the best available
measure of progress on these contracts. No gross profit is recognized until a
contract has reached a stage of completion sufficient to reasonably determine,
in the opinion of management, the ultimate realizable profit. Provisions for
estimated losses on uncompleted contracts are made in the period such losses
become apparent.
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. Also included in contract costs
are prepaid materials that have been purchased and billed to the owner. No gross
profit is recognized on these costs until used on the contract. General and
administrative costs and unallocated equipment costs are charged to expense as
incurred. Changes in job performance, job conditions, estimated profitability,
including those arising from contract penalty provisions, and final contract
settlements may result in revisions to costs and income and are recognized in
the period in which the revisions are determined.
The Company believes that the retentions receivable balance as shown will
be collected within the next fiscal year.
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 revenue recognized.
Fair value of financial instruments
The carrying amounts of financial instruments including cash, accounts
receivable, advances to related parties and accounts payable approximate their
fair values because of their short maturities.
The carrying amounts of the line of credit, long-term debt, and due to
related parties approximate their fair values because the interest rates on
these instruments are at market rates.
NOTE 2 -- ACCOUNTS RECEIVABLE
Accounts receivable consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Contracts in progress................................... $2,305,360
Completed contracts..................................... 1,838,472
Retainages.............................................. 1,560,796
----------
$5,704,628
==========
</TABLE>
77
<PAGE> 79
BONNEVILLE CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS
Costs and billings on uncompleted contracts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Total amount of contracts in process....................... $26,165,506 $31,728,344
=========== ===========
Cost incurred on uncompleted contracts..................... $ 9,670,553 $19,133,118
Estimated earnings......................................... 3,367,027 3,510,332
----------- -----------
13,037,580 22,643,450
Less billings to date...................................... 13,333,384 22,708,059
----------- -----------
$ (295,804) $ (64,609)
=========== ===========
</TABLE>
Included in the accompanying balance sheets under the following captions:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Costs and estimated earnings in excess of billings on
uncompleted contracts....................................... $ 279,805 $ 423,023
Billings in excess of costs and estimated earnings on
completed contracts....................................... (575,609) (487,632)
--------- ---------
$(295,804) $ (64,609)
========= =========
</TABLE>
NOTE 4 -- OTHER ASSETS
Other assets consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Prepaid expenses............................................ $101,558
Materials and supply inventory, net of customer advances.... 10,664
--------
$112,222
========
</TABLE>
Customer advances of approximately $621,000 received by the Company to
allow for the purchases of certain materials have been netted against the
associated inventory.
NOTE 5 -- FURNITURE AND EQUIPMENT
Furniture and equipment consist of the following at December 31, 1998:
<TABLE>
<S> <C>
Equipment and vehicles...................................... $7,388,761
Furniture and fixtures...................................... 446,934
----------
7,835,695
Less accumulated depreciation............................... 3,451,537
----------
$4,384,158
==========
</TABLE>
NOTE 6 -- JOINT VENTURE
In February 1998, the Company entered into a joint venture arrangement with
a subcontractor to manage certain construction contracts. As part of this
agreement, the Company purchased existing receivables of the subcontractor in
exchange for cash. The subcontractor subsequently collected on these
receivables, but failed to remit the funds to the Company. As a result, the
Company recognized a loss of approximately $182,000 which is included in bad
debt expense at December 31, 1998. The agreement was rescinded in May 1998, with
no further liability to the Company.
78
<PAGE> 80
BONNEVILLE CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- ACCOUNTS PAYABLE
Accounts payable include amounts due to subcontractors, totaling $496,073
at December 31, 1998, which have been retained pending completion and customer
acceptance of contract performance.
NOTE 8 -- LONG-TERM DEBT AND LINE OF CREDIT
Long-term debt and line of credit at December 31, 1998 are as follows:
<TABLE>
<S> <C>
Notes payable to dealers, secured by equipment, due in
aggregate monthly installments including interest at
12%(A)...................................................... $ 652,907
Notes payable to a bank, secured by equipment, due in
aggregate monthly installments of $13,619 including
interest at 7.95% to 8.19%, through various dates to May
2003...................................................... 513,410
Note payable to a bank, secured by equipment, interest at
prime rate (7.75% at December 31, 1998) plus 1.25%, due in
monthly installments of interest only through June 1999;
beginning July 1999 principal and interest payments due in
monthly installments ($8,664 at December 31, 1998) to
amortize repayment by May 31, 2002(B)..................... 269,498
Note payable to a financial institution, secured by
airplane, interest at 7.3%, due in monthly installments of
$3,063 including interest through November 2005. This note
is subject to a 5% prepayment penalty if paid in full
prior to November 1999 and 1% to November 2000............ 198,153
Notes payable to a bank, secured by equipment, interest at
9%, due in monthly installments of $5,136 including
interest through October 2000............................. 76,764
Note payable to a financial institution, secured by
equipment and personally guaranteed by a stockholder,
interest at 10.9%, due in annual installments of $11,966
including interest through August 2002.................... 37,499
Note payable to a bank, secured by equipment, interest at
10.25%, due in monthly installments of $832 including
interest through April 2001............................... 20,653
----------
1,768,884
Less current maturities................................... (374,980)
----------
$1,393,904
==========
</TABLE>
Long-term debt at December 31, 1998 matures as follows:
<TABLE>
<S> <C>
1999..................................................... $ 374,980
2000..................................................... 406,136
2001..................................................... 412,945
2002..................................................... 308,025
2003..................................................... 202,684
Thereafter............................................... 64,114
----------
$1,768,884
==========
</TABLE>
- ---------------
(A) On January 11, 1999, the Company refinanced the dealers notes payable.
Under the terms of the loan agreement, the Company was granted a term loan
of $655,053 with interest at 7.54%. The term loan is payable in monthly
installments of $13,158, including interest. The loan is secured by
equipment and is subject to a 5% prepayment penalty if paid in full prior
to January 2000 and 1% to January 2001.
79
<PAGE> 81
BONNEVILLE CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
(B) The note is a $300,000 non-revolving line of credit through May 31, 1999
with term note payable repayment terms. Note is subject to the same
restrictive covenants disclosed below under the revolving line of credit.
In addition, the Company has a revolving line of credit with a bank on
which it may borrow the lesser of $2,000,000 or an amount equal to the sum of
eligible accounts receivable and equipment as defined in the agreement. This
line is guaranteed by the stockholders, and a corporation controlled by the
Company's stockholders. Borrowings on the line of credit bear interest at the
prime rate (7.75% at December 31, 1998) plus 0.75% due monthly. The line is
secured by substantially all the assets of the Company. Balances outstanding
were $35,321 at December 31, 1998. The line of credit is due on May 31, 1999.
The line of credit agreement contains various financial covenants including
1) maintaining a debt to tangible net worth ratio not to exceed 2.0 to 1.0, 2)
maintaining a current ratio of at least 1.2 to 1.0, 3) maintaining working
capital in excess of $1,500,000 4) maintaining a minimum tangible net worth of
not less than $4,500,000, and 5) maintaining a debt service coverage ratio of at
least 1.25 to 1.0. The line of credit agreement also places restrictions on the
amount of distributions which can be made on an annual basis.
At September 30, 1999 the Company was in violation of certain of the
financial covenants and the restriction placed on distributions (Note 13).
NOTE 9 -- RELATED PARTY TRANSACTIONS
Advances to related parties
Advances to related parties consist of the amounts due from a corporation
controlled by the Company's stockholders. Advances are unsecured and are due on
demand. Advances totaled $128,471 at December 31, 1998.
Due to related parties
Included in due to related parties are the following balances at December
31, 1998:
<TABLE>
<S> <C>
Unsecured note payable to a stockholder, subordinated to the
bank line of credit and non-revolving line of credit (Note
8), due in bimonthly installments of $8,000, including
interest at 8.32%, due March 2002........................... $293,064
Less current portion........................................ 82,885
--------
$210,179
========
</TABLE>
Interest expense to the stockholder was $16,058 for the year ended December
31, 1998.
Note payable to stockholder matures as follows:
<TABLE>
<S> <C>
1999..................................................... $ 82,885
2000..................................................... 90,064
2001..................................................... 97,865
2002..................................................... 22,250
--------
$293,064
========
</TABLE>
NOTE 10 -- BENEFIT PLANS
The Company maintains a 401(k) plan covering all qualified employees.
Employees must have, at the fiscal year-end, one continuous year of service and
1,000 hours of employment to qualify for participation. The Company may make a
matching contribution at any time and in any amount at the discretion of the
Company's Board of Directors, up to a maximum contribution requirement of 10% of
the gross salaries of qualified employees. In addition, the Company may make at
its discretion non-elective profit-sharing
80
<PAGE> 82
BONNEVILLE CONSTRUCTION COMPANY, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
contributions to the plan that are allocated based upon total compensation paid
to qualified employees during the plan year. The Company made total
contributions of $200,000 for the year ended December 31, 1998.
The Company maintains a cafeteria plan covering all qualified employees.
The plan provides eligible employees of the Company the opportunity to
contribute toward the cost of coverage under the benefit plans of the Company.
NOTE 11 -- SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
FOR THE YEAR FOR THE NINE MONTHS
ENDED -----------------------------
DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30,
1998 1998 1999
------------ ------------- -------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C>
Retirement of 5.99 shares of common stock at December
31, 1998, through the issuance of notes payable to a
stockholder............................................. $433,310 $433,310 $ --
======== ======== ========
Equipment acquired through financing agreements......... $751,600 $597,780 $563,541
======== ======== ========
Cash surrender value of life insurance and related party
receivable distributed to stockholder................. $ -- $ -- $341,905
======== ======== ========
Net furniture and equipment and related debt distributed
to stockholder........................................ $ -- $ -- $183,943
======== ======== ========
</TABLE>
NOTE 12 -- MAJOR CUSTOMERS
Revenues for the Company include revenues to the following customers:
<TABLE>
<CAPTION>
PERCENT TO TOTAL SALES
YEAR ENDED
CUSTOMER DECEMBER 31, 1998
- -------- ----------------------
<S> <C>
A.................................................. 50%
B.................................................. 16%
C.................................................. 11%
</TABLE>
NOTE 13 -- EVENTS SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT
(UNAUDITED)
FINANCING
On July 27, 1999, the Company entered into a loan agreement with a bank.
The Company borrowed $645,000 to be repaid in 60 monthly payments of $13,363,
including interest at 8.85%. The loan is secured by certain existing equipment
of the Company. In addition, subsequent to year end, the due date of the
revolving line of credit with a bank in the maximum amount of $2,000,000 was
extended through November 1999, under similar terms.
CONTRACT NEGOTIATION
Contracts in progress at September 30, 1999 include a contract with an
unrelated third party where the resolution of certain change orders are under
negotiation. The third party is withholding payment of remaining balances due on
the contract totaling approximately $2,000,000 pending agreement on the costs
and merits of the work performed. Management has reduced the amounts billed as
of September 30, 1999 to the amount it expects to collect on resolution of these
change orders with the third party.
ACQUISITION
On October 1, 1999, pursuant to an Acquisition Agreement and Plan of
Reorganization, 100% of the Company's outstanding common stock was purchased by
a subsidiary of Quanta Services, Inc. In anticipation of or concurrent with the
purchase, the Company's treasury stock was retired and distributions were made
to the shareholder of cash and certain Company assets of approximately $430,000
and $526,000, respectively.
81
<PAGE> 83
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Trawick Construction Company Group:
We have audited the accompanying combined balance sheet of Trawick
Construction Company Group (the Group) as defined in Note 1 to the combined
financial statements as of December 31, 1998 and the related combined statements
of income, stockholders' equity, and cash flows for the year then ended. These
combined financial statements are the representation of the Group'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 from
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 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 combined financial position of Trawick
Construction Company Group as of December 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.
McDANIEL & ASSOCIATES, P.C.
Dothan, Alabama
November 5, 1999
82
<PAGE> 84
TRAWICK CONSTRUCTION COMPANY GROUP
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents................................. $ 190,389 $ 3,423,001
Investment in marketable securities....................... 817,043 --
Accounts receivable, trade................................ 4,646,196 3,307,649
Accounts receivable, retainage............................ -- --
Accounts receivable, other................................ 1,782 30,858
Prepaid expenses.......................................... 600 2,595
Note receivable, current portion.......................... 8,087 --
----------- -----------
Total current assets............................... 5,664,097 6,764,103
----------- -----------
PROPERTY AND EQUIPMENT, at cost............................. 5,802,204.. 5,374,452
Less accumulated depreciation............................. (3,526,118) (3,387,296)
----------- -----------
Total property and equipment....................... 2,276,086.. 1,987,156
----------- -----------
INVESTMENT PROPERTIES
Commercial real estate, net of accumulated depreciation of
$6,286
in 1998................................................. 33,714 --
Timber land............................................... 53,600 --
----------- -----------
Total investment properties........................ 87,314 --
----------- -----------
OTHER ASSETS
Cash value of officers' life insurance, face amount
$3,000,000.............................................. 217,618 --
Land...................................................... 30,128 --
Note receivable, long-term portion........................ 435,493 --
Investment in Lightwave, LLC.............................. -- 956,813
----------- -----------
Total other assets................................. 683,239 956,813
----------- -----------
Total assets....................................... $ 8,710,736 $ 9,708,072
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable, current portion............................ $ 179,757 $ 330,330
Accounts payable.......................................... 238,799 283,033
Customer deposits......................................... 2,019,808 --
Accrued dividends......................................... 500,000 2,600,000
Accrued profit sharing.................................... 245,505 --
Accrued expenses, other................................... 71,544 247,171
Accrued income taxes...................................... 6,441 --
----------- -----------
Total current liabilities.......................... 3,261,854 3,460,534
----------- -----------
LONG-TERM DEBT
Notes payable, noncurrent portion......................... 1,045,214 1,773,778
----------- -----------
STOCKHOLDERS' EQUITY
Common stock.............................................. 51,000 51,000
Retained earnings......................................... 4,063,964 4,422,760
Accumulated other comprehensive income.................... 288,704 --
----------- -----------
Total stockholders' equity......................... 4,403,668 4,473,760
----------- -----------
Total liabilities and stockholders' equity......... $ 8,710,736 $ 9,708,072
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements
83
<PAGE> 85
TRAWICK CONSTRUCTION COMPANY GROUP
COMBINED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
FOR THE FOR THE NINE MONTH PERIOD
YEAR ENDED ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------
1998 1998 1999
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
REVENUES.............................................. $16,051,324 $11,977,591 $17,358,103
COSTS OF SERVICES, including depreciation............. 11,443,749 6,691,493 8,943,325
----------- ----------- -----------
Gross profit................................ 4,607,575 5,286,098 8,414,778
GENERAL AND ADMINISTRATIVE EXPENSES................... 3,512,705 2,597,551 1,855,001
----------- ----------- -----------
Income from operations...................... 1,094,870 2,688,547 6,559,777
----------- ----------- -----------
OTHER INCOME (EXPENSE)
Gain (loss) on sale of assets....................... 167,089 162,236 27,467
Gain on sale of investments......................... 62,922 55,882 332,862
Equity in loss on investment in Lightwave LLC. ..... -- -- (74,564)
Interest income and other, net...................... 74,884 64,792 82,281
Interest expense.................................... (62,072) (29,712) (75,176)
----------- ----------- -----------
242,823 253,198 292,870
----------- ----------- -----------
Income before taxes on income............... 1,337,693 2,941,745 6,852,647
INCOME TAXES.......................................... 8,941 274 --
----------- ----------- -----------
Net income.................................. $ 1,328,752 $ 2,941,471 $ 6,852,647
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
84
<PAGE> 86
TRAWICK CONSTRUCTION COMPANY GROUP
COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED
COMMON STOCK OTHER
---------------- RETAINED COMPREHENSIVE COMPREHENSIVE
SHARES AMOUNT EARNINGS INCOME INCOME
------ ------- ----------- ------------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31, 1997.......... 1,500 $51,000 $ 3,595,212 $ -- $222,863
Net income........................ -- -- 1,328,752 1,328,752 --
Other comprehensive income:
Unrealized gains on
securities................... -- -- -- 65,841 65,841
----------
Comprehensive income.............. -- -- -- $1,394,593 --
==========
Dividends......................... -- -- (860,000) --
----- ------- ----------- --------
BALANCE, December 31, 1998.......... 1,500 51,000 4,063,964 $ -- 288,704
Net income (unaudited)............ -- -- 6,852,647 6,852,647 --
Other comprehensive income:
Reclassification adjustment for
gains included in net income
(unaudited).................. -- -- -- (288,704) (288,704)
----------
Comprehensive income
(unaudited).................... -- -- -- $6,563,943 --
==========
Dividends (unaudited)............. -- -- (6,493,851) --
----- ------- ----------- --------
BALANCE, September 30, 1999
(unaudited)....................... 1,500 $51,000 $ 4,422,760 $ --
===== ======= =========== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
85
<PAGE> 87
TRAWICK CONSTRUCTION COMPANY GROUP
COMBINED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTH
FOR THE PERIOD ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -------------------------
1998 1998 1999
------------ ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income................................................ $ 1,328,752 $ 2,941,471 $ 6,852,647
Adjustments to reconcile net income to net cash provided
by (used in) operating activities:
Depreciation............................................ 715,955 518,625 350,252
Gain on sale of assets.................................. (167,089) (162,236) (27,467)
Bad debts............................................... 18,961 17,115 2,661
Gain on sale of investments............................. (62,922) (55,882) (332,862)
Equity in loss of limited liability company............. -- -- 74,564
Changes in operating assets and liabilities:
(Increase) decrease in:
Trade receivables..................................... (3,273,266) (3,107,731) 1,335,886
Retainage receivables................................. -- -- --
Other receivables..................................... 21,404 19,953 (29,076)
Prepaid expenses...................................... 16,168 10,355 (1,995)
Increase (decrease) in:
Customer deposits..................................... 2,019,808 -- (2,019,808)
Accounts payable...................................... (275,868) 238,645 44,234
Accrued expenses...................................... 125,418 (56,739) 175,627
Accrued income taxes.................................. (19,513) (25,954) (6,441)
Accrued dividends..................................... -- (430,000) 2,100,000
Accrued profit sharing................................ -- (202,337) (245,505)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) OPERATING
ACTIVITIES........................................ 447,808 (294,715) 8,272,717
----------- ----------- -----------
INVESTING ACTIVITIES
Purchase of equipment..................................... (1,867,387) (586,941) (568,258)
Purchase of investment assets............................. (672,571) (456,244) (485,460)
Proceeds from sale of assets.............................. 117,240 36,847 61,536
Increase in cash value of life insurance.................. (54,960) (7,567) (15,600)
Proceeds from note receivable............................. -- 4,251 5,988
Proceeds from sale of investments......................... 599,628 446,325 1,346,661
Investment in Lightwave, LLC.............................. -- -- (2,000,000)
----------- ----------- -----------
NET CASH USED IN INVESTING ACTIVITIES............... (1,878,050) (563,329) (1,655,133)
----------- ----------- -----------
FINANCING ACTIVITIES
Proceeds from new borrowings.............................. 1,210,000 100,000 2,000,000
Payments on notes payable................................. (45,499) (43,634) (1,277,025)
Dividends to stockholders................................. (860,000) (360,000) (4,107,947)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) FINANCING
ACTIVITIES........................................ 304,501 (303,634) (3,384,972)
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (1,125,741) (1,161,678) 3,232,612
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 1,316,130 1,316,130 190,389
----------- ----------- -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 190,389 $ 154,452 $ 3,423,001
=========== =========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid during the period for:
Interest................................................ $ 62,162 $ 29,712 $ 75,176
Income taxes............................................ $ 26,228 $ 2,774 $ 3,882
SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
Purchase of property and equipment........................ $ 60,470 $ 1,178,640 $ 156,162
Short-term debt assumed................................... (60,470) (1,178,640) (156,162)
----------- ----------- -----------
Cash paid for acquisition........................... $ -- $ -- $ --
=========== =========== ===========
Sale of assets, net....................................... $ 449,730 $ 449,730 $ --
Note received at closing.................................. 449,730 (449,730) --
----------- ----------- -----------
Cash received from sale............................. $ -- $ -- $ --
=========== =========== ===========
Noncash distributions to stockholders:
Note receivable........................................... -- $ -- $ 437,592
Property and plant........................................ -- -- 746,471
Cash value of life insurance.............................. -- -- 233,218
Investment in Lightwave, L.L.C............................ -- -- 968,623
----------- ----------- -----------
-- $ -- $ 2,385,904
=========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
86
<PAGE> 88
TRAWICK CONSTRUCTION COMPANY GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND ORGANIZATION
Trawick Construction Company Group (the Group) includes the financial
statements of the following companies under common control and ownership:
Trawick Construction Company, Inc. (a Florida S-corporation) and Communication
Manpower, Inc. (a Florida S-corporation.) Trawick Construction Company, Inc.
operates in the telephone line installation industry. Communication Manpower,
Inc. provides labor to telecommunication companies.
Common Stock
Common stock at December 31, 1998, is composed of the following:
a. Trawick Construction Company, Inc. -- 500 shares authorized,
issued, and outstanding at $100 par value per share
b. Communication Manpower, Inc. -- 1,000 shares authorized, issued,
and outstanding at $1 par value per share
NOTE 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. All significant intercompany accounts and
transactions have been eliminated in combination.
Interim Combined Financial Information
The interim combined financial statements for the nine months ended
September 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.
Revenue Recognition
The Group 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 Group for services which have been rendered, measured typically
in terms of units installed, hours expended, or some other nature 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 Group believes that the retention balance
shown on the accompanying combined balance sheet will be collected within the
next fiscal year.
87
<PAGE> 89
TRAWICK CONSTRUCTION COMPANY GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Marketable Securities
Marketable securities have been categorized as available for sale
securities and as a result are stated at fair value. Unrealized holding gains
and losses are included as a component of stockholders' equity until realized.
Accounts Receivable
The Group considers accounts receivable to be fully collectible;
accordingly, no allowance for doubtful accounts is required.
Cash and Cash Equivalents
For purposes of the statement of cash flows, the Group considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
Compensated Absences
Employees of the Group are entitled to paid vacation, paid sick days, and
personal days off, depending on job classification, length of service, and other
factors. It is impractical to estimate the amount of compensation for future
absences and, accordingly, no liability has been recorded in the accompanying
financial statements. The Group's policy is to recognize the costs of
compensated absences when actually paid to employees.
Customer Deposits
Advance payments for future work received from customers is recorded as
customer deposits under current liabilities. The payments are recognized as
income as the work is performed, which is believed to be within one year.
Use of Estimates
The Group is required to make estimates and assumptions in preparing
financial statements in conformity with generally accepted accounting
principles. These estimates and assumptions affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and liabilities, and
the reported revenues and expenses. Actual results could differ from those
estimates.
Fair Value of Financial Instruments
The Group's financial instruments consist of cash, 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.
NOTE 3 -- PROPERTY AND EQUIPMENT
Property and equipment are recorded at cost and depreciated over the
estimated useful lives of the various assets generally by accelerated methods.
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 statements of operations.
88
<PAGE> 90
TRAWICK CONSTRUCTION COMPANY GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The following is a summary of property and equipment and their estimated
useful lives:
<TABLE>
<CAPTION>
ASSET CLASS LIFE (YEARS) COST BASIS
- ----------- ------------ -----------
<S> <C> <C>
Machinery and equipment.................................... 5-7 $ 3,526,092
Autos and trucks........................................... 5 1,484,461
Office furniture and equipment............................. 5-7 87,048
Building and improvements.................................. 15-39 704,603
-----------
5,802,204
Less accumulated depreciation.............................. (3,526,118)
-----------
$ 2,276,086
===========
</TABLE>
The total depreciation expense was $715,955 for 1998.
NOTE 4 -- PROFIT SHARING PLAN
The Group maintains a qualified profit sharing plan for substantially all
full-time employees. The annual contribution to the plan, as determined by the
Board of Directors, is discretionary but may not exceed 15% of the annual
aggregate compensation paid to all participating employees. The contribution was
$245,505 in 1998.
NOTE 5 -- INCOME TAXES
Both Trawick Construction Company, Inc. and Communication Manpower, Inc.,
with the consent of their stockholders, have elected S-corporation status under
appropriate sections of the Internal Revenue Code and a similar section of the
Florida income tax laws, which provide that in lieu of corporate income taxes,
the stockholders have consented to include their proportionate share of each
company's taxable income in their individual returns. Therefore, these
statements do not include a provision for Federal or Florida income taxes.
The income taxes shown on the statements of income represent income taxes
due to the States of Alabama, Georgia, and Mississippi.
NOTE 6 -- OPERATING LEASES
The Group had an agreement with a party related to one of its stockholders
for the rental of land and building on an annual basis. The lease was treated as
an operating lease under generally accepted accounting principles. The total
rent expense was $32,000 for 1998.
During 1998, the Group purchased the real estate at its fair market value.
The Group has other operating lease arrangements for temporary rental of
equipment at its job site locations for lease terms of less than one year. The
minimal lease payment for the next lease term will be approximately $174,000.
89
<PAGE> 91
TRAWICK CONSTRUCTION COMPANY GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- NOTES PAYABLE
<TABLE>
<S> <C>
Note payable to SunTrust Bank at prime, due on demand,
secured by owners' assets, interest paid monthly............ $ 100,000
Note payable to SunTrust Bank at prime, due July 29, 2003,
secured by real estate, interest paid monthly............. 500,000
Note payable to SunTrust Bank at prime, due $7,500 monthly,
secured by equipment, matures September 1, 2013........... 589,666
Note payable to Caterpillar Credit at 0% interest, due
$5,061 for 12 months, secured by equipment................ 25,305
Note payable to SouthTrust Bank at prime, due July 29, 1999,
secured by equipment...................................... 10,000
----------
Total notes payable............................... 1,224,971
Less current portion.............................. (179,757)
----------
Total long-term debt.............................. $1,045,214
==========
</TABLE>
Current maturities are as follows:
<TABLE>
<S> <C>
1999.................................................... $ 179,757
2000.................................................... 48,142
2001.................................................... 52,137
2002.................................................... 56,465
2003.................................................... 561,151
Thereafter.............................................. 327,319
----------
$1,224,971
==========
</TABLE>
The Group has available lines of credit for a total of $1,125,000 with
SunTrust Bank, at prime, secured by equipment through July 24, 2000.
NOTE 8 -- CONCENTRATIONS OF CREDIT RISKS
Financial instruments that potentially subject the Group to concentrations
of credit risk consist principally of temporary cash investments and trade
accounts receivables. At year end, the Group had deposits in excess of the
$100,000 FDIC insured amount with SunTrust Bank. The Group performs ongoing
credit evaluations of its customers' financial condition and, generally,
requires no collateral from its customers.
NOTE 9 -- RELATED PARTY TRANSACTIONS
In addition to the leasing activities discussed in Note 5, the Group
recorded the following related party transactions:
Included in account receivable -- other on the balance sheet is $600 for
1998, which is due from stockholders.
90
<PAGE> 92
TRAWICK CONSTRUCTION COMPANY GROUP
NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 10 -- INVESTMENTS IN MARKETABLE SECURITIES
The aggregate fair value, gross unrealized holding gains, and amortized
cost by major security is as follows:
<TABLE>
<S> <C>
Equity securities:
Aggregate fair value.................................. $ 817,043
Less cost basis....................................... (528,339)
---------
Unrealized gain......................................... $ 288,704
=========
</TABLE>
Proceeds from the sale of available-for-sale securities for 1998 were
$599,628. Net realized gains for 1998 were $62,922. The specific identification
method is used to determine cost.
NOTE 11 -- COMMITMENTS AND CONTINGENCIES
Litigation
The Group is involved in disputes or legal actions 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 worker's compensation, business auto liability, equipment liability,
general liability, and an umbrella policy.
NOTE 12 -- SUBSEQUENT EVENTS (UNAUDITED)
In April 1999, the Company formed a limited liability company, Lightwave
LLC (Lightwave), with another company to acquire, hold, own, develop, utilize
and exploit fiberoptic communication and telecommunication lines. The Company's
initial investment was $2,000,000 and the Company owned 50% of Lightwave. In
June 1999, the Company distributed 50%, or $968,623, of its investment in
Lightwave to its stockholders, with the Company retaining a 25% ownership in
Lightwave. Lightwave is accounted for by the Company under the equity method and
summarized information on Lightwave at September 30, 1999 is as follows:
<TABLE>
<S> <C>
Current assets.......................................... $1,457,990
Property and equipment, net............................. 2,369,260
----------
3,827,250
Less liabilities........................................ --
----------
Net assets.............................................. $3,827,250
==========
Revenue................................................. $ 17,847
==========
Net loss................................................ $ (172,750)
==========
</TABLE>
On October 1, 1999, the Group was sold to Quanta Services, Inc. (Quanta)
for cash and Quanta stock.
91
<PAGE> 93
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Conti Enterprises, Inc.:
We have audited the accompanying statement of assets, liabilities and
divisional equity of the Telecommunications Division of Conti Enterprises, Inc.
as of December 31, 1998, and the related statements of divisional operating
profit 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 Telecommunications
Division of Conti Enterprises, Inc. as of December 31, 1998, and its results of
operations and cash flows for the year then ended, in conformity with generally
accepted accounting principles.
As discussed in Note 1 to the financial statements, the accompanying
financial statements present the financial position, results of operations and
cash flows of the Division and are not intended to present the financial
position, results of operations and cash flows of Conti Enterprises, Inc. taken
as a whole.
J.H. COHN LLP
Roseland, New Jersey
April 9, 1999, except for Note 5
as to which the date is October 1, 1999
92
<PAGE> 94
TELECOMMUNICATIONS DIVISION OF
CONTI ENTERPRISES, INC.
STATEMENTS OF ASSETS, LIABILITIES AND DIVISIONAL EQUITY
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Contracts receivable, including retainage of $169,493 and
$249,465.................................................... $2,599,199 $3,238,555
Costs and estimated earnings in excess of billings.......... 115,343 569,276
Deposits.................................................... 13,796 13,096
Machinery and equipment, net of accumulated depreciation of
$137,761 and $198,630..................................... 268,526 287,317
---------- ----------
Totals............................................ $2,996,864 $4,108,244
========== ==========
LIABILITIES AND DIVISIONAL EQUITY
Liabilities:
Billings in excess of costs and estimated earnings........ $ 480,200 $ 779,966
Accounts payable -- trade................................. 759,047 750,672
Accrued expenses.......................................... 34,236 36,131
---------- ----------
Total liabilities................................. 1,273,483 1,566,769
Divisional equity........................................... 1,723,381 2,541,475
---------- ----------
Totals............................................ $2,996,864 $4,108,244
========== ==========
</TABLE>
See Notes to Financial Statements.
93
<PAGE> 95
TELECOMMUNICATIONS DIVISION OF
CONTI ENTERPRISES, INC.
STATEMENTS OF DIVISIONAL OPERATING PROFIT
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, -----------------------
1998 1998 1999
------------ ---------- ----------
(UNAUDITED)
<S> <C> <C> <C>
Construction revenue.................................... $12,422,117 9,013,782 $9,325,086
Construction costs, including depreciation.............. 8,771,765 6,335,077 6,806,091
----------- ---------- ----------
Gross margin............................................ 3,650,352 2,678,705 2,518,995
General and administrative expenses..................... 1,513,007 1,090,475 1,283,733
----------- ---------- ----------
Operating income........................................ 2,137,345 1,588,230 1,235,262
----------- ---------- ----------
Allocated corporate expenses:
General and administrative expenses................... 308,410 226,720 491,533
Executive compensation................................ 145,637 29,815 101,626
----------- ---------- ----------
Totals........................................ 454,047 256,535 593,159
----------- ---------- ----------
Net income.............................................. $ 1,683,298 1,331,695 $ 642,103
=========== ========== ==========
</TABLE>
See Notes to Financial Statements.
94
<PAGE> 96
TELECOMMUNICATIONS DIVISION OF
CONTI ENTERPRISES, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ------------------------
1998 1998 1999
------------ ---------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Operating activities:
Net income........................................... $1,683,298 $1,331,695 $ 642,103
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation...................................... 71,707 46,064 63,763
Changes in operating assets and liabilities:
Contracts receivable............................ (1,335,943) (683,148) (639,356)
Costs and estimated earnings in excess of
billings..................................... (102,759) (104,043) (453,933)
Deposits........................................ (8,570) (8,766) 700
Billings in excess of costs and estimated
earnings..................................... 15,384 71,358 299,766
Accounts payable -- trade....................... 39,394 (84,760) (8,375)
Accrued expenses................................ 10,651 5,034 1,895
---------- ---------- -----------
Net cash provided by (used in) operating
activities................................. 373,162 573,434 (93,437)
---------- ---------- -----------
Investing activities -- expenditures for machinery and
equipment............................................ (124,781) (54,251) (82,554)
---------- ---------- -----------
Financing activities:
Contributions from corporate......................... -- -- 175,991
Distributions to corporate........................... (248,381) (519,183) --
---------- ---------- -----------
Net cash provided by (used in) financing
activities................................. (248,381) (519,183) 175,991
---------- ---------- -----------
Net increase in cash and cash balance.................. $ -- $ -- $ --
========== ========== ===========
</TABLE>
See Notes to Financial Statements.
95
<PAGE> 97
TELECOMMUNICATIONS DIVISION OF
CONTI ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES:
Business:
The Telecommunications Division (the "Division") of Conti Enterprises, Inc.
(the "Company") is engaged primarily as a utility contractor for private
entities located in the eastern United States.
Basis of presentation:
The accompanying financial statements present the financial position and
results of operations and cash flows of the Division and are not intended to
present the financial position, results of operations and cash flows of the
Company taken as a whole. In addition, as discussed in Note 4, certain expenses
have been allocated to the Division by the Company and, accordingly, the
accompanying financial statements are not necessarily indicative of the
financial position, results of operations or cash flows of the Division had it
operated as a separate entity.
The unaudited financial statements have been prepared pursuant to the rules
of the Securities and Exchange Commission ("SEC"). 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 unaudited financial statements of the Division, have been
included. The results of operations for the interim periods are not necessarily
indicative of the results for the entire year.
Use of estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect certain reported amounts and disclosures. Accordingly,
actual results could differ from those estimates.
Basis for recording income on construction contracts:
Profits on contracts are credited to income under the
percentage-of-completion method of accounting, based on the estimated stage of
completion of individual contracts. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss on both short and
long-term contracts is recorded. Because of the inherent uncertainties in
estimating costs, it is at least reasonably possible that the estimates used
will change within the near term.
Machinery and equipment:
Machinery and equipment are stated at cost, net of depreciation to date.
Depreciation is provided on the straight-line method at rates calculated to
provide for the retirement of machinery and equipment at the end of their
estimated useful lives.
Income taxes:
The Company, with the consent of its stockholders, has elected to be
treated as an "S" Corporation under Sections 1371-1378 of the Internal Revenue
Code. Under these sections, corporate income or loss, in general, is allocated
to the stockholders for inclusion in their personal income tax returns.
Accordingly, there is no provision for Federal income tax in the accompanying
financial statements attributable to the operations of the Division.
96
<PAGE> 98
TELECOMMUNICATIONS DIVISION OF
CONTI ENTERPRISES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 2 -- COSTS AND ESTIMATED EARNINGS ON CONTRACTS:
Costs and estimated earnings on contracts consist of the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
Costs incurred on contracts................................ $15,381,365 $16,246,647
Estimated contract profit.................................. 8,279,820 6,085,439
----------- -----------
23,661,185 22,332,086
Less billings to date...................................... 24,026,042 22,542,776
----------- -----------
Totals........................................... $ (364,857) $ (210,690)
=========== ===========
Costs and estimated earnings in excess of billings on
contracts................................................ $ 115,343 $ 569,276
Billings in excess of costs and estimated earnings on
contracts................................................ 480,200 779,966
----------- -----------
Totals........................................... $ (364,857) $ (210,690)
=========== ===========
</TABLE>
NOTE 3 -- MACHINERY AND EQUIPMENT:
The cost of major classes of machinery and equipment and the range of
estimated useful lives are as follows:
<TABLE>
<CAPTION>
ESTIMATED
USEFUL DECEMBER 31, SEPTEMBER 30,
LIVES 1998 1999
--------- ------------ -------------
(UNAUDITED)
<S> <C> <C> <C>
Automobiles and trucks........................... 5 years $230,087 $287,968
Computer and office equipment.................... 5-7 years 158,548 180,327
Machinery and equipment.......................... 5 years 17,652 17,652
-------- --------
406,287 485,947
Less accumulated depreciation.................... 137,761 198,630
-------- --------
Totals................................. $268,526 $287,317
======== ========
</TABLE>
NOTE 4 -- ALLOCATED COSTS AND EXPENSES:
Common corporate general and administrative expenses, interest expense,
other income and owner's compensation are allocated among each of the Company's
divisions based primarily on a percentage of direct construction costs.
Management considers its methodologies for specifically identifying or
allocating costs and expenses to the Division to be reasonable and to present
fairly the costs and expenses of the Division.
NOTE 5 -- SUBSEQUENT EVENT:
On October 1, 1999, the Company sold the Division to Quanta Services, Inc.
("Quanta") for cash and stock of Quanta.
97
<PAGE> 99
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 of Quanta Services, Inc. and subsidiaries
("Quanta" or the "Company") as of September 30, 1999 and for the nine months
then ended (unaudited) and for the year ended December 31, 1998 adjusted as
follows: (i) the unaudited pro forma combined balance sheet at September 30,
1999 gives effect to the acquisition of nine businesses acquired by Quanta from
October 1, 1999 through November 1, 1999 (the "Subsequent Acquisitions") as if
they occurred on September 30, 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 four entities
acquired concurrent with the IPO ("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 39 businesses accounted for using
the purchase method of accounting from January 1, 1999 through November 1, 1999
(the "1999 Acquisitions"), (d) the issuance of the Convertible Subordinated
Notes, (e) the follow-on public offering completed by Quanta in January of 1999
and (f) the issuance of Series A Convertible Preferred Stock in September of
1999; and (iii) the unaudited pro forma combined statement of operations for the
nine months ended September 30, 1999 gives effect to the following events as if
they had occurred on January 1, 1999 (a) the follow-on public offering, (b) the
pre-acquisition results of the 1999 Acquisitions as if they occurred on January
1, 1999 and (c) the issuance of Series A Convertible Preferred Stock in
September of 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 in the Company's Annual Report on Form 10-K which was filed
with the SEC on March 31, 1999 and additionally the Company's related financial
statements on Form 8-K which was filed with the SEC on June 17, 1999 giving
effect to a pooling-of-interests transaction which occurred in February 1999.
98
<PAGE> 100
QUANTA SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED BALANCE SHEET
SEPTEMBER 30, 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....................... $ 12,687 $ 3,920 $ -- $ 16,607
Accounts receivable, net........................ 212,308 16,816 (213) 228,911
Cost and estimated earnings in excess of
billings on uncompleted contracts............. 55,741 1,351 -- 57,092
Inventories..................................... 9,012 135 -- 9,147
Prepaid expenses and other current assets....... 8,999 116 -- 9,115
---------- ------- -------- ----------
Total current assets..................... 298,747 22,338 (213) 320,872
PROPERTY AND EQUIPMENT, net....................... 161,001 9,231 (204) 170,028
OTHER ASSETS...................................... 7,156 957 -- 8,113
GOODWILL, net..................................... 567,277 -- 64,843 632,120
---------- ------- -------- ----------
Total assets............................. $1,034,181 $32,526 $ 64,426 $1,131,133
========== ======= ======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt............ $ 6,777 $ 4,178 $ -- $ 10,955
Accounts payable and accrued expenses........... 139,741 7,701 1,526 148,968
Billings in excess of costs and estimated
earnings on uncompleted contracts............. 17,877 1,532 -- 19,409
---------- ------- -------- ----------
Total current liabilities................ 164,395 13,411 1,526 179,332
LONG-TERM DEBT, net of current maturities......... 97,110 5,437 54,953 157,500
CONVERTIBLE SUBORDINATED NOTES.................... 49,350 -- -- 49,350
DEFERRED INCOME TAXES AND OTHER NON-CURRENT
LIABILITIES..................................... 14,582 160 -- 14,742
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock................................. -- -- -- --
Common Stock.................................... -- 112 (112) --
Limited Vote Common Stock....................... -- -- -- --
Treasury Stock.................................. -- (1,202) 1,202 --
Additional paid-in capital...................... 653,236 2,590 18,875 674,701
Retained earnings............................... 55,508 12,018 (12,018) 55,508
---------- ------- -------- ----------
Total stockholders' equity............... 708,744 13,518 7,947 730,209
---------- ------- -------- ----------
Total liabilities and stockholders'
equity................................. $1,034,181 $32,526 $ 64,426 $1,131,133
========== ======= ======== ==========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
99
<PAGE> 101
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET
(a) Reflects the adjustments related to the purchase of nine additional
acquisitions that were consummated subsequent to September 30, 1999 and
through November 1, 1999, including approximately $55.0 million of debt
incurred under Quanta's line of credit to finance the cash portion of
the purchase price paid upon acquisition, approximately 1.0 million
shares of common stock issued, distribution of certain assets not
acquired and certain S corporation distributions which were distributed
subsequent to September 30, 1999, resulting in goodwill of
approximately $64.8 million.
100
<PAGE> 102
QUANTA SERVICES, INC. AND SUBSIDIARIES
UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 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........................................ $593,388 $234,119 $ (11,628)(a) $815,879
COST OF SERVICES (including depreciation)....... 460,809 171,571 (11,628)(b) 620,752
-------- -------- --------- --------
Gross Profit.................................. 132,579 62,548 -- 195,127
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 53,481 29,317 (3,477)(c) 79,321
MERGER EXPENSES -- Pooling...................... 6,574 -- -- 6,574
GOODWILL AMORTIZATION........................... 6,911 4 5,135(d) 12,050
-------- -------- --------- --------
Income (loss) from Operations................. 65,613 33,227 (1,658) 97,182
OTHER INCOME (EXPENSE)
Interest Expense.............................. (10,790) (1,493) 1,076(e) (11,207)
Other, net.................................... 1,006 2,221 -- 3,227
-------- -------- --------- --------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE......... 55,829 33,955 (582) 89,202
PROVISION FOR INCOME TAXES...................... 28,436 1,284 13,098(f) 42,818
-------- -------- --------- --------
NET INCOME (LOSS)............................... 27,393 32,671 (13,680) 46,384
DIVIDENDS ON PREFERRED STOCK.................... 25 -- 673(g) 698
-------- -------- --------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCK......................................... $ 27,368 $ 32,671 $ (14,353) $ 45,686
======== ======== ========= ========
BASIC EARNINGS PER SHARE OF COMMON STOCK........ $ 1.25
========
DILUTED EARNINGS PER SHARE OF COMMON STOCK...... $ 1.02
========
DILUTED EARNINGS PER SHARE OF COMMON STOCK
BEFORE MERGER EXPENSES........................ $ 1.18
========
SHARES USED IN COMPUTING PRO FORMA COMBINED
EARNINGS PER SHARE --
BASIC(h)...................................... 36,461
========
DILUTED(h).................................... 46,932
========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
101
<PAGE> 103
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 $521,126 $(13,446)(a) $943,118
COST OF SERVICES (including
depreciation)..................... 257,270 94,565 389,261 (13,125)(b) 727,971
-------- -------- -------- -------- --------
Gross Profit...................... 61,989 21,614 131,865 (321) 215,147
SELLING, GENERAL AND ADMINISTRATIVE
EXPENSES.......................... 27,160 11,697 71,307 (19,822)(c) 90,342
MERGER EXPENSES -- Pooling.......... 231 -- -- -- 231
GOODWILL AMORTIZATION............... 2,513 2 -- 13,238(d) 15,753
-------- -------- -------- -------- --------
Income from Operations............ 32,085 9,915 60,558 6,263 108,821
OTHER INCOME (EXPENSE)
Interest Expense.................. (4,855) (622) (3,394) (5,201)(e) (14,072)
Other, net........................ 641 820 3,847 -- 5,308
-------- -------- -------- -------- --------
INCOME BEFORE INCOME TAX
PROVISION......................... 27,871 10,113 61,011 1,062 100,057
PROVISION FOR INCOME TAXES.......... 11,683 572 7,082 24,790(f) 44,127
-------- -------- -------- -------- --------
NET INCOME (LOSS)................... 16,188 9,541 53,929 (23,728) 55,930
DIVIDENDS ON PREFERRED STOCK........ -- -- -- 930(g) 930
-------- -------- -------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO
COMMON STOCK...................... $ 16,188 $ 9,541 $ 53,929 $(24,658) $ 55,000
======== ======== ======== ======== ========
BASIC EARNINGS PER SHARE OF COMMON STOCK........................................................ $ 1.52
========
DILUTED EARNINGS PER SHARE OF COMMON STOCK...................................................... $ 1.26
========
DILUTED EARNINGS PER SHARE OF COMMON STOCK BEFORE MERGER EXPENSES...............................
$ 1.26
========
SHARES USED IN COMPUTING PRO FORMA
COMBINED EARNINGS PER SHARE --
BASIC(h)...................................................................................... 36,277
========
DILUTED(h).................................................................................... 46,221
========
</TABLE>
The accompanying notes are an integral part of these pro forma combined
financial statements.
102
<PAGE> 104
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS
Nine Months Ended September 30, 1999
(a) Reflects the elimination of intercompany revenues between certain of the
1999 Acquisitions prior to their acquisition by Quanta.
(b) Reflects the elimination of intercompany expenses between certain of the
1999 Acquisitions prior to their acquisition by Quanta.
(c) Adjusts compensation expense to the level the previous owners of the 1999
Acquisitions have agreed to receive as employees of the Company subsequent
to their acquisition.
(d) Adjusts goodwill amortization expense to reflect the acquisitions of the
1999 Acquisitions 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 1999 Acquisitions 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 and from proceeds from the sale of Series A Convertible Preferred
Stock in September 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) Gives effect to the .5% dividend requirement on the Series A Convertible
Preferred Stock issued in September 1999.
(h) The computation of pro forma basic and diluted earnings per share for the
nine months ended September 30, 1999 is based upon the historical shares of
common stock outstanding at September 30, 1999, adjusted for the issuance
of approximately 1.0 million shares related to the acquisition of nine
businesses subsequent to September 30, 1999 and through November 1, 1999.
Diluted earnings per share additionally includes the dilution attributable
to the assumed conversion of the Convertible Subordinated Notes and the
Series A Convertible Preferred Stock 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 intercompany revenues between certain of the
1998 and 1999 Acquisitions prior to their acquisition by Quanta and the
elimination of the revenues for a division of one of the 1998 Acquisitions
because the Company did not purchase that division.
(b) Reflects the elimination of intercompany expenses between certain of the
1998 and 1999 Acquisitions prior to their acquisition by Quanta and the
elimination of the expenses for a division of one of the 1998 Acquisitions
because the Company did not purchase that division.
(c) Adjusts compensation expense to the level the previous owners of the 1998
and 1999 Acquisitions have agreed to receive as employees of the Company
subsequent to their acquisition.
(d) Adjusts goodwill amortization expense to reflect the acquisitions of the
1998 and 1999 Acquisitions, 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 1998 and 1999
Acquisitions, 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 and from proceeds from the sale of Series A
Preferred Stock in September 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.
103
<PAGE> 105
(g) Gives effect to the .5% dividend requirement on Series A Preferred Stock
issued in September 1999.
(h) 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 10.0 million shares related to the acquisition of 40
businesses from January 1, 1999 through November 1, 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 the Series A Convertible Preferred Stock and
dilution attributable to outstanding options to purchase common stock,
using the treasury stock method.
104
<PAGE> 106
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: November 15, 1999
By: /s/ DERRICK A. JENSEN
------------------------------------
Derrick A. Jensen
Vice President, Controller and Chief
Accounting Officer
105
<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
this Form 8-K of Quanta Services, Inc.: report dated October 8, 1999, on the
financial statements of W.C. Communications, Inc. for the year ended December
31, 1998, and our report dated October 7, 1999, on the financial statements of
Edwards Pipeline Company LLC for the year ended December 31, 1998. It should be
noted that we have not audited any financial statements of W.C. Communications,
Inc. or Edwards Pipeline Company LLC subsequent to December 31, 1998 or
performed any audit procedures subsequent to the date of our reports.
ARTHUR ANDERSEN LLP
Houston, Texas
November 12, 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 July 9, 1999 on the financial statements of North Sky
Communications and Affiliates combined for the year ended December 31, 1998
included in this Form 8-K of Quanta Services, Inc. It should be noted that we
have not audited any financial statements of North Sky Communications and
Affiliates subsequent to July 9, 1999 or performed any audit procedures
subsequent to the date of our report.
Arthur Andersen LLP
Portland, OR
November 12, 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 October 14, 1999, on the financial statements of Western Directional, Inc.
as of and for the year ended December 31, 1998 included in this Form 8-K of
Quanta Services, Inc. It should be noted that we have not audited any financial
statements of Western Directional, Inc. subsequent to December 31, 1998 or
performed any audit procedures subsequent to the date of our report.
S. J. Gallina & Co., LLP
Sacramento, California
November 12, 1999
<PAGE> 1
EXHIBIT 23.4
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT
As independent public accountants, we hereby consent to the use of our
report dated April 28, 1999, on the financial statements of Gem Engineering
Co., Inc. as of and for the year ended December 31, 1998 included in this Form
8-K of Quanta Services, Inc. It should be noted that we have not audited any
financial statements of Gem Engineering Co., Inc. subsequent to April 28, 1999
or performed any audit procedures subsequent to the date of our report.
Jerry T. Paul
Certified Public Accountant
Houston, Texas
November 12, 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 February 5, 1999, on the financial statements of Bonneville Construction
Company, Inc. as of and for the year ended December 31, 1998 included in this
Form 8-K of Quanta Services, Inc. It should be noted that we have not audited
any financial statements of Bonneville Construction Company, Inc. subsequent to
December 31, 1998 or performed any audit procedures subsequent to the date of
our report.
McGladrey & Pullen, LLP
Las Vegas, Nevada
October 27, 1999
<PAGE> 1
EXHIBIT 23.6
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated June 18, 1999, on the financial statements of Haines Construction
Co. as of and for the year ended March 31, 1999 included in this Form 8-K of
Quanta Services, Inc. It should be noted that we have not audited any financial
statements of Haines Construction Co. subsequent to March 31, 1999 or performed
any audit procedures subsequent to the date of our report.
Paul B. Leathers, Inc.
Oklahoma City, Oklahoma
November 12, 1999
<PAGE> 1
EXHIBIT 23.7
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our
report dated July 30, 1999, on the financial statements of Crown Fiber
Communications, Inc. as of and for the year ended December 31, 1998 included in
this Form 8-K of Quanta Services, Inc. It should be noted that we have not
audited any financial statements of Crown Fiber Communications, Inc. subsequent
to December 31, 1998 or performed any audit procedures subsequent to the date of
our report.
BABUSH, NEIMAN, KORNMAN & JOHNSON, LLP
Atlanta, Georgia
November 12, 1999
<PAGE> 1
EXHIBIT 23.8
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated November 5, 1999, on the combined financial statements of Trawick
Construction Company Group as of and for the year ended December 31, 1998,
included in this form 8-K of Quanta Services, Inc. It should be noted that we
have not audited any financial statements of Trawick Construction Company Group
subsequent to December 31, 1998, or performed any audit procedures subsequent to
the date of our report.
McDANIEL & ASSOCIATES, P.C.
Dothan, Alabama
November 12, 1999
<PAGE> 1
EXHIBIT 23.9
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use of our report
dated April 9, 1999, except for Note 5, as to which the date is October 1, 1999,
on the financial statements of the Telecommunications Division of Conti
Enterprises, Inc. as of and for the year ended December 31, 1998 included in
this Form 8-K of Quanta Services, Inc. It should be noted that we have not
audited any financial statements of the Telecommunications Division of Conti
Enterprises, Inc. subsequent to December 31, 1998 or performed any audit
procedures subsequent to the date of our report.
J.H. COHN LLP
Roseland, New Jersey
November 12, 1999
