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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
MARK ONE
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 1-13831
QUANTA SERVICES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 74-2851603
(State or other jurisdiction (IRS employer identification no.)
of incorporation or organization)
1360 POST OAK BOULEVARD, SUITE 2100
HOUSTON, TEXAS 77056
(Address of principal executive offices, including ZIP Code)
(713) 629-7600
(Registrant's telephone number, including area code)
Securities Registered Pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EXCHANGE ON WHICH REGISTERED
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Common Stock, $.00001 par value New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
TITLE OF EACH CLASS
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None
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days: Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 15, 1999, the aggregate market value of the Common Stock of the
Registrant held by non-affiliates of the Registrant, based on the last sale
price of the Common Stock of the Registrant was approximately $516,030,696 (for
purposes of calculating this amount, only directors, officers, and beneficial
owners of 5% or more of the capital stock of the Registrant have been deemed
affiliates).
The number of shares of the Common Stock of the Registrant outstanding as
of March 15, 1999 was 25,670,073.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 1999 Annual
Meeting of Stockholders to be held on May 19, 1999, are incorporated by
reference into Part III of this Form 10-K.
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QUANTA SERVICES, INC.
ANNUAL REPORT ON FORM 10-K
FOR THE YEAR ENDED DECEMBER 31, 1998
INDEX
PAGE
NUMBER
------
PART I.
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 11
Item 4. Submission of Matters to a Vote of Security Holders......... 11
PART II.
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters................................................... 12
Item 6. Selected Financial Data..................................... 13
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 15
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 22
Item 8. Financial Statements and Supplementary Data................. 23
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................. 46
PART III.
Item 10. Directors and Executive Officers of the Registrant.......... 46
Item 11. Executive Compensation...................................... 46
Item 12. Security Ownership of Certain Beneficial Owners and
Management................................................ 46
Item 13. Certain Relationships and Related Transactions.............. 46
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 46
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PART I
ITEM 1. BUSINESS
GENERAL
Quanta is a leading provider of specialty contracting and maintenance
services primarily for electric and telecommunications infrastructure in North
America. We also install transportation control and lighting systems and provide
specialty contracting services to commercial and industrial customers. Quanta,
on a pro forma basis including all companies acquired prior to December 31,
1998, had combined revenues for the year ended December 31, 1998 of $423.6
million, of which 45.2% was attributable to electric utility infrastructure
services, 37.9% was attributable to telecommunications infrastructure services,
9.5% was attributable to transportation control and lighting systems services
and 7.4% was attributable to commercial and industrial services.
We provide services to electric utilities, telecommunication and cable
television operators, governmental entities, general contractors and builders,
and owners and managers of commercial and industrial properties. We currently
have offices in 20 states, and perform work nationwide. We have strategic
alliance agreements or long-term maintenance agreements with some of our
customers including Enron Capital & Trade Resources Corp., Nevada Power Company,
Pacific Gas & Electric Company, Pacific Bell and Western Resources, Inc.
Quanta was formed through the combination of four separate specialty
contracting businesses in February 1998 when we completed our initial public
offering (the "IPO"). We intend to continue to pursue an aggressive acquisition
strategy to acquire operations in new markets, as well as leverage current
operations within existing markets. Between our IPO and December 31, 1998, we
acquired 12 additional specialty contracting businesses. Internal growth is also
an important component of our growth strategy. The businesses we have acquired
through December 31, 1998, including those acquired concurrently with our IPO,
have achieved internal revenue growth on a pro forma combined basis at a
compound annual rate of 25.6% between 1996 and 1998. Subsequent to December 31,
1998 and through March 15, 1999, we acquired eight other specialty contracting
businesses.
INDUSTRY OVERVIEW
Quanta estimates that the electrical and telecommunications contracting
industry generates annual revenues in excess of $40 billion. We believe that
growth in this industry is being positively affected by the following trends:
Deregulation. The wholesale electricity market, including sales of
electricity between utilities and other generators, is regulated by the Federal
Energy Regulatory Commission ("FERC"). In 1996, FERC accelerated the
deregulation of the electric power industry by issuing Order nos. 888 and 889,
which require shareholder-owned utilities (of which there were approximately 223
in 1997) to provide wholesale electricity suppliers with access to transmission
services. We expect the deregulation of the electric power industry to increase
competition among suppliers of electricity, which will lead utilities to lower
their costs by outsourcing non-core functions such as the installation,
construction, maintenance and repair of electric transmission and distribution
systems and electric substations, services that have traditionally been
performed by the utilities themselves.
The Telecommunications Act of 1996 preempted state and local government
control over access to the telecommunications market, eliminating barriers to
entry and opening the markets to new entrants. Management expects the
elimination of such barriers to lead to increased construction of competing
telecommunications networks as competitive telecommunications providers,
existing as well as new, expand into new markets and offer services that once
were reserved for incumbents.
Upgrading and Expanding Existing Infrastructure. As access to electric
transmission services increases, we believe that financial penalties will be
imposed upon electric utilities in the event of transmission and distribution
system downtime attributable to the utilities. As a result, we expect that
utilities will modernize existing transmission systems, which will increase the
amount of upgrading and repair work available to
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outside contractors. Quanta also expects commercial and industrial companies to
continue to upgrade and expand their existing electrical infrastructure as a
result of (1) increasing levels of modernization activity, (2) the effects of
more stringent electric codes, which establish minimum power and safety
requirements, (3) revised national energy standards and (4) increases in use of
electric power.
The amount of traditional voice and data traffic has increased steadily,
and growth in the use of personal computers and modems has created significant
data traffic from a wide variety of sources. Because of the physical limitations
of the existing communications network facilities, Quanta believes there is an
immediate need to upgrade and expand facilities with new and innovative
technology, expanding and in many cases replacing existing telecommunications
and cable television infrastructure to allow for increases in the volume of
traffic. The need to upgrade and expand telecommunications infrastructure as a
result of deregulation and the growth in consumer demand for enhanced
telecommunications services is expected to continue to prompt telecommunications
providers to increase the current level of outsourcing to independent
contractors who serve the industry.
Increased Outsourcing. The outsourcing trend has largely been driven by the
efforts of electric utilities and telecommunications providers to reduce costs
and focus on their core competencies. Quanta believes that electric utilities
and telecommunications providers will increasingly seek comprehensive solutions
to their infrastructure needs by utilizing fewer qualified contractors that can
provide a full range of new construction, installation, repair, maintenance and
emergency services.
We believe that our industry is highly fragmented. According to the U.S.
Census Bureau, there are more than 50,000 electrical and telecommunications
contracting businesses, consisting of a small number of regional or national
providers and a large number of relatively small, owner-operated businesses that
have limited access to capital and that offer a limited range of services. We
believe that the fragmented nature of the industry presents substantial
consolidation and growth opportunities for companies with a disciplined
acquisition program, a decentralized operating strategy and access to financial
resources. We also believe that the prominence and operating strength of the
businesses we have acquired and the experience of our executive management will
provide us with significant competitive advantages to capitalize on these
opportunities.
STRATEGY
We plan to continue to maintain our position as a leading provider of
electric and telecommunications infrastructure contracting services by
emphasizing continued internal growth, expanding through acquisitions and
implementing our operating strategy.
INTERNAL GROWTH. We are focused on continuing our strong internal growth by
(1) increasing the volume of services provided to existing customers, (2)
expanding the scope of services provided to existing customers, (3) broadening
our customer base and (4) geographically expanding our service area. We believe
we will be able to expand the services we offer in our markets by leveraging the
specialized strengths of our individual acquired businesses. Such services
include design and engineering, where the contractor applies in-house
engineering expertise to design the most cost-effective system, and the
application of new technologies, such as the LineMaster robotic arm (for which
we acquired the United States patent in July 1998) that can be used to
facilitate the repair of high voltage power transmission lines without taking
them out of service. We also believe that strategic agreements with large
electric and telecommunications infrastructure owners will provide opportunities
for future internal growth. For instance, in October 1998, we entered into a
strategic investment agreement with Enron Capital & Trade Resources Corp.
("Enron Capital"), a subsidiary of Enron Corp., under which Enron Capital and an
affiliate made an investment of $49.4 million in Quanta in the form of
convertible subordinated notes (the "Convertible Subordinated Notes").
Additionally, Quanta and Enron Capital entered into a strategic alliance under
which Enron Capital and Quanta agreed to exchange information regarding the
design, installation and maintenance of electric power transmission and
distribution systems and fiber optic communications systems.
ACQUISITIONS. We believe that the increasing trend toward the outsourcing
of services to the electric and telecommunications infrastructure contracting
industry will result in a competitive disadvantage for small and mid-sized
companies that do not have access to capital and cannot provide a broad range of
specialty
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contracting services on a national basis. In addition, Quanta expects that there
will continue to be a large number of attractive acquisition candidates due to
the highly fragmented nature of the industry, the inability of many companies to
expand and modernize due to capital constraints and the desire of owners for
liquidity. We believe that our financial strength and experienced management
will be attractive to acquisition candidates. The key elements of our
acquisition strategy are:
Enter New Geographic Markets. Quanta intends to expand into geographic
markets we do not currently serve by selectively acquiring well-established
specialty electrical and telecommunications contractors that are leaders in
their regional markets, are financially stable, have a strong customer
base, have senior management committed to participating in the future
growth of Quanta and can serve as "platforms" for Quanta's future growth.
Expand Within Existing Markets. Quanta intends to explore acquisition
opportunities in the geographic markets we already serve as well as
geographic markets served by businesses we acquire in the future. Once we
have entered a specific geographic market, we will seek to acquire other
well-established companies in that particular market to deepen our market
penetration and expand the range of services offered to our customers.
Quanta will also pursue "tuck-in" acquisitions of smaller companies whose
operations can be integrated into and leveraged with an existing operation.
OPERATING STRATEGY. The key elements of our operating strategy are:
Operate on a Decentralized Basis. We manage our operations on a
decentralized basis while maintaining operating and financial controls.
Local management retains responsibility for the operations, profitability
and growth of its individual business. We believe that, while maintaining
operating and financial controls, our decentralized operating structure
retains the entrepreneurial spirit of each of the businesses we acquire and
permits us to capitalize on the acquired businesses' local and regional
market knowledge, specialized skills and customer relationships. In
addition, we believe that our operating efficiency, financial strength,
technical expertise, presence in key geographic areas and reputation for
quality and reliability provide competitive advantages in bidding for,
winning and executing new contracts for infrastructure projects. While
local management retains control of the operations of its individual
business, our executive management has responsibility for corporate
strategy and acquisitions, financing, insurance, investor relations and
employee benefit plans.
Achieve Operating Efficiencies. Certain administrative functions are
being centralized. In addition, by combining overlapping operations of
certain of the businesses we acquire, we expect to achieve more efficient
asset utilization and realize savings in overhead and other expenses. We
intend to use our increased purchasing power to gain volume discounts in
areas such as vehicles and equipment, electrical materials, marketing,
bonding, employee benefits and insurance. We will seek to realize cost
savings and other benefits by the sharing of purchasing, pricing, bidding
and other business practices and the sharing of licenses. Quanta intends to
further develop and expand the use of management information systems to
facilitate financial control, project costing and asset utilization. At
some locations, the larger combined workforce will provide additional
staffing flexibility.
ACQUISITION PROGRAM
Between our IPO and March 15, 1999, we acquired 20 specialty contracting
businesses which when combined with the four specialty contracting businesses
acquired simultaneously with the completion of our IPO in February 1998
(collectively, the "Acquired Businesses") result in pro forma combined revenues
for the year ended December 31, 1998 of $620.2 million. We acquired these 20
businesses for a combined
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consideration of $185.6 million in cash and notes and 7.6 million shares of
common stock. The following table describes the businesses we have acquired
between the IPO and March 15, 1999:
MONTH
BUSINESS ACQUIRED ACQUIRED PRINCIPAL SERVICE SECTORS HEADQUARTERS
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Valverde Communications, Inc........ 3/99 Telecommunications Fontana, CA
Western Directional, Inc............ 3/99 Telecommunications/ Santa Clara, CA
Electric
Northern Line Layers, Inc........... 2/99 Telecommunications/ Billings, MT
Electric
R. A. Waffensmith, Inc.............. 2/99 Electric Boulder, CO
Dillard Smith Construction
Company........................... 2/99 Electric Chattanooga, TN
The Ryan Company, Inc............... 2/99 Electric Boston, MA
Fiber Technology, Inc............... 2/99 Telecommunications Houston, TX
Tip Top Arborists, Inc.............. 2/99 Electric Lancaster, CA
Wilson Roadbores, Inc............... 12/98 Telecommunications/ Princeton, MO
Electric
Manuel Bros., Inc................... 10/98 Telecommunications Grass Valley, CA
Smith Contracting................... 09/98 Telecommunications Fergus Falls, MN
Harker & Harker, Inc................ 09/98 Electric Reno, NV
Telecom Network Specialists, Inc.... 08/98 Telecommunications Kirkland, WA
Sumter Builders, Inc................ 08/98 Electric Sumter, SC
North Pacific Construction Co....... 08/98 Telecommunications Woodland, CA
Underground Construction Co.,
Inc............................... 08/98 Telecommunications/ Benicia, CA
Transportation/
Commercial and Industrial
Environmental Professional
Associates, Ltd................... 07/98 Electric Marysville, CA
NorAm Telecommunications, Inc....... 06/98 Telecommunications Clackamas, OR
Spalj Construction Company.......... 05/98 Telecommunications Deerwood, MN
Golden State Utility Co............. 04/98 Telecommunications Turlock, CA
We believe that we are regarded by acquisition candidates as an attractive
acquiror because of (1) our strategy for creating a national, comprehensive and
professionally managed specialty electric and telecommunications infrastructure
contracting business, (2) our decentralized operating strategy and opportunities
to participate in a larger organization, (3) our access to financial resources
as a public company, (4) our potential for increased profitability due to
centralizing certain administrative functions, enhanced systems capabilities and
economies of scale and (5) the potential for owners of the businesses being
acquired to participate in our planned growth while realizing liquidity. We
believe that the management of the acquired businesses will be instrumental in
identifying and assisting in the completion of future acquisitions.
We have developed a set of financial, geographic and management criteria
designed to assist management in the evaluation of acquisition candidates. These
criteria evaluate a variety of factors, including, but not limited to (1)
historical and projected financial performance, (2) experience and reputation of
the candidate's management and operations, (3) composition and size of the
candidate's customer base, (4) whether the geographic location of the candidate
will enhance or expand our market area or ability to attract other acquisition
candidates, (5) whether the acquisition will augment or increase Quanta's market
share or services offered or help protect our existing customer base, (6)
potential synergies gained by combining the acquisition
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candidate with our existing operations and (7) liabilities, contingent or
otherwise, of the candidate. We anticipate that the majority of our acquisition
candidates in the target markets and industries will have annual revenues
ranging from $10 million to $100 million. All acquisition candidates are subject
to initial evaluation and approval by our management before being recommended to
our Board of Directors.
As consideration for future acquisitions, we expect to utilize a
combination of cash, common stock and debt. The purchase price for each future
acquisition will vary. The major factors in establishing the purchase price will
be historical earnings, strength of management, future prospects of the acquiree
and the ability of the acquiree to complement or leverage the services already
offered by us.
SERVICES
We currently provide specialty contracting and maintenance services for the
following: electric utility infrastructure; telecommunications infrastructure;
transportation control and lighting systems; and commercial and industrial.
Electric Utility Infrastructure Services. We perform specialty electrical
contracting services for electric utilities, which services generated 45.2% of
our pro forma combined revenues for the year ended December 31, 1998. These
services include installing, repairing and maintaining electric transmission and
distribution lines, maintaining street lights and other system components,
constructing electric substations and erecting transmission towers. The work
performed often involves the splicing of high voltage lines and, on occasion,
the installation of underground high voltage distribution systems. We also
repair and replace lines which have been damaged or destroyed as a result of
adverse weather conditions.
Telecommunications Infrastructure Services. We provide a variety of
services in connection with telecommunications, cable television and other data
transmission, which services generated 37.9% of our pro forma combined revenues
for the year ended December 31, 1998. We install fiber optic, coaxial and copper
cable both above and below ground on behalf of telecommunications and cable
service providers. The services provided by us include design/build consulting,
the placing and splicing of cable, excavation of trenches in which to place the
cable, placement of related structures such as poles, anchors, conduits,
manholes, cabinets and closures, placement of drop lines from the main
distribution lines to an individual residence or business and maintenance and
removal of these fiber optic, coaxial and copper lines and related structures.
We have the ability to directionally bore and place cables, a highly specialized
method of positioning buried cable which is often required in congested urban
and suburban markets where trenching may be impractical. In addition, we are
involved in the engineering, design and erection of communications towers,
including cellular telephone, PCS(R) and microwave towers.
Transportation Control and Lighting Systems Services. We install, maintain
and repair traffic and highway control systems, such as signals, signage,
lighting and freeway management systems components. In addition, we install
overhead cable and control systems for light rail lines, "intelligent" highway
control systems and airport lighting and designs, and construct and maintain
airport fueling systems. These services generated 9.5% of our pro forma combined
revenues for the year ended December 31, 1998.
Commercial and Industrial Services. We design, install, maintain and repair
electrical wiring, telephone and data copper wiring, fiber optic cabling and
building control and automation systems for commercial and industrial customers,
which services generated 7.4% of our pro forma combined revenues for the year
ended December 31, 1998.
CUSTOMERS
Our customers include electric utilities, telecommunications and cable
television system operators, governmental entities, general contractors,
builders and owners and managers of commercial and industrial properties.
Electric utilities, in the aggregate, represent our largest customer base.
General contractors, as a group, account for a significant portion of our
customers for commercial and industrial work.
Management at each of the Acquired Businesses has been responsible for
developing and maintaining successful long-term relationships with customers. We
rely heavily on repeat customers and use both the
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written and verbal referrals of our satisfied customers to help generate new
business. Many of our customers or prospective customers have a qualification
procedure for becoming an approved bidder or vendor based upon the satisfaction
of particular performance and safety standards set by the customer. These
customers often maintain a list of vendors meeting such standards and award
contracts for individual jobs only to such vendors. We strive to maintain our
status as a preferred or qualified vendor to such customers.
EMPLOYEES
As of December 31, 1998, Quanta had 330 salaried employees, including
executive officers, project managers or engineers, job superintendents, staff
and clerical personnel and approximately 2,995 hourly employees, the number of
which fluctuates depending upon the number and size of the projects undertaken
by us at any particular time. Approximately 43% of our employees at December 31,
1998 were covered by collective bargaining agreements. We do not anticipate any
overall reductions in staff as a result of the consolidation of the Acquired
Businesses, although there may be some job realignments and new assignments in
an effort to eliminate overlapping and redundant positions.
Ten of the Acquired Businesses are parties to master collective bargaining
agreements with the International Brotherhood of Electrical Workers (the
"IBEW"). Two of these businesses are also parties to local agreements with the
Laborers International Union and the Operating Engineers Union. Furthermore, one
of the Acquired Businesses is a party to local agreements with the Operative
Plasters and Cement Masons International Association and the United Brotherhood
of Carpenters and Joiners of America. Under these agreements, these companies
agree to pay specified wages to their union employees, observe certain workplace
rules and make employee benefit payments to multi-employer pension plans and
employee benefit trusts rather than administering the funds on behalf of their
employees. These collective bargaining agreements have varying terms and
expiration dates. The majority of the collective bargaining agreements contain
provisions that prohibit work stoppages or strikes, even during specified
negotiation periods relating to agreement renewal, and provide for binding
arbitration dispute resolution in the event of prolonged disagreement. None of
the Acquired Businesses has experienced any strikes or work stoppages in the
past 20 years; however, there can be no assurance that work stoppages or strikes
will not occur from time to time.
Each of the Acquired Businesses provides a variety of health, welfare and
benefit plans for their employees who are not covered by collective bargaining
agreements. We anticipate that these various employee benefit plans will be
replaced by a single plan covering all of our non-bargaining employees.
Effective February 1, 1999, Quanta adopted a 401(k) plan pursuant to which
eligible employees who are not provided retirement benefits through a collective
bargaining agreement may make contributions through a payroll deduction. Quanta
will make a matching contribution of 100% of each employee's contribution up to
3% of that employee's salary and 50% of each employee's contribution between 3%
and 6% of such employee's salary.
The electric and telecommunications infrastructure contracting industry is
experiencing a shortage of skilled craftsmen. In response to the shortage,
Quanta seeks to take advantage of various IBEW and NECA referral programs and
hire graduates of the joint IBEW/NECA apprenticeship program for training
qualified electricians.
Quanta believes its relationships with its employees and union
representatives are excellent.
TRAINING, QUALITY ASSURANCE AND SAFETY
Performance of Quanta's services requires the use of equipment and exposure
to conditions that can be dangerous. Although Quanta is committed to a policy of
operating safely and prudently, it has been and is subject to claims by
employees, customers and third parties for property damage and personal injuries
resulting from performance of its services. We perform on-site services using
employees who have completed our applicable safety and training programs.
Quanta's policies require that employees complete the prescribed training and
service program of the company for which they work in addition to those required
by NECA and the IBEW prior to performing more sophisticated and technical jobs.
For example, all journeymen linemen are required by the IBEW and NECA to
complete a minimum of 8,000 hours of on-the-job training,
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approximately 200 hours of classroom education and extensive testing and
certification. The Acquired Businesses require additional training, depending
upon the sophistication and technical requirements of each particular job.
Quanta intends to establish company-wide training and educational programs, as
well as comprehensive safety policies and regulations, by sharing "best
practices" throughout our operations.
REGULATION
Our operations are subject to various federal, state and local laws and
regulations including (1) licensing requirements applicable to electricians and
engineers, (2) building and electrical codes, (3) permitting and inspection
requirements applicable to construction projects, (4) regulations relating to
worker safety and environmental protection and (5) special bidding and
procurement requirements on government projects.
We believe that we have all the required licenses to conduct our operations
and that we are in substantial compliance with applicable regulatory
requirements. Our failure to comply with applicable regulations could result in
substantial fines and/or revocation of our operating licenses. Many state and
local regulations governing electrical construction require permits and licenses
to be held by individuals who typically have passed an examination or met other
requirements. Quanta intends to implement a policy to ensure that, where
possible, any such permits or licenses that may be material to Quanta's
operations are held by at least two of our employees.
COMPETITION
The markets in which we operate are highly competitive, requiring
substantial resources and skilled and experienced personnel. Quanta competes
with other independent contractors in most of the markets in which we operate,
several of which are large domestic companies that have greater financial,
technical and marketing resources. In addition, there are relatively few
barriers to entry into the industry in which we operate and, as a result, any
organization that has adequate financial resources and access to technical
expertise may become a competitor. A significant portion of our revenues are
currently derived from fixed price agreements and price is often an important
factor in the award of such agreements. Accordingly, we could be underbid by our
competitors in an effort to procure such business. There can be no assurance
that Quanta's competitors will not develop the expertise, experience and
resources to provide services that are superior in both price and quality to
Quanta's services, or that Quanta will be able to maintain or enhance its
competitive position. We may also face competition from the in-house service
organizations of our existing or prospective customers, including electric
utility and telecommunications providers, which employ personnel who perform
some of the same types of services as those provided by us. Although a
significant portion of these services is currently outsourced, there can be no
assurance that existing or prospective customers of Quanta will continue to
outsource services in the future.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
The primary risks in Quanta's operations are bodily injury, property damage
and injured workers' compensation. We maintain automobile and general liability
insurance for third party bodily injury and property damage and workers'
compensation coverage which we consider sufficient to insure against these
risks. Certain of these policies previously maintained by the Acquired
Businesses were subject to self- insured amounts ranging from $100,000 to
$1,000,000. We have consolidated the casualty insurance programs for all
subsidiaries of Quanta, which has resulted in savings from the amounts paid by
the Acquired Businesses. This program has no self-insurance provisions.
Self-insured claims under previous policies are monitored to ensure that such
remaining accruals are adequate. Accruals for outstanding claims are estimated
based on known facts and Quanta's prior experience. Actual experience and claims
could differ from Quanta's estimates.
Contracts in the electrical contracting industry may require performance
bonds or other means of financial assurance to secure contractual performance.
If we were unable to obtain surety bonds or letters of credit in sufficient
amounts or at acceptable rates, we might be precluded from entering into
additional contracts with certain of our customers.
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RISK FACTORS
Quanta's business is subject to a variety of risks, including the risks
described below. The risks and uncertainties described below are not the only
ones facing our company. Additional risks and uncertainties not known to us or
that we currently deem immaterial may also impair our business operations. If
any of the following risks actually occur, our business, financial condition and
results of operations could be materially and adversely affected.
Limited Combined Operating History. Quanta was founded in August 1997 but
conducted no operations and generated no revenues prior to acquiring certain of
the Acquired Businesses in February 1998. The Acquired Businesses have been
operating as separate entities and we expect that these businesses and any
others we acquire will continue to operate as separate entities with a large
degree of operating autonomy. To manage the combined enterprise on a profitable
basis, we must institute certain necessary common systems and procedures. We
intend to integrate computer, accounting and financial reporting systems, and
certain of the operational administrative, banking and insurance procedures of
the businesses we acquire. However, we cannot be certain that we will
successfully institute these common systems and procedures. In addition, we
cannot be certain that our management group will be able to successfully manage
the businesses we acquire as a combined entity and effectively implement our
operating or growth strategies.
Risks Related to Acquisition Strategy. One of our principal growth
strategies is to increase our revenues and the markets we serve through the
acquisition of additional electric and telecommunications infrastructure
operating companies. We expect to face competition for acquisition candidates,
which may limit the number of acquisition opportunities and may lead to higher
acquisition prices. We cannot be sure that we will be able to identify, acquire
or profitably manage additional businesses. We also cannot be sure that we can
integrate successfully any acquired businesses with our other operations without
substantial costs, delays or other personal or financial problems. Further,
acquisitions involve a number of special risks including:
- failure of the acquired business to achieve the results we expect;
- diversion of our management's attention from operational matters;
- our inability to retain key personnel of the acquired businesses; and
- risks associated with unanticipated events or liabilities.
If one of our acquired businesses suffers customer dissatisfaction or
performance problems, then the reputation of our entire company could be
materially and adversely effected.
Recoverability of Goodwill. When we acquire a business we record an asset
called "goodwill" equal to the excess amount we pay, including liabilities
assumed, for the business over the fair value of the tangible and intangible
assets of the business we acquire. Pursuant to generally accepted accounting
principles, we amortize this goodwill over its estimated useful life. We
amortize the goodwill we acquire over 40 years following the acquisition which
directly impacts our earnings in those years. Furthermore, we continually
evaluate whether events or circumstances have occurred that indicate that the
remaining estimated useful life of goodwill may warrant revision or that the
remaining balance may not be recoverable. Should we decide to accelerate the
amortization of goodwill or write it off completely, then our results of
operations may be materially and adversely affected.
Risks Related to Acquisition Financing. We cannot readily predict the
timing, size and success of our acquisition efforts or the capital we will need
for these efforts. We intend to use our common stock for all or a portion of the
consideration for future acquisitions. These issuances could have a dilutive
effect on our then existing stockholders. If our common stock does not maintain
a sufficient market value or potential acquisition candidates are unwilling to
accept our common stock as part of the consideration for the sale of their
business, we may be required to utilize more of our cash resources to pursue our
acquisition program. Using cash for acquisitions limits our financial
flexibility and makes us more likely to seek additional capital through future
debt or equity financings. If we seek more debt, we may have to agree to
financial covenants that further limit our operational and financial
flexibility. If we seek more equity, we may dilute the ownership interests of
our
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then existing stockholders. When we seek additional debt or equity financings,
we cannot be certain that additional debt or equity will be available to us on
terms acceptable to us. Our $175.0 million revolving credit facility contains a
requirement to obtain the consent of the lenders for acquisitions exceeding a
certain level of cash consideration. If we cannot secure additional financing on
acceptable terms, we may be unable to pursue our acquisition strategy
successfully and be unable to support our growth strategy.
Risks Related to Operating and Internal Growth Strategies. A key element of
our strategy is to increase the profitability and revenues of the businesses we
acquire. Although we have begun to implement this strategy by various means, we
cannot be certain that we will be able to continue to do so successfully.
Another key component of our strategy is to operate the business we acquire on a
decentralized basis, with local management retaining responsibility for
day-to-day operations, profitability and the internal growth of the individual
business. If we do not implement proper overall business controls, this
decentralized operating strategy could result in inconsistent operating and
financial practices at the businesses we acquire, and our overall profitability
could be adversely affected. Our ability to generate internal growth will be
affected by, among other factors, our ability to:
- expand the range of services we offer to customers;
- attract new customers;
- increase the number of projects performed for existing customers;
- hire and retain employees;
- open additional facilities; and
- reduce operating and overhead expenses.
Many of the factors affecting our ability to generate internal growth may
be beyond our control, and we cannot be certain that our strategies will be
successful or that we will be able to generate cash flow sufficient to fund our
operations and to support internal growth.
Management of Growth. We expect to grow both internally and through
acquisitions. We expect to expend significant time and effort in evaluating,
completing and integrating acquisitions. We cannot be certain that our systems,
procedures and controls will be adequate to support our operations as they
expand. Any future growth will also impose significant additional
responsibilities on members of our senior management, including the need to
recruit and integrate new senior level managers and executives.
Availability of Qualified Employees. Our ability to provide high-quality
services on a timely basis requires that we employ an adequate number of skilled
electricians, journeymen linemen and project managers. Accordingly, our ability
to increase our productivity and profitability will be limited by our ability to
employ, train and retain skilled personnel necessary to meet our requirements.
We, like many of our competitors, are currently experiencing shortages of
qualified personnel. We cannot be certain that we will be able to maintain an
adequate skilled labor force necessary to operate efficiently and to support our
growth strategy or that our labor expenses will not increase as a result of a
shortage in the supply of skilled personnel.
Unionized Workforce. As of December 31, 1998, approximately 43% of our
employees were covered by collective bargaining agreements. Although the
majority of these agreements prohibit strikes and work stoppages, we cannot be
certain that strikes or work stoppages will not occur in the future. Strikes or
work stoppages would adversely impact our relationship with our customers. In
addition, our acquisition strategy could be adversely affected because of our
union status for a variety of reasons. For instance, our union agreements may be
incompatible with the union agreements of a business we want to acquire and some
businesses may not want to become affiliated with a union based company.
Competition. The electric and telecommunications infrastructure contracting
industry is highly competitive and is served by numerous small, owner-operated
private companies, public companies and several large regional companies. In
addition, relatively few barriers prevent entry into our industry. As a result,
any organization that has adequate financial resources and access to technical
expertise may become one of our
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competitors. Competition in the industry depends on a number of factors,
including price. Certain of our competitors may have lower overhead cost
structures and may, therefore, be able to provide their services at lower rates
than we can provide such services. In addition, some of our competitors are
larger and have greater resources than us. We cannot be certain that our
competitors will not develop the expertise, experience and resources to provide
services that are superior in both price and quality to our services. Similarly,
we cannot be certain that we will be able to maintain or enhance our competitive
position.
We may also face competition from the in-house service organization of our
existing or prospective customers. Electric utility and telecommunications
service providers usually employ personnel who perform some of the same type of
services we do. We cannot be certain that our existing or prospective customers
will continue to outsource services in the future.
Risks Associated with Contracts. We currently generate, and expect to
continue to generate, a significant portion of our revenues under fixed price
contracts. We must estimate the costs of completing a particular project to bid
for such fixed price contracts. The cost of labor and materials, however, may
vary from the costs we originally estimated. These variations, along with other
risks inherent in performing fixed price contracts, may result in actual revenue
and gross profits for a project differing from those we originally estimated and
could result in reduced profitability and losses on projects.
Certain of our customers assign work to us on a project by project basis
under master service agreements. Under master service agreements, our customers
generally have no obligation to assign work to us. We cannot be certain that
customers with whom we have master service agreements will continue to assign
work to us as expected.
Potential Exposure to Environmental Liabilities. Our operations are subject
to various environmental laws and regulations, including those dealing with the
handling and disposing of waste products, PCBs, fuel storage and air quality. As
a result of past and future operations at our facilities, we may be required to
incur environmental and remediation costs and other cleanup expenses. In
addition, we cannot be certain that we will be able to identify or be
indemnified for all potential environmental liabilities relating to any acquired
business.
Dependence on Key Personnel. We depend on the continued efforts of our
executive officers and on senior management of the businesses we acquire.
Although we intend to enter into an employment agreement with each of our
executive officers and other key employees, we cannot be certain that any
individual will continue in such capacity for any particular period of time.
Year 2000. Many currently installed computer systems and software products
are coded to accept only two-digit entries in the date code field. Beginning in
the year 2000, these date code fields will need to accept four-digit entries to
distinguish 21(st) century dates from 20(th) century dates. As a result,
computer systems and software used by many companies may need to be upgraded to
comply with such "Year 2000" requirements. The unanticipated failure of one of
our systems, or one of the systems of our vendors, customers and service
providers, to properly recognize date information beyond the year 1999 could
have a significant impact on our ability to deliver services to customers and to
manage our continuing operations.
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Forward-Looking Statements. A number of statements in this report address
activities, events or developments which we anticipate may occur in the future,
including our strategy for internal growth and improved profitability, the
nature and amount of additional capital expenditures, acquisitions of assets and
businesses and industry trends. These statements are based on certain
assumptions and analyses we make in light of our perception of historical
trends, current business and economic conditions and expected future
developments, as well as other factors we believe are reasonable or appropriate.
However, whether actual results and developments will conform with our
expectations is subject to a number of risks and uncertainties, including:
- the risk factors discussed in this report;
- general economic, market or business conditions;
- the business opportunities (or lack thereof) that may be presented to us
and pursued by us; and
- changes in laws or regulations and other factors.
Many of these risks and uncertainties are beyond our control. Consequently,
we cannot be certain that the actual results or developments that we anticipate
will be realized or, even if substantially realized, that they will have the
expected effects on our business or operations.
ITEM 2. PROPERTIES
FACILITIES
We lease our corporate headquarters in Houston, Texas. As of December 31,
1998 we maintained 44 offices throughout the United States. This space is used
for offices, equipment yards, warehousing, storage and vehicle shops. We own
some of the facilities we occupy and lease the rest. We believe that our
facilities are sufficient for our current needs.
EQUIPMENT
We operate a fleet of owned and leased trucks and trailers, support
vehicles and specialty construction equipment, such as backhoes, excavators,
trenchers, generators, boring machines, cranes and wire pullers and tensioners.
As of December 31, 1998, the total size of the rolling-stock fleet was
approximately 4,725 units. Most of this fleet is serviced by our own mechanics
who work at various maintenance sites and facilities. We believe that these
vehicles generally are well-maintained and adequate for our present operations.
We believe that in the future, we will be able to lease or purchase this
equipment at lower prices due to our larger size and the volume of our leasing
and purchasing activity.
ITEM 3. LEGAL PROCEEDINGS
Quanta is, from time to time, a party to litigation or administrative
proceedings that arise in the normal course of our business. Quanta does not
have pending any litigation that, separately or in the aggregate, would, in the
opinion of management, have a material adverse effect on our results of
operations or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the stockholders during the
fourth quarter of the year ended December 31, 1998.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
We initially offered our common stock to the public on February 12, 1998,
the date of our IPO, at a price of $9.00 per share. Our common stock is listed
on the NYSE under the symbol "PWR"." The following table sets forth the high and
low sales prices per quarter as reported by the NYSE.
HIGH LOW
------ ------
YEAR ENDED DECEMBER 31, 1998
1st Quarter (from February 12, 1998)...................... $16.75 $11.00
2nd Quarter............................................... $17.75 $12.25
3rd Quarter............................................... $15.38 $12.00
4th Quarter............................................... $23.00 $11.25
YEAR ENDING DECEMBER 31, 1999
1st Quarter (through March 15, 1999)...................... $29.75 $21.63
On March 15, 1999, the last sale price for the common stock as reported by
the NYSE was $25.4375 per share. On March 15, 1999, there were 135 holders of
record of common stock and 46 holders of record of Limited Vote Common Stock.
There is no established trading market for the Limited Vote Common Stock.
DIVIDENDS
Quanta currently intends to retain our future earnings, if any, to finance
the growth, development and expansion of our business. Accordingly, we do not
currently intend to declare or pay any cash dividends on our common stock in the
immediate future. The declaration, payment and amount of future cash dividends,
if any, will be at the discretion of our Board of Directors after taking into
account various factors. These factors include: our financial condition, results
of operations, cash flows from operations, current and anticipated capital
requirements and expansion plans, the income tax laws then in effect and the
requirements of Delaware law. In addition, the terms of our revolving credit
facility (the "Credit Facility") and Convertible Subordinated Notes include
restrictions on payment of cash dividends without the consent of the respective
lenders.
RECENT SALES OF UNREGISTERED SECURITIES
(a) Between October 1, 1998 and December 31, 1998, Quanta issued 672,089
shares of common stock as part of the consideration for businesses acquired
during such period.
(b) On October 5, 1998, Quanta issued and sold $49,350,000 principal amount
of Convertible Subordinated Notes that are convertible, at the option of the
holder, into an aggregate of 3,589,091 shares of common stock.
All of the transactions described above were exempt from the registration
requirements of the Securities Act pursuant to Section 4(2) thereunder. All of
such sales were conducted without any public solicitation and all of the
purchasers were provided with all material information that was available
regarding Quanta. All of such purchasers were informed that the transactions
were being effected without registration under the Securities Act and that the
shares acquired by them could not be resold without registration under the
Securities Act unless the sale was effected pursuant to an exemption from the
registration requirements thereof.
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ITEM 6. SELECTED FINANCIAL DATA
For financial statement presentation purposes, PAR Electrical Contractors,
Inc. ("PAR") has been identified as the "accounting acquiror." Between our IPO
in February 1998 and December 31, 1998, we acquired 12 specialty contracting
businesses. Of these 12 acquired businesses, 11 were accounted for using the
purchase method of accounting (the "Purchased Companies") and one was accounted
for using the pooling-of-interests method of accounting (the "Pooled Company").
Quanta's consolidated historical financial statements as of December 31, 1996,
1997 and 1998, and for each of the four years in the period ended December 31,
1998, and the related selected historical financial data have been derived from
audited financial statements of Quanta and represent the financial position and
results of operations of PAR as restated to include the financial position and
results of operations of the Pooled Company. The following selected historical
financial data for Quanta as of December 31, 1994 and 1995 and for the year
ended December 31, 1994 have been derived from the unaudited financial
statements of PAR as restated for the Pooled Company, which have been prepared
on the same basis as the audited financial statements and, in our opinion,
reflect all adjustments, consisting only of normal recurring adjustments,
necessary for a fair presentation of such data. The remaining three specialty
electrical contracting businesses we acquired concurrently with our IPO
(collectively with PAR, the "Founding Companies") and the Purchased Companies
are reflected in the financial statements beginning on their respective dates of
acquisition.
The following selected unaudited pro forma combined financial data present
certain data for Quanta, adjusted for (1) the Founding Companies, (2) the
effects of certain other pro forma adjustments to the historical financial
statements and (3) the consummation of our IPO in February 1998 and the
application of the net proceeds therefrom. The pro forma combined results do not
include the pre-acquisition results of the Purchased Companies which are
reflected in the financial statements beginning on their respective dates of
acquisition. The unaudited pro forma combined statements of operations data
assume that the acquisition of the Founding Companies, the IPO and related
transactions occurred on January 1, 1997 and are not necessarily indicative of
the results that we would have obtained had these events actually then occurred
or of our future results. During the pro forma periods presented below, the
Founding Companies were not under common control or management. Therefore, the
data presented may not be comparable to or indicative of post combination
results to be achieved by us. The unaudited pro forma combined statements of
operations should be read in conjunction with the audited financial statements
included elsewhere in this Report.
YEAR ENDED DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL STATEMENTS OF OPERATIONS DATA:
Revenues.................................. $57,020 $53,224 $71,294 $76,204 $309,209
Costs of services (including
depreciation).......................... 47,216 44,608 57,164 58,896 249,195
------- ------- ------- ------- --------
Gross profit.............................. 9,804 8,616 14,130 17,308 60,014
Selling, general and administrative
expenses............................... 6,686 6,438 9,876 11,589 26,418
Merger expenses -- pooling................ -- -- -- -- 231
Goodwill amortization..................... 184 50 55 56 2,513
------- ------- ------- ------- --------
Income from operations.................... 2,934 2,128 4,199 5,663 30,852
Other income (expense), net............... (598) (712) (1,020) (1,350) (3,994)
------- ------- ------- ------- --------
Income before income tax provision........ 2,336 1,416 3,179 4,313 26,858
Provision for income taxes................ 867 353 1,389 1,786 11,683
------- ------- ------- ------- --------
Net income................................ $ 1,469 $ 1,063 $ 1,790 $ 2,527 $ 15,175
======= ======= ======= ======= ========
Basic earnings per share.................. $ 0.37 $ 0.27 $ 0.45 $ 0.64 $ 0.86
======= ======= ======= ======= ========
Diluted earnings per share(1)............. $ 0.37 $ 0.27 $ 0.45 $ 0.64 $ 0.84
======= ======= ======= ======= ========
Diluted earnings per share before merger
expenses(1)............................ $ 0.37 $ 0.27 $ 0.45 $ 0.64 $ 0.85
======= ======= ======= ======= ========
Shares used in computing earnings per
share(2)...............................
Basic.................................. 3,952 3,952 3,952 3,952 17,646
======= ======= ======= ======= ========
Diluted................................ 3,952 3,952 3,952 3,952 18,666
======= ======= ======= ======= ========
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YEAR ENDED
DECEMBER 31,
---------------------------
1997 1998
------------ ------------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
PRO FORMA COMBINED STATEMENTS OF OPERATIONS DATA:
Revenues.................................................. $179,374 $323,745
Costs of services (including depreciation)................ 144,474 261,368
-------- --------
Gross profit.............................................. 34,900 62,377
Selling, general and administrative expenses(3)........... 14,864 27,374
Merger expenses -- pooling................................ -- 231
Goodwill amortization(4).................................. 1,696 2,731
-------- --------
Income from operations.................................... 18,340 32,041
Other income (expense), net(5)............................ (1,090) (3,911)
-------- --------
Income before income tax provision........................ 17,250 28,130
Provision for income taxes(6)............................. 7,426 12,260
-------- --------
Net income................................................ $ 9,824 $ 15,870
======== ========
Basic earnings per share.................................. $ 0.58 $ 0.82
======== ========
Diluted earnings per share(1)............................. $ 0.58 $ 0.81
======== ========
Diluted earnings per share before merger expenses(1)...... $ 0.58 $ 0.82
======== ========
Shares used in computing pro forma earnings per
share(2)...............................................
Basic.................................................. 16,995 19,314
======== ========
Diluted................................................ 16,995 20,334
======== ========
HISTORICAL
------------------------------------------------
DECEMBER 31,
------------------------------------------------
1994 1995 1996 1997 1998
------- ------- ------- ------- --------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital........................... $ 1,794 $ 871 $ 1,792 $ 2,186 $ 55,881
Total assets.............................. 22,713 24,761 29,734 35,747 334,958
Long-term debt, net of current
maturities............................. 4,512 4,291 6,478 7,542 60,201
Convertible Subordinated Notes............ -- -- -- -- 49,350
Total stockholders' equity................ 7,921 8,709 8,460 11,210 170,298
- ---------------
(1) For purposes of computing historical and pro forma diluted earnings per
share, net income has been increased by $506,000 due to reduced interest
expense from the assumed conversion of the Convertible Subordinated Notes.
(2) The shares used in computing earnings per share for the following periods
include:
(a)Four years ended December 31, 1997 (historical) -- the 3,000,000 shares
issued to the stockholders of PAR Electrical Contractors, Inc. and the
951,945 shares issued in connection with the acquisition of the Pooled
Company.
(b)Year ended December 31, 1997 (pro forma) -- shares used in the
calculation of basic and diluted earnings per share include (1) the
shares described above in (a), (2) 5,750,000 shares of common stock sold
in our initial public offering, (3) 4,527,000 shares issued to the
owners of the other Founding Companies and (4) 3,345,333 shares of
Limited Vote Common Stock issued to the initial stockholders and
management personnel of Quanta. The 579,222 shares excluded reflect net
cash to Quanta.
(c)Year ended December 31, 1998 (historical) -- shares used in the
calculation of basic earnings per share include the weighted average
portion of (1) the shares described above in (a) and (b), (2) 4,058,376
shares issued in acquisitions accounted for as purchases and (3) shares
issued upon exercise of stock options.
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Shares used in the calculation of the diluted earnings per share include
(1) the shares described above, (2) the dilution attributable to the
assumed conversion of the Convertible Subordinated Notes and (3) the
dilution attributable to outstanding options to purchase common stock
using the treasury stock method.
(d)Year ended December 31, 1998 (pro forma) -- shares used in the
calculation of basic earnings per share information include the shares
used in the calculation of historical basic earnings per share described
in (c) above computed as if those shares had been issued as of January
1, 1998, except for the shares issued in acquisitions accounted for as
purchases, which are considered to be issued on their respective dates
of acquisition.
Shares used in the calculation of pro forma diluted earnings per share
include (1) the shares described above, (2) the dilution attributable to
the assumed conversion of the Convertible Subordinated Notes, and (3)
the dilution attributable to outstanding options to purchase common
stock using the treasury stock method.
(3) The unaudited pro forma combined statement of operations data reflect an
aggregate of approximately $2.7 million for the year ended December 31, 1997
in pro forma reductions in salaries, bonuses and benefits of the previous
owners and management of the Founding Companies. These amounts are intended
to show you the difference between the historical compensation costs for
these owners and management and the amounts to which they have agreed with
us on a prospective basis.
(4) Reflects amortization of goodwill over a 40-year period as a result of our
acquisition of the Founding Companies as if they had been acquired on
January 1, 1997 and the Purchased Companies beginning on their respective
dates of acquisition, using the purchase method of accounting.
(5) Reflects additional interest expense related to borrowings required to fund
certain S Corporation Distributions of the Founding Companies, net of
interest savings on the Founding Companies' debt assumed to be repaid using
proceeds from the IPO.
(6) Assumes all pretax pro forma combined income before non-deductible goodwill
and other permanent items is subject to an estimated 39.0% combined tax
rate.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with our
Consolidated Financial Statements and related notes thereto included elsewhere
in this Report. Except for the historical financial information contained
herein, the matters discussed in this Report may be considered "forward-looking"
statements within the meaning of Section 27A of the Securities Act of 1933 and
Section 21E of the Securities Exchange Act of 1934. Such statements include
declarations regarding our intent, belief or current expectations, statements
regarding the future results of acquired companies, our gross margins and our
expectations regarding Year 2000 issues. Any such forward-looking statements are
not guarantees of future performance and involve a number of risks and
uncertainties. Actual results could differ materially from those indicated by
such forward-looking statements. Among the important factors that could cause
actual results to differ materially from those indicated by such forward-looking
statements are those discussed in "Business -- Risk Factors" in this Report.
INTRODUCTION
Quanta derives its revenues from one reportable segment by providing
specialty contracting and maintenance services related to electric and
telecommunications infrastructure, installing transportation control and
lighting systems, and providing specialty contracting services to the commercial
and industrial markets. Our services include the installation, repair and
maintenance of electric power transmission and distribution lines,
telecommunication lines and cable television lines, the construction of electric
substations, the erection of cellular telephone, PCS(R) and microwave towers,
the installation of highway lighting and traffic control systems, specialized
underground construction including underground fueling systems, design and
engineering services, as well as the provision of specialty contracting services
for electric, video, security, fire, voice and data systems. Our customers
include electric utilities, telecommunication and cable television system
operators, governmental entities, general contractors and owners and managers of
commercial and industrial properties. Including all companies we acquired prior
to December 31, 1998, we had pro forma combined revenues for the year ended
December 31, 1998 of $423.6 million, of which 45.2% was attributable
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to electric utility infrastructure services, 37.9% was attributable to
telecommunications infrastructure services, 9.5% was attributable to
transportation control and lighting systems services and 7.4% was attributable
to commercial and industrial services.
Quanta enters into contracts principally on the basis of competitive bids,
the final terms and prices of which we frequently negotiate with the customer.
Although the terms of our contracts vary considerably, the contracts are usually
on either a lump sum or unit price basis in which we agree to do the work for a
fixed amount for the entire project (lump sum) or for units of work performed
(unit price). We complete most installation projects within one year, while we
frequently provide maintenance and repair work under open-ended, unit price
master service agreements which are renewable annually. We generally record
revenues from lump sum contracts on a percentage-of-completion basis, using the
cost-to-cost method based on the percentage of total costs incurred to date in
proportion to total estimated costs to complete the contract. Quanta recognizes
revenue when services are performed except when work is being performed under a
fixed price or cost-plus-fee contract. Such contracts generally provide that the
customer accept completion of progress to date and compensate us for services
rendered, measured typically in terms of units installed, hours expended or some
other measure of progress. Some of our customers require us to post performance
and payment bonds upon execution of the contract, depending upon the nature of
the work to be performed. Our fixed price contracts often include payment
provisions pursuant to which the customer withholds a 5% to 10% retainage from
each progress payment and forwards the retainage to us upon completion and
approval of the work.
Costs of services consist primarily of salaries and benefits to employees,
depreciation, fuel and other vehicle expenses, equipment rentals, subcontracted
services, materials, parts and supplies. Quanta's gross margin, which is gross
profit expressed as a percentage of revenues, is typically higher on projects
where labor, rather than materials, constitutes a greater portion of the cost of
services. Labor costs can be predicted with relatively less accuracy than
materials costs. Therefore, to compensate for the potential variability of labor
costs, we seek to maintain higher margins on labor-intensive projects. Certain
of our subsidiaries were previously subject to deductibles ranging from $100,000
to $1,000,000 for workers' compensation insurance. Fluctuations in insurance
accruals related to this deductible could have an impact on gross margins in the
period in which such adjustments are made. Selling, general and administrative
expenses consist primarily of compensation and related benefits to management,
administrative salaries and benefits, marketing, office rent and utilities,
communications and professional fees.
The Acquired Businesses have operated throughout the pre-acquisition
periods presented as independent, privately-owned entities, and their results of
operations reflect varying tax structures (S corporations or C corporations)
which have influenced the historical level of owners' compensation. Gross
profits and selling, general and administrative expenses as a percentage of
revenues may not be comparable among the individual Acquired Businesses. In
connection with Quanta's acquisitions, certain owners of the businesses we have
acquired through December 31, 1998 have agreed to reductions in their
compensation and related benefits totaling $8.4 million and $2.5 million lower
than 1997 and 1998 levels, respectively. Such reductions have been reflected in
the terms of the employment agreements entered into between us and these
persons.
Quanta believes that it will realize savings from:
- consolidation of insurance and bonding programs,
- reduction in other selling, general and administrative expenses such as
training, marketing, communications and professional fees,
- our ability to borrow at lower interest rates than most, if not all, of
the Acquired Businesses,
- consolidation of operations in certain locations, and
- greater volume discounts from suppliers of materials, parts and supplies.
We anticipate that additional costs related to our new corporate
infrastructure, operating as a public company and integrating the Acquired
Businesses will partially offset these savings. We believe that neither
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these savings nor the costs associated therewith can be quantified at this time
as there have been limited combined operating results upon which to base any
assumptions. As a result, these savings and associated costs have not been
included in the pro forma financial information included herein.
The acquisition of the Founding Companies (excluding PAR) and the Purchased
Companies have been accounted for using the purchase method of accounting.
Accordingly, the excess amount we paid, including liabilities assumed, for such
businesses acquired prior to December 31, 1998, over the fair value of the
tangible and intangible assets of these businesses of $127.7 million has been
recorded as goodwill. In addition, goodwill of $25.6 million has been recorded
attributable to the 3,345,333 shares of Limited Vote Common Stock issued to
initial stockholders and management. Together, this goodwill, totaling $153.3
million, will be amortized over its estimated useful life of 40 years as a
non-cash charge to operating income. The pro forma effect of this amortization
expense, the majority of which is not deductible for tax purposes, is expected
to be approximately $3.8 million per year.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
Quanta's results of operations can be subject to seasonal variations.
During the winter months, demand for new projects and maintenance services may
be lower due to reduced construction activity. However, demand for repair and
maintenance services attributable to damage caused by inclement weather during
the winter months may partially offset the loss of revenues from lower demand
for new projects and maintenance services. Additionally, the industry can be
highly cyclical. As a result, our volume of business may be adversely affected
by declines in new projects in various geographic regions in the U.S. Typically,
we experience lower gross margins and operating margins during the winter
months. The timing of acquisitions, variations in the margins of projects
performed during any particular quarter, the timing and magnitude of acquisition
assimilation costs and regional economic conditions may also materially affect
quarterly results. Accordingly, our operating results in any particular quarter
may not be indicative of the results that can be expected for any other quarter
or for the entire year.
LIQUIDITY AND CAPITAL RESOURCES
In February 1998, Quanta completed its IPO, which involved the issuance of
5,000,000 shares of common stock at a price of $9.00 per share (before deducting
underwriting discounts and commissions). In March 1998, Quanta sold an
additional 750,000 shares of common stock at a price of $9.00 per share (before
deducting underwriting discounts and commissions) pursuant to the underwriters'
overallotment option. We realized proceeds from these transactions, net of the
discounts and after deducting the expenses of the IPO, of approximately $44.9
million. Of this amount, we used $21.0 million to fund the cash portion of the
purchase price relating to the acquisition of the Founding Companies.
As of December 31, 1998, Quanta had cash and cash equivalents of $3.2
million, working capital of $55.9 million and long-term debt of $60.2 million,
net of current maturities, including borrowings of $56.0 million under the
Credit Facility, and the Company had $2.5 million of letters of credit
outstanding under the Credit Facility. In addition, the Company had $49.4
million of Convertible Subordinated Notes.
During the year ended December 31, 1998, operating activities provided a
net cash flow of $8.3 million. Changes in working capital accounts are driven
predominantly by the acquisitions throughout the year and as such are not
comparable to prior periods. We used net cash in investing activities of $109.1
million, including $89.2 million used for the purchase of businesses, net of
cash acquired. Financing activities provided a net cash flow of $103.5 million,
resulting primarily from $44.9 million of net proceeds from the IPO, $52.5
million from net borrowings under our Credit Facility, $49.4 million of net
proceeds from issuance of the Convertible Subordinated Notes, partially offset
by $32.8 million in repayments of debt assumed in connection with acquisitions
and cash payments of $8.4 million representing cash consideration paid to the
stockholders of PAR.
In August 1998, we amended our $50.0 million Credit Facility to increase it
to $125.0 million. In November 1998, we expanded our bank group from two banks
to nine banks and amended the Credit Facility to increase it to $175.0 million.
We pledged all of the capital stock of our material operating subsidiaries and
17
20
the majority of our assets to secure the Credit Facility. The purpose of the
Credit Facility is to provide funds to be used for working capital, to finance
acquisitions and for other general corporate purposes. Amounts borrowed under
the Credit Facility bear interest at a rate equal to either (a) the London
Interbank Offered Rate ("LIBOR" which was 5.63% at December 31, 1998) plus 1.00%
to 2.00%, as determined by the ratio of our total funded debt to EBITDA (as
defined in the Credit Facility) or (b) the bank's prime rate (which was 7.75% at
December 31, 1998) plus up to 0.25%, as determined by the ratio of our total
funded debt to EBITDA. We incur commitment fees of 0.175% to 0.30% (based on
certain financial ratios) on any unused borrowing capacity under the Credit
Facility. Quanta's existing and future subsidiaries will guarantee the repayment
of all amounts due under the Credit Facility, and the Credit Facility restricts
pledges of all material assets. The Credit Facility contains usual and customary
covenants for a credit facility of this nature including the prohibition of the
payment of dividends, certain financial ratios and indebtedness covenants and a
requirement to obtain the consent of the lenders for acquisitions exceeding a
certain level of cash consideration. As of March 15, 1999, we had approximately
$73.9 million outstanding under the Credit Facility and $3.5 million of letters
of credit outstanding, resulting in a borrowing availability of $97.6 million
under the revolving Credit Facility.
Additionally, on October 5, 1998, we issued and sold $49.4 million of
Convertible Subordinated Notes bearing interest at 6 7/8% to Enron Capital and
one of its affiliates. We used the proceeds of the Convertible Subordinated
Notes to reduce outstanding borrowings under the Credit Facility. The
Convertible Subordinated Notes include restrictive covenants substantially
similar to those included in the Credit Facility. The Convertible Subordinated
Notes are convertible into common stock at any time at the option of the holder
at a conversion price of $13.75 per share, subject to adjustment. The
Convertible Subordinated Notes are nonredeemable for four years and are
redeemable thereafter at our option at a redemption price which is initially
$103.50 per $100.00 principal amount, with such premium declining ratably over
the succeeding four years. The Convertible Subordinated Notes are mandatorily
redeemable in nine semi-annual installments beginning in June 2006. Upon a
change in control, the Convertible Subordinated Notes are mandatorily redeemable
at a redemption price which is initially $107.00 per $100.00 principal amount,
with such premium declining ratably over eight years following the date of
issuance.
The Company issued shares of common stock to an Employee Stock Ownership
Plan (the "ESOP") in connection with the acquisition of the Pooled Company. The
ESOP was terminated on July 31, 1998, and pending a favorable determination
letter from the Internal Revenue Service, a portion of the shares of the
Company's common stock held by the ESOP will be sold to repay debt owed by the
ESOP to the Company and the remaining portion of the unallocated shares will be
distributed to its participants. The cost of the unallocated ESOP shares is
reflected as a reduction in the Company's stockholders' equity. Upon
distribution from the ESOP, the Company will owe an excise tax equal to 10% of
the value of the Company's common stock distributed. In addition, the Company
will eliminate the remaining balance reflected as Unearned ESOP Shares on the
Company's balance sheet and will have to recognize a non-cash non-recurring
compensation charge equal to the value of the unallocated shares held by the
ESOP at the time it allocates and distributes such shares. We currently cannot
determine the amount of the excise tax that will be owed or the non-cash,
non-recurring compensation charge that will be recognized. However, based on the
closing price of our common stock on December 31, 1998, the amount of such
charges would be approximately $670,000 and $2,541,000, respectively.
In January 1999, we completed our second public offering of common stock,
which included the issuance of 4,600,000 shares of common stock (including
600,000 shares pursuant to the underwriters' over-allotment option) at a price
of $23.25 per share (before deducting underwriting discounts and commissions).
We realized proceeds from this transaction, net of the discounts and after
deducting the expenses of the offering, of approximately $101.3 million. Of this
amount, we used $57.8 million to repay outstanding indebtedness under the Credit
Facility and the remainder to acquire additional businesses.
In addition to the Founding Companies, through March 15, 1999, we have
acquired 20 companies for an aggregate consideration of 7.6 million shares of
common stock and $185.6 million in cash and notes. The cash portion of such
consideration was provided by borrowings under the Credit Facility and proceeds
from the IPO
18
21
and our second public offering of common stock. The timing, size or success of
any acquisition effort and the associated potential capital commitments cannot
be predicted.
We intend to continue our aggressive acquisition program, and to continue
to use a combination of cash and common stock to finance the principal part of
the consideration payable in acquisitions. We anticipate that our cash flow from
operations and the Credit Facility will provide sufficient cash to enable us to
meet our working capital needs, debt service requirements and planned capital
expenditures for property and equipment for at least the next 12 months.
INFLATION
Due to relatively low levels of inflation experienced during the years
ended December 31, 1996, 1997 and 1998, inflation did not have a significant
effect on the results of Quanta or any of the Acquired Businesses.
YEAR 2000
Impact of Year 2000. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates. As
a result, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists concerning the potential effects associated with such compliance, but
systems that do not properly recognize such information could generate erroneous
data or cause a system to fail.
State of Readiness. We have assessed our Year 2000 issues and have
developed a plan to address both the information technology ("IT") and non-IT
systems issues. We have not developed any of the systems we use in our business;
consequently, we believe our Year 2000 issues relate to systems that different
vendors have developed and sold to us. We assess Year 2000 issues relating to
the operating and other systems of all business we may acquire. Since our
acquisition program is ongoing, our assessment of potential Year 2000 issues is
not complete.
We have circulated a formal questionnaire to all of our significant
suppliers, customers and service providers to determine the extent to which
Quanta is vulnerable to those third parties' failure to remediate the Year 2000
problem. We have received assurances of Year 2000 compliance from many of our
suppliers, customers and service providers, including the providers of most of
our computer systems and the providers of financial services to us. Because of
the nature of our business and the number of vendors available to us, we believe
that our operations will not be significantly disrupted even if third parties
with whom we have relationships are not Year 2000 compliant.
Costs to Address the Year 2000 Issue. We have not identified any material
systems which are not Year 2000 compliant, although four of our Acquired
Businesses have systems which are not Year 2000 compliant. We plan to have
replacements for these systems operational by December 31, 1999, at an estimated
cost of $350,000, as part of our previously planned systems integration program
which will be funded from cash flows from operations. To date, costs incurred to
address Year 2000 compliance have been internal in nature and have been charged
to income as incurred. We have not delayed any IT projects due to our Year 2000
compliance program.
Risks to the Company and Contingency Plan. In the worst case scenario, if
the replacements and modifications are not completed, our operating subsidiaries
may experience temporary problems with certain computer systems that contain
date critical functions. We believe that any temporary disruptions from the
failures of our own systems would not be material to our overall business or
results of operations. However, should our customers experience a sustained
period of unanticipated disruption because of Year 2000 problems, our customers
may delay the award of new contracts or payment for work already completed, and
our business, results of operations and financial condition may be materially
and adversely affected. As a contingency plan, immediately prior to January 1,
2000, we intend to maintain an adequate supply of fuel and spare parts so that
we can continue to operate normally until such time as any temporary Year 2000
problems
19
22
related to our operations are remedied. The Company will continue throughout
1999 to consider the likelihood of a material business interruption due to the
Year 2000 issue.
While we have made a careful assessment of both our own internal operating
systems and the Year 2000 compliance of our suppliers, customer and service
providers, because of the complexity of the problem, we cannot be certain that
all of our own systems and those of third parties with whom we operate will be
made Year 2000 compliant in a timely manner or that any such failure to be Year
2000 compliant will not materially and adversely affect our business, results of
operations or financial condition.
RESULTS OF OPERATIONS
For financial statement presentation purposes, as required by the rules and
regulations of the Securities Act, PAR has been identified as the accounting
acquiror. As such, the financial statements of Quanta for periods prior to
February 18, 1998 are the financial statements of PAR as restated for the
acquisition of the Pooled Company. The operations of the other Founding
Companies have been included in our historical Financial Statements beginning
February 19, 1998 and the operations of the Purchased Companies have been
included from their respective acquisition dates.
The following table sets forth selected statements of operations data and
such data as a percentage of revenues for the years indicated:
YEAR ENDED DECEMBER 31,
----------------------------------------------------
1996 1997 1998
--------------- --------------- ----------------
(DOLLARS IN THOUSANDS)
Revenues.................................. $71,294 100.0% $76,204 100.0% $309,209 100.0%
Cost of services.......................... 57,164 80.2 58,896 77.3 249,195 80.6
------- ----- ------- ----- -------- -----
Gross Profit.............................. 14,130 19.8 17,308 22.7 60,014 19.4
Selling, general and administrative
expenses................................ 9,876 13.8 11,589 15.2 26,418 8.5
Merger expenses -- pooling................ -- -- -- -- 231 0.1
Goodwill amortization..................... 55 0.1 56 0.1 2,513 0.8
------- ----- ------- ----- -------- -----
Income from operations.................... 4,199 5.9 5,663 7.4 30,852 10.0
Other income (expense), net............... (1,020) 1.4 (1,350) 1.8 (3,994) 1.3
------- ----- ------- ----- -------- -----
Income before income tax provision........ 3,179 4.5 4,313 5.6 26,858 8.7
Provision for income taxes................ 1,389 1.9 1,786 2.3 11,683 3.8
------- ----- ------- ----- -------- -----
Net income................................ $ 1,790 2.6% $ 2,527 3.3% $ 15,175 4.9%
======= ===== ======= ===== ======== =====
QUANTA RESULTS FOR THE YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1997
Revenues. Historical revenues increased $233.0 million, or 305.8%, to
$309.2 million for the year ended December 31, 1998. This increase in revenues
was primarily attributable to revenues from Purchased Companies acquired in 1998
of $93.6 million and revenues attributable to the Founding Companies acquired on
February 18, 1998 of $131.4 million.
Gross profit. Gross profit increased $42.7 million, or 246.7%, to $60.0
million for the year ended December 31, 1998. Gross margin decreased from 22.7%
for the year ended December 31, 1997 to 19.4% for the year ended December 31,
1998. This decrease in gross margin was primarily due to a larger amount of high
margin storm and emergency work performed by PAR in 1997 compared to 1998, and
the acquisition of the Founding and Purchased Companies which earned lower
margins than those experienced by PAR and the Pooled Company in 1997.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $14.8 million, or 128.0%, to $26.4 million for
the year ended December 31, 1998, due to the acquisition of the Founding
Companies on February 18, 1998, the acquisition of the Purchased Companies,
increases in selling and administrative salaries required to support the higher
level of revenues generated from an increased volume of projects, and the
establishment of a corporate office and administrative infrastructure during
1998.
20
23
As a percentage of revenues, selling, general and administrative expenses
decreased due to excess compensation paid to the owners of PAR in 1997 as
compared to agreed upon salary levels at the date of the IPO and due to the
Pooled Company having a higher sales commission structure than the Founding and
Purchased Companies.
Other income (expense), net. Other income (expense), net increased $2.6
million, or 195.9%, to $4.0 million for the year ended December 31, 1998 due to
interest expense attributable to higher levels of debt resulting from cash paid
and debt assumed in connection with the acquisition of certain Acquired
Businesses. In addition, the Company borrowed funds under the Credit Facility
for equipment purchases and other operating activities in connection with the
addition of the Purchased Companies during 1998. Also, interest expense
increased due to the addition of the Convertible Subordinated Notes, partially
offset by lower overall effective borrowing rates in 1998 versus 1997.
QUANTA RESULTS FOR THE YEAR ENDED DECEMBER 31, 1997 COMPARED TO THE YEAR ENDED
DECEMBER 31, 1996
Revenues. Revenues increased $4.9 million, or 6.9%, to $76.2 million for
the year ended December 31, 1997, primarily as a result of an increased demand
for our services in Missouri, California and Colorado, partially offset by a
decrease in activity in Oregon.
Gross profit. Gross profit increased $3.2 million, or 22.5% to $17.3
million for the year ended December 31, 1997. As a percentage of revenues, gross
profit increased from 19.8% to 22.7%. The increase in gross profit and gross
margin is primarily due to increased labor productivity, renegotiated unit
pricing on certain long-term contracts and lower equipment rental expense as PAR
replaced rental equipment on certain projects with company-owned equipment,
partially offset by lower gross profit from operations in Oregon due to the
completion of a significant telecommunications contract in 1997 at a lower gross
margin.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $1.7 million, or 17.3%, to $11.6 million for
the year ended December 31, 1997, primarily due to increased administrative
support required by the higher level of revenues and increases in owner
compensation, partially offset by decreased commissions paid to salesmen. As a
percentage of revenues, selling, general and administrative expenses increased
from 13.8% to 15.2%.
Other income (expense), net. Other income (expense), net increased $0.3
million, or 32.4%, to $1.4 million for the year ended December 31, 1997 due to
interest expense incurred on higher levels of debt required in 1997 to fund
additional equipment purchases.
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24
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risk primarily related to potential adverse
changes in interest rates as discussed below. Management is actively involved in
monitoring exposure to market risk and continues to develop and utilize
appropriate risk management techniques. We are not exposed to any other
significant market risks, including commodity price risk, foreign currency
exchange risk or interest rate risks from the use of derivative financial
instruments. Management does not use derivative financial instruments for
trading or to speculate on changes in interest rates or commodity prices.
Therefore, our exposure to changes in interest rates primarily results from
its short-term and long-term debt with both fixed and floating interest rates.
Our debt with fixed interest rates primarily consists of Convertible
Subordinated Notes. Our debt with variable interest rates is primarily the
Credit Facility. The following table presents principal or notional amounts
(stated in thousands) and related average interest rates by year of maturity for
our debt obligations and their indicated fair market value at December 31, 1998:
FAIR
1999 2000 2001 2002 2003 THEREAFTER TOTAL
----- ----- ----- ----- ------- ---------- -------
Liabilities -- Long-Term
Debt:
Variable Rate.............. $ -- $ -- $ -- $ -- $56,000 $ -- $56,000
Average Interest Rate...... 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0%
Fixed Rate................. $ -- $ -- $ -- $ -- $ -- $49,350 $49,350
Average Interest Rate...... 6.875% 6.875% 6.875% 6.875% 6.875% 6.875% 6.875%
VALUE
--------
Liabilities -- Long-Term debt:
Variable Rate............................................. $ 56,000
Fixed Rate................................................ $ 49,350
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Quanta Services, Inc. and Subsidiaries
Report of Independent Public Accountants.................. 24
Consolidated Balance Sheets............................... 25
Consolidated Statements of Operations..................... 26
Consolidated Statements of Cash Flows..................... 27
Consolidated Statements of Stockholders' Equity........... 28
Notes to Consolidated Financial Statements................ 29
23
26
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Quanta Services, Inc.:
We have audited the accompanying consolidated balance sheets of Quanta Services,
Inc. (a Delaware corporation) and subsidiaries as of December 31, 1997 and 1998,
and the related consolidated statements of operations, cash flows and
stockholders' equity for the three years ended December 31, 1998. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Quanta Services,
Inc. and subsidiaries as of December 31, 1997 and 1998, and the results of their
operations and their cash flows for the three years ended December 31, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas
February 26, 1999
24
27
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
DECEMBER 31,
------------------
1997 1998
------- --------
CURRENT ASSETS:
Cash and cash equivalents................................. $ 489 $ 3,246
Accounts receivable, net of allowance of $193 and
$1,405................................................. 12,878 71,992
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 1,746 22,620
Inventories............................................... 865 2,534
Prepaid expenses and other current assets................. 724 4,337
------- --------
Total current assets.............................. 16,702 104,729
PROPERTY AND EQUIPMENT, net................................. 18,286 74,165
OTHER ASSETS, net........................................... 645 5,177
GOODWILL, net............................................... 114 150,887
------- --------
Total assets...................................... $35,747 $334,958
======= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 7,200 $ 3,786
Accounts payable and accrued expenses..................... 6,578 38,031
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 738 7,031
------- --------
Total current liabilities......................... 14,516 48,848
LONG-TERM DEBT, net of current maturities................... 7,542 60,201
CONVERTIBLE SUBORDINATED NOTES.............................. -- 49,350
DEFERRED INCOME TAXES AND OTHER NON-CURRENT LIABILITIES..... 2,479 6,261
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.00001 par value, 10,000,000 shares
authorized, none issued and outstanding................ -- --
Common Stock, $.00001 par value, 36,654,667 shares
authorized, 3,951,945 and 18,347,322 shares issued and
outstanding, respectively.............................. -- --
Limited Vote Common Stock, $.00001 par value, 3,345,333
shares authorized, 3,345,333 shares issued and
outstanding, respectively.............................. -- --
Unearned ESOP shares...................................... (1,831) (1,831)
Additional paid-in capital................................ 1,238 145,151
Retained earnings......................................... 11,803 26,978
------- --------
Total stockholders' equity........................ 11,210 170,298
------- --------
Total liabilities and stockholders' equity........ $35,747 $334,958
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
25
28
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
REVENUES.................................................... $71,294 $76,204 $309,209
COST OF SERVICES (including depreciation)................... 57,164 58,896 249,195
------- ------- --------
Gross profit.............................................. 14,130 17,308 60,014
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 9,876 11,589 26,418
MERGER EXPENSES -- Pooling.................................. -- -- 231
GOODWILL AMORTIZATION....................................... 55 56 2,513
------- ------- --------
Income from operations.................................... 4,199 5,663 30,852
OTHER INCOME (EXPENSE):
Interest expense.......................................... (989) (1,219) (4,635)
Other, net................................................ (31) (131) 641
------- ------- --------
Other income (expense), net............................ (1,020) (1,350) (3,994)
------- ------- --------
INCOME BEFORE INCOME TAX PROVISION.......................... 3,179 4,313 26,858
PROVISION FOR INCOME TAXES.................................. 1,389 1,786 11,683
------- ------- --------
NET INCOME.................................................. $ 1,790 $ 2,527 $ 15,175
======= ======= ========
BASIC EARNINGS PER SHARE.................................... $ 0.45 $ 0.64 $ 0.86
======= ======= ========
DILUTED EARNINGS PER SHARE.................................. $ 0.45 $ 0.64 $ 0.84
======= ======= ========
DILUTED EARNINGS PER SHARE BEFORE MERGER EXPENSES........... $ 0.45 $ 0.64 $ 0.85
======= ======= ========
SHARES USED IN COMPUTING EARNINGS PER SHARE:
Basic..................................................... 3,952 3,952 17,646
======= ======= ========
Diluted................................................... 3,952 3,952 18,666
======= ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
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29
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,790 $ 2,527 $ 15,175
Adjustments to reconcile net income to net cash provided
by operating activities --
Depreciation and amortization........................... 2,814 3,323 10,600
Loss (gain) on sale of property and equipment........... (96) 49 (91)
Non-cash compensation charge for issuance of Common
Stock (ESOP)......................................... 720 254 --
Deferred income tax provision (benefit)................. 364 5 (370)
Changes in operating assets and liabilities, net of
non-cash transactions --
Accounts receivable................................ (2,532) (1,084) (7,294)
Inventories........................................ (579) (286) (904)
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... (233) (947) (2,286)
Prepaid expenses and other current assets.......... (63) 42 (2,798)
Other, net......................................... (100) (88) (90)
Accounts payable and accrued expenses.............. 1,150 1,706 (5,811)
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 1,026 (478) 2,185
------- ------- --------
Net cash provided by operating activities........ 4,261 5,023 8,316
------- ------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 172 268 1,394
Additions of property and equipment and other assets...... (3,981) (6,429) (22,637)
Cash paid for acquisitions, net of cash acquired.......... -- -- (89,176)
Proceeds from sale of investments......................... -- -- 1,342
------- ------- --------
Net cash used in investing activities............ (3,809) (6,161) (109,077)
------- ------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.............................. 7,152 4,714 301
Payments on long-term debt................................ (5,400) (4,063) (32,846)
Redemptions of Common Stock............................... (2,805) (31) --
Issuances of Common Stock, net of offering costs.......... -- -- 44,914
Net borrowings under bank lines of credit................. 843 495 52,522
Distributions to accounting acquiror...................... -- -- (8,370)
Proceeds from Convertible Subordinated Notes.............. -- -- 49,350
Debt issuance costs....................................... -- -- (3,066)
Exercise of stock options................................. -- -- 713
Other..................................................... (95) -- --
------- ------- --------
Net cash provided by (used in) financing
activities.................................... (305) 1,115 103,518
------- ------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ 147 (23) 2,757
CASH AND CASH EQUIVALENTS, beginning of year................ 365 512 489
------- ------- --------
CASH AND CASH EQUIVALENTS, end of year...................... $ 512 $ 489 $ 3,246
======= ======= ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest................................................ $ 637 $ 679 $ 4,470
Income taxes, net of refunds............................ 870 1,518 10,800
The accompanying notes are an integral part of these consolidated financial
statements.
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30
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
LIMITED VOTE
COMMON STOCK COMMON STOCK UNEARNED ADDITIONAL
------------------- ------------------ ESOP PAID-IN RETAINED TOTAL
SHARES AMOUNT SHARES AMOUNT SHARES CAPITAL EARNINGS EQUITY
---------- ------ --------- ------ -------- ---------- -------- --------
Balance, December 31, 1995.... 3,951,945 $-- -- $-- -- $ 848 $ 7,861 $ 8,709
Distribution to
stockholders.............. -- -- -- -- -- -- (375) (375)
Purchase of stock from
stockholders.............. -- -- -- -- (2,805) -- -- (2,805)
Distribution of stock
through ESOP.............. -- -- -- -- 720 -- -- 720
Other....................... -- -- -- -- -- 421 -- 421
Net income.................. -- -- -- -- -- -- 1,790 1,790
---------- --- --------- --- ------- -------- ------- --------
Balance, December 31, 1996.... 3,951,945 -- -- -- (2,085) 1,269 9,276 8,460
Distribution of stock
through ESOP.............. -- -- -- -- 254 -- -- 254
Other....................... -- -- -- -- -- (31) -- (31)
Net income.................. -- -- -- -- -- -- 2,527 2,527
---------- --- --------- --- ------- -------- ------- --------
Balance, December 31, 1997.... 3,951,945 -- -- -- (1,831) 1,238 11,803 11,210
Issuances of stock.......... -- -- 3,345,333 -- -- -- -- --
Stock options exercised..... 60,000 -- -- -- -- 1,125 -- 1,125
Initial public offering, net
of offering costs......... 5,750,000 -- -- -- -- 44,914 -- 44,914
Acquisition of Founding
Companies................. 4,527,000 -- -- -- -- 53,890 -- 53,890
Acquisition of Purchased
Companies................. 4,058,377 -- -- -- -- 43,984 -- 43,984
Net income.................. -- -- -- -- -- -- 15,175 15,175
---------- --- --------- --- ------- -------- ------- --------
Balance, December 31, 1998.... 18,347,322 $-- 3,345,333 $-- $(1,831) $145,151 $26,978 $170,298
========== === ========= === ======= ======== ======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
28
31
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Quanta Services, Inc., a Delaware corporation ("Quanta"), was founded in
August 1997 to create a leading provider of specialty contracting and
maintenance services primarily related to electric, utility and
telecommunications infrastructure in North America.
In February 1998, Quanta completed its initial public offering (the
"Offering" or "IPO"), concurrent with which Quanta acquired, in separate
transactions, four entities (the "Founding Companies"). Subsequent to the date
of the Offering, and through December 31, 1998, the Company has acquired twelve
additional businesses for approximately $84.6 million in cash and 5.0 million
shares of common stock. Of these additional acquired businesses, one was
accounted for as a pooling-of-interests and is referred to herein as the "Pooled
Company" (see Note 4). The remaining acquired businesses were accounted for as
purchases and are referred to herein as the "Purchased Companies." Quanta
intends to continue to acquire through merger or purchase similar companies to
expand its national and regional operations.
The financial statements of Quanta for periods prior to February 18, 1998
(the effective closing date of the acquisitions of the Founding Companies), are
the financial statements of PAR Electrical Contractors, Inc. ("PAR" or the
"Accounting Acquiror") as restated for the acquisition of the Pooled Company in
June 1998. The operations of the other Founding Companies and Quanta, acquired
by the Accounting Acquiror, have been included in the Company's historical
financial statements beginning February 19, 1998, and the Purchased Companies
beginning on their respective dates of acquisition. References herein to the
"Company" include Quanta and its subsidiaries.
In the course of its operations, the Company is subject to certain risk
factors, including but not limited to: limited combined operating history, risks
related to acquisition strategy, recoverability of goodwill, risks related to
acquisition financing, risks related to operating and internal growth
strategies, management of growth, availability of qualified employees, unionized
workforce, competition, risks associated with contracts, potential exposure to
environmental liabilities, dependence on key personnel and Year 2000 risks.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Principles of Consolidation
The consolidated financial statements of the Company, include the accounts
of Quanta and its wholly owned subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Supplemental Cash Flow Information
The Company had non-cash investing and financing activities related to
capital leases of approximately $111,000, $692,000 and $1,218,000 during the
years ended December 31, 1996, 1997 and 1998, respectively.
In addition, pursuant to its acquisition program, the Company acquired
assets with an estimated fair market value, net of cash acquired, of
approximately $116,022,000 and liabilities of approximately $71,598,000
resulting in the recording of approximately $127,654,000 in goodwill.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts when collection is
considered doubtful.
29
32
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued by the Company at the lower of cost or market
using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method over the estimated useful lives of the assets.
Leasehold improvements are capitalized and amortized over the lesser of the life
of the lease or the estimated useful life of the asset. Depreciation and
amortization expense related to property and equipment, was approximately
$2,759,000, $3,267,000 and $8,087,000 for the years ended December 31, 1996,
1997 and 1998, respectively.
Expenditures for repairs and maintenance are charged to expense when
incurred. Expenditures for major renewals and betterments, which extend the
useful lives of existing equipment, are capitalized and depreciated. Upon
retirement or disposition of property and equipment, the cost and related
accumulated depreciation are removed from the accounts and any resulting gain or
loss is recognized in the statements of operations.
Debt Issue Costs
Debt issue costs related to the Company's credit facility and the
Convertible Subordinated Notes are included in other assets and are amortized to
interest expense over the scheduled maturity periods of the related debt. As of
December 31, 1997 and 1998, accumulated amortization was approximately $-- and
$178,000, respectively.
Goodwill
Goodwill represents the excess of the aggregate purchase price paid by the
Company in the acquisition of businesses accounted for as purchases over the
fair market value of the net assets acquired. Goodwill is amortized on a
straight-line basis over 40 years. Management continually evaluates whether
events or circumstances have occurred that indicate that the remaining estimated
useful lives of property and equipment, other identifiable intangible assets and
goodwill may warrant revision or that the remaining balances may not be
recoverable.
Revenue Recognition
The Company recognizes revenue when services are performed except when work
is being performed under a fixed price or cost-plus-fee contract. Such contracts
generally provide that the customer accept completion of progress to date and
compensate the Company for services rendered, measured typically in terms of
units installed, hours expended or some other measure of progress. Revenues from
fixed price or cost-plus-fee contracts are recognized on the
percentage-of-completion method measured by the percentage of costs incurred to
date to total estimated costs for each contract. Contract costs typically
include all direct material, labor and subcontract costs and those indirect
costs related to contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Provisions for the total estimated losses on
uncompleted contracts are made in the period in which such losses are
determined. Changes in job performance, job conditions, estimated profitability
and final contract settlements may result in revisions to costs and income and
their effects are recognized in the period in which the revisions are
determined.
The balances billed but not paid by customers pursuant to retainage
provisions in fixed price or cost-plus-fee contacts will be due upon completion
of the contracts and acceptance by the customer. Based on the Company's
experience with similar contracts in recent years, the retention balance at each
balance sheet date will be collected within the subsequent fiscal year.
Retainage balances as of December 31, 1997 and 1998 were approximately $400,000
and $11,155,000, respectively, and are included in accounts receivable.
30
33
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The current asset "Cost and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The current liability "Billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company generally warrants labor for new
installations and construction and servicing of existing infrastructure. An
accrual for warranty costs is recorded based upon the historical level of
warranty claims and management's estimate of future costs.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under this method, deferred assets and
liabilities are recorded for future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
Certain of the Acquired Businesses were S corporations for income tax
purposes and, accordingly, any income tax liabilities for the periods prior to
the acquisitions are the responsibility of the respective stockholders.
Effective with the acquisitions, the S corporations converted to C corporations.
Accordingly, at the date of acquisition an estimated deferred tax liability has
been recorded to provide for the estimated future income tax liability resulting
from the difference between the book and tax bases of the net assets of these
former S corporations. For purposes of these consolidated financial statements,
federal and state income taxes have been provided for the post-acquisition
periods.
Earnings per Share
The Company has adopted SFAS No. 128, "Earnings Per Share," which requires
restatement of all comparative per share amounts. Under the provisions of SFAS
No. 128, the presentation of primary earnings per share has been replaced with
earnings per share for potentially dilutive securities such as outstanding
options. All prior period earnings per share data have been restated.
For financial statement purposes, as required by the rules and regulations
of the Securities Act, PAR has been identified as the accounting acquiror in the
transaction with Quanta and its initial public offering. As such, the shares of
Quanta common stock beneficially owned by the stockholders of PAR and the shares
issued in connection with the acquisition of the Pooled Company have been used
in the calculation of basic and diluted earnings per share of the Company for
all periods prior to the IPO.
Collective Bargaining Agreements
Certain of the subsidiaries are party to various collective bargaining
agreements with certain of its employees. The agreements require the Company to
pay specified wages and provide certain benefits to its union employees. These
agreements expire at various times.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of estimates and assumptions by
management in determining the reported amounts of assets and liabilities,
disclosures of contingent liabilities at the date of the financial statements
and the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates. Reference is made to the
"Revenue Recognition" section of this footnote and Note 12 for discussion of
certain estimates reflected in the Company's financial statements.
31
34
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
New Accounting Pronouncements
In the first quarter of 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income," which requires the display of comprehensive income and
its components in the financial statements. Comprehensive income represents all
non-stockholder related changes in equity of an entity during the reporting
period, including net income and charges directly to equity, which are excluded
from net income. For the three years ended December 31, 1998, there are no
material differences between the Company's "traditional" and "comprehensive" net
income.
The Company has complied with the provisions of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which establishes
standards for reporting certain information about operating segments in annual
financial statements and, to a lesser extent, reporting of selected information
about operating segments in interim financial reports issued to stockholders.
SFAS No. 131 also establishes standards for specific disclosures about products
and services, geographic areas, and major customers.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," which becomes effective for
financial statements for the year ended December 31, 1998. SFAS No. 132 requires
revised disclosures about pension and other postretirement benefit plans. The
Company has adopted the provisions of SFAS No. 132.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which becomes effective for financial
statements beginning January 1, 2000. SFAS No. 133 requires a company to
recognize all derivative instruments (including certain derivative instruments
embedded in other contracts) as assets or liabilities in its balance sheet and
measure them at fair value. The statement requires that changes in the
derivative's fair value be recognized currently in earnings unless specific
hedge accounting criteria are met. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. The Company is evaluating SFAS No. 133 and the
impact on existing accounting policies and financial reporting disclosures.
However, the Company has not historically engaged in activities or entered into
arrangements normally associated with derivative instruments.
In March 1998, the American Institute of Certified Public Accountants
("AICPA") issued Statement of Position (SOP) 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use." The SOP provides
guidance with respect to accounting for the various types of costs incurred for
computer software developed or obtained for the Company's use. The Company is
required to, and will adopt SOP 98-1 by the first quarter of fiscal 1999 and
believes that adoption will not have a material effect on its consolidated
financial statements.
In April 1998, the AICPA issued SOP 98-5, "Reporting on the Costs of
Start-Up Activities," which requires costs of start-up activities to be expensed
as incurred, and upon adoption, previously deferred costs should be charged as a
cumulative effect of a change in accounting principle. The statement is
effective for financial statements beginning after December 15, 1998, and the
Company expects to adopt the new standard in January 1999. The adoption of this
standard is not expected to have a material effect on the Company's financial
position or result of operations.
3. PER SHARE INFORMATION:
The computation of basic and diluted earnings per share for the two years
ended December 31, 1997 is based upon the 3,000,000 shares of common stock
issued in connection with PAR and 951,945 shares issued in connection with the
acquisition of the Pooled Company.
The computation of basic earnings per share for the year ended December 31,
1998 is based upon 17,646,249 weighted average shares of common stock
outstanding which includes the weighted average portion of (i) 7,527,000 shares
of common stock issued to the owners of the Founding Companies,
32
35
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(ii) 3,345,333 shares of Limited Vote Common Stock issued to the initial
stockholders and certain management personnel of the Company, (iii) 5,750,000
shares of common stock sold in the Offering to pay the cash portion of the
consideration for the Founding Companies, to repay expenses incurred in
connection with the Offering and to retire debt, (iv) 951,945 shares issued for
the acquisition of the Pooled Company, (v) the 4,058,376 shares issued in
acquisitions accounted for as purchases, and (vi) shares issued upon exercise of
stock options.
Shares used in the calculation of the diluted earnings per share for the
year ended December 31, 1998 include (i) the shares described above, (ii) the
dilution attributable to the assumed conversion of the Convertible Subordinated
Notes, and (iii) the dilution attributable to outstanding options to purchase
common stock, using the treasury stock method. Included in net income used in
computing diluted earnings per share is approximately $506,000 in reduced
interest expense, net of tax, attributable to the assumed conversion of the
Convertible Subordinated Notes.
4. BUSINESS COMBINATIONS:
Pooling
During the second quarter of 1998, Quanta completed the acquisition of all
the common stock of NorAm Telecommunications, Inc. ("NorAm" or the "Pooled
Company"), in a business combination accounted for as a "pooling-of-interests"
transaction in accordance with the requirements of APB No. 16. NorAm,
headquartered in Oregon, provides outside and inside network and technical
support for the telecommunications industry. Quanta issued 951,945 shares of
common stock in exchange for all the common stock of NorAm. There were no
transactions between Quanta and NorAm during the periods prior to the business
combination.
The following table summarizes the unaudited restated revenues, net income
and per share data of the Company after giving effect to the Pooled Company (in
thousands, except per share data).
YEARS ENDED DECEMBER 31,
-------------------------------------
1996 1997
----------------- -----------------
NET NET
REVENUES INCOME REVENUES INCOME
-------- ------ -------- ------
Revenues and net income --
As previously reported................................. $42,684 $ 750 $49,132 $2,294
Pooled Company......................................... 28,610 1,040 27,072 233
------- ------ ------- ------
As restated......................................... $71,294 $1,790 $76,204 $2,527
======= ====== ======= ======
Earnings per share basic and diluted --
As previously reported................................. $ 0.25 $ 0.76
Pooled Company......................................... 0.20 (0.12)
------ ------
As restated......................................... $ 0.45 $ 0.64
====== ======
Purchases
Through the year ended December 31, 1998, the Company completed eleven
acquisitions accounted for as purchases. The aggregate consideration paid in
these transactions consisted of $84.6 million in cash and notes and 4.1 million
shares of common stock. The accompanying balance sheet as of December 31, 1998
includes preliminary allocations of the respective purchase prices and is
subject to final adjustment. The following summarized unaudited pro forma
financial information adjusts the historical financial information by
33
36
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
assuming the acquisition of the Founding Companies, the Purchased Companies and
the issuance of the Convertible Subordinated Notes (as defined in Note 7)
occurred on January 1, 1997 (dollars in thousands):
YEAR ENDED
DECEMBER 31,
----------------------------
1997 1998
------------ ------------
(UNAUDITED)
Revenues.................................................... $339,324 $423,572
Net income.................................................. $ 17,699 $ 19,452
Basic earnings per share.................................... $ 0.82 $ 0.90
Diluted earnings per share.................................. $ 0.78 $ 0.86
Pro forma adjustments included in the amounts above primarily relate to:
(a) contractually agreed reductions in salaries and benefits for former owners,
and certain key employees; (b) adjustment to depreciation and amortization
expense due to the purchase price allocations; (c) the assumed reductions in
interest expense due to unassumed debt and the refinancing of the outstanding
indebtedness in conjunction with the acquisition of the Founding Companies and
Purchased Companies, offset by an assumed increase in interest expense incurred
in connection with financing the acquisitions; (d) elimination of non-recurring
acquisition costs associated with the Pooled Company; (e) the incremental
interest expense and amortization of deferred financing costs incurred as a
result of the issuance of the Convertible Subordinated Notes (as defined in Note
7), net of the repayment of outstanding indebtedness of the Company; (f)
adjustment to the federal and state income tax provisions based on the combined
operations; and (g) the elimination of merger expenses related to the Pooled
Company. The pro forma financial data does not purport to represent what the
Company's combined financial position or results of operations would actually
have been if such transactions had in fact occurred on those dates and are not
necessarily representative of the Company's financial position or results of
operations for any future period.
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED DECEMBER 31,
USEFUL LIVES -------------------
IN YEARS 1997 1998
------------ -------- --------
Land................................................ -- $ 1,861 $ 1,947
Buildings and leasehold improvements................ 5-31 1,927 4,232
Operating equipment and vehicles.................... 5-25 32,768 90,534
Office equipment, furniture and fixtures............ 3-7 955 2,828
-------- --------
37,511 99,541
Less -- Accumulated depreciation and amortization... (19,225) (25,376)
-------- --------
Property and equipment, net....................... $ 18,286 $ 74,165
======== ========
34
37
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS:
Activity in the Company's allowance for doubtful accounts consists of the
following (in thousands):
DECEMBER 31,
-------------
1997 1998
---- ------
Balance at beginning of period.............................. 174 193
Beginning balance of Purchased Companies.................. -- 984
Charged to expense........................................ 19 275
Deductions for uncollectible receivables written off and
recoveries............................................. -- (47)
---- ------
Balance at end of period.................................... $193 $1,405
==== ======
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
----------------
1997 1998
------ -------
Accounts payable, trade..................................... $3,196 $18,473
Accrued compensation and other related expenses............. 722 9,045
Other expenses.............................................. 2,660 10,513
------ -------
$6,578 $38,031
====== =======
Contracts in progress are as follows (in thousands):
DECEMBER 31,
--------------------
1997 1998
-------- ---------
Costs incurred on contracts in progress..................... $ 11,578 $ 231,526
Estimated earnings, net of losses........................... 3,017 44,405
-------- ---------
14,595 275,931
Less -- Billings to date.................................... (13,587) (260,342)
-------- ---------
$ 1,008 $ 15,589
======== =========
Costs and estimated earnings recognized in excess of
billings.................................................. $ 1,746 $ 22,620
Less -- Billings in excess of costs and estimated earnings
recognized................................................ (738) (7,031)
-------- ---------
$ 1,008 $ 15,589
======== =========
35
38
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. DEBT:
The Company's long-term debt obligations consisted of the following (in
thousands):
DECEMBER 31,
-----------------
1997 1998
------- -------
Revolving credit facility................................... $ -- $56,000
Bank lines of credit, with total borrowing capacity of
$2,000,000, interest at bank's prime rate plus 1%, secured
by accounts receivable and guaranteed by NorAm's
stockholders.............................................. 968 --
Bank lines of credit, with total borrowing capacity of
$8,000,000, interest at bank's prime rate, secured by
equipment, receivables and other assets................... 2,510 --
Notes payable to bank, interest ranging from 9.08% to 10%,
payments due monthly from $9,313 to $36,613 including
interest, secured by equipment............................ 1,578 --
Note payable to bank, prime interest rate, due $250,000
annually including interest, secured by stock............. 1,831 --
Notes payable to various banks, interest ranging from 4.8%
to 15.35%, secured by certain equipment, receivables and
other assets.............................................. 7,300 2,168
Notes payable to certain previous owners of the Purchased
Companies bearing interest at 7.0% due 2001............... -- 2,145
Capital lease obligations................................... 555 3,674
------- -------
14,742 63,987
Less -- Current maturities.................................. (7,200) (3,786)
------- -------
Total long-term debt.............................. $ 7,542 $60,201
======= =======
Credit Facility
In August 1998, the Company amended its $50.0 million revolving credit
facility (the "Credit Facility") to increase it to $125 million. In November
1998, the Company expanded its bank group from two banks to nine banks and
amended its Credit Facility to increase it to $175 million. The Credit Facility
is secured by a pledge of all of the capital stock of the Company's material
operating subsidiaries and the majority of the Company's assets and is to
provide funds to be used for working capital, to finance acquisitions and for
other general corporate purposes. Amounts borrowed under the Credit Facility
bear interest at a rate equal to either (a) the London Interbank Offered Rate
("LIBOR" which was 5.63% at December 31, 1998) plus 1.00% to 2.00%, as
determined by the ratio of the Company's total funded debt to EBITDA (as defined
in the Credit Facility) or (b) the bank's prime rate (which was 7.75% at
December 31, 1998) plus up to 0.25%, as determined by the ratio of the Company's
total funded debt to EBITDA. Commitment fees of 0.175% to 0.30% (based on
certain financial ratios) are due on any unused borrowing capacity under the
Credit Facility. The Credit Facility matures August 2, 2003. The Company's
existing and future subsidiaries will guarantee the repayment of all amounts due
under the facility and the facility restricts pledges on all material assets.
The Credit Facility contains usual and customary covenants for a credit facility
of this nature including the prohibition of the payment of dividends, certain
financial ratio covenants and the consent of the lenders for acquisitions
exceeding a certain level of cash consideration. As of December 31, 1998, $56.0
million was borrowed under the Credit Facility, and the Company had $2.5 million
of letters of credit outstanding, resulting in a borrowing availability of
$116.5 million under the Credit Facility.
36
39
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The maturities of long-term debt (excluding capital leases) as of December
31, 1998, are as follows (in thousands):
YEAR ENDING DECEMBER 31 --
- --------------------------
1999.............................................. $ 2,032
2000.............................................. 1,272
2001.............................................. 852
2002.............................................. 135
2003.............................................. 56,022
-------
$60,313
=======
The Company leases certain buildings and equipment under non-cancellable
lease agreements. The following schedule shows the future minimum lease payments
under these leases as of December 31, 1998 (in thousands):
CAPITAL OPERATING
YEAR ENDING DECEMBER 31 -- LEASES LEASES
- -------------------------- ------- ---------
1999.............................................. $ 1,879 $2,675
2000.............................................. 1,177 2,433
2001.............................................. 893 2,021
2002.............................................. 24 1,036
2003.............................................. 1 86
------- ------
Total minimum lease payments............ 3,974 $8,251
======
Less -- Amounts representing interest............. (300)
-------
Present value of minimum lease payments......... 3,674
Less -- Current portion........................... (1,754)
-------
Long-term obligation............................ $ 1,920
=======
Rent expense related to operating leases was approximately $205,000,
$462,000 and $1,519,000 for the years ended December 31, 1996, 1997 and 1998,
respectively. Assets under capital leases are included as part of property and
equipment.
Certain of the Company's subsidiaries have entered into a number of related
party lease arrangements for operational facilities. These lease agreements
generally have a term of 5 years. There were no such related-party lease
payments during the years ended December 31, 1996 and 1997. Lease payments for
the year ended 1998 were approximately $315,000. Future commitments with respect
to these leases are included above.
Strategic Investment
In October 1998, the Company entered into a strategic investment agreement
with Enron Capital & Trade Resources Corp. ("Enron Capital"), a subsidiary of
Enron Corp., pursuant to which Enron Capital and an affiliate made an investment
of $49.4 million in Quanta. The investment is in the form of Convertible
Subordinated Notes bearing interest at 6 7/8 percent and convertible into Quanta
common stock at a price of $13.75 per share. Additionally, Quanta and Enron
Capital entered into a strategic alliance under which Enron Capital and Quanta
will exchange information regarding the design, construction and maintenance of
electric power transmission and distribution systems and fiber optic
communications systems. The Convertible Subordinated Notes require quarterly
interest payments and equal semi-annual principal payments beginning
37
40
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
in 2006 until the notes are paid in full in 2010. The Company has the option to
redeem the notes at a premium beginning in 2002.
8. INCOME TAXES:
Federal and state income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------ ------ -------
Federal --
Current................................................. $ 840 $1,475 $10,214
Deferred................................................ 299 10 (262)
State --
Current................................................. 185 306 1,839
Deferred................................................ 65 (5) (108)
------ ------ -------
$1,389 $1,786 $11,683
====== ====== =======
Actual income tax expense differs from income tax expense computed by
applying the U.S. federal statutory corporate rate to income (loss) before
provision for income taxes as follows (in thousands):
YEAR ENDED DECEMBER 31,
-------------------------
1996 1997 1998
------ ------ -------
Provision at the statutory rate........................... $1,093 $1,504 $ 9,400
Increase resulting from --
State income tax, net of related tax effect............. 166 187 1,125
Goodwill................................................ -- -- 899
Nondeductible and other expenses........................ 130 95 259
------ ------ -------
$1,389 $1,786 $11,683
====== ====== =======
38
41
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deferred income tax provisions result from temporary differences in the
recognition of income and expenses for financial reporting purposes and for tax
purposes. The tax effects of these temporary differences, representing deferred
tax assets and liabilities, result principally from the following (in
thousands):
DECEMBER 31,
-----------------
1997 1998
------- -------
Deferred income tax liabilities --
Property and equipment.................................... $(2,500) $(5,461)
Book/tax accounting method difference..................... -- (684)
Other..................................................... (162) (132)
------- -------
Total deferred income tax liabilities............. (2,662) (6,277)
------- -------
Deferred income tax assets --
Allowance for doubtful accounts and other reserves........ 42 1,222
Accounts receivable....................................... 35 --
Goodwill.................................................. 41 47
Inventory................................................. 29 176
State taxes............................................... (29) --
Other accruals not currently deductible................... 473 1,317
------- -------
Total deferred income tax assets.................. 591 2,762
------- -------
Total net deferred income tax liabilities......... $(2,071) $(3,515)
======= =======
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
DECEMBER 31,
-----------------
1997 1998
------- -------
Deferred tax assets --
Current................................................... $ 591 $ 2,714
Long-term................................................. -- 48
------- -------
Total............................................. 591 2,762
------- -------
Deferred tax liabilities --
Current................................................... (183) (816)
Long-term................................................. (2,479) (5,461)
------- -------
Total............................................. (2,662) (6,277)
------- -------
Net deferred income tax liabilities............... $(2,071) $(3,515)
======= =======
Current deferred tax assets are included in prepaid expenses and other
current assets.
9. STOCKHOLDERS' EQUITY:
Limited Vote Common Stock
The shares of Limited Vote Common Stock have rights similar to shares of
common stock, except that such shares are entitled to elect one member of the
board of directors and are entitled to one-tenth of one vote for each share held
on all other matters. Each share of Limited Vote Common Stock will convert into
common stock upon disposition by the holder of such shares in accordance with
the transfer restrictions applicable to such shares.
39
42
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock Options
In December 1997, the Board of Directors adopted, and the stockholders of
the Company approved, the 1997 Stock Option Plan. The purpose of the 1997 Stock
Option Plan is to provide directors, key employees, officers and certain
advisors with additional incentives by increasing their proprietary interest in
the Company. The aggregate amount of common stock of the Company with respect to
which options may be granted may not exceed the greater of 2,380,850 shares or
15% of the outstanding shares of common stock. On February 27, 1998, the Company
filed a Registration Statement on Form S-8 with respect to 2,380,850 shares of
common stock issuable in connection with the 1997 Stock Option Plan.
The 1997 Stock Option Plan provides for the grant of incentive stock
options ("ISOs") as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code") and nonqualified stock options (collectively, the
"Awards"). The amount of ISOs that may be granted under the 1997 Stock Option
Plan is limited to 2,380,850 shares. The 1997 Stock Option Plan is administered
by the Compensation Committee of the Board of Directors. The Compensation
Committee has, subject to the terms of the 1997 Stock Option Plan, the sole
authority to grant Awards under the 1997 Stock Option Plan, to construe and
interpret the 1997 Stock Option Plan and to make all other determinations and
take any and all actions necessary or advisable for the administration of the
1997 Stock Option Plan.
All of the Company's employees, non-employee directors, officers and
advisors are eligible to receive Awards under the 1997 Stock Option Plan, but
only employees of the Company are eligible to receive ISOs. Options will be
exercisable during the period specified in each option agreement and will
generally become exercisable in installments pursuant to a vesting schedule
designated by the Compensation Committee. In the discretion of the Compensation
Committee, option agreements may provide that options will become immediately
exercisable in the event of a "change in control" (as defined in the 1997 Stock
Option Plan) of the Company. No ISO will remain exercisable later than ten years
after the date of grant (or five years in the case of ISOs granted to employees
owning more than 10% of the voting capital stock).
The 1997 Stock Option Plan also provides for automatic option grants to
directors who are not otherwise employed by the Company or its subsidiaries.
Upon commencement of service, a non-employee director will receive a
non-qualified option to purchase 10,000 shares of common stock, and each
continuing or re-elected non-employee director annually will receive an option
to purchase 5,000 shares of common stock. Options granted to non-employee
directors are fully exercisable following the expiration of six months from the
date of grant.
The exercise price for ISOs granted under the 1997 Stock Option Plan may be
no less than the fair market value of a share of the common stock on the date of
grant (or 110% in the case of ISOs granted to employees owning more than 10% of
the voting capital stock).
The following table summarizes activity under the 1997 Stock Option Plan
for the year ended December 31, 1998:
WEIGHTED
AVERAGE
EXERCISE EXERCISE
SHARES PRICE PRICE
--------- -------------- --------
Granted........................................... 1,674,500 $9.00 - $21.13 $ 12.00
Exercised......................................... (60,000) $11.875 $11.875
Forfeited and canceled............................ (36,520) $9.00 - $16.68 $ 12.84
---------
Outstanding at December 31, 1998.................. 1,577,980
=========
Weighted average fair value per share of options
granted during 1998............................. $ 5.17
Weighted average remaining contractual life in
years........................................... 9.43
40
43
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
At December 31, 1998, there were options to purchase 40,000 shares of
Common Stock that were exercisable.
The Company accounts for its stock-based compensation under Accounting
Principles Board Statement No. 25 "Accounting for Stock Issued to Employees."
Under this accounting method, no compensation expense is recognized in the
consolidated statements of income if no intrinsic value of the option exists at
the date of grant. In October 1995, the Financial Accounting Standards Board
issued SFAS No. 123, "Accounting for Stock Based Compensation." SFAS No. 123
encourages companies to account for stock based compensation awards based on the
fair value of the awards at the date they are granted. The resulting
compensation cost would be shown as an expense in the statement of income.
Companies can choose not to apply the new accounting method and continue to
apply current accounting requirements; however, disclosure is required as to
what net income and earnings per share would have been had the new accounting
method been followed. Had compensation costs for this plan been determined
consistent with SFAS No. 123, the Company's net income and earnings per share
would have been reduced to the following pro forma amounts (in thousands, except
per share data):
1998
-------
Net Earnings........................ As reported......................... $15,175
Pro forma........................... $10,392
Diluted Earnings Per Share.......... As reported......................... $ 0.84
Pro forma........................... $ 0.59
The effects of applying SFAS No. 123 in the pro forma disclosure may not be
indicative of future amounts as additional awards in future years are
anticipated. The fair value of each option grant is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
assumptions for 1998: (i) risk-free interest rates ranging from 4.17% to 5.80%,
(ii) expected life of 6 years, (iii) average volatility of 24.85%, and (iv)
dividend yield of 0%.
Initial Public Offering
In February, 1998, Quanta completed its initial public offering, which
involved the issuance of 5.0 million shares of its common stock at a price of
$9.00 per share, resulting in net proceeds to the Company of $38.6 million after
deducting underwriting discounts and commissions and expenses related to the
IPO. In March 1998, the Company sold 750,000 shares of common stock resulting in
net proceeds of $6.3 million pursuant to an over-allotment granted to the
underwriters.
Employee Stock Ownership Plan.
The Company issued shares of common stock to an Employee Stock Ownership
Plan (the "ESOP") in connection with the acquisition of the Pooled Company. The
ESOP was terminated on July 31, 1998, and pending a favorable determination
letter from the Internal Revenue Service, a portion of the shares of the
Company's common stock held by the ESOP will be sold to repay debt owed by the
ESOP to the Company and the remaining portion of the unallocated shares will be
distributed to its participants. The cost of the unallocated ESOP shares is
reflected as a reduction in the Company's stockholders' equity. Upon
distribution from the ESOP, the Company will owe an excise tax equal to 10% of
the value of the Company's common stock distributed. In addition, the Company
will eliminate the remaining balance reflected as Unearned ESOP Shares on the
Company's balance sheet and will have to recognize a non-cash non-recurring
compensation charge equal to the value of the unallocated shares held by the
ESOP at the time it allocates and distributes such shares. The Company currently
cannot determine the amount of the excise tax that will be owed or the non-cash,
non-recurring compensation charge that will be recognized. However, based on the
closing price of
41
44
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Company's common stock on December 31, 1998, the amount of such charges
would be approximately $670,000 and $2,541,000, respectively.
10. EMPLOYEE BENEFIT PLAN:
In connection with its collective bargaining agreements with various
unions, the Company participates with other companies in the unions'
multi-employer pension plans. These plans cover all of the Company's employees
who are members of such unions. The Employee Retirement Income Security Act of
1974, as amended by the Multi-Employer Pension Plan Amendments Act of 1980,
imposes certain liabilities upon employers who are contributors to a
multi-employer plan in the event of the employer's withdrawal from, or upon
termination of such plan. The Company has no plans to withdraw from these plans.
The plans do not maintain information on net assets and actuarial present value
of the accumulated share of the plans' unfunded vested benefits allocable to the
Company, and amounts, if any, for which the Company may be contingently liable
is not ascertainable at this time.
Certain subsidiaries of the Company provide various defined contribution
plans to their employees. The plans cover substantially all full-time employees
of the Company. Contributions to the plans by the Company vary from plan to
plan. Contributions to the plans were approximately $214,000, $217,000 and
$1,434,000 for the years ended December 31, 1996, 1997 and 1998, respectively.
11. FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, lines of credit, accounts payable, notes payable and debt.
The Company believes that the carrying value of these instruments on the
accompanying balance sheets approximates their fair value.
12. COMMITMENTS AND CONTINGENCIES:
Litigation
Certain subsidiaries of the Company are involved in disputes or legal
actions arising in the ordinary course of business. Management does not believe
the outcome of such legal actions will have a material adverse effect on the
Company's financial position or results of operations.
Insurance
The Company carries a broad range of insurance coverage, including business
auto liability, business property liability, workers' compensation, general
liability and an umbrella policy. Effective January 1, 1996, the Company began
self-insuring for certain workers' compensation risks up to $1,000,000 per
occurrence. In October 1997, the Company reduced the deductible to $500,000 per
occurrence. The Company has accrued for the estimated probable claims costs in
satisfying the deductible provisions of the insurance policies for claims
occurring through December 31, 1998. The accrual is based on known facts and
historical trends, and management believes such accrual to be adequate.
In August 1998, the Company consolidated the casualty insurance program for
all subsidiaries of Quanta. This program has no self-insurance provisions.
Self-insured claims under previous policies are monitored to ensure that such
remaining accruals are adequate.
Performance Bonds
In certain circumstances, the Company is required to provide performance
bonds in connection with its contract commitments.
42
45
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. QUARTERLY FINANCIAL DATA (UNAUDITED):
The table below sets forth the unaudited consolidated operating results by
quarter for the years ended December 31, 1997 and 1998. All quarters presented
have been restated for the operations of the Pooled Company (in thousands,
except per share data).
FOR THE THREE MONTHS ENDED,
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
1997:
Revenues........................................... $14,573 $20,226 $ 21,668 $ 19,737
Gross profit....................................... 1,685 4,253 6,474 4,896
Net income (loss).................................. (470) 738 1,476 783
Basic earnings per share .......................... $ (0.12) $ 0.19 $ 0.37 $ 0.20
Diluted earnings per share ........................ $ (0.12) $ 0.19 $ 0.37 $ 0.20
1998:
Revenues........................................... $30,038 $63,679 $100,639 $114,853
Gross profit....................................... 4,582 12,454 20,102 22,876
Net income......................................... 368 3,041 5,960 5,806
Basic earnings per share .......................... $ 0.04 $ 0.16 $ 0.30 $ 0.27
Diluted earnings per share ........................ $ 0.04 $ 0.16 $ 0.30 $ 0.25
The sum of the individual quarterly earnings per share amounts may not
agree with year-to-date earnings per share as each period's computation is based
on the weighted average number of shares outstanding during the period.
14. RISK CONCENTRATION:
The Company grants credit, generally without collateral, to its customers,
which include utility companies, telecommunications providers, municipalities
and commercial companies located primarily in the United States. Consequently,
the Company is subject to potential credit risk related to changes in business
and economic factors throughout the United States. However, the Company
generally is entitled to payment for work performed and has certain lien rights
in that work and concentrations of credit risk are limited due to the diversity
of the Company's customer base. Further, management believes that its contract
acceptance, billing and collection policies are adequate to minimize the
potential credit risk.
15. SEGMENT INFORMATION:
The Company operates in one reportable segment as a specialty contractor.
The Company provides contracting and maintenance services including services for
electric utility infrastructure, telecommunications, transportation control and
lighting systems and commercial and industrial services. Each of these services
is provided by various of the Company's subsidiaries and discrete financial
information is not provided to management at the service level. The following
table presents information regarding revenues derived from the services noted
above.
43
46
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
YEARS ENDED DECEMBER 31,
----------------------------
1996 1997 1998
------- ------- --------
(IN THOUSANDS)
Electric utility infrastructure............................. $41,830 $48,149 $159,243
Telecommunications.......................................... 28,038 26,531 100,184
Transportation control and lighting systems................. 427 491 27,520
Commercial and industrial................................... 999 1,033 22,262
------- ------- --------
$71,294 $76,204 $309,209
======= ======= ========
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
16. SUBSEQUENT EVENTS
Pooling Subsequent to December 31, 1998
Subsequent to December 31, 1998, Quanta completed the acquisition of all
the common stock of Fiber Technology, Inc. ("Fiber Tech"), in a business
combination to be accounted for as a "pooling-of-interests" transaction in
accordance with the requirements of APB No. 16. Fiber Tech, headquartered in
Houston, Texas, provides specialty contracting services to the cable television
and telecommunications industries. Quanta issued 210,627 shares of common stock
in exchange for all the common stock of Fiber Tech. There were no transactions
between Quanta and Fiber Tech during the periods prior to the business
combination.
The following table summarizes the unaudited restated revenues net income
and per share data of Quanta after giving effect to the Fiber Tech transaction
(in thousands, except per share data).
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1996 1997 1998
----------------- ----------------- ------------------
NET NET NET
REVENUES INCOME REVENUES INCOME REVENUES INCOME
-------- ------ -------- ------ -------- -------
Revenues and net income -- As previously
reported................................. $71,294 $1,790 $76,204 $2,527 $309,209 $15,175
Fiber Tech............................... 6,936 652 3,806 (733) 10,050 1,013
------- ------ ------- ------ -------- -------
As restated...................... $78,230 $2,442 $80,010 $1,794 $319,259 $16,188
======= ====== ======= ====== ======== =======
Basic earnings per share -- As previously
reported................................. $ 0.45 $ 0.64 $ 0.86
Fiber Tech............................... 0.14 (0.21) 0.05
------ ------ -------
As restated...................... $ 0.59 $ 0.43 $ 0.91
====== ====== =======
Diluted earnings per share -- As previously
reported................................. $ 0.45 $ 0.64 $ 0.84
Fiber Tech............................... 0.14 (0.21) 0.04
------ ------ -------
As restated...................... $ 0.59 $ 0.43 $ 0.88
====== ====== =======
Purchases Subsequent to December 31, 1998
Subsequent to December 31, 1998 and through February 26, 1999, Quanta
completed five acquisitions accounted for as purchases. The aggregate
consideration paid in these transactions consisted of $80.0 million in cash and
1.8 million shares of common stock. These acquisitions produced 1998 pro forma
combined revenues of $157.7 million.
44
47
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Secondary Common Stock Offering
On January 27, 1999, Quanta completed a secondary public offering, which
involved the issuance of 4.6 million shares of its common stock at a price of
$23.25 per share, resulting in net proceeds to Quanta of $101.3 million after
deducting underwriting discounts and commissions and expenses related to the
offering.
401(k) Plan
Effective February 1, 1999, Quanta adopted a 401(k) plan pursuant to which
employees who are not provided retirement benefits through a collective
bargaining agreement may make contributions through a payroll deduction. Quanta
will make a matching contribution of 100% of each employee's contribution up to
3% of that employee's salary and 50% of each employee's contribution between 3%
and 6% of such employee's salary.
17. SUBSEQUENT EVENTS (UNAUDITED):
Subsequent to February 26, 1999 and through March 15, 1999, Quanta
completed two acquisitions accounted for as purchases. The aggregate
consideration paid in these transactions consisted of $21.0 million in cash and
509,407 shares of common stock. These acquisitions produced 1998 pro forma
combined revenues of $28.6 million.
45
48
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information concerning the Company's directors and officers required by
Item 10 is incorporated by reference to the information set forth in Quanta's
Definitive Proxy Statement for the 1998 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning the compensation of the Company's executives
required by Item 11 is incorporated by reference to the information set forth in
Quanta's Definitive Proxy Statement for the 1998 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning security ownership of certain beneficial owners
and management required by Item 12 is incorporated by reference to the
information set forth in Quanta's Definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information concerning certain relationships and related transactions
required by Item 13 is incorporated by reference to the information set forth in
Quanta's Definitive Proxy Statement for the 1998 Annual Meeting of Stockholders.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following financial statements, schedules and exhibits are filed as
part of this Report:
(1) Financial Statements. Reference is made to the Financial
Statements commencing on page 23 of this Report.
(2) Exhibits.
EXHIBIT
NUMBER DESCRIPTION
------- -----------
2.1 -- Amended and Restated Agreement and Plan of Organization
dated as of December 11, 1997 by and among Quanta
Services, Inc. and PAR Electrical Contractors, Inc. and
its stockholders*
2.2 -- Amended and Restated Agreement and Plan of Organization
dated as of December 11, 1997 by and among Quanta
Services, Inc. and Union Power Construction Company and
its stockholders*
2.3 -- Amended and Restated Agreement and Plan of Organization
dated as of December 11, 1997 by and among Quanta
Services, Inc. and TRANS TECH Electric, Inc. and its
stockholders*
2.4 -- Amended and Restated Agreement and Plan of Organization
dated as of December 11, 1997 by and among Quanta
Services, Inc. and Potelco, Inc. and its stockholders*
46
49
EXHIBIT
NUMBER DESCRIPTION
------- -----------
3.1 -- Amended and Restated Certificate of Incorporation*
3.2 -- Amended and Restated Bylaws*
4.1 -- Form of Common Stock Certificate*
10.1 -- Form of Employment Agreement*
10.2 -- 1997 Stock Option Plan*
10.3 -- Acquisition Agreement and Plan of Reorganization dated as
of May 5, 1997, by and among Quanta Services, Inc., Spalj
Acquisition, Inc. and Spalj Construction Company and its
stockholders**
10.4 -- Acquisition Agreement and Plan of Reorganization dated as
of August 4, 1998, by and among Quanta Services, Inc.,
Underground Construction Co., Inc., Five Points
Construction Company and their stockholders+
10.5 -- Second Amended and Restated Secured Credit Agreement
dated as of November 12, 1998 among Quanta Services, Inc.
as Borrower and Bank One Texas, National Association,
National City Bank and the other financial institutions
parties thereto, as Lenders++
10.6 -- Securities Purchase Agreement among Quanta Services, Inc.
and Enron Capital & Trade Resources Corp. ("Enron
Capital") and Joint Energy Development Investments II
Limited Partnership ("JEDI") dated as of September 29,
1998**
10.7 -- Registration Rights Agreement dated as of September 29,
1998 by and among Quanta Services, Inc., JEDI and Enron
Capital**
10.8 -- Form of Convertible Promissory Note issued to Enron
Capital and JEDI**
10.9 -- Acquisition Agreement and Plan of Reorganization dated as
of February 12, 1999, by and among Quanta Services, Inc.,
Quanta I Acquisition, Inc., The Ryan Company, Inc. and
its stockholders+++
10.10 -- Acquisition Agreement and Plan of Reorganization dated
February 16, 1999 by and among Quanta Services, Inc.,
Quanta II Acquisition, Inc., Northern Line Layers, Inc.
and its stockholders+++
21.1 -- Subsidiaries
23.1 -- Consent of Arthur Andersen LLP
27.1 -- Financial Data Schedule
- ---------------
* Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-42957) and incorporated herein by reference.
** Previously filed as an exhibit to the Company's Registration Statement on
Form S-4 (No. 333-47083) and incorporated herein by reference.
+ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the period ended June 30, 1998 and incorporated herein by
reference.
++ Previously filed as an exhibit to the Company's Quarterly Report on Form
10-Q for the period ended September 30, 1998 and incorporated herein by
reference.
+++ Previously filed as an exhibit to the Company's Current Report on Form 8K
for February 12, 1999 and incorporated herein by reference.
(b) Reports on Form 8-K:
None.
47
50
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, Quanta Services, Inc. has duly caused this Report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the City
of Houston, State of Texas, on March 31, 1999.
QUANTA SERVICES, INC.
By /s/ JOHN R. COLSON
-----------------------------------
John R. Colson
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed by the following persons in the capacities indicated and
on March 31, 1999.
SIGNATURE TITLE
--------- -----
/s/ JOHN R. COLSON Chief Executive Officer, Director
- ----------------------------------------------------- (Principal Executive Officer)
John R. Colson
/s/ JAMES H. HADDOX Chief Financial Officer (Principal
- ----------------------------------------------------- Financial Officer)
James H. Haddox
/s/ DERRICK A. JENSEN Vice President, Controller and Chief
- ----------------------------------------------------- Accounting Officer
Derrick A. Jensen
/s/ VINCENT D. FOSTER Director
- -----------------------------------------------------
Vincent D. Foster
/s/ JOHN R. WILSON Director
- -----------------------------------------------------
John R. Wilson
/s/ TIMOTHY A. SOULE Director
- -----------------------------------------------------
Timothy A. Soule
/s/ JOHN A. MARTELL Director
- -----------------------------------------------------
John A. Martell
/s/ GARY A. TUCCI Director
- -----------------------------------------------------
Gary A. Tucci
/s/ JAMES R. BALL Director
- -----------------------------------------------------
James R. Ball
/s/ RODNEY R. PROTO Director
- -----------------------------------------------------
Rodney R. Proto
/s/ MICHAEL T. WILLIS Director
- -----------------------------------------------------
Michael T. Willis
48
51
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ----------- -----------
21.1 Subsidiaries
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule