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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
MARK ONE ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
FISCAL YEAR ENDED DECEMBER 31, 1999
[ ] 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 of (IRS Employer identification no.)
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
(including rights attached thereto)
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
TITLE OF EACH CLASS
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, 2000, 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 $1,380,215,670
(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, 2000 was 35,607,769 (53,411,653, as adjusted for a 3-for-2 stock
split declared on March 8, 2000 and payable on April 7, 2000, to stockholders of
record on March 27, 2000).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Definitive Proxy Statement for the 2000 Annual
Meeting of Stockholders to be held on May 24, 2000, 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, 1999
INDEX
PAGE
NUMBER
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PART I...................................................... 1
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 11
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II..................................................... 12
Item 5. Market for Registrant's Common Stock and Related Stockholder
Matters..................................................... 12
Item 6. Selected Financial Data..................................... 16
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 17
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 22
Item 8. Financial Statements and Supplementary Data................. 24
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosures................................... 49
PART III.................................................... 49
Item 10. Directors and Executive Officers of the Registrant.......... 49
Item 11. Executive Compensation...................................... 49
Item 12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 49
Item 13. Certain Relationships and Related Transactions.............. 49
PART IV..................................................... 50
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K......................................................... 50
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PART I
ITEM 1. BUSINESS
All share amounts and per share amounts in this report have been adjusted
to give effect to a 3-for-2 stock split declared by the Board of Directors on
March 8, 2000 and payable on April 7, 2000 to stockholders of record as of March
27, 2000.
GENERAL
Quanta is a leading provider of specialized contracting services, offering
end-to-end network solutions to the telecommunications, cable television and
electric power industries. Our comprehensive services include designing,
installing, repairing and maintaining network infrastructure. The Internet and
the resulting explosive growth in demand for increased bandwidth, coupled with
deregulation, increased outsourcing by our customers and the convergence of the
telecommunications, cable television and electric power industries have resulted
in significant growth in demand for our services. This growth in demand is
evidenced by our strong internal revenue growth. Operating units we owned at
December 31, 1999 had aggregate revenues on a combined pro forma basis of $1.15
billion in 1999 compared to $943 million in 1998, representing pro forma
internal revenue growth of 21.7%. Our pro forma revenue grew at a compounded
annual rate of 24.7% between 1996 and 1999. To leverage the growth in demand for
our services, we have made strategic acquisitions to expand our geographic
presence, generate operating synergies with existing businesses and develop new
capabilities to meet our customers' evolving needs.
We currently have principal offices in 37 states, providing us the presence
and capability to quickly, reliably and effectively complete turnkey projects
nationwide. We work for many of the leading companies in the industries we
serve. Representative customers include:
- AT&T
- Enron
- Time Warner
- Charter Communications
- PG&E
- US West
- Nevada Power
- Williams Communications
- UtiliCorp United
- Century Telephone
- PF.net
- Seren
- Sprint PCS
- Puget Sound Energy
Our reputation for speed, performance, geographic reach and comprehensive
service offering has also enabled us to develop profitable strategic alliances
with customers such as Enron and UtiliCorp United.
INDUSTRY OVERVIEW
Based on our review of industry sources, we estimate that network
infrastructure spending by telecommunications, cable television and electric
power providers was more than $45 billion in 1999 and will continue to grow. We
believe the following trends are fueling growth in our business:
Increased Demand for Bandwidth. To meet increasing demand for bandwidth
required for video, voice and data transmission, existing telecommunications and
cable television providers must expand and upgrade their networks. Cable and DSL
residential broadband subscriptions are projected to grow at an annual rate of
82% between 1998 and 2003. In addition, many new entrants into the local and
long distance telephone, Internet and cable television markets have an immediate
need to install and expand their networks to be competitive.
Deregulation. Deregulation of the telecommunications markets has spurred
significant additional investment by cable television companies, local exchange
carriers and long distance companies as they seek to protect and expand their
customer bases. Electric power companies have responded to deregulation of the
utility markets by seeking new lines of business and innovative methods to
reduce their costs. The movement from a regulated business environment to an
environment exposed to market forces has led our customers to
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increase outsourcing of non-core activities, particularly network development,
and has facilitated the convergence of the telecommunications, cable television,
and electric power industries.
Increased Outsourcing. Competitive pressures on telecommunications, cable
television and electric power providers caused by deregulation and an increased
focus on core competencies have caused an acceleration of outsourcing of network
services. For instance, although investor owned utilities have increased the
services they provide and the amount of power generated, total employment at
these companies has declined dramatically in the last decade. Outsourcing
network services reduces costs, provides flexibility in budgets and improves
service and performance for our customers.
Industry Convergence. Deregulation and demand for increased bandwidth has
encouraged local and long distance telecommunications, cable television and
electric power providers to leverage their rights-of-way and existing assets to
deliver comprehensive, value-added services to their customer base. For
instance, according to the Edison Electric Institute, over half of the investor
owned electric utilities have a telecommunications related subsidiary as part of
their corporate structure. As business lines between traditional
telecommunications, cable television and electric power markets continue to
blur, our target customers are increasingly seeking single-source providers who
have expertise in fiber optic, coaxial, copper and energized power networks.
Increased Demand for Comprehensive End-to-End Solutions. We believe that
telecommunications, cable television and electric power companies will seek
service providers who can rapidly and effectively design, install and maintain
their networks and continue to meet their needs as they enter new geographic and
product markets. The strategic and financial value to these companies of
geographically expanded and technologically improved networks has caused them to
place a premium on the provision of quick and reliable turnkey network solutions
within increasingly challenging scale, time and complexity constraints.
Accordingly, they are partnering with fewer proven full-service network
providers with broad geographic reach, financial capability and technical
expertise.
Increasing Need to Upgrade Electric Power Transmission and Distribution
Networks. We believe that the aging of many electric power networks and the
increase in competition in the electric power industry will spur increased
investment in electric power transmission and distribution networks. As
competition gives consumers and businesses more choice as to their provider of
electric power, concerns about power quality and reliability will result in
increased investment in transmission and distribution infrastructure.
Additionally, as deregulation accelerates the selling of electricity across
regional networks, capacity and reliability will become even more important.
STRATEGY
The key elements of our growth strategy are:
Focus on Internal Growth and Integration. We believe we can continue our
strong internal revenue growth by providing our customers comprehensive
end-to-end solutions for their infrastructure needs. Our operating units
cooperate in the spreading of best practices and innovative technology, and the
sharing of equipment and human resources. Accordingly, each operating unit is
well-positioned to deepen its relationship with current customers and develop
relationships with new customers. By cross-selling the capabilities of our
operating units, we offer our customers cost-effective, turnkey solutions to
their network needs.
Expand Portfolio of Services to Meet Customers' Evolving Needs. We offer an
expanding portfolio of services that allows us to develop, build and maintain
networks on both a regional and a national scale and adapt to our customers'
changing and growing needs. We intend to expand our geographic and technological
capabilities through both internal development and innovation and through
selective acquisitions.
Continue to Expand Operating Efficiencies. In 1999, we experienced
increases in our gross profit, operating income and net income margins. We
intend to continue to improve our profitability by:
- continuing to focus on growth in our more profitable services;
- combining overlapping operations of certain of the businesses we acquire;
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- using our assets more efficiently;
- increasing purchasing power to gain volume discounts in areas such as
vehicles and equipment, materials, marketing, bonding, employee benefits
and insurance;
- sharing of pricing, bidding, licensing and other business practices among
our operating units;
- developing and expanding the use of management information systems to
facilitate financial control and asset allocation.
Pursue Selected Acquisitions. We plan to continue to pursue acquisitions of
profitable companies with strong management teams and good reputations to
broaden our customer base, expand our geographic area and grow our portfolio of
services. Disciplined acquisitions allow us to cost-effectively meet our
strategic needs. We have successfully integrated 52 acquisitions since our
initial public offering in February 1998. We expect 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.
SERVICES
We design, install and maintain end-to-end networks for the
telecommunications, cable television and electric power industries as well as
commercial, industrial and governmental entities.
Telecommunications Network Services. We provide a variety of services to
the telecommunications industry, which generated 35% of our pro forma combined
revenues for the year ended December 31, 1999. Our telecommunications network
services include:
- fiber optic, copper and coaxial cable installation and maintenance for
video, data and voice transmission;
- designing, building and maintaining DSL networks;
- engineering and erecting cellular, digital, PCS(R), microwave and other
wireless communications towers;
- designing and installing switching systems for incumbent local exchange
carriers, competitive local exchange carriers, regional Bell operating
companies and long distance providers;
- trenching and plowing applications;
- horizontal directional boring;
- rock saw, rock wheel and rock trench capabilities;
- vacuum excavation services;
- splicing and testing of fiber optic and copper networks;
- cable locating.
Cable Television Network Services. We provide a variety of services to the
cable television industry, which generated 13% of our pro forma combined
revenues for the year ended December 31, 1999. Our cable television network
services include:
- fiber optic and coaxial cable installation and maintenance for voice,
video and data transmission;
- system design and installation;
- upgrading power and telecommunications infrastructure for cable
installations;
- system splicing, balance, testing and sweep certification;
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- residential installation and customer connects, both analog and digital,
for cable television, telephony and Internet services.
Electric Power Network Services. We provide a variety of services to the
electrical power industry, which generated 30% of our pro forma combined
revenues for the year ended December 31, 1999. These services include:
- installation, repair and maintenance of electric transmission lines from
69,000 volts to 760,000 volts;
- installation, repair and maintenance of electric power distribution
projects;
- designing and constructing substation projects;
- installing fiber optic lines for voice, video and data transmission on
existing electric power infrastructure;
- installing and maintaining joint trench natural gas distribution systems;
- trenching and horizontal boring for underground installations;
- cable and fault locating;
- storm damage restoration work.
Ancillary Services. We provide a variety of ancillary services to
commercial, industrial and governmental entities, which generated 22% of our pro
forma combined revenues for the year ended December 31, 1999. These services
include:
- installing intelligent traffic networks such as traffic signals,
controllers, connecting signals, variable message signs, closed circuit
television and other monitoring devices for governments;
- installing cable and control systems for light rail lines, airports and
highways;
- designing, installing, maintaining and repairing electrical components,
fiber optic cabling and building control and automation systems;
- installing and maintaining natural gas transmission systems;
- providing specialty rock trenching, directional boring and road milling
for industrial and commercial customers.
CUSTOMERS, STRATEGIC ALLIANCES AND PREFERRED PROVIDER RELATIONSHIPS
Our customers include telecommunications, cable television and electric
power companies, as well as commercial, industrial and governmental entities.
Telecommunications companies, in the aggregate, represent our largest customer
base. Our 10 largest customers accounted for 28% of our revenues in 1999.
Representative customers include:
- AT&T
- Enron
- Time Warner
- Charter Communications
- PG&E
- US West
- Nevada Power
- Williams Communications
- UtiliCorp United
- Century Telephone
- PF.net
- Seren
- Sprint PCS
- Puget Sound Energy
Management at each of our operating units is responsible for developing and
maintaining successful long-term relationships with customers. Our management is
incented to cross-sell additional services of other operating units to their
customers. In addition, our corporate marketing staff promotes and markets our
services for prospective large national accounts and projects that require
services from multiple business units,
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such as our recently announced contract with PF.net. Many of our customers and
prospective customers have qualification procedures for approved bidders or
vendors based upon the satisfaction of particular performance and safety
standards set by the customer. These customers typically 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.
We believe that our strategic relationships with large providers of
telecommunications services and electric power providers will provide
opportunities for future growth. In September 1999, UtiliCorp invested $186
million in Quanta and agreed to use Quanta as a preferred contractor in
outsourced transmission and distribution infrastructure construction and
maintenance and natural gas distribution construction and maintenance in all
areas serviced by Quanta. In October 1998, in connection with a $49.4 million
investment in Quanta, we entered into a strategic alliance agreement with an
affiliate of Enron regarding the design, construction and maintenance of
electric power transmission and distribution systems and fiber optic
communications systems.
We also maintain strategic alliance agreements or preferred provider
relationships with several other leading companies competing in the
telecommunications and electric power industries. Strategic alliances are
typically agreements for periods of approximately two to four years that may
include an option to add one to two years at the end of a contract. Many of the
strategic alliance agreements we have secured include exclusivity clauses
providing that Quanta will be awarded all contracts for a certain type of work
or in a certain geographic region. None of these contracts, however, guarantee a
specific dollar amount of work to be performed by Quanta. Preferred provider
agreements typically indicate the intention to work together. Certain of these
agreements provide us with preferential bidding procedures. Certain of our
strategic alliances and preferred provider relationships are listed in the
following table:
START OF
RELATIONSHIP RELATIONSHIP
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UtiliCorp United............................................ 1999
Enron....................................................... 1998
Washington Water & Power (Avista)........................... 1996
Century Telephone........................................... 1993
Nevada Power Company........................................ 1989
Mid American Energy Corp.................................... 1988
Western Resources........................................... 1979
Kansas City Power & Light................................... 1978
Intermountain R.E.A......................................... 1953
ACQUISITIONS
During 1999, we acquired 40 network service or related businesses which
when combined with our existing operations resulted in pro forma combined
revenues for the year ended December 31, 1999 of $1.15 billion. We acquired
these 40 businesses for a combined consideration of $323.6 million in cash and
notes and 15.0 million shares of common stock.
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:
- historical and projected financial performance;
- experience and reputation of the candidate's management and operations;
- composition and size of the candidate's customer base;
- whether the geographic location of the candidate will enhance or expand
our market area or ability to attract other acquisition candidates;
- whether the acquisition will augment or increase Quanta's market share or
services offered or help protect our existing customer base;
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- potential synergies gained by combining the acquisition candidate with
our existing operations; and
- liabilities, contingent or otherwise, of the candidate.
EMPLOYEES
As of December 31, 1999, Quanta had 1,154 salaried employees, including
executive officers, project managers or engineers, job superintendents, staff
and clerical personnel and approximately 6,600 hourly employees, the number of
which fluctuates depending upon the number and size of the projects undertaken
by us at any particular time. We do not anticipate any overall reductions in
staff as a result of the consolidation of the businesses we acquire, although
there may be some job realignments and new assignments in an effort to eliminate
overlapping and redundant positions.
Approximately 33% of our employees at December 31, 1999 were covered by
collective bargaining agreements, primarily with the International Brotherhood
of Electrical Workers. Under our agreement with our unions, we agree to pay
specified wages to our 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 these 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 our operating units
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 our operating units provides a variety of health, welfare and
benefit plans for their employees who are not covered by collective bargaining
agreements. We are currently considering replacing these various employee
benefit plans with 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
makes matching contributions 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. Quanta also has an employee stock purchase plan which
provides that eligible employees may contribute up to 10% of their cash
compensation, up to $25,000 annually, toward the semi-annual purchase of
Quanta's common stock at a discounted price. Over 1,100 of our employees
participated in the initial offering period for this plan.
Our industry, like many industries, is experiencing a shortage of skilled
workers. 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 electrical workers.
We believe our relationships with our employees and union representatives
are good.
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 will continue to be 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 operating unit for which they work in
addition to those required, if applicable, 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 7,000 hours
of on-the-job training, approximately 200 hours of classroom education and
extensive testing and certification. Each operating unit requires 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.
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REGULATION
Our operations are subject to various federal, state and local laws and
regulations including:
- licensing requirements applicable to electricians and engineers;
- building and electrical codes;
- permitting and inspection requirements applicable to construction
projects;
- regulations relating to worker safety and environmental protection; and
- special bidding and procurement requirements on government projects.
We believe that we have all the licenses required 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 or revocation of our operating licenses. Many state and local
regulations governing electrical construction require permits and licenses to be
held by individuals who 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 by them to procure such business. We believe that as
demand for our services increases, customers will increasingly consider other
factors in choosing a service provider, including technical expertise and
experience, financial and operational resources, nationwide presence, industry
reputation and dependability, which should benefit contractors such as us. There
can be no assurance, however, 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 we will be able to maintain
or enhance our competitive position. We may also face competition from the
in-house service organizations of our existing or prospective customers,
including telecommunication, cable television and electric power companies, that
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 our existing or prospective customers
will continue to outsource services in the future.
RISK MANAGEMENT, INSURANCE AND PERFORMANCE BONDS
The primary risks in our 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 maintained by our operating units prior to our
acquisition of them were subject to self-insured amounts ranging from $100,000
to $1,000,000. We have consolidated the casualty insurance programs for most of
our subsidiaries, which has resulted in savings from the amounts historically
paid by the operating units. Our current insurance program has no self-insurance
provisions. In the future, however, we may have insurance programs with
significant self-insurance obligations. Self-insured claims under previous
policies are monitored to ensure that remaining accruals are adequate. Accruals
for outstanding claims are estimated based on known facts and our prior
experience. Actual experience and claims could differ from our estimates.
Contracts in the telecommunications, cable television and electrical power
contracting industry may require performance bonds or other means of financial
assurance to secure contractual performance. If we
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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.
RISK FACTORS
Our 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.
The Industries We Serve Are Subject to Rapid Technological and Structural
Changes That Could Reduce the Demand for the Services We Provide. The
telecommunications, cable television and electric power industries are
undergoing rapid change as a result of technological advances and deregulation
that could in certain cases reduce the demand for our services or otherwise
adversely affect our business. New or developing technologies could displace the
wireline systems used for voice, video and data transmissions, and improvements
in existing technology may allow telecommunications and cable television
companies to significantly improve their networks without physically upgrading
them. In addition, consolidation in the telecommunications, cable television and
electric power industries may result in the loss of one or more customers.
We May Be Unsuccessful At Generating Internal Growth. 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 to address their
evolving network needs;
- attract new customers;
- increase the number of projects performed for existing customers;
- hire and retain employees;
- open additional facilities; and
- reduce operating and overhead expenses.
Many of the factors affecting our ability to generate internal growth may be
beyond our control, and we cannot be certain that our strategies will be
successful or that we will be able to generate cash flow sufficient to fund our
operations and to support internal growth. Our inability to achieve internal
growth could materially and adversely affect our business, financial condition
and results of operations.
We May Be Unsuccessful At Integrating Companies That We Acquire. We cannot
be sure that we can successfully integrate our acquired companies with our other
operations without substantial costs, delays or other operational or financial
problems. If we do not implement proper overall business controls, our
decentralized operating strategy could result in inconsistent operating and
financial practices at the companies we acquire, and our overall profitability
could be adversely affected. Integrating our acquired companies involves a
number of special risks which could materially and adversely affect our
business, financial condition and results of operations, including:
- failure of acquired companies to achieve the results we expect;
- diversion of our management's attention from operational matters;
- difficulties integrating the operations and personnel of acquired
companies;
- inability to retain key personnel of the acquired companies;
- risks associated with unanticipated events or liabilities;
- the potential disruption of our business; and
- the difficulty of maintaining uniform standards, controls, procedures and
policies.
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If one of our acquired companies suffers customer dissatisfaction or performance
problems, the reputation of our entire company could be materially and adversely
affected.
We May Not Have Access In The Future To Sufficient Funding To Finance
Desired Growth. If we cannot secure additional financing from time to time in
the future on acceptable terms, we may be unable to support our growth strategy.
We cannot readily predict the timing, size and success of our acquisition
efforts and therefore the capital we will need for these efforts. Using cash for
acquisitions limits our financial flexibility and makes us more likely to seek
additional capital through future debt or equity financings. Our existing debt
agreements contain significant restrictions on our operational and financial
flexibility, including our ability to obtain additional debt, and if we seek
more debt we may have to agree to additional covenants that limit our
operational and financial flexibility. When we seek additional debt or equity
financings, we cannot be certain that additional debt or equity will be
available to us at all or on terms acceptable to us. Our $350.0 million credit
facility contains a requirement to obtain the consent of the lenders for
acquisitions exceeding a certain level of cash consideration.
Our Operating Results May Vary Significantly From
Quarter-To-Quarter. During the winter months, demand for our services may be
lower due to inclement weather. Additionally, our quarterly results may also be
materially affected by:
- the timing of acquisitions;
- variations in the margins of projects performed during any particular
quarter;
- the timing and magnitude of acquisition assimilation costs;
- the timing and volume of work under new agreements;
- the budgetary spending patterns of customers;
- the termination of existing agreements;
- costs we incur to support growth internally or through acquisitions or
otherwise;
- losses experienced in our operations not otherwise covered by insurance;
- the change in mix of our customers, contracts and business;
- increases in construction and design costs; and
- regional or general economic conditions.
Accordingly, our operating results in any particular quarter may not be
indicative of the results that you can expect for any other quarter or for the
entire year.
Our Dependence Upon Fixed Price Contracts Could Adversely Affect Our
Business. 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 cause actual revenue and gross profits
for a project to differ from those we originally estimated and could result in
reduced profitability and losses on projects. Depending upon the size of a
particular project, variations from the estimated contract costs can have a
significant impact on our operating results for any fiscal quarter or year.
Many of Our Contracts May Be Canceled On Short Notice and We May Be
Unsuccessful In Replacing Our Contracts As They Are Completed or Expire. We
could experience a material adverse affect on our revenue, net income and
liquidity if any of the following occur:
- our customers cancel a significant number of contracts;
- we fail to win a significant number of our existing contracts upon
re-bid; or
- we complete the required work under a significant number of non-recurring
projects and cannot replace them with similar projects.
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Many of our customers may cancel our contracts with them on short notice,
typically 30-90 days, even if we are not in default under the contract. Certain
of our customers assign work to us on a project-by-project basis under master
service agreements. Under these agreements, our customers often have no
obligation to assign work to us. Our operation could be materially and adversely
affected if the anticipated volume of work is not assigned to us. Many of our
contracts, including our master service contracts, are opened to public bid at
the expiration of their terms. We cannot assure you that we will be the
successful bidder on our existing contracts that come up for bid.
Our Business Growth Could Outpace the Capability of Our Corporate
Management Infrastructure. We cannot be certain that our systems, procedures and
controls will be adequate to support our operations as they expand. Future
growth also will impose significant additional responsibilities on members of
our senior management, including the need to recruit and integrate new senior
level managers and executives. We cannot be certain that we can recruit and
retain such additional managers and executives. To the extent that we are unable
to manage our growth effectively, or are unable to attract and retain additional
qualified management, our financial condition and results of operations could be
materially and adversely affected.
The Departure of Key Personnel Could Disrupt Our Business. 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 certain other key employees, we cannot
be certain that any individual will continue in such capacity for any particular
period of time. The loss of key personnel, or the inability to hire and retain
qualified employees, could adversely affect our business, financial condition
and results of operations. We do not carry key-person life insurance on any of
our employees.
Our Business Is Labor Intensive and We May Be Unable To Attract and Retain
Qualified Employees. 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. Labor shortages or increased labor costs could have a material
adverse affect on our ability to implement our growth strategy and our
operations.
Our Unionized Workforce Could Adversely Affect Our Operations and
Acquisition Strategy. As of December 31, 1999, approximately 33% of our
employees were covered by collective bargaining agreements. Although the
majority of these agreements prohibit strikes and work stoppages, we cannot be
certain that strikes or work stoppages will not occur in the future. Strikes or
work stoppages would adversely impact our relationship with our customers and
could materially and adversely affect our business, financial condition and
results of operations. In addition, our selective 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.
Our Industry Is Highly Competitive. Our industry is served by numerous
small, owner-operated private companies, a few public companies and several
large regional companies. In addition, relatively few barriers prevent entry
into our industry. As a result, any organization that has adequate financial
resources and access to technical expertise may become one of our competitors.
Competition in the industry depends on a number of factors, including price.
Certain of our competitors may have lower overhead cost structures and may,
therefore, be able to provide their services at lower rates than we can provide
such services. In addition, some of our competitors are larger and have greater
resources than us. We cannot be certain that our competitors will not develop
the expertise, experience and resources to provide services that are superior in
both price and quality to our services. Similarly, we cannot be certain that we
will be able to maintain or enhance our competitive position within our
industry. We may also face competition from the in-house service organizations
of our existing or prospective customers. Telecommunications, cable television
and electric power service providers usually employ personnel who perform some
of the same types of services we do. We cannot be certain that our existing or
prospective customers will continue to outsource services in the future.
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Our Results Of Operations Could Be Adversely Affected as a Result of
Goodwill Amortization. When we acquire a business, we record an asset called
"goodwill" equal to the excess amount we pay for the business, including
liabilities assumed, over the fair value of the tangible 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 useful life of
goodwill may warrant revision or that the remaining balance may not be
recoverable. Should we be required to accelerate the amortization of goodwill or
write it off completely because of impairments or changes in accepted accounting
principles, our results from operations may be materially adversely affected.
We Could Have Potential Exposure To Environmental Liabilities. Our
operations are subject to various environmental laws and regulations, including
those dealing with the handling and disposal of waste products, PCBs, fuel
storage and air quality. As a result of past and future operations at our
facilities, we may be required to incur environmental remediation costs and
other cleanup expenses. In addition, we cannot be certain that we will be able
to identify or be indemnified for all potential environmental liabilities
relating to any acquired business.
Certain Provisions of Our Corporate Governing Documents Could Make An
Acquisition of Our Company More Difficult. The following provisions of our
certificate of incorporation and bylaws, as currently in effect, as well as our
stockholders rights plan and Delaware law, could discourage potential
acquisition proposals, delay or prevent a change in control of Quanta or limit
the price that investors may be willing to pay in the future for shares of our
common stock. Our certificate of incorporation permits our board of directors to
issue "blank check" preferred stock and to adopt amendments to our bylaws. Our
bylaws contain restrictions regarding the right of stockholders to nominate
directors and to submit proposals to be considered at stockholder meetings.
Also, our certificate of incorporation and bylaws restrict the right of
stockholders to call a special meeting of stockholders and to act by written
consent. We are also subject to provisions of Delaware law which prohibit us
from engaging in any of a broad range of business transactions with an
"interested stockholder" for a period of three years following the date such
stockholder became classified as an interested stockholder. In addition, on
March 8, 2000 we adopted a stockholders rights plan that could cause substantial
dilution to a person or group that attempts to acquire us on terms not approved
by our board of directors.
ITEM 2. PROPERTIES
FACILITIES
We lease our corporate headquarters in Houston, Texas. As of December 31,
1999 we maintained offices in 37 states. This space is used for offices,
equipment yards, warehousing, storage and vehicle shops. We own 12 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, wire pullers and tensioners. As
of December 31, 1999, the total size of the rolling-stock fleet was
approximately 14,000 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.
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ITEM 3. LEGAL PROCEEDINGS
We are from time to time a party to litigation or administrative
proceedings that arise in the normal course of our business. We do 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, 1999.
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,
at a price of $6.00 per share. The initial public offering price, recent price
and all price data in the following table have been adjusted to give effect to a
3-for-2 stock split payable April 7, 2000. 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)...................... $11.17 $ 7.33
2nd Quarter............................................... 11.83 8.17
3rd Quarter............................................... 10.25 8.00
4th Quarter............................................... 15.33 7.50
YEAR ENDED DECEMBER 31, 1999
1st Quarter............................................... 19.83 14.42
2nd Quarter............................................... 29.59 15.75
3rd Quarter............................................... 28.17 13.42
4th Quarter............................................... 23.13 15.67
YEAR ENDED DECEMBER 31, 2000
1st Quarter (through March 15, 2000)...................... 37.92 17.92
On March 15, 2000, the last sale price for the common stock as reported by
the NYSE was $37.71 per share. On March 15, 2000, there were 259 holders of
record of common stock, 44 holders of record of Limited Vote Common Stock and
one holder of record of Series A preferred stock. There is no established
trading market for the Limited Vote Common Stock or Series A preferred stock.
DIVIDENDS AND PENDING EXCHANGE
Our Series A preferred stock accrues a dividend at a rate of 0.5 % per
annum on a stated amount per share currently equal to $100.00 per share.
Dividends of $260,000 were accrued on the Series A preferred stock during 1999.
Dividends on the Series A preferred stock accumulate until paid. In accordance
with a contractual commitment contained in the initial UtiliCorp investment
agreement, we have recommended that our stockholders approve a proposal at our
annual meeting on May 24, 2000 that would allow UtiliCorp to exchange up to
5,283,204 shares of common stock for up to 1,584,961 additional shares of Series
A preferred stock, at a rate of 3.333334 shares of common stock for one share of
Series A preferred stock. The proposal would also reduce the stated amount per
share of Series A preferred stock on which dividends are paid to $53.99 per
share. The proposed exchange will not adversely affect our other holders of
common stock or Limited Vote Common Stock. The additional shares of Series A
preferred stock to be issued to UtiliCorp in the exchange will not give
UtiliCorp any greater voting power than it presently has as a holder of the
common stock to be exchanged, and will not give UtiliCorp any additional veto
power. In addition, the Series A
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preferred stock has no liquidation preference, and the certificate of
designation will be amended so that the aggregate dividend payable to UtiliCorp
on the Series A preferred stock is, as a result of the change in the stated
amount per share, unaffected by the proposed exchange.
We currently intend 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, and convertible subordinated notes include restrictions on the payment
of cash dividends without the consent of the respective lenders.
RECENT SALES OF UNREGISTERED SECURITIES
In 1999, we completed 40 acquisitions in which some or all of the
consideration was unregistered securities of Quanta. The aggregate consideration
paid in these transactions was $323.6 million in cash and notes and 15.0 million
shares of Quanta common stock. We consider the acquisitions of H. L. Chapman
Pipeline Construction, Inc., H. L. Chapman Pipeline Leasing Co., Inc., Austin
Trencher, Inc. and Sullivan Welders, Inc. to be one acquisition as these
companies were all part of a related business. None of the other acquisitions
were affiliated with each other prior to acquisition by Quanta. Additionally, we
sold shares of Series A preferred stock in an unregistered transaction in
September 1999.
Except for the sale of Series A preferred stock to UtiliCorp on September
21, 1999, all securities listed on the following table were shares of Quanta
common stock. Share data in the following table reflects a 3-for-2 stock split
declared on March 8, 2000, payable on April 7, 2000, to stockholders of record
on March 27, 2000. We relied on Section 4(2) of the Securities Act of 1933 as
the basis for exemption from registration. The shares of Series A preferred
stock are convertible into 9,300,000 shares of common stock, subject to
customary anti-dilution adjustments. For all issuances, the purchasers were
"accredited investors" as defined in Rule 501 promulgated pursuant to the
Securities Act of 1933. All issuances, other than the issuances to UtiliCorp,
were to the owners of businesses acquired in privately negotiated transactions,
not pursuant to public solicitation. The issuance of Series A preferred stock
and common stock to UtiliCorp was negotiated with UtiliCorp as part of a
strategic alliance and not pursuant to a public solicitation.
NUMBER OF
DATE SHARES PURCHASERS OF QUANTA STOCK CONSIDERATION RECEIVED FOR QUANTA STOCK
---- --------- -------------------------- ---------------------------------------
2/3/99 33,267 Sole owner of Tip Top Arborists, Acquisition of Tip Top Arborists, Inc.
Inc.
2/12/99 649,527 Three owners of R.A. Waffensmith & Acquisition of R. A. Waffensmith & Co.,
Co., Inc. Inc.
2/12/99 657,840 Five owners of Dillard Smith Acquisition of Dillard Smith
Construction Company Construction Company
2/12/99 395,497 Five owners of The Ryan Company, Acquisition of The Ryan Company, Inc.
Inc.
2/16/99 1,000,422 Four owners of Northern Line Acquisition of Northern Line Layers,
Layers, Inc. Inc.
3/3/99 170,050 Four owners of Western Acquisition of Western Directional,
Directional, Inc. Inc.
3/9/99 594,060 Seven owners of Valverde Acquisition of Valverde Communications,
Communications, Inc. Inc. and
and VCI Telcom, Inc. VCI Telcom, Inc.
3/23/99 252,927 Two owners of P.D.G. Electric Acquisition of P.D.G. Electric Company
Company
4/15/99 646,485 Sole owner of Tom Allen Acquisition of Tom Allen Construction
Construction Company Company
5/12/99 81,058 Two owners of TTM, Inc. Acquisition of TTM, Inc.
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NUMBER OF
DATE SHARES PURCHASERS OF QUANTA STOCK CONSIDERATION RECEIVED FOR QUANTA STOCK
---- --------- -------------------------- ---------------------------------------
5/14/99 53,860 One owner of Seaward Corporation Acquisition of Seaward Corporation
5/14/99 964,554 Three owners H. L. Chapman Acquisition of H. L. Chapman Pipeline
Pipeline Construction, Inc. and H. Construction, Inc. and H. L. Chapman
L. Chapman Leasing Co., Inc. Leasing Co., Inc.
5/14/99 29,839 Three owners of Austin Trencher, Acquisition of Austin Trencher, Inc.
Inc.
5/14/99 9,738 Two owners of Sullivan Welders, Acquisition of Sullivan Welders, Inc.
Inc.
5/14/99 348,387 Sole owner of Driftwood Electrical Acquisition of Driftwood Electrical
Contractors, Inc. and The 27 Contractors, Inc. and The 27 Digging
Digging Company Company
5/28/99 274,704 Two owners of GEM Engineering Co., Acquisition of GEM Engineering Co.,
Inc. Inc.
6/15/99 400,000 Sole owner of W.C. Communications, Acquisition of W.C. Communications,
Inc. Inc.
7/9/99 19,809 Sole owner of Specialty Drilling Acquisition of Specialty Drilling
Technology, Inc. Technology, Inc.
7/15/99 961,230 Two owners of Sky Antenna Systems, Acquisition of Sky Antenna Systems,
Inc. and North Pacific Utility Inc. and North Pacific Utility
Contractors, Inc. Contractors, Inc.
7/21/99 26,523 Sole owner of Taylor Built, Inc. Acquisition of Taylor Built, Inc.
7/22/99 26,649 Sole owner of Allmat, Inc. Acquisition of Allmat, Inc.
7/23/99 67,102 Sole owner of Utilco, Inc. and Acquisition of Utilco, Inc. and Utilco
Utilco Constructors, Inc. Constructors, Inc.
7/23/99.. 30,627 Two Owners of Intermountain Acquisition of Intermountain Electric,
Electric, Inc. Inc.
8/13/99.. 3,052,273 Sole owner of Crown Fiber Acquisition of Crown Fiber
Communications, Inc. Communications, Inc.
8/13/99.. 288,403 Sole owner of T.H. Cable Acquisition of T.H. Cable Construction,
Construction, Inc. Inc.
8/13/99.. 240,336 Sole owner of World CATV Acquisition of World CATV
Communications, Inc. Communications, Inc.
8/26/99.. 358,851 Four owners of W.C.E., Inc. Acquisition of W.C.E., Inc.
8/27/99.. 42,489 Sole owner of Computapole, Inc. Acquisition of Computapole, Inc.
9/15/99.. 1,053,658 Sole owner of Haines Construction Acquisition of Haines Construction
Company Company
9/21/99.. 1,860,000 UtiliCorp United Inc. $186,000,000
Series A
Preferred
Stock
9/22/99.. 183,567 Two owners of Ranger Directional, Acquisition of Ranger Directional, Inc.
Inc.
9/22/99.. 87,217 Two owners of Hudson & Poncetta, Acquisition of Hudson & Poncetta, Inc.
Inc.
9/22/99.. 186,282 Three owners of Renaissance Acquisition of Renaissance
Construction, Inc., Renaissance Construction, Inc., Renaissance
Construction of Utah, Inc. and Construction of Utah, Inc. and
Renaissance Construction of Renaissance Construction of Nevada,
Nevada, Inc. Inc.
10/1/99.. 410,881 Eight owners of Trawick Acquisition of Trawick Construction
Construction Company Inc. and Company Inc. and Communication
Communication Manpower, Inc. Manpower, Inc.
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NUMBER OF
DATE SHARES PURCHASERS OF QUANTA STOCK CONSIDERATION RECEIVED FOR QUANTA STOCK
---- --------- -------------------------- ---------------------------------------
10/1/99.. 139,437 Sole owner of Conti Acquisition of Conti Communications,
Communications, Inc. Inc.
10/1/99.. 271,248 Sole owner of Bonneville Acquisition of Bonneville Construction
Construction Co., Inc. Co., Inc.
10/4/99.. 49,911 Sole owner of Thorstad Brothers Acquisition of Thorstad Brothers
Tiling, Inc. Tiling, Inc.
10/6/99.. 246,406 Three owners of P.W.I. d/b/a Pac Acquisition of Pac West Construction
West Construction
10/15/99.. 207,183 Three owners of NCS Fiber Optic Acquisition of Network Communication
Services, Inc. d/b/a Network Services
Communication Services
10/15/99.. 82,873 Two owners of DB Utilities, Inc. Acquisition of DB Utilities, Inc.
10/15/99.. 11,049 Twelve owners of Kingston Acquisition of Kingston Contracting,
Contracting, Inc. Inc.
10/15/99.. 55,095 Sole Owner of Wade D. Taylor, Inc. Acquisition of Wade D. Taylor, Inc.
11/30/99.. 57,727 UtiliCorp United Inc. $1,041,591
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ITEM 6. SELECTED FINANCIAL DATA
For financial statement presentation purposes, in connection with the
combination of the founding companies concurrent with our initial public
offering, PAR Electrical Contractors, Inc. was identified as the "accounting
acquiror." Between our initial public offering in February 1998 and December 31,
1999, we acquired 52 specialty contracting businesses. Of these, 50 were
accounted for using the purchase method of accounting and two were accounted for
using the pooling-of-interests method of accounting. Quanta's consolidated
historical financial statements represent the financial position and results of
operations of PAR as restated to include the financial position and results of
operations of companies acquired in pooling transactions. The remaining
businesses we acquired are reflected in the financial statements beginning on
their respective dates of acquisition.
YEAR ENDED DECEMBER 31,
-------------------------------------------------
1995 1996 1997 1998 1999
------- ------- ------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
HISTORICAL STATEMENTS OF OPERATIONS DATA:
Revenues............................... $56,482 $78,230 $80,010 $319,259 $925,654
Costs of services (including
depreciation)....................... 47,266 62,772 62,599 257,270 711,353
------- ------- ------- -------- --------
Gross profit...................... 9,216 15,458 17,411 61,989 214,301
Selling, general and administrative
expenses............................ 6,787 10,445 12,354 27,160 80,132
Merger related charges................. -- -- -- 231 6,574(a)
Goodwill amortization.................. 50 55 56 2,513 10,902
------- ------- ------- -------- --------
Income from operations......... 2,379 4,958 5,001 32,085 116,693
Other income (expense), net............ (785) (1,127) (1,421) (4,214) (13,755)
------- ------- ------- -------- --------
Income before income tax provision..... 1,594 3,831 3,580 27,871 102,938
Provision for income taxes............. 353 1,389 1,786 11,683 48,999(b)
------- ------- ------- -------- --------
Net income..................... 1,241 2,442 1,794 16,188 53,939
Dividends on preferred stock........... -- -- -- -- 260
------- ------- ------- -------- --------
Net income attributable to common
stock............................... $ 1,241 $ 2,442 $ 1,794 $ 16,188 $ 53,679
======= ======= ======= ======== ========
Basic earnings per share............... $ 0.20 $ 0.39 $ 0.29 $ 0.60 $ 1.14
======= ======= ======= ======== ========
Diluted earnings per share............. $ 0.20 $ 0.39 $ 0.29 $ 0.59 $ 1.00
======= ======= ======= ======== ========
Diluted earnings per share before
merger charges(c)................... $ 0.20 $ 0.39 $ 0.29 $ 0.60 $ 1.13
======= ======= ======= ======== ========
- ---------------
Note (a) As a result of the termination in June 1999 of an employee stock
ownership plan associated with a company acquired in a pooling
transaction, we incurred a non-cash, non-recurring compensation charge
of $5.3 million and a non-recurring excise tax charge of $1.1 million.
In addition, we incurred $137,000 in merger charges associated with a
pooling transaction in the first quarter of 1999.
Note (b) Reflects the non-deductibility of the merger related charges. In
addition, for the twelve months ended December 31, 1999, it includes a
non-cash, non-recurring deferred tax charge of $677,000 as a result of
a change in the tax status of a company acquired in a pooling
transaction from an S corporation to a C corporation during the first
quarter of 1999.
Note (c) Excludes the effect of all non-recurring, merger related charges.
Additionally, for the twelve months ended December 31, 1999, it
excludes the non-cash, non-recurring deferred tax charge of $677,000
described in Note (b) above.
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DECEMBER 31,
-------------------------------------------------------
1995 1996 1997 1998 1999
----------- ------- ------- -------- ----------
(UNAUDITED)
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital....................... $ 1,117 $ 2,797 $ 2,381 $ 57,106 $ 164,140
Total assets.......................... 26,191 31,607 37,561 339,081 1,159,636
Long-term debt, net of current
maturities......................... 4,430 6,665 7,638 60,281 150,308
Convertible subordinated notes........ -- -- -- 49,350 49,350
Total stockholders' equity............ 8,982 9,385 11,402 171,503 756,925
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
All share amounts and per share amounts in this discussion have been
adjusted to give effect to a 3-for-2 stock split declared by our Board of
Directors on March 8, 2000 and payable on April 7, 2000 to stockholders of
record as of March 27, 2000.
We derive our revenues from one reportable segment by providing specialized
contracting services and offering comprehensive network solutions. Our customers
include telecommunications, cable television and electric power companies, as
well as commercial, industrial and governmental entities. Including all
companies we acquired prior to December 31, 1999, we had pro forma combined
revenues for the year ended December 31, 1999 of $1.15 billion, of which 35% was
attributable to telecommunications customers, 13% was attributable to cable
television operators, 30% was attributable to electric power companies, and 22%
was attributable to ancillary services, such as installing intelligent traffic
networks, cable and control systems for light rail lines, airports and highways,
and providing specialty rock trenching, directional boring and road milling for
industrial and commercial customers. We acquired 40 companies in 1999, 32 of
which have continued as separate operating and reporting subsidiaries, or
"platform" companies, while the remaining eight acquired companies were
"tuck-in" acquisitions whose operating and accounting activities were absorbed
into other operating subsidiaries.
We enter 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, most are 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
also perform services on a cost-plus or time and materials basis. We are
generally able to achieve higher margins on lump sum and unit price contracts
than on cost-plus contracts as a result of our experience in bidding and
performance. Our exposure to loss on fixed price contracts has historically been
limited by the high volume and relatively short duration of the fixed price
contracts we undertake. However, as we perform larger projects, our reported
margins may be significantly affected by actual results on these projects.
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
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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. We
recognize revenue when services are performed except when work is being
performed under fixed price or cost-plus-fee contracts. Such contracts generally
require 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. Our 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. We can predict materials costs more accurately than labor 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 and in the future we may have
similar large deductibles in our insurance program. Fluctuations in insurance
accruals related to these deductibles 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.
For those acquisitions we accounted for using the purchase method of
accounting through December 31, 1999, we recognized goodwill of $612.6 million
which equaled the excess amount we paid for such businesses over the fair value
of the tangible and intangible assets of such businesses. In addition, we
recorded goodwill of $25.6 million for the issuance of 5,017,999 shares of
Limited Vote Common Stock we issued prior to our initial public offering to the
initial stockholders and management. We amortize this $638.2 million aggregate
goodwill over its estimated useful life of 40 years as a non-cash charge to
operating income. We are unable to deduct the majority of amortized goodwill
from our income for tax purposes. We expect the pro forma effect of this
amortization expense to be approximately $16.0 million per year.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
Our results of operations can be subject to seasonal variations. During the
winter months, demand for new projects and new maintenance service arrangements
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 new maintenance service arrangements. Additionally,
our 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 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
As of December 31, 1999, we had cash and cash equivalents of $10.8 million,
working capital of $164.1 million and long-term debt of $199.7 million, net of
current maturities. Our long-term debt balance at that date included borrowings
of $138.6 million under our credit facility and $49.4 million of convertible
subordinated notes and $11.7 million of other debt. In addition, we had $5.5
million of letters of credit outstanding under the credit facility.
18
21
During the year ended December 31, 1999, operating activities provided net
cash to us of $46.3 million. Acquisitions created the largest changes in our
working capital accounts throughout the year and such accounts are not
comparable to prior periods. We used net cash in investing activities of $368.3
million, including $308.7 million used for the purchase of businesses, net of
cash acquired. Financing activities provided net cash of $329.5 million,
resulting primarily from $82.9 million from net borrowings under our credit
facility, $101.1 million of net proceeds from a January 1999 public equity
offering and $182.1 million of net proceeds from the issuance of the Series A
preferred stock, partially offset by $43.3 million in repayments of debt assumed
in connection with acquisitions.
In January 1999, we completed a public offering of common stock, which
included the issuance of 6,900,000 shares of common stock (including 900,000
shares pursuant to the underwriters' over-allotment option) at a price of $15.50
per share (before deducting underwriting discounts and commissions). We realized
proceeds from this transaction, net of the discounts and commissions and after
deducting the expenses of the offering, of approximately $101.1 million. Of this
amount, we used $57.8 million to repay outstanding indebtedness under our credit
facility and the remainder to acquire additional businesses.
In June 1999, we expanded our bank group from nine to 14 banks and
increased our $175.0 million credit facility to $350.0 million. The credit
facility is secured by a pledge of all of the capital stock of our operating
subsidiaries and the majority of our assets. We use the credit facility 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) LIBOR plus 1.00 percent to 2.00
percent, as determined by the ratio of our total funded debt to EBITDA (as
defined in the credit facility) or (b) the bank's prime rate plus up to 0.25
percent, as determined by the ratio of our total funded debt to EBITDA. We owe
commitment fees of 0.25 percent to 0.50 percent (based on total funded debt to
EBITDA) on any unused borrowing capacity under the credit facility. Our
subsidiaries guarantee repayment of all amounts due under the credit facility,
and the credit facility restricts pledges of material assets. We agreed to usual
and customary covenants for a credit facility of this nature, including a
prohibition on the payment of dividends on common stock, 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.
In September 1999, we issued 1,860,000 shares of Series A preferred stock
to UtiliCorp for an initial investment of $186,000,000, before transaction
costs. The Series A preferred stock bears a dividend rate of 0.5% per annum and
is convertible into common stock at any time at the option of UtiliCorp at
$20.00 per share, subject to customary adjustments for certain dilutive events.
We used the net proceeds from the investment to reduce outstanding borrowings
under our credit facility.
We also entered into a management services agreement with UtiliCorp for
advice and services including financing activities; corporate strategic
planning; research on the restructuring of the power industries; the
development, evaluation and marketing of our products, services and
capabilities; identification of and evaluation of potential U.S. acquisition
candidates and other merger and acquisition advisory services; and other
services that we may reasonably request. In consideration of the advice and
services rendered by UtiliCorp, we agreed to pay UtiliCorp, on a quarterly basis
in arrears, a fee of $2,325,000. The UtiliCorp management services agreement
lasts for six years, but can be extended by mutual agreement of the parties. We
have the right to terminate the management services agreement at any time if, in
our reasonable judgment, changes in the nature of our relationship with
UtiliCorp make effective provision of the services to be provided unlikely.
During 1999, we acquired 40 companies for an aggregate consideration of
15.0 million shares of common stock and $323.6 million in cash and notes. The
cash portion of such consideration was provided by borrowings under our credit
facility and proceeds from our January 1999 public offering of common stock.
In March 2000, we closed a private placement of senior secured notes with
16 lenders, primarily insurance companies, for $150 million. The senior secured
notes have maturities of five, seven or ten years with a weighted average
interest rate of 8.52% and, pursuant to an intercreditor agreement, rank pari
passu in right of repayment with our credit facility indebtedness. The senior
secured notes have financial covenants similar to the credit facility. We used
the proceeds from this private placement to reduce outstanding
19
22
borrowings under the credit facility. Accordingly, as of March 27, 2000, we had
a borrowing availability of $305.4 million under the credit facility.
We anticipate that our cash flow from operations and our 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. However, if companies we wish to
acquire are unwilling to accept our common stock as part of the consideration
for the sale of their businesses, we could be required to utilize more cash to
complete acquisitions. If sufficient funds were not available from operating
cash flow or through borrowings under the credit facility, we may be required to
seek additional financing through the public or private sale of equity or debt
securities. There can be no assurance that we could secure such financing if and
when we need it or on terms we would deem acceptable.
INFLATION
Due to relatively low levels of inflation experienced during the years
ended December 31, 1997, 1998 and 1999, inflation did not have a significant
effect on our results.
YEAR 2000
The Company did not experience any significant operational difficulties nor
are we aware of any of our suppliers, customers or service providers
experiencing any significant operational difficulties as a result of Year 2000
issues. We will continue to monitor all critical systems for any incidents of
delayed complications or disruptions and problems encountered through third
parties with whom we deal so that they may be timely addressed.
RESULTS OF OPERATIONS
For financial statement presentation purposes, in connection with the
combination of the founding companies concurrent with our initial public
offering, PAR has been identified as the accounting acquiror. As such, our
financial statements for periods prior to February 18, 1998 are the financial
statements of PAR as restated for the acquisition of the two businesses we
acquired in pooling transactions. The operations of the other businesses we
acquired 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,
-----------------------------------------------------
1997 1998 1999
--------------- ---------------- ----------------
(DOLLARS IN THOUSANDS)
Revenues........................ $80,010 100.0% $319,259 100.0% $925,654 100.0%
Cost of services (including
depreciation)................. 62,599 78.2 257,270 80.6 711,353 76.8
------- ----- -------- ----- -------- -----
Gross profit.................... 17,411 21.8 61,989 19.4 214,301 23.2
Selling, general and
administrative expenses....... 12,354 15.4 27,160 8.5 80,132 8.7
Merger related charges.......... -- -- 231 0.1 6,574 0.7
Goodwill amortization........... 56 0.1 2,513 0.8 10,902 1.2
------- ----- -------- ----- -------- -----
Income from operations.......... 5,001 6.3 32,085 10.0 116,693 12.6
Interest expense................ (1,290) (1.6) (4,855) (1.5) (15,184) (1.6)
Other income (expense), net..... (131) (.2) 641 .2 1,429 .1
------- ----- -------- ----- -------- -----
Income before income tax
provision..................... 3,580 4.5 27,871 8.7 102,938 11.1
Provision for income taxes...... 1,786 2.3 11,683 3.6 48,999 5.3
------- ----- -------- ----- -------- -----
Net income...................... $ 1,794 2.2% $ 16,188 5.1% $ 53,939 5.8%
======= ===== ======== ===== ======== =====
YEAR ENDED DECEMBER 31, 1999 COMPARED TO THE YEAR ENDED DECEMBER 31, 1998
Revenues. Revenues increased $606.4 million, or 189.9%, to $925.7 million
for the year ended December 31, 1999. This increase was primarily attributable
to revenues of $403.5 million from platform
20
23
companies acquired in 1999 which continued to exist as separate reporting
subsidiaries, as well as a full year of contributed revenues in 1999 for those
companies acquired in 1998. We are experiencing strong growth in key business
areas as a result of greater demand for bandwidth, increased outsourcing,
deregulation and industry convergence. Because the businesses we acquired in
1998 and 1999 had aggregate revenues that were much larger than our revenues at
the beginning of the 1998 period, we believe that pro forma revenue growth is a
more meaningful measure of our business performance. Operating units we owned as
of December 31, 1999 experienced aggregate internal revenue growth on a pro
forma combined basis of 21.7% in 1999 and at a compound annual rate of 24.7%
between 1996 and 1999.
Gross profit. Gross profit increased $152.3 million, or 245.7%, to $214.3
million for the year ended December 31, 1999. Gross margin increased from 19.4%
for the year ended December 31, 1998 to 23.2% for the year ended December 31,
1999. This increase in our gross margin resulted from a shift in our revenue mix
to higher margin cable television and telecommunications services. We also
experienced improved margins in our electric power network services as a result
of better asset utilization and more favorable pricing.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $53.0 million, or 195.0%, to $80.1 million for
the year ended December 31, 1999. Of this increase, $25.8 million was
attributable to the platform companies we acquired in 1999 and $5.4 million was
attributable to the implementation in 1999 of a company-wide incentive program
that paid bonuses to management at the operating units that exceeded their
performance targets and to corporate management. Selling, general and
administrative expenses also included a full year of costs in 1999 associated
with those companies acquired in 1998. The remainder of the increase was
attributable to tuck-in acquisitions and the continued establishment of
infrastructure to facilitate our growth and to integrate our acquired
businesses. As a percentage of revenues, selling, general and administrative
expenses remained relatively constant.
Merger related charges. Merger related charges for the year ended December
31, 1999 included $5.3 million of non-cash compensation charges related to the
allocation of shares of common stock to participants of an ESOP associated with
one of the companies acquired in a pooling transaction, and $1.1 million of
excise tax charges. We did not recognize significant merger related charges in
1998.
Interest expense. Interest expense increased $10.3 million, or 212.7%, to
$15.2 million for the year ended December 31, 1999, due to higher levels of debt
resulting from the acquisitions of the companies we purchased in 1999. In
addition, we borrowed funds under our credit facility for equipment purchases
and other operating activities in connection with the addition of certain of the
companies purchased in 1999. The issuance of the 6 7/8% convertible subordinated
notes in late 1998 also increased interest expense.
Provision for income taxes. The provision for income taxes was $49.0
million for the year ended December 31, 1999 with an effective tax rate of 47.6%
compared to $11.7 million for the year ended December 31, 1998 and an effective
tax rate of 41.9%. In 1999, the provision reflects the non-deductibility of the
merger related charges and a non-cash non-recurring tax charge of $677,000 as a
result of a change in the tax status of a company acquired in a
pooling-of-interest transaction from an S corporation to a C corporation.
Net income. Net income increased $37.8 million, or 233%, to $53.9 million
for the year ended December 31, 1999 compared to $16.2 million for the year
ended December 31, 1998.
YEAR ENDED DECEMBER 31, 1998 COMPARED TO THE YEAR ENDED DECEMBER 31, 1997
Revenues. Revenues increased $239.2 million, or 299.0%, to $319.3 million
for the year ended December 31, 1998. This increase in revenues was primarily
attributable to revenues from companies we acquired in 1998 of $225.0 million.
Gross profit. Gross profit increased $44.6 million, or 256.0%, to $62.0
million for the year ended December 31, 1998. Gross margin decreased from 21.8%
for the year ended December 31, 1997 to 19.4% for the year ended December 31,
1998. This decrease in gross margin was primarily due to a larger amount of high
margin storm and emergency work performed by PAR in 1997 compared to 1998, and
the acquisition of certain companies which earned lower margins than those
experienced in 1997 by PAR and one of the companies acquired in a pooling
transaction.
21
24
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $14.8 million, or 119.8%, to $27.2 million for
the year ended December 31, 1998, due to acquisitions we completed in 1998, and
the establishment of a corporate office and administrative infrastructure during
1998. As a percentage of revenues, selling, general and administrative expenses
decreased due to excess compensation paid to the owners of PAR in 1997 compared
to agreed upon salary levels commencing with our initial public offering and due
to one of the companies acquired in a pooling transaction having a higher sales
commission structure than the other companies.
Interest expense. Interest expense increased $3.6 million, or 276.4%, to
$4.9 million for the year ended December 31, 1998 due to higher levels of debt
resulting from cash paid and debt assumed in connection with the acquisition of
certain of the companies acquired in 1998. In addition, we borrowed funds under
our credit facility for equipment purchases and other operating activities in
connection with the addition of certain of the companies acquired in 1998. Also,
interest expense increased due to the addition of the convertible subordinated
notes, partially offset by lower overall effective borrowing rates in 1998
compared to 1997.
Provision for income taxes. The provision for income taxes was $11.7
million for the year ended December 31, 1998 with an effective tax rate of 41.9%
compared to $1.8 million for the year ended December 31, 1997 and an effective
tax rate of 49.9%. In 1997, the provision does not reflect a tax benefit
associated with the operating loss of one of the businesses acquired in a
pooling transaction which was converted from an S-corporation to a C-corporation
on the acquisition date.
Net income. Net income increased $14.4 million to $16.2 million for the
year ended December 31, 1998 compared to $1.8 million for the year ended
December 31, 1997.
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
our short-term and long-term debt with both fixed and floating interest rates.
Our debt with fixed interest rates primarily consists of our 6 7/8% convertible
subordinated notes issued in September 1998. Our debt with variable interest
rates is primarily our credit facility. The following table presents principal
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, 1999:
2000 2001 2002 2003 2004 THEREAFTER TOTAL
------ ------ ------ ------ -------- ---------- --------
Liabilities -- Long-Term Debt
Variable Rate................. $ -- $ -- $ -- $ -- $138,630 $ -- $138,630
Average Interest Rate......... 7.6% 7.6% 7.6% 7.6% 7.6% 7.6% 7.6%
Fixed Rate.................... $ -- $ -- $ -- $ -- $ -- $49,350 $ 49,350
Average Interest Rate......... 6.875% 6.875% 6.875% 6.875% 6.875% 6.875% 6.875%
FAIR VALUE
----------
Liabilities -- Long-Term Debt:
Variable Rate............................................. $138,630
Fixed Rate................................................ $ 49,350
22
25
For comparative purposes, the following table presents principal amounts
(stated in thousands) and related average interest rates by year of maturity for
our 1998 debt obligations and their indicated fair market value at December 31,
1998:
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%
FAIR VALUE
----------
Liabilities -- Long-Term Debt:
Variable Rate............................................. $ 56,000
Fixed Rate................................................ $ 49,350
Subsequent to December 31, 1999, we issued $150 million of senior notes.
The senior notes have maturities of five, seven and ten years with a weighted
average interest rate of 8.52%. The proceeds were used to pay down our credit
facility.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
----
Quanta Services, Inc. and Subsidiaries
Report of Independent Public Accountants.................. 25
Consolidated Balance Sheets............................... 26
Consolidated Statements of Operations..................... 27
Consolidated Statements of Cash Flows..................... 28
Consolidated Statements of Stockholders' Equity........... 29
Notes to Consolidated Financial Statements................ 30
24
27
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, 1998 and 1999,
and the related consolidated statements of operations, cash flows and
stockholders' equity for each of the three years in the period ended December
31, 1999. 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 auditing standards generally accepted
in the United States. 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, 1998 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999, in conformity with accounting principles generally accepted
in the United States.
ARTHUR ANDERSEN LLP
Houston, Texas
February 24, 2000 (except for the matter
discussed in Note 17b., as to which the
date is March 27, 2000)
25
28
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
DECEMBER 31,
---------------------
1998 1999
-------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 3,246 $ 10,775
Accounts receivable, net of allowance of $1,616 and
$5,947................................................. 76,040 253,881
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 22,620 45,963
Inventories............................................... 2,534 8,741
Prepaid expenses and other current assets................. 4,352 15,703
-------- ----------
Total current assets.............................. 108,792 335,063
PROPERTY AND EQUIPMENT, net................................. 74,212 191,854
OTHER ASSETS, net........................................... 5,190 7,962
GOODWILL, net............................................... 150,887 624,757
-------- ----------
Total assets...................................... $339,081 $1,159,636
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 4,357 $ 6,664
Accounts payable and accrued expenses..................... 40,298 141,025
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 7,031 23,234
-------- ----------
Total current liabilities......................... 51,686 170,923
LONG-TERM DEBT, net of current maturities................... 60,281 150,308
CONVERTIBLE SUBORDINATED NOTES.............................. 49,350 49,350
DEFERRED INCOME TAXES AND OTHER NON-CURRENT LIABILITIES..... 6,261 32,130
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.00001 par value, 10,000,000 shares
authorized:
Series A Convertible Preferred Stock, -- and 1,860,000
shares issued and outstanding......................... -- --
Common Stock, $.00001 par value, 36,654,667 and
100,000,000 shares authorized, 18,557,949 and,
51,035,283 shares issued and outstanding,
respectively........................................... -- --
Limited Vote Common Stock, $.00001 par value, 3,345,333
shares authorized, 3,345,333, and 3,746,020 shares
issued and outstanding, respectively................... -- --
Unearned ESOP shares...................................... (1,831) --
Additional paid-in capital................................ 145,194 675,106
Retained earnings......................................... 28,140 81,819
-------- ----------
Total stockholders' equity........................ 171,503 756,925
-------- ----------
Total liabilities and stockholders' equity........ $339,081 $1,159,636
======== ==========
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 OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
YEAR ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
REVENUES.................................................... $80,010 $319,259 $925,654
COST OF SERVICES (including depreciation)................... 62,599 257,270 711,353
------- -------- --------
Gross profit.............................................. 17,411 61,989 214,301
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 12,354 27,160 80,132
MERGER RELATED CHARGES...................................... -- 231 6,574(a)
GOODWILL AMORTIZATION....................................... 56 2,513 10,902
------- -------- --------
Income from operations.................................... 5,001 32,085 116,693
OTHER INCOME (EXPENSE):
Interest expense.......................................... (1,290) (4,855) (15,184)
Other, net................................................ (131) 641 1,429
------- -------- --------
INCOME BEFORE INCOME TAX PROVISION.......................... 3,580 27,871 102,938
PROVISION FOR INCOME TAXES.................................. 1,786 11,683 48,999(b)
------- -------- --------
NET INCOME.................................................. 1,794 16,188 53,939
DIVIDENDS ON PREFERRED STOCK................................ -- -- 260
------- -------- --------
NET INCOME ATTRIBUTABLE TO COMMON STOCK..................... $ 1,794 $ 16,188 $ 53,679
======= ======== ========
BASIC EARNINGS PER SHARE(c)................................. $ 0.29 $ 0.60 $ 1.14
======= ======== ========
DILUTED EARNINGS PER SHARE(c)............................... $ 0.29 $ 0.59 $ 1.00
======= ======== ========
DILUTED EARNINGS PER SHARE BEFORE MERGER
CHARGES(c)(d)............................................. $ 0.29 $ 0.60 $ 1.13
======= ======== ========
SHARES USED IN COMPUTING EARNINGS PER SHARE:
Basic(c).................................................. 6,244 26,785 47,177
======= ======== ========
Diluted(c)................................................ 6,244 28,315 56,146
======= ======== ========
- ---------------
Note (a) As a result of the termination in June 1999 of an employee stock
ownership plan associated with a company acquired in a pooling
transaction the Company incurred a non-cash, non-recurring compensation
charge of $5.3 million and a non-recurring excise tax charge of $1.1
million. In addition, the Company incurred $137,000 in merger charges
associated with a pooling transaction in the first quarter of 1999.
Note (b) Reflects the non-deductibility of the merger related charges. In
addition, for the twelve months ended December 31, 1999, it includes a
non-cash, non-recurring deferred tax charge of $677,000 as a result of
a change in the tax status from an S corporation to a C corporation of
a company acquired in a pooling transaction during the first quarter of
1999.
Note (c) Share and earnings per share data have been restated to give effect to
a 3-for-2 stock split as discussed in Note 17 to these consolidated
financial statements.
Note (d) Excludes the effect of all non-recurring, merger related charges.
Additionally, for the twelve months ended December 31, 1999, it
excludes the non-cash, non-recurring deferred tax charge of $677,000
described in Note (b) above.
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 CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
1997 1998 1999
------- --------- ---------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to common stock................... $ 1,794 $ 16,188 $ 53,679
Adjustments to reconcile net income attributable to common
stock to net cash provided by operating activities --
Depreciation and amortization.......................... 3,361 10,666 35,163
Loss (gain) on sale of property and equipment.......... 49 (91) (252)
Non-cash merger related compensation charge for
issuance of common stock to ESOP..................... 254 -- 5,319
Deferred income tax provision (benefit)................ 5 (370) 5,620
Preferred stock dividend............................... -- -- 260
Changes in operating assets and liabilities, net of
non-cash transactions --
(Increase) decrease in --
Accounts receivable, net............................. (1,010) (9,649) (74,041)
Costs and estimated earnings in excess of billings on
uncompleted contracts............................. (947) (2,286) (11,172)
Inventories.......................................... (286) (904) (1,740)
Prepaid expenses and other current assets............ 14 (2,784) (1,959)
Other, net........................................... (56) (93) 2,446
Increase (decrease) in --
Accounts payable and accrued expenses................ 2,621 (4,672) 29,358
Billings in excess of costs and estimated earnings on
uncompleted contracts............................. (478) 2,185 3,645
------- --------- ---------
Net cash provided by operating activities......... 5,321 8,190 46,326
------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.............. 268 1,394 1,533
Additions of property and equipment and other assets...... (6,456) (22,667) (61,124)
Cash paid for acquisitions, net of cash acquired.......... -- (89,176) (308,671)
Proceeds from sale of investments......................... -- 1,342 --
------- --------- ---------
Net cash used in investing activities............. (6,188) (109,107) (368,262)
------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings under bank lines of credit................. 495 52,522 82,946
Proceeds from other long-term debt........................ 6,867 3,722 4,868
Payments on other long-term debt.......................... (6,487) (36,111) (43,317)
Proceeds from Convertible Subordinated Notes.............. -- 49,350 --
Debt issuance costs....................................... -- (3,066) (1,659)
Redemptions of common stock............................... (31) -- --
Issuances of stock, net of offering costs................. -- 44,914 284,280
Distributions to previous owners of accounting acquiror... -- (8,370) --
Exercise of stock options................................. -- 713 2,347
------- --------- ---------
Net cash provided by financing activities......... 844 103,674 329,465
------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........ (23) 2,757 7,529
CASH AND CASH EQUIVALENTS, beginning of year................ 512 489 3,246
------- --------- ---------
CASH AND CASH EQUIVALENTS, end of year...................... $ 489 $ 3,246 $ 10,775
======= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the year for --
Interest............................................... $ 750 $ 4,690 $ 13,230
Income taxes, net of refunds........................... 1,518 10,800 33,644
The accompanying notes are an integral part of these consolidated financial
statements.
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31
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
LIMITED VOTE
PREFERRED STOCK COMMON STOCK COMMON STOCK UNEARNED ADDITIONAL
-------------------- --------------------- -------------------- ESOP PAID-IN
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT SHARES CAPITAL
--------- -------- ---------- -------- --------- -------- -------- ----------
Balance, December 31, 1996.......... -- $ -- 4,162,572 $ -- -- $ -- $(2,085) $ 1,312
Distribution of stock through
ESOP............................ -- -- -- -- -- -- 254 --
Other............................. -- -- -- -- -- -- -- (31)
Net income........................ -- -- -- -- -- -- -- --
--------- -------- ---------- -------- --------- -------- ------- --------
Balance, December 31, 1997.......... -- -- 4,162,572 -- -- -- (1,831) 1,281
Issuances of stock................ -- -- -- -- 3,345,333 -- -- --
Stock options exercised........... -- -- 60,000 -- -- -- -- 1,125
Initial public offering, net of
offering costs.................. -- -- 5,750,000 -- -- -- -- 44,914
Acquisition of Founding
Companies....................... -- -- 4,527,000 -- -- -- -- 53,890
Acquisition of Purchased
Companies....................... -- -- 4,058,377 -- -- -- -- 43,984
Net income........................ -- -- -- -- -- -- -- --
--------- -------- ---------- -------- --------- -------- ------- --------
Balance, December 31, 1998.......... -- -- 18,557,949 -- 3,345,333 -- (1,831) 145,194
Issuance of Preferred Stock....... 1,860,000 -- -- -- -- -- -- 182,119
Sales of common stock under
preemptive rights agreement..... -- -- 38,485 -- -- -- -- 1,042
Stock options exercised........... -- -- 204,888 -- -- -- -- 2,347
Income tax benefit from stock
options exercised............... -- -- -- -- -- -- -- 1,446
Conversion of Limited Vote Common
Stock to common stock........... -- -- 847,986 -- (847,986) -- -- --
Termination of ESOP............... -- -- -- -- -- -- 1,831 5,319
Follow-on offering, net of
offering
costs........................... -- -- 4,600,000 -- -- -- -- 101,119
Acquisition of Purchased
Companies....................... -- -- 9,774,214 -- -- -- -- 236,520
Three-for-two common stock
split........................... -- -- 17,011,761 -- 1,248,673 -- -- --
Net income........................ -- -- -- -- -- -- -- --
--------- -------- ---------- -------- --------- -------- ------- --------
Balance, December 31, 1999.......... 1,860,000 $ -- 51,035,283 $ -- 3,746,020 $ -- $ -- $675,106
========= ======== ========== ======== ========= ======== ======= ========
RETAINED TOTAL
EARNINGS EQUITY
-------- --------
Balance, December 31, 1996.......... $10,158 $ 9,385
Distribution of stock through
ESOP............................ -- 254
Other............................. -- (31)
Net income........................ 1,794 1,794
------- --------
Balance, December 31, 1997.......... 11,952 11,402
Issuances of stock................ -- --
Stock options exercised........... -- 1,125
Initial public offering, net of
offering costs.................. -- 44,914
Acquisition of Founding
Companies....................... -- 53,890
Acquisition of Purchased
Companies....................... -- 43,984
Net income........................ 16,188 16,188
------- --------
Balance, December 31, 1998.......... 28,140 171,503
Issuance of Preferred Stock....... -- 182,119
Sales of common stock under
preemptive rights agreement..... -- 1,042
Stock options exercised........... -- 2,347
Income tax benefit from stock
options exercised............... -- 1,446
Conversion of Limited Vote Common
Stock to common stock........... -- --
Termination of ESOP............... -- 7,150
Follow-on offering, net of
offering
costs........................... -- 101,119
Acquisition of Purchased
Companies....................... -- 236,520
Three-for-two common stock
split........................... -- --
Net income........................ 53,679 53,679
------- --------
Balance, December 31, 1999.......... $81,819 $756,925
======= ========
The accompanying notes are an integral part of these consolidated financial
statements.
29
32
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND ORGANIZATION:
Quanta Services, Inc. is a leading provider of specialized contracting
services, offering end-to-end network solutions to the telecommunications, cable
television and electric power industries.
In February 1998, Quanta completed its initial public offering (the "IPO"),
concurrent with which Quanta acquired, in separate transactions, four entities
(the "Founding Companies"). Quanta acquired 12 additional businesses in 1998 and
40 additional businesses in 1999. Of these additional acquired businesses, two
were accounted for as poolings-of-interests and are referred to herein as the
"Pooled Companies." The remaining acquired businesses were accounted for as
purchases and are referred to herein as the "Purchased Companies." Quanta
intends to continue to acquire through merger or purchase similar companies to
expand its national and regional operations.
The financial statements of Quanta for periods prior to February 18, 1998
(the effective closing date of the acquisitions of the Founding Companies), are
the financial statements of PAR Electrical Contractors, Inc. ("PAR" or the
"Accounting Acquiror") as restated for the acquisitions of the Pooled Companies.
The operations of the other Founding Companies and Quanta, acquired by the
Accounting Acquiror, have been included in the Company's historical financial
statements beginning February 19, 1998, and the Purchased Companies beginning on
their respective dates of acquisition. References herein to the "Company"
include Quanta and its subsidiaries.
In the course of its operations, the Company is subject to certain risk
factors, including but not limited to: rapid technological and structural
changes in our industries, risks related to internal growth and operating
strategies, risks related to acquisition financing, significant fluctuations in
quarterly results, risks associated with contracts, management of growth,
dependence on key personnel, availability of qualified employees, unionized
workforce, competition, recoverability of goodwill, potential exposure to
environmental liabilities and anti-takeover measures.
All share amounts and per share amounts in these notes to consolidated
financial statements have been adjusted to give effect to a 3-for-2 stock split
declared by the Board of Directors on March 8, 2000 and payable on April 7, 2000
to stockholders of record as of March 27, 2000.
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 $692,000, $1,218,000 and $170,000 during the
years ended December 31, 1997, 1998 and 1999, respectively.
In addition, pursuant to its acquisition program, the Company acquired
assets through purchase acquisitions with an estimated fair market value, net of
cash acquired, of approximately $116.0 million and liabilities of approximately
$71.6 million resulting in the recording of approximately $127.7 million in
goodwill in 1998. In 1999, the Company acquired assets through purchase
acquisitions with an estimated fair market
30
33
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
value, net of cash acquired, of approximately $236.0 million and liabilities of
approximately $160.2 million resulting in the recording of approximately $484.9
million in goodwill.
Accounts Receivable and Provision for Doubtful Accounts
The Company provides an allowance for doubtful accounts when collection is
considered doubtful.
Inventories
Inventories consist of parts and supplies held for use in the ordinary
course of business and are valued by the Company at the lower of cost or market
using the first-in, first-out (FIFO) method.
Property and Equipment
Property and equipment are stated at cost, and depreciation is computed
using the straight-line method, net of estimated salvage values, 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, $3,305,000, $8,153,000 and $24,261,000 for the
years ended December 31, 1997, 1998 and 1999, 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.
Management reviews long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may not be
realizable. If an evaluation is required, the estimated future undiscounted cash
flows associated with the asset are compared to the asset's carrying amount to
determine if an impairment of such asset is necessary. The effect of any
impairment would be to expense the difference between the fair value of such
asset and its carrying value.
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, 1998 and 1999, accumulated amortization was approximately $178,000
and $857,000, 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 life of goodwill may warrant revision or that the remaining balance may
not be recoverable. If an evaluation is required, the estimated future
undiscounted cash flows associated with the asset will be compared to the
asset's carrying amount to determine if such an impairment exists.
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
31
34
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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, 1998 and 1999 were approximately
$11,704,000 and $30,453,000, respectively, and are included in accounts
receivable.
The current asset "Cost and estimated earnings in excess of billings on
uncompleted contracts" represents revenues recognized in excess of amounts
billed. The current liability "Billings in excess of costs and estimated
earnings on uncompleted contracts" represents billings in excess of revenues
recognized.
Warranty Costs
For certain contracts, the Company warrants labor for new installations and
construction and servicing of existing infrastructure. An accrual for warranty
costs is recorded based upon the historical level of warranty claims and
management's estimate of future costs.
Income Taxes
The Company follows the liability method of accounting for income taxes in
accordance with Statement of Financial Accounting Standards ("SFAS") No. 109,
"Accounting for Income Taxes." Under this method, deferred assets and
liabilities are recorded for future tax consequences of temporary differences
between the financial reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that will be in effect when the
underlying assets or liabilities are recovered or settled.
Certain of the Purchased Companies were S corporations for income tax
purposes and, accordingly, any income tax liabilities for the periods prior to
the acquisitions are the responsibility of the respective stockholders. In
addition, one of the Pooled Companies was an S corporation prior to its merger
with Quanta and, therefore, income taxes have not been provided for in the
historical financial statements. Effective with the acquisitions, the S
corporations converted to C corporations. Accordingly, at the date of
acquisition an estimated deferred tax liability has been recorded to provide for
the estimated future income tax liability resulting from the difference between
the book and tax bases of the net assets of these former S corporations. For
purposes of these consolidated financial statements, federal and state income
taxes have been provided for the post-acquisition periods.
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.
32
35
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States 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 13 for
discussion of certain estimates reflected in the Company's financial statements.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (the "FASB") issued
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities".
SFAS No. 133 requires a company to recognize all derivative instruments
(including certain derivative instruments embedded in other contracts) as assets
or liabilities in its balance sheet and measure them at fair value. The
statement requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. In June
1999, SFAS No. 137, "Deferral of the Effective Date of FASB Statement No. 133,"
was issued and defers the adoption date to the beginning of an entity's fiscal
year-end beginning after June 15, 2000. Management does not believe that the
adoption of this statement will have a material impact on the financial position
or results of operations of the Company.
3. PER SHARE INFORMATION:
For financial statement purposes, PAR was identified as the accounting
acquiror in the transaction with Quanta and the IPO. As such, the shares of
Quanta common stock beneficially owned by the former stockholders of PAR and the
shares issued in connection with the acquisition of the Pooled Companies have
been used in the calculation of basic and diluted earnings per share of the
Company for all periods prior to the IPO.
Earnings per share amounts are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. The weighted average number of shares used to compute basic and diluted
earnings per share for 1997, 1998 and 1999 is illustrated below (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------- -------
NET INCOME:
Net income for basic earnings per share -- income
attributable to common stockholders.................... $1,794 $16,188 $53,679
Effect of Convertible Subordinated Notes under the "if
converted" method -- interest expense addback, net of
taxes.................................................. -- 506 2,198
Dividends on Preferred Stock.............................. -- -- 260
------ ------- -------
Net income for diluted earnings per share................. $1,794 $16,694 $56,137
====== ======= =======
WEIGHTED AVERAGE SHARES:
Weighted average shares outstanding for basic earnings per
share.................................................. 6,244 26,785 47,177
Effect of dilutive stock options.......................... -- 232 986
Effect of Convertible Subordinated Notes under the "if
converted" method -- weighted convertible shares
issuable............................................... -- 1,298 5,384
Effect of conversion of Preferred Stock into common
stock -- weighted convertible shares issuable.......... -- -- 2,599
------ ------- -------
Weighted average shares outstanding for diluted earnings
per share.............................................. 6,244 28,315 56,146
====== ======= =======
33
36
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. BUSINESS COMBINATIONS:
Purchases
During 1998 and 1999, in addition to the Founding Companies, the Company
completed 50 acquisitions accounted for as purchases. The aggregate
consideration paid in these transactions consisted of $408.2 million in cash and
notes and 20.7 million shares of common stock. The accompanying balance sheet as
of December 31, 1999 includes preliminary allocations of the respective purchase
prices and is subject to final adjustment. The following summarized unaudited
pro forma financial information adjusts the historical financial information by
assuming the acquisition of the Founding Companies, the Purchased Companies, the
issuance of the Convertible Subordinated Notes (as defined in Note 7) and the
issuance of the Preferred Stock (as defined in Note 9) occurred on January 1,
1998 (dollars in thousands):
YEAR ENDED DECEMBER 31,
-----------------------
1998 1999
--------- -----------
(UNAUDITED)
Revenues.................................................... $943,118 $1,148,145
Net income attributable to common stock..................... $ 55,000 $ 71,997
Basic earnings per share.................................... $ 1.01 $ 1.31
Diluted earnings per share.................................. $ 0.84 $ 1.07
Diluted earnings per share before merger charges............ $ 0.84 $ 1.17
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) the incremental interest
expense and amortization of deferred financing costs incurred as a result of the
issuance of the Convertible Subordinated Notes, net of the repayment of
outstanding indebtedness of the Company; (e) the reduction in interest expense
related to the repayment of outstanding indebtedness from proceeds from the sale
of Series A Preferred Stock; (f) adjustment to the federal and state income tax
provisions based on the combined operations; and (g) the 0.5 percent dividend
requirement on the Series A Preferred Stock. Diluted earnings per share before
merger charges excludes the effects of all non-recurring merger charges and the
non-cash non-recurring deferred tax charge (as discussed in Note 8). 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 January 1, 1998 and are not necessarily
representative of the Company's financial position or results of operations for
any future period.
Poolings
During the second quarter of 1998, Quanta completed the acquisition of all
the common stock of NorAm Telecommunications, Inc. ("NorAm"), in a business
combination accounted for as a "pooling-of-interests" transaction in accordance
with the requirements of the Accounting Principles Board (APB) No. 16. NorAm,
headquartered in Oregon, provides outside and inside network and technical
support for the telecommunications industry. Quanta issued 1,427,917 shares of
common stock in exchange for all the common stock of NorAm.
In the first quarter of 1999, Quanta completed the acquisition of all the
common stock of Fiber Technology, Inc. ("Fiber Tech") in a business combination
accounted for as a "pooling-of-interests" transaction. Fiber Tech, headquartered
in Houston, Texas, provides specialty contracting services to the cable
34
37
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
television and telecommunications industries. Quanta issued 315,940 shares of
common stock in exchange for all the common stock of Fiber Tech.
There were no transactions between Quanta and the Pooled Companies during
the periods prior to the business combination. As reported in the Company's
Annual Report on Form 10-K for the year ended December 31, 1998 the financial
statements of the Company have been previously restated to reflect the impact of
the NorAm pooling.
The following table summarizes the audited restated revenues, net income
and per share data of the Company after giving effect to the Fiber Tech pooling
transaction (in thousands, except per share data).
YEARS ENDED DECEMBER 31,
--------------------------------------
1997 1998
----------------- ------------------
NET NET
REVENUES INCOME REVENUES INCOME
-------- ------ -------- -------
Revenues and net income -- As previously
reported in 1998 Form 10-K................... $76,204 $2,527 $309,209 $15,175
Fiber Tech................................... 3,806 (733) 10,050 1,013
------- ------ -------- -------
As restated............................... $80,010 $1,794 $319,259 $16,188
======= ====== ======== =======
Basic earnings per share -- As previously
reported in 1998 Form 10-K................... $ 0.43 $ 0.57
Fiber Tech................................... (0.14) 0.03
------ -------
As restated............................... $ 0.29 $ 0.60
====== =======
Diluted earnings per share -- As previously
reported in 1998 Form 10-K................... $ 0.43 $ 0.56
Fiber Tech................................... (0.14) 0.03
------ -------
As restated............................... $ 0.29 $ 0.59
====== =======
5. PROPERTY AND EQUIPMENT:
Property and equipment consists of the following (in thousands):
ESTIMATED
USEFUL DECEMBER 31,
LIVES -------------------
IN YEARS 1998 1999
--------- -------- --------
Land.................................................. -- $ 1,947 2,218
Buildings and leasehold improvements.................. 5-31 4,232 6,093
Operating equipment and vehicles...................... 5-25 90,831 222,543
Office equipment, furniture and fixtures.............. 3-7 2,845 7,260
-------- --------
99,855 238,114
Less -- Accumulated depreciation and amortization..... (25,643) (46,260)
-------- --------
Property and equipment, net......................... $ 74,212 $191,854
======== ========
35
38
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,
---------------
1998 1999
------ ------
Balance at beginning of period.............................. $ 400 $1,616
Beginning balance of Purchased Companies.................. 984 2,824
Charged to expense........................................ 292 1,749
Deductions for uncollectible receivables written off and
recoveries............................................. (60) (242)
------ ------
Balance at end of period.................................... $1,616 $5,947
====== ======
Accounts payable and accrued expenses consist of the following (in
thousands):
DECEMBER 31,
------------------
1998 1999
------- --------
Accounts payable, trade..................................... $18,805 $ 72,187
Accrued compensation and other related expenses............. 9,209 27,370
Federal and state taxes payable............................. 4,074 16,465
Other accrued expenses...................................... 8,210 25,003
------- --------
$40,298 $141,025
======= ========
Contracts in progress are as follows (in thousands):
DECEMBER 31,
--------------------
1998 1999
--------- --------
Costs incurred on contracts in progress..................... $ 231,526 $492,150
Estimated earnings, net of estimated losses................. 44,405 120,969
--------- --------
275,931 613,119
Less -- Billings to date.................................... (260,342) (590,390)
--------- --------
$ 15,589 $ 22,729
========= ========
Costs and estimated earnings in excess of billings on
uncompleted contracts..................................... $ 22,620 $ 45,963
Less -- Billings in excess of costs and estimated earnings
on uncompleted contracts.................................. (7,031) (23,234)
--------- --------
$ 15,589 $ 22,729
========= ========
36
39
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,
------------------
1998 1999
------- --------
Credit Facility............................................. $56,000 $138,630
Notes payable to various financial institutions, interest
ranging from 0.9% to 16.72%, secured by certain equipment,
receivables and other assets.............................. 2,819 13,513
Notes payable to certain previous owners of the Purchased
Companies bearing interest at 7.0% due 2001............... 2,145 948
Capital lease obligations................................... 3,674 3,881
------- --------
64,638 156,972
Less -- Current maturities.................................. (4,357) (6,664)
------- --------
Total long-term debt.............................. $60,281 $150,308
======= ========
Credit Facility
In June 1999, the Company expanded its bank group from nine to 14 banks and
increased its $175.0 million Credit Facility to $350.0 million. The Credit
Facility is secured by a pledge of all of the capital stock of the Company's
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 (the 30 day LIBOR
rate was 6.49 percent at December 31, 1999) plus 1.00 percent to 2.00 percent,
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 8.5
percent at December 31, 1999) plus up to 0.25 percent, as determined by the
ratio of the Company's total funded debt to EBITDA. Commitment fees of 0.25
percent to 0.50 percent (based on certain financial ratios) are due on any
unused borrowing capacity under the Credit Facility. The Credit Facility matures
June 14, 2004. The Company's subsidiaries 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 on
common stock, certain financial ratio covenants and the consent of the lenders
for acquisitions exceeding a certain level of cash consideration. As of December
31, 1999, $138.6 million was borrowed under the Credit Facility, and the Company
had $5.5 million of letters of credit outstanding, resulting in a borrowing
availability of $205.9 million under the Credit Facility.
The maturities of long-term debt (excluding capital leases) as of December
31, 1999, are as follows (in thousands):
Year Ending December 31 --
2000...................................................... $ 4,534
2001...................................................... 4,078
2002...................................................... 3,080
2003...................................................... 1,241
2004...................................................... 138,781
Thereafter........................................... 1,377
--------
$153,091
========
37
40
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company leases certain buildings and equipment under non-cancelable
lease agreements. The following schedule shows the future minimum lease payments
under these leases as of December 31, 1999 (in thousands):
CAPITAL OPERATING
LEASES LEASES
------- ---------
Year Ending December 31 --
2000...................................................... $ 2,266 $ 9,569
2001...................................................... 1,097 7,459
2002...................................................... 565 5,254
2003...................................................... 166 3,175
2004...................................................... -- 1,955
Thereafter........................................... -- 2,526
------- -------
Total minimum lease payments...................... 4,094 $29,938
=======
Less -- Amounts representing interest................ (213)
-------
Present value of minimum lease payments........... 3,881
Less -- Current portion.............................. (2,130)
-------
Long-term obligation.............................. $ 1,751
=======
Rent expense related to operating leases was approximately $519,000,
$1,816,000 and $11,706,000 for the years ended December 31, 1997, 1998 and 1999,
respectively. Assets under capital leases are included as part of property and
equipment.
Certain of the Company's subsidiaries have entered into 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 year
ended December 31, 1997. Related party lease expense for the years ended
December 31, 1998 and 1999 was approximately $315,000 and $1,215,000. 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 is convertible into
5,383,636 shares of Quanta common stock at a price of $9.17 per share.
Additionally, Quanta and Enron Capital entered into a strategic alliance under
which Enron Capital and Quanta will exchange information regarding the design,
construction and maintenance of electric power transmission and distribution
systems and fiber optic communications systems. The Convertible Subordinated
Notes require quarterly interest payments and equal semi-annual principal
payments beginning in 2006 until the notes are paid in full in 2010. The Company
has the option to redeem the notes at a premium beginning in 2002.
38
41
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
8. INCOME TAXES:
The components of the provision for income taxes are as follows (in
thousands):
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------- -------
Federal --
Current................................................ $1,475 $10,214 $36,044
Deferred............................................... 10 (262) 5,071
State --
Current................................................ 306 1,839 7,335
Deferred............................................... (5) (108) 549
------ ------- -------
$1,786 $11,683 $48,999
====== ======= =======
Actual income tax provision differs from the income tax provision computed
by applying the U.S. federal statutory corporate rate to the income before
provision for income taxes as follows (in thousands):
YEAR ENDED DECEMBER 31,
--------------------------
1997 1998 1999
------ ------- -------
Provision at the statutory rate.......................... $1,504 $ 9,400 $36,028
Increase resulting from --
State income tax, net of federal benefit............... 187 1,125 5,124
Goodwill............................................... -- 899 3,381
Nondeductible expenses................................. 95 259 3,789
Deferred tax charge -- pooling......................... -- -- 677
------ ------- -------
$1,786 $11,683 $48,999
====== ======= =======
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,
------------------
1998 1999
------- --------
Deferred income tax liabilities --
Property and equipment.................................... $(5,461) $(28,945)
Book/tax accounting method difference..................... (684) (1,818)
Other..................................................... (132) (348)
------- --------
Total deferred income tax liabilities............. (6,277) (31,111)
------- --------
Deferred income tax assets --
Allowance for doubtful accounts and other reserves........ 1,222 4,105
Other accruals not currently deductible................... 1,317 6,748
Inventory................................................. 176 279
Goodwill.................................................. 47 --
------- --------
Total deferred income tax assets.................. 2,762 11,132
------- --------
Total net deferred income tax liabilities......... $(3,515) $(19,979)
======= ========
39
42
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The net deferred tax assets and liabilities are comprised of the following
(in thousands):
DECEMBER 31,
------------------
1998 1999
------- --------
Deferred tax assets --
Current................................................... $ 2,714 $ 11,132
Long-term................................................. 48 --
------- --------
Total............................................. 2,762 11,132
------- --------
Deferred tax liabilities --
Current................................................... (816) (2,166)
Long-term................................................. (5,461) (28,945)
------- --------
Total............................................. (6,277) (31,111)
------- --------
Net deferred income tax liabilities............... $(3,515) $(19,979)
======= ========
Net current deferred tax assets are included in prepaid expenses and other
current assets.
In the first quarter of 1999, a non-cash, non-recurring tax charge of
$677,000 was recorded as a result of a change in the tax status from an S
corporation to a C corporation of a company acquired in a pooling-of-interests
transaction.
9. STOCKHOLDERS' EQUITY:
Series A Convertible Preferred Stock
In September 1999, the Company entered into a securities purchase agreement
with UtiliCorp United Inc. ("UtiliCorp") pursuant to which the Company issued
1,860,000 shares of Series A Convertible Preferred Stock (the "Series A
Preferred Stock"), $.00001 par value per share, for an initial investment of
$186,000,000, before transaction costs. The holders of the Series A Preferred
Stock are entitled to receive dividends in cash at a rate of 0.5% per annum on
an amount equal to $100.00 per share, plus all unpaid dividends accrued. In
addition to the preferred dividend, the holders are entitled to participate in
any cash or non-cash dividends or distributions declared and paid on the shares
of common stock, as if each share of Series A Preferred Stock had been converted
into common stock at the applicable conversion price immediately prior to the
record date for payment of such dividends or distributions. However, holders of
Series A Preferred Stock will not participate in non-cash dividends or
distributions if such dividends or distributions cause an adjustment in the
price at which Series A Preferred Stock converts into common stock. At any time
after the sixth anniversary of the issuance of the Series A Preferred Stock, if
the closing price per share of the Company's common stock is greater than
$20.00, then the Company may terminate the preferred dividend. At any time after
the sixth anniversary of the issuance of the Series A Preferred Stock, if the
closing price per share of the Company's common stock is equal to or less than
$20.00, then the preferred dividend may, at the option of UtiliCorp, be adjusted
to the then "market coupon rate", which shall equal the Company's after-tax cost
of obtaining financing, excluding common stock, to replace UtiliCorp's
investment in the Company.
UtiliCorp is entitled to that number of votes equal to the number of shares
of common stock into which the outstanding shares of Series A Preferred Stock
are then convertible. Subject to certain limitations, UtiliCorp will be entitled
to elect two of the total number of directors of the Company. All or any portion
of the outstanding shares of Series A Preferred Stock may, at the option of
UtiliCorp, be converted at any time into fully paid and nonassessable shares of
common stock. The conversion price shall initially be $20.00, yielding 9,300,000
shares of common stock upon conversion of all outstanding shares of Series A
Preferred Stock. The conversion price may be adjusted under certain
circumstances. Also in certain circumstances, UtiliCorp has the right to
purchase additional securities from the Company to maintain the percentage
40
43
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ownership of the Company represented by the Series A Preferred Stock. In 1999,
UtiliCorp purchased 57,727 shares of common stock pursuant to these rights.
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. In 1999, 1,271,979 shares
of Limited Vote Common Stock were converted to common stock.
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 15% of the outstanding shares of
common stock.
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 3,571,275 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 (including officers), non-employee
directors, and certain consultants 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 15,000 shares of common stock, and each
continuing or re-elected non-employee director annually will receive an option
to purchase 7,500 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).
41
44
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes activity under the 1997 Stock Option Plan
for the years ended December 31, 1998 and 1999 (shares in thousands):
WEIGHTED WEIGHTED
AVERAGE AVERAGE
EXERCISE FAIR
SHARES PRICE VALUE
------ -------- --------
Outstanding at December 31, 1997........................ -- --
Granted............................................... 2,519 $ 8.02 $ 3.48
Exercised............................................. (90) 7.92
Forfeited and canceled................................ (63) 8.56
-----
Outstanding at December 31, 1998........................ 2,366 8.07
Granted............................................... 4,500 23.90 $10.95
Exercised............................................. (307) 8.41
Forfeited and canceled................................ (113) 14.09
-----
Outstanding at December 31, 1999........................ 6,446 15.66
=====
Options exercisable at --
December 31, 1998..................................... 60
December 31, 1999..................................... 335
The following table summarizes information for outstanding options at
December 31, 1999 (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------- ----------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE AVERAGE NUMBER OF AVERAGE
OPTIONS CONTRACTUAL EXERCISE OPTIONS EXERCISE
RANGE OF EXERCISE PRICES OUTSTANDING LIFE IN YEARS PRICE EXERCISABLE PRICE
- ------------------------ ----------- ------------- -------- ----------- --------
$6.00-$8.83 1,259 8.33 $ 6.93 121 $ 6.47
$9.25-$11.13 697 8.50 9.97 184 9.97
$14.00-$20.71 3,291 9.39 17.62 -- --
$21.04-$26.58 1,199 9.46 22.78 30 21.08
----- ---
$6.00-$26.58 6,446 9.10 15.66 335 9.70
===== ===
The Company accounts for its stock-based compensation under APB No. 25
"Accounting for Stock Issued to Employees." Under this accounting method, no
compensation expense is recognized in the consolidated statements of operations
if no intrinsic value of the option exists at the date of grant. In October
1995, the FASB 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 consolidated
statements of operations. 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
attributable to
42
45
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
common stock and earnings per share would have been reduced to the following as
adjusted amounts (in thousands, except per share data):
1998 1999
------- -------
Net income attributable to As reported $16,188 $53,679
common stock.................
As Adjusted - Basic $15,298 $48,359
As Adjusted - Diluted $15,804 $50,817
Earnings per share............. As Reported - Basic $ 0.60 $ 1.14
As Adjusted - Basic $ 0.57 $ 1.03
As Reported - Diluted $ 0.59 $ 1.00
As Adjusted - Diluted $ 0.56 $ 0.91
The effects of applying SFAS No. 123 in the as adjusted 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 and 1999, respectively: (i) risk-free interest rates
ranging from 4.17% to 5.80% and 4.30% to 6.82%, (ii) expected life of 6 years,
(iii) average volatility of 24.85% and 54.0%, and (iv) dividend yield of 0%.
Public Offerings
In February 1998, Quanta completed its IPO, which involved the issuance of
7.5 million shares of its common stock at a price of $6.00 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 1.1 million shares of common stock resulting in net proceeds of
$6.3 million pursuant to an over-allotment granted to the underwriters. On
January 27, 1999, Quanta completed a follow-on public offering, which involved
the issuance of 6.9 million shares of its common stock at a price of $15.50 per
share, resulting in net proceeds to Quanta of $101.1 million after deducting
underwriting discounts and commissions and expenses related to the offering.
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 one of the Pooled
Companies. The ESOP was terminated on July 31, 1998. In June 1999, after the
receipt of a favorable determination letter from the Internal Revenue Service, a
portion of the unallocated shares of the Company's common stock held by the ESOP
were sold to repay debt owed by the ESOP to the Company and the remaining
portion of the unallocated shares were distributed to the plan participants. The
cost of the unallocated ESOP shares was reflected as a reduction in the
Company's stockholders' equity. As a result of the above, the Company incurred
an excise tax of approximately $1.1 million equal to 10 percent of the value of
the Company's common stock distributed to the plan participants. In addition,
the Company eliminated the remaining balance reflected as Unearned ESOP Shares
on the Company's balance sheet and recognized a non-cash, non-recurring
compensation charge of approximately $5.3 million equal to the value of the
unallocated shares held by the ESOP.
43
46
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Employee Stock Purchase Plan
An Employee Stock Purchase Plan was adopted by the board of directors of
the Company and was approved by the stockholders of the Company in May 1999. The
purpose of the Plan is to provide an incentive for employees of the Company and
any Participating Company (as defined in the Plan) to acquire or increase a
proprietary interest in the Company through the purchase of shares of the
Company's common stock. At the date hereof, all of the existing subsidiaries of
the Company have been designated as Participating Companies. The Plan is
intended to qualify as an "Employee Stock Purchase Plan" under Section 423 of
the Internal Revenue Code of 1986, as amended (the "Code"). The provisions of
the Plan are construed in a manner consistent with the requirements of that
section of the Code. The Plan is administered by a committee appointed from time
to time by the board of directors. The Plan is not subject to any of the
provisions of the Employee Retirement Income Security Act of 1974, as amended.
As of December 31, 1999, there were no shares purchased under the Plan as no
offering period had ended at that time. In January, 2000 the Company issued a
total of 35,783 shares pursuant to the Plan.
Common Stock Shares Authorized
Effective May 1999, the Company amended its Amended and Restated
Certificate of Incorporation to increase the number of authorized shares of
common stock to 100.0 million shares.
10. RELATED PARTY TRANSACTIONS:
As previously discussed, Enron Capital and Utilicorp have made investments
in Quanta. Quanta has had transactions in the normal course of business with
various other subsidiaries of Enron Corp. and UtiliCorp. Subsequent to the
investment by Enron Capital, revenues from Enron in 1998 and 1999, were $2.8
million and $40.1 million and balances due Quanta at year-end were $2.1 million
and $20.3 million, respectively. Subsequent to the investment by Utilicorp,
revenues from UtiliCorp were $7.4 million and balances due Quanta at December
31, 1999 were $1.3 million.
The Company also entered into a management services agreement (the
"Management Services Agreement") with UtiliCorp. Under the Management Services
Agreement, to the extent mutually agreed upon by the parties, UtiliCorp will
provide advice and services including financing activities; corporate strategic
planning; research on the restructuring of the utility industries; the
development, evaluation and marketing of the Company's products, services and
capabilities; identification of and evaluation of potential acquisition
candidates and other merger and acquisition advisory services; and other
services that the board of directors may reasonably request. In consideration of
the advice and services rendered by UtiliCorp, the Company will pay UtiliCorp on
a quarterly basis in arrears a fee of $2,325,000. The Management Services
Agreement has a term of six years. The Company has the right to terminate the
Management Services Agreement at any time if, in the reasonable judgment of the
board of directors, changes in the nature of the relationship between the
Company and UtiliCorp make effective provision of the services to be provided
unlikely. Payments owed to UtiliCorp under this arrangement were approximately
$2.6 million.
Management believes transactions with these related parties were under
terms no less favorable to the Company than those arranged with other parties.
11. 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
44
47
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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 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.
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. Prior to joining Quanta's 401(k) plan, certain
subsidiaries of the Company provided various defined contribution plans to their
employees. Contributions to all non-union defined contribution plans by the
Company were approximately $217,000, $1,434,000 and $5,044,000 for the years
ended December 31, 1997, 1998 and 1999, respectively.
12. FAIR VALUE OF FINANCIAL INSTRUMENTS:
The Company's financial instruments consist of cash and cash equivalents,
accounts receivable, a credit facility, 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.
13. 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. In addition, certain of the Purchased Companies were self-insured
prior to acquisition. In August 1998, the Company consolidated the casualty
insurance program for all subsidiaries of Quanta and continues to consolidate
most acquired companies to this plan at the date of acquisition. This program
has no self-insurance provisions. Self-insured claims under previous policies
are monitored to ensure that such remaining accruals are adequate. The Company
has accrued for the estimated probable claims costs in satisfying the deductible
provisions of the previous insurance policies for claims occurring through
December 31, 1999. The accruals are based on known facts and historical trends
and management believes such accruals to be adequate.
Performance Bonds
In certain circumstances, the Company is required to provide performance
bonds in connection with its contract commitments.
45
48
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. QUARTERLY FINANCIAL DATA (UNAUDITED):
The table below sets forth the unaudited consolidated operating results by
quarter for the years ended December 31, 1998 and 1999. All quarters presented
have been restated for the operations of the Pooled Companies and the effect of
the 3-for-2 stock split discussed in Note 17 (in thousands, except per share
data).
FOR THE THREE MONTHS ENDED,
------------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- -------- ------------ -----------
1998:
Revenues............................. $ 32,230 $ 65,045 $103,737 $118,247
Gross profit......................... 5,234 12,796 20,814 23,145
Net income........................... 817 3,139 6,360 5,872
Basic earnings per share............. $ 0.05 $ 0.11 $ 0.21 $ 0.18
Diluted earnings per share........... $ 0.05 $ 0.11 $ 0.21 $ 0.17
Diluted earnings per share
before merger charges............. $ 0.05 $ 0.12 $ 0.21 $ 0.17
1999:
Revenues............................. $127,779 $193,821 $271,788 $332,266
Gross profit......................... 22,908 43,572 66,099 81,722
Net income attributable to common
stock............................. 3,423 4,807 19,138 26,311
Basic earnings per share............. $ 0.09 $ 0.11 $ 0.38 $ 0.48
Diluted earnings per share........... $ 0.09 $ 0.10 $ 0.34 $ 0.39
Diluted earnings per share
before merger charges............. $ 0.11 $ 0.23 $ 0.34 $ 0.39
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.
15. RISK CONCENTRATION:
The Company grants credit, generally without collateral, to its customers,
which include telecommunications and cable television system operators, electric
power companies, governmental entities, general contractors, builders and owners
and managers of commercial and industrial properties 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.
46
49
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
16. SEGMENT INFORMATION:
The Company operates in one reportable segment as a specialty contractor.
The Company provides comprehensive network solutions to the telecommunications,
cable and electric power industries, including designing, installing, repairing
and maintaining network infrastructure. 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.
YEARS ENDED DECEMBER 31,
-----------------------------
1997 1998 1999
------- -------- --------
(IN THOUSANDS)
Telecommunications network services................... $26,531 $100,184 $318,461
Cable television network services..................... 3,806 10,050 91,391
Electric power network services....................... 48,149 159,243 316,794
Ancillary services.................................... 1,524 49,782 199,008
------- -------- --------
$80,010 $319,259 $925,654
======= ======== ========
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
17. SUBSEQUENT EVENTS
a. Purchases Subsequent to December 31, 1999
Subsequent to December 31, 1999 and through February 24, 2000, Quanta
completed three acquisitions accounted for as purchases. The aggregate
consideration paid in these transactions consisted of $30.6 million in cash and
1,356,474 shares of common stock. The cash portion of such consideration was
provided by borrowings under the Company's Credit Facility.
b. Stock Split
On March 8, 2000 the board of directors of the Company approved a 3-for-2
stock split of the Company's outstanding common stock in the form of a stock
dividend. Par value of the common stock will remain $.00001 per share. Holders
of the Company's common stock of record at the close of business on March 27,
2000 will receive one additional share of common stock for every two shares of
common stock owned. Fractional shares resulting from the stock split will be
paid in cash in lieu of shares. The stock dividend will be paid on April 7,
2000. The effect of the stock split has been recognized retroactively in the
stockholders' equity account on the balance sheet as of December 31, 1999, and
in all share and per share data in the accompanying consolidated financial
statements and notes thereto.
18. SUBSEQUENT EVENTS TO AUDITORS' REPORT DATE (UNAUDITED):
a. Purchases Subsequent to Auditors' Report
Subsequent to February 24, 2000 and through March 15, 2000, Quanta
completed two acquisitions accounted for as purchases. The aggregate
consideration paid in these transactions consisted of $8.7 million in cash and
247,501 shares of common stock. The cash portion of such consideration was
provided by borrowings under the Company's Credit Facility.
47
50
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
b. Shareholder Rights Plan
On March 8, 2000 the board of directors of the Company adopted a
Shareholder Rights Plan. Under the plan, a dividend of one Preferred Stock Right
was declared on each outstanding share of the Company's common stock and Series
A Preferred Stock (on an as converted basis) for holders of record as of the
close of business on March 27, 2000. The Preferred Stock Purchase Rights will
also attach to all common stock and Series A Preferred Stock issued after March
27, 2000. No separate certificates evidencing the Rights will be issued unless
and until they become exercisable. Each Right has an initial exercise price of
$153.33. The Rights will be exercisable if a person or group (other than
UtiliCorp United Inc.) becomes the beneficial owner of, or tenders for, 15
percent or more of the Company's common shares. The Rights also will be
exercisable if UtiliCorp, together with any affiliates or associates, becomes
the beneficial owner of, or tenders for, more than 49.9 percent of the Company's
common shares, or if there is a change of control of UtiliCorp. In the event
that the Rights become exercisable, each Right will entitle its holder to
purchase, at the Right's exercise price, a number of common shares having a
market value at that time of twice the Right's exercise price. Rights held by
the triggering person will become void and will not be exercisable to purchase
shares at the reduced purchase price. The Rights will expire in ten years.
c. Issuance of Senior Secured Notes
In March 2000, the Company closed a Senior Notes private placement with 16
lenders, primarily insurance companies, for $150 million. The Senior Notes have
maturities of five, seven or ten years with a weighted average interest rate of
8.52% and rank pari passu in right of repayment to Quanta's Credit Facility. The
Senior Notes have financial covenants similar to the Credit Facility. Proceeds
from this private placement were used to reduce outstanding borrowings under the
Credit Facility.
48
51
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 2000 Annual Meeting of Stockholders.
ITEM 11. EXECUTIVE COMPENSATION
The information concerning the Company's directors and officers required by
Item 11 is incorporated by reference to the information set forth in Quanta's
Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information concerning the Company's directors and officers required by
Item 12 is incorporated by reference to the information set forth in Quanta's
Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIP AND RELATED TRANSACTIONS
The information concerning the Company's directors and officers required by
Item 13 is incorporated by reference to the information set forth in Quanta's
Definitive Proxy Statement for the 2000 Annual Meeting of Stockholders.
49
52
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
The information concerning the Company's directors and officers required by
Item 14 is incorporated by reference to the information set forth in Quanta's
Definitive Proxy Statement for the 1999 Annual Meeting of Stockholders.
(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 24 of this Report.
(2) All schedules are omitted because they are not applicable or
the required information is shown in the financial statements or the
notes to the financial statements.
(3) Exhibits
EXHIBIT NO. DESCRIPTION
----------- -----------
3.1 -- Amended and Restated Certificate of Incorporation*
3.2 -- Amended and Restated Bylaws*
3.3 -- Certificate of Amendment to the Amended and Restated
Certificate of IncorporationX
3.4 -- Certificate of Designation for the Series A Preferred
Stock+++
3.5 -- Certificate of Designation for the Series B Preferred
Stock
3.6 -- Certificate of Correction to Certificate of Designation
for the Series A Preferred Stock
4.1 -- Form of Common Stock Certificate*
10.1 -- Form of Employment Agreement*
10.2 -- 1997 Stock Option Plan*
10.3 -- Third Amended and Restated Secured Credit Agreement dated
as of June 14, 1999 among Quanta Services, Inc. as
Borrower and Nationsbank, N.A. d/b/a Bank of America,
N.A., as Administrative Agent, and the other financial
institutions parties thereto, as LendersX
10.4 -- 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**
10.5 -- Registration Rights Agreement dated as of September 29,
1998 by and among Quanta Services, Inc., JEDI and Enron
Capital**
10.6 -- Form of Convertible Promissory Note issued to Enron
Capital and JEDI**
10.7 -- Securities Purchase Agreement between Quanta Services,
Inc. and UtiliCorp United Inc. dated as of September 21,
1999+++
10.8 -- Investor's Rights Agreement by and between Quanta
Services, Inc. and UtiliCorp United Inc. dated September
21, 1999+++
10.9 -- Management Services Agreement by and between Quanta
Services, Inc. and UtiliCorp United Inc.+++
10.10 -- Letter Agreement by and between Quanta Services, Inc. and
UtiliCorp United Inc. dated September 21, 1999+++
50
53
EXHIBIT NO. DESCRIPTION
----------- -----------
10.11 -- Strategic Alliance Agreement by and between Quanta
Services, Inc. and UtiliCorp United Inc. dated as of
September 21, 1999+++
10.12 -- Form of Stockholders Voting Agreement+++
10.13 -- First Amendment to Third Amended and Restated Secured
Credit Agreement+++
10.14 -- Letter Agreement by and among ECT Merchant Investments
Corp., Joint Energy Development Investments II Limited
Partnership, Quanta Services, Inc. and UtiliCorp United
Inc. dated September 21, 1999+++
10.15 -- First Amendment to Securities Purchase Agreement and
Registration Rights Agreement+++
10.16 -- Note Purchase Agreement dated as of March 1, 2000 between
Quanta Services, Inc. and the Purchasers named therein
10.17 -- Intercreditor Agreement dated March 23, 2000 related to
the March 1, 2000 Note Purchase Agreement
10.18 -- Rights Agreement dated March 8, 2000 between Quanta
Services, Inc. and American Stock Transfer & Trust
Company, as Rights AgentXX
10.19 -- Form of Lockup Agreement
10.20 -- Second Amendment to Third Amended and Restated Credit
Agreement
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 Registration Statement on
Form S-3 (No. 333-90961) and incorporated herein by reference.
X Previously filed as an exhibit to the Company's Registration Statement on
Form S-3 (No. 333-81419).
XX Previously filed as an exhibit to the Company's Registration Statement on
Form 8-A filed March 21,2000.
(b) Reports on Form 8-K:
(1) Quanta filed a Form 8-K on November 15, 1999 in which it
reported certain audited financial statements of businesses acquired and
the pro forma financial statements of Quanta Services, Inc. and
subsidiaries.
(2) Quanta filed a Form 8-K on December 20, 1999 setting forth
additional details about its sales of unregistered securities during the
period from January 1, 1999 until September 30, 1999.
51
54
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 30, 2000.
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 30, 2000.
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/ JOHN A. MARTELL Director
- -----------------------------------------------------
John A. Martell
Director
- -----------------------------------------------------
Robert K. Green
/s/ JAMES G. MILLER Director
- -----------------------------------------------------
James G. Miller
/s/ GARY A. TUCCI Director
- -----------------------------------------------------
Gary A. Tucci
Director
- -----------------------------------------------------
James R. Ball
Director
- -----------------------------------------------------
Rodney R. Proto
52