-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, QFLk7Rkwc/hgslTAXu6yChv0Mqj7aC647yBIU4HUXuopp0q2rFE78m8IyhklQfo/ miV8e7jzX/D0vWm9sfFQNw== 0000950129-99-005070.txt : 19991117 0000950129-99-005070.hdr.sgml : 19991117 ACCESSION NUMBER: 0000950129-99-005070 CONFORMED SUBMISSION TYPE: 8-K PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19991115 ITEM INFORMATION: ITEM INFORMATION: FILED AS OF DATE: 19991115 FILER: COMPANY DATA: COMPANY CONFORMED NAME: QUANTA SERVICES INC CENTRAL INDEX KEY: 0001050915 STANDARD INDUSTRIAL CLASSIFICATION: ELECTRICAL WORK [1731] IRS NUMBER: 742851603 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 8-K SEC ACT: SEC FILE NUMBER: 001-13831 FILM NUMBER: 99756103 BUSINESS ADDRESS: STREET 1: 1360 POST OAK BLVD STREET 2: SUITE 2100 CITY: HOUSTON STATE: TX ZIP: 77056 BUSINESS PHONE: 7133506000 MAIL ADDRESS: STREET 1: 1360 POST OAK BLVD SUITE 2100 CITY: HOUSTON STATE: TX ZIP: 77056 8-K 1 QUANTA SERVICES, INC. 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 8-K PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 Date of Report: November 15, 1999 QUANTA SERVICES, INC. (Exact name of registrant as specified in its charter) COMMISSION FILE NUMBER: 1-13831 DELAWARE 74-2851603 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.)
1360 POST OAK BLVD., SUITE 2100 HOUSTON, TEXAS 77056 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 629-7600 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 Quanta Services, Inc., a Delaware Corporation (the "Company"), is a leading provider of specialty contracting and maintenance services primarily related to electric, utility and telecommunications infrastructure in North America. In order to comply with the disclosure requirements of the Securities and Exchange Commission regarding the financial statements of businesses acquired, the Company is filing this current report containing certain audited financial statements of the businesses acquired and the pro forma financial statements of Quanta Services, Inc. and subsidiaries. ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS a. Financial Statements of Businesses Acquired: (i) Western Directional, Inc. Independent Auditor's Report Balance Sheets Statements of Operations Statements of Stockholders' Equity Statements of Cash Flows Notes to Financial Statements (ii) GEM Engineering Co., Inc. Report of Independent Public Accountants Balance Sheets Statements of Operations Statements of Stockholders' Equity Statements of Cash Flows Notes to Financial Statements (iii) W.C. Communications, Inc. Report of Independent Public Accountants Balance Sheets Statements of Operations Statements of Stockholder's Equity Statements of Cash Flows Notes to Financial Statements (iv) North Sky Communications Independent Accountant's Report Balance Sheets Statements of Income Statements of Stockholders' Equity Statements of Cash Flows Notes to Financial Statements (v) Crown Fiber Communications, Inc. Report of Independent Public Accountants Balance Sheets Statements of Income Statements of Stockholder's Equity Statements of Cash Flows Notes to Financial Statements (vi) Edwards Pipeline Company LLC Report of Independent Public Accountants Balance Sheets Statements of Operations Statements of Members' Equity Statements of Cash Flows Notes to Financial Statements
1 3 (vii) Haines Construction Company Independent Auditor's Report Balance Sheets Statements of Income Statements of Stockholder's Equity Statements of Cash Flows Notes to Financial Statements (viii) Bonneville Construction Company Independent Accountant's Report Balance Sheets Statements of Operations Statements of Stockholder's Equity Statements of Cash Flows Notes to Financial Statements (ix) Trawick Construction Co. Report of Independent Accountants Combined Balance Sheets Combined Statements of Income Combined Statements of Stockholders' Equity Combined Statements of Cash Flows Notes to Combined Financial Statements (x) Telecommunications Division of Conti Enterprises, Inc. Report of Independent Public Accountants Statements of Assets, Liabilities and Divisional Equity Statements of Divisional Operating Profit Statements of Cash Flows Notes to Financial Statements
b. Pro forma financial information The following Unaudited Pro Forma Combined Financial Statements of Quanta Services, Inc. and subsidiaries are attached hereto and made a part hereof: (i) Basis of Presentation Unaudited Pro Forma Combined Balance Sheet as of September (ii) 30, 1999 Notes to Unaudited Pro Forma Combined Balance Sheet as of (iii) September 30, 1999 (iv) Unaudited Pro Forma Combined Statements of Operations Notes to Unaudited Pro Forma Combined Statements of (v) Operations
c. Exhibits: 23.1 -- Consent of Arthur Andersen LLP 23.2 -- Consent of Arthur Andersen LLP 23.3 -- Consent of S. J. Gallina & Co., LLP 23.4 -- Consent of Jerry T. Paul, CPA 23.5 -- Consent of McGladrey & Pullen, LLP 23.6 -- Consent of Paul B. Leathers, Inc. 23.7 -- Consent of Babush, Neiman, Kornman & Johnson LLP 23.8 -- Consent of McDaniel & Associates, P.C. 23.9 -- Consent of J.H. Cohn LLP
2 4 INDEX TO FINANCIAL STATEMENTS
PAGE ---- ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS a. Financial Statements of Businesses Acquired: Western Directional, Inc. Independent Auditor's Report........................... 5 Balance Sheets......................................... 6 Statements of Operations............................... 7 Statements of Stockholders' Equity..................... 8 Statements of Cash Flows............................... 9 Notes to Financial Statements.......................... 10 GEM Engineering Co., Inc. Report of Independent Public Accountants............... 15 Balance Sheets......................................... 16 Statements of Operations............................... 17 Statements of Stockholders' Equity..................... 18 Statements of Cash Flows............................... 19 Notes to Financial Statements.......................... 20 W.C. Communications, Inc. Report of Independent Public Accountants............... 26 Balance Sheets......................................... 27 Statements of Operations............................... 28 Statements of Stockholder's Equity..................... 29 Statements of Cash Flows............................... 30 Notes to Financial Statements.......................... 31 North Sky Communications and Affiliates Report of Independent Public Accountants............... 35 Combined Balance Sheets................................ 36 Combined Statements of Income.......................... 37 Combined Statements of Stockholders' Equity............ 38 Combined Statements of Cash Flows...................... 39 Notes to Combined Financial Statements................. 40 Crown Fiber Communications, Inc. Report of Independent Public Accountants............... 44 Balance Sheets......................................... 45 Statements of Income................................... 46 Statements of Shareholder's Equity..................... 47 Statements of Cash Flows............................... 48 Notes to Financial Statements.......................... 49 Edwards Pipeline Company LLC Report of Independent Public Accountants............... 53 Balance Sheets......................................... 54 Statements of Operations............................... 55 Statements of Members' Equity.......................... 56 Statements of Cash Flows............................... 57 Notes to Financial Statements.......................... 58
3 5
PAGE ---- Haines Construction Co. Independent Auditor's Report........................... 62 Balance Sheets......................................... 63 Statements of Income................................... 64 Statements of Stockholder's Equity..................... 65 Statements of Cash Flows............................... 66 Notes to Financial Statements.......................... 67 Bonneville Construction Company, Inc. Independent Accountant's Report........................ 71 Balance Sheets......................................... 72 Statements of Operations............................... 73 Statements of Stockholder's Equity..................... 74 Statements of Cash Flows............................... 75 Notes to Financial Statements.......................... 76 Trawick Construction Co. Report of Independent Public Accountants............... 82 Combined Balance Sheets................................ 83 Combined Statements of Income.......................... 84 Combined Statements of Stockholders' Equity............ 85 Combined Statements of Cash Flows...................... 86 Notes to Combined Financial Statements................. 87 Telecommunications Division of Conti Enterprises, Inc. Report of Independent Public Accountants............... 92 Statements of Assets, Liabilities, and Divisional Equity................................................ 93 Statements of Divisional Operating Profit.............. 94 Statements of Cash Flows............................... 95 Notes to Financial Statements.......................... 96
b. Pro forma financial information: (i) Basis of Presentation....................................... 98 Unaudited Pro Forma Combined Balance Sheet as of September (ii) 30, 1999.................................................... 99 Notes to Unaudited Pro Forma Combined Balance Sheet as of (iii) September 30, 1999.......................................... 100 Unaudited Pro Forma Combined Statements of Operations....... 101 (iv) Notes to Unaudited Pro Forma Combined Statements of (v) Operations.................................................. 103
c. Exhibits................................................. 106
4 6 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Western Directional, Inc.: We have audited the accompanying balance sheet of WESTERN DIRECTIONAL, INC. as of December 31, 1998, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of WESTERN DIRECTIONAL, INC. as of December 31, 1998, and the results of its operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. S. J. Gallina & Co., LLP Sacramento, California October 14, 1999 5 7 WESTERN DIRECTIONAL, INC. BALANCE SHEET (IN THOUSANDS, EXCEPT SHARE INFORMATION) ASSETS
DECEMBER 31, 1998 ------------ CURRENT ASSETS: Cash...................................................... $ 503 Accounts receivable: Trade.................................................. 47 Other.................................................. 13 Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 1,177 Prepaid expenses and other current assets................. 5 ------ Total current assets.............................. 1,745 PROPERTY AND EQUIPMENT, net................................. 1,264 ------ Total assets...................................... $3,009 ====== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt...................... $ 122 Accounts payable and accrued expenses..................... 93 Income taxes payable...................................... 6 Deferred income taxes..................................... 20 ------ Total current liabilities......................... 241 LONG-TERM DEBT, net of current maturities................... 288 DEFERRED INCOME TAXES....................................... 7 ------ Total liabilities................................. 536 STOCKHOLDERS' EQUITY: Common stock, no par value, 100,000 shares authorized, 10,000 shares issued and outstanding................... 50 Retained earnings......................................... 2,423 ------ Total stockholders' equity........................ 2,473 ------ Total liabilities and stockholders' equity........ $3,009 ======
The accompanying notes are an integral part of the financial statements. 6 8 WESTERN DIRECTIONAL, INC. STATEMENT OF OPERATIONS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1998 ------------ REVENUES.................................................... $5,160 COST OF SERVICES, including depreciation.................... 2,858 ------ Gross profit...................................... 2,302 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 640 ------ Income from operations............................ 1,662 OTHER INCOME (EXPENSE), net: Interest expense.......................................... (28) Interest income and other, net............................ 1 ------ Other income (expense), net....................... (27) ------ INCOME BEFORE PROVISION FOR INCOME TAXES.................... 1,635 PROVISION FOR INCOME TAXES.................................. 25 ------ Net income........................................ $1,610 ======
The accompanying notes are an integral part of the financial statements. 7 9 WESTERN DIRECTIONAL, INC. STATEMENT OF STOCKHOLDERS' EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK TOTAL --------------- RETAINED STOCKHOLDERS' SHARES AMOUNT EARNINGS EQUITY ------ ------ -------- ------------- BALANCE, January 1, 1998.............................. 10,000 $50 $ 1,941 $ 1,991 Net income.......................................... -- -- 1,610 1,610 Dividends........................................... -- -- (1,128) (1,128) ------ --- ------- ------- BALANCE, December 31, 1998............................ 10,000 $50 $ 2,423 $ 2,473 ====== === ======= =======
The accompanying notes are an integral part of the financial statements. 8 10 WESTERN DIRECTIONAL, INC. STATEMENT OF CASH FLOWS (IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1998 ------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 1,610 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................... 221 Loss on sale of property and equipment................. 3 Change in deferred income taxes........................ 6 Changes in operating assets and liabilities: Decrease (increase) in: Accounts receivable............................... 703 Costs and estimated earnings in excess of billings on uncompleted contracts.......................... (445) Prepaid expenses and other current assets......... 9 Increase (decrease) in: Accounts payable and accrued expenses............. (52) Income taxes payable.............................. 6 ------- Net cash provided by operating activities......... 2,061 CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of property and equipment.............. 104 Additions of property and equipment....................... (452) Advances on notes receivable.............................. (13) ------- Net cash used for investing activities............ (361) CASH FLOWS FROM FINANCING ACTIVITIES: Payments of long-term debt................................ (103) Dividends................................................. (1,128) ------- Net cash used for financing activities............ (1,231) ------- Net increase in cash.............................. 469 CASH, beginning of period................................... 34 ------- CASH, end of period......................................... $ 503 ======= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Income taxes paid......................................... $ 13 Interest paid............................................. $ 28
The accompanying notes are an integral part of the financial statements. 9 11 WESTERN DIRECTIONAL, INC. NOTES TO THE FINANCIAL STATEMENTS 1. BUSINESS AND ORGANIZATION: WESTERN DIRECTIONAL, INC. (the Company) located in Elk Grove, California, is engaged in heavy engineering construction which includes installation of underground communications cable, and various types of sewer, water, and natural gas pipelines. The Company performs its contract work substantially under unit-price contracts with various contracts being modified by incentive and penalty provisions. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES: Supplemental Cash Flow Information The Company had noncash investing activities of approximately $513,000 related to the purchase of approximately $965,000 in property and equipment during the year ended December 31, 1998. Property and Equipment Property and equipment are stated at cost, and depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense was $221,259 for the year ended December 31, 1998. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated over its estimated life. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of operations. Revenue Recognition The Company generally recognizes revenue as services are performed. The Company's contracts, however, generally provide that the customer compensate the Company only upon full completion of all contract services. Revenues are recognized using the percentage-of-completion method measured by the percentage of costs incurred to date to the total estimated costs for each contract. Contract costs include all direct material, direct labor, subcontract cost and indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, interest, and depreciation. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to contract costs and income. The resulting effects are recognized in the period in which the revisions are determined. The current asset "Costs and estimated earnings in excess of billings on uncompleted contracts" represents revenues recognized in excess of amounts billed. Income Taxes The Company follows the liability method of accounting for income taxes in accordance with Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for Income Taxes." Under this method, deferred assets and liabilities are recorded for future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities, and are measured using the enacted tax rates and laws that will be in effect when the underlying assets or liabilities are recovered or settled. For income tax purposes, the Company reports income on the accrual method of accounting. The Company has elected to be taxed under the provisions of subchapter S of the Internal Revenue Code and the Revenue and Taxation Code of the State of California. Under those provisions, the Company did not 10 12 WESTERN DIRECTIONAL, INC. NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) pay federal corporate income taxes on its taxable income for the year ended December 31, 1998. However, the Company did pay a California franchise tax at a reduced rate of 1.5% on the taxable income it earned within California. The stockholders are liable for individual federal and California taxes on the Company's taxable income. In order for the stockholders to be able to pay these taxes, the board of directors of the Company has resolved that the stockholders may take minimum annual dividends up to the full tax liability on the Company's taxable income. The expected federal and California tax liability on the Company's taxable income for the year ended December 31, 1998 is approximately $622,000. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. Reference is made to the "Revenue Recognition" section of this footnote for discussion of certain estimates reflected in the Company's financial statements. 3. PROPERTY AND EQUIPMENT: Property and equipment at December 31, 1998, consist of the following (in thousands):
ESTIMATED USEFUL LIVES IN YEARS --------- Building.................................................... 40 $ 37 Operating equipment and vehicles............................ 5 1,529 Office equipment, furniture and fixtures.................... 5 - 7 21 ------ 1,587 Less -- Accumulated depreciation............................ (323) ------ Property and equipment, net................................. $1,264 ======
4. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS: Accounts payable and accrued expenses at December 31, 1998, consist of the following (in thousands): Accounts payable, trade..................................... $85 Accrued compensation and other expenses..................... 8 --- $93 ===
Contracts in progress at December 31, 1998, are as follows (in thousands): Costs incurred on contracts in progress..................... $ 641 Estimated earnings, net of losses........................... 536 ------ 1,177 Less -- Billings to date.................................... -- ------ $1,177 ====== Costs and estimated earnings in excess of billings on uncompleted contracts..................................... $1,177 ======
11 13 WESTERN DIRECTIONAL, INC. NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 5. DEBT: The Company's long-term debt obligations at December 31, 1998, consist of the following (in thousands): Notes payable to third parties due in monthly installments through May 2008; interest ranging from 8.1% to 8.9%; collateralized by equipment (See Note 11)................... $ 410 Less -- Current maturities.................................. (122) ----- Total long-term debt.............................. $ 288 =====
The maturities of long-term debt at December 31, 1998, are as follows (in thousands): 1999........................................................ $122 2000........................................................ 41 2001........................................................ 25 2002........................................................ 27 2003........................................................ 29 Thereafter.................................................. 166 ---- $410 ====
6. OPERATING LEASES: The Company leases shop and yard space in Santa Clara, California from a third party under a long-term operating lease. Payments made for the operating lease were approximately $112,300 for the year ended December 31, 1998. The original lease term expires November 30, 1999. The Company may, at its option, extend the term of the lease for two additional one-year periods under substantially the same conditions. The Company also leases construction equipment under an operating lease expiring in June 2000. Payments made for the operating lease were approximately $40,000 for the year ended December 31, 1998. Future minimum lease payments under these operating leases are as follows (in thousands):
YEAR ENDING DECEMBER 31, ------------------------ 1999........................................................ $143 2000........................................................ 20 ---- $163 ====
7. INCOME TAXES: Income tax expense is as follows (in thousands):
YEAR ENDED DECEMBER 31, 1998 ------------ State -- Current................................................... $19 Deferred.................................................. 6 --- $25 ===
12 14 WESTERN DIRECTIONAL, INC. NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) Actual income tax expense differs from income taxes computed by applying the California reduced tax rate for S corporations of 1.5 percent to income before provision for income taxes as follows (in thousands):
YEAR ENDED DECEMBER 31, 1998 ------------ Provision at the reduced rate............................... $25 Increase resulting from -- Permanent differences..................................... 1 Other..................................................... (1) --- $25 ===
Deferred income tax provisions result from temporary differences in the recognition of income and expenses for financial reporting purposes and for tax purposes. The tax effects of these temporary differences, representing deferred tax liabilities, result principally from the following (in thousands):
DECEMBER 31, 1998 ------------ Deferred income tax liabilities -- Property and equipment.................................... $ 3 Difference in method of accounting for long-term construction contracts................................. 18 Change in income tax accounting method.................... 6 --- Total net deferred income tax liabilities......... $27 ===
The net deferred income tax liabilities are comprised of the following (in thousands):
DECEMBER 31, 1998 ------------ Deferred tax liabilities -- Current................................................... $20 Long-term................................................. 7 --- Net deferred income tax liabilities............... $27 ===
8. FINANCIAL INSTRUMENTS: The Company's financial instruments consist of cash, accounts receivable, accounts payable and debt. The Company believes that the carrying values of these instruments on the accompanying balance sheet approximates their fair values. 9. COMMITMENTS AND CONTINGENCIES: Litigation The Company is involved in disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such legal actions will have a material adverse effect on the Company's financial position or results of operations. Insurance The Company carries a broad range of insurance coverage, including business auto liability, business property liability, workers' compensation, general liability and an umbrella policy. 13 15 WESTERN DIRECTIONAL, INC. NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED) 10. MAJOR CUSTOMERS AND RISK CONCENTRATION: The Company had sales greater than 10 percent of total sales to two major customers (comprising approximately 85% and 12% of total sales) during the year ended December 31, 1998. Approximately 97% of trade receivables are due from one of the major customers. The Company grants credit, generally without collateral, to its customers, which include publicly traded companies and general contractors. Consequently, the Company is subject to potential credit risk related to changes in business and economic factors. However, management believes that its contract acceptance, billing and collection policies are adequate to minimize the potential credit risk. 11. SUBSEQUENT EVENTS: Acquisition of Company On March 3, 1999, the Company was acquired by Quanta Services, Inc. and operates as a division of Manuel Bros., Inc. (a wholly-owned subsidiary of Quanta Services, Inc.). In conjunction with this acquisition, third party notes payable of $409,727 were paid in full. 14 16 INDEPENDENT AUDITOR'S REPORT To Gem Engineering Co., Inc. We have audited the accompanying balance sheet of Gem Engineering Co., Inc. as of December 31, 1998, and the related statements of operations, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Gem Engineering Co., Inc. December 31, 1998 and the results of its operations and cash flows for the year ended in conformity with generally accepted accounting principles. Jerry T. Paul Certified Public Accountant Houston, Texas April 28, 1999 15 17 GEM ENGINEERING CO., INC. BALANCE SHEET ASSETS
DECEMBER 31, MARCH 31, 1998 1999 ------------ ------------ (UNAUDITED) CURRENT ASSETS: Cash and Cash Equivalents................................. $ 384,533 $ 38,253 Accounts Receivable: Trade..................................................... 2,247,776 2,679,450 Retainage................................................. 5,992 5,984 Employees................................................. 741 35 Other..................................................... 38,978 38,978 Costs and Estimated Earnings in Excess of Billings on Uncompleted Contracts..................................... 2,207,249 904,453 Prepaid Expenses............................................ 88,152 72,208 ---------- ---------- TOTAL CURRENT ASSETS................................ 4,973,421 3,739,361 PROPERTY AND EQUIPMENT: Transportation Equipment.................................. 122,362 71,807 Leasehold Improvements.................................... 29,944 29,944 Office Furniture and Equipment............................ 286,106 286,106 Shop Equipment and Tools.................................. 114,539 114,539 ---------- ---------- 552,951 502,396 Less-Accumulated Depreciation............................... 309,939 304,331 ---------- ---------- TOTAL PROPERTY AND EQUIPMENT........................ 243,012 198,065 OTHER ASSETS: Security Deposits......................................... 2,292 2,092 ---------- ---------- TOTAL ASSETS........................................ $5,218,725 $3,939,518 ========== ========== LIABILITIES CURRENT LIABILITIES: Accounts Payable -- Trade................................. $1,027,222 $ 712,260 Note Payable -- Line of Credit............................ -- 20,477 Current Portion -- Long Term Debt......................... 1,103,986 1,014,111 Payroll Taxes Payable..................................... 3,310 2,363 Accrued Expenses.......................................... 8,825 14,013 Due to Affiliates......................................... 80,468 3,880 Accrued Management Incentives............................. 1,639,427 849,612 State Taxes Payable....................................... 3,983 3,983 Deferred State Tax Provision.............................. 9,400 11,200 Billings in Excess of Costs and Estimated Earnings on Contracts In Progress................................... 219,523 186,577 ---------- ---------- TOTAL CURRENT LIABILITIES........................... 4,096,144 2,818,476 LONG TERM DEBT: Notes Payable -- Affiliates............................... 1,098,143 1,008,143 Note Payable -- Vehicle................................... 16,129 14,715 ---------- ---------- 1,114,272 1,022,858 Less -- Current Portion................................... 1,103,986 1,014,111 ---------- ---------- TOTAL LONG TERM DEBT................................ 10,286 8,747 OTHER LIABILITIES: Deferred State Tax Provision.............................. 25,000 25,000 ---------- ---------- TOTAL LIABILITIES................................... 4,131,430 2,852,223 ---------- ---------- STOCKHOLDERS' EQUITY Common Stock -- Par Value $1, Authorized 10,000 shares; Issued and Outstanding 2,000 shares....................... 2,000 2,000 Retained Earnings........................................... 1,085,295 1,085,295 TOTAL STOCKHOLDERS' EQUITY.......................... 1,087,295 1,087,295 ---------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS EQUITY........... $5,218,725 $3,939,518 ========== ==========
See Accompanying Notes to Financial Statements 16 18 GEM ENGINEERING CO., INC. STATEMENTS OF OPERATIONS
FOR THE FOR THE THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, 1998 1998 1999 ----------------- ---------- ---------- (UNAUDITED) CONTRACT REVENUE..................................... $13,662,613 $2,062,638 $4,028,567 COST OF CONSTRUCTION................................. 10,216,186 1,547,849 2,878,247 GROSS PROFIT......................................... 3,446,427 514,789 1,150,320 INDIRECT AND ADMINISTRATIVE EXPENSES............................................. 3,256,370 533,427 1,125,568 ----------- ---------- ---------- INCOME (LOSS) FROM OPERATIONS........................ 190,057 (18,638) 24,752 OTHER INCOME (EXPENSE): Interest Expense................................... (133,694) (7,393) (25,839) Interest Income & Other, Net....................... (56,363) 26,031 1,087 INCOME BEFORE INCOME TAXES........................... -- -- -- PROVISION FOR INCOME TAXES........................... -- -- -- ----------- ---------- ---------- $ -- $ -- $ -- =========== ========== ==========
See accompanying Notes to Financial Statements 17 19 GEM ENGINEERING CO., INC. STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK --------------- RETAINED SHARES AMOUNT EARNINGS TOTAL ------ ------ ---------- ---------- BALANCE -- December 31, 1997......................... 2,000 $2,000 $1,085,295 $1,085,295 Net Income...................................... -- -- -- -- ----- ------ ---------- ---------- BALANCE -- December 31, 1998......................... 2,000 2,000 1,085,295 1,087,295 Net Income (Unaudited).......................... -- -- -- -- ----- ------ ---------- ---------- BALANCE -- March 31,1999 (Unaudited)................. 2,000 $2,000 $1,085,295 $1,087,295 ===== ====== ========== ==========
See accompanying Notes to Financial Statements 18 20 GEM ENGINEERING CO., INC. STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS FOR THE ENDED MARCH 31, YEAR ENDED ---------------------- DECEMBER 31, 1998 1998 1999 ----------------- --------- ---------- (UNAUDITED) CASH FLOW FROM OPERATING ACTIVITIES: Net Income......................................... $ -- $ -- $ -- Adjustments to Reconcile Net Income to Net Cash Used In Operating Activities: Depreciation.................................... 91,772 23,290 21,574 Gain on Sale of Equipment....................... (39,505) 2,293 Changes in Operating Assets and Liabilities: (Increase) Decrease in Assets: Accounts Receivable........................... (803,054) 595,545 (430,960) Underbillings................................. (633,435) (939,437) 1,302,796 Prepaid Expenses.............................. 37,972 29,336 15,944 Other Assets.................................. (202) 200 Increase (Decrease) in Liabilities: Accounts Payable.............................. (592,845) (210,218) (314,962) Due to Affiliate.............................. (150,116) 76,358 (76,588) Overbillings.................................. 108,445 12,860 (32,946) Accrued Expenses.............................. (12,095) (84,631) 5,188 Provision for State Income Taxes.............. 590 1,800 Accrued Salaries.............................. 1,479,554 252,777 (789,815) Payroll Taxes Payable......................... 776 57 (947) ---------- --------- ---------- NET CASH USED BY OPERATING ACTIVITIES................ $ (512,143) (244,063) (296,423) CASH FLOW FROM INVESTING ACTIVITIES: Purchase of Property and Equipment................. (104,043) (78,056) Proceeds from Sale of Equipment.................... 56,159 21,080 ---------- --------- ---------- NET CASH PROVIDED BY INVESTING ACTIVITIES............ (47,884) (78,056) 21,080 CASH FLOW FROM FINANCIAL ACTIVITIES: Loans From Affiliates.............................. 1,091,635 (90,000) Advances on Line of Credit-Net..................... (333,594) 232,306 20,477 Repayments of Vehicle Notes........................ (5,346) (1,299) (1,414) ---------- --------- ---------- NET CASH FLOW PROVIDED BY FINANCIAL ACTIVITIES....... 752,696 231,007 70,937 ---------- --------- ---------- INCREASE (DECREASE) IN CASH.......................... $ 192,669 (91,112) (346,280) CASH AT BEGINNING OF PERIOD.......................... 191,864 191,864 384,533 ---------- --------- ---------- CASH AT END OF PERIOD................................ $ 384,533 $ 100,752 $ 38,253 ========== ========= ========== SUPPLEMENTARY INFORMATION: CASH PAID DURING THE YEAR FOR: Interest........................................... $ 133,694 $ 7,393 $ 25,838 NONCASH FINANCING ACTIVITIES: Intercompany Debt Incurred for Equipment Purchases....................................... 77,000 -- --
See accompanying Notes to Financial Statements 19 21 GEM ENGINEERING CO., INC. NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 1998 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The following items comprise the significant accounting policies of the Company. The financial statements and notes are representations of the Company's management, who is responsible for their integrity and objectivity. The policies reflect industry practices and conform to generally accepted accounting principles. Business Activity The Company is engaged in the design, engineering, and construction management of communication towers throughout the United States. The Company is headquartered in Houston, Texas. Interim Financial Information The unaudited interim financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the financial position, results of operations and cash flows with respect to the interim consolidated financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results of the entire fiscal year. Use of Estimates Management uses estimates and assumptions in preparing financial statements. Those estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Property and Equipment Property and equipment are carried at cost. Provisions for depreciation are calculated using the straight-line method. Maintenance and repairs are charged to operations when incurred. Betterment and renewals are capitalized. When property and equipment are sold otherwise or disposed of, the asset account and related accumulated depreciation accounts are reduced, and any gain or loss is included in operations. Depreciation expense for the year ended December 31, 1998 was $91,772. Operating Cycle The Company's "operating cycle" is the length of each individual contract. Therefore, the accounts and retainage receivable and payable related to contracts and the future taxes related to income earned on the contracts in progress are treated as current items. Comparative Statements The Company experiences significant changes in timing, size and type of jobs from year to year. Because of the effect of such differences on the balance sheet and the statement of operations and changes in financial position, comparative statements would not be completely valid without additional explanations which would detract from the clarity of the financial report. Therefore, comparative statements have not been included in this report. 20 22 GEM ENGINEERING CO., INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Revenues and Cost The Company recognizes revenues from fixed-price and modified fixed-price construction contracts on the percentage-of-completion method, measured by the percentage of cost incurred to date to estimated total cost for each contract. That method is used because management considers total cost to be the best available measure of progress on the contracts. Because of inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation. Selling, general, and administrative costs are charges to expense as incurred. Provisions for estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, and estimated profitability may result in revisions to costs and income, which are recognized in the period in which the revisions are determined. Changes in estimated job profitability resulting from job performance, job conditions, contract penalty provisions, claims, change orders, and settlements, are accounted for as changes in estimates in the current period. The assets, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenues recognized. Income Taxes The shareholders of Gem Engineering Co., Inc. have elected to be taxed under Subchapter S of the Internal Revenue Code. Subchapter S taxes the shareholders of the corporation individually on their proportionate share of the corporation's income. The Company recognizes revenue on lump sum contracts on the percentage of completion method of accounting for financial statement purposes and federal income tax purposes. The Company has elected to convert from the cash basis of accounting to the percentage of completion method as of January 1, 1997. The Company will recognize the accumulated difference in the accounting methods at January 1, 1997 of $1,517,598 over the next six years. Cash and Cash Equivalents Amounts included in cash and cash equivalents include cash on hand, unrestricted cash deposits with banks, investments in money market mutual funds, and short term (three months or less) securities of governmental agencies. 2 -- ACCOUNTS RECEIVABLE An aging of the accounts receivable of the Company at December 31, 1998 is as follows: Current................................................. $1,231,919 Over 30 days............................................ 597,546 Over 60 days............................................ 340,425 Over 90 days............................................ 77,886 ---------- $2,247,776 ==========
The accounts receivable are pledged as security for the line of credit loan. In management's opinion, an allowance for doubtful accounts is not deemed necessary. 21 23 GEM ENGINEERING CO., INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) During the year ended December 31, 1998, management wrote off as bad debts $122,783 relating to prior year sales. The Company is currently pursuing collection of these amounts even though they have been written off due to their current inactivity. 3 -- CONTRACTS IN PROGRESS Information with respect to contracts in progress at December 31, 1998 follows: Expenditures on uncompleted contract jobs................... $7,623,595 Recognized profits thereon.................................. 1,860,142 ---------- 9,483,737 Less-Advance billings applicable thereto.................... 7,496,011 ---------- $1,987,726 ==========
Included in the accompanying balance sheets at December 31, 1998 under the following caption: Costs and estimated earnings in excess of billings on contracts in progress....................................... $2,207,249 Billings in excess of costs and estimated earnings on contracts in progress..................................... 219,523 ---------- $1,987,726 ==========
4 -- INCOME TAXES As discussed in Note 1, the Company's shareholders elected to be taxed as a Subchapter S Corporation. Subchapter S taxes the shareholders individually on their proportionate share of the corporation's net income. Due to various timing differences, income is recognized in different periods for tax reporting purposes than for financial statement purposes. The shareholders taxable income for the year ended December 31, 1998 will be as follows: Income before income tax effects..................................... $ -- Amortization of deferred cash basis adjustment....................... 252,933 --------- 252,933 Depreciation Adjustment: Book depreciation......................................... $91,772 Tax depreciation.......................................... 88,377 $ 3,395 ------- Basis difference on sale of assets................................... 5,251 State tax provision.................................................. 1,400 Management incentives accrued (net).................................. (140,355) Other reconciling items.............................................. 784 --------- Shareholders' taxable income......................................... $ 123,408 =========
22 24 GEM ENGINEERING CO., INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company's retained earnings is composed of the following at December 31, 1998: Retained earnings recognized for tax purposes in prior years: Pre-election accumulation................................. $ None Post S election accumulation.............................. (69,860) $ (69,860) --------- Retained earnings recognized as income in the current year............. 122,627 Distributions to shareholders from current earnings.................... None Retained earnings representing income not yet recognized for tax purposes............................................................. 1,032,528 ---------- Total retained earnings per financial statements at December 31, 1998................................................................. $1,085,295 ========== Timing differences at year end are composed of the following: Deferred "cash basis" income......................................... $1,011,732 Tax depreciation in excess of book depreciation...................... 74,714 Provision for State Income Taxes..................................... (34,400) Accrued management incentives........................................ (19,518) ---------- $1,032,528 ==========
5 -- REVOLVING LINE OF CREDIT The Company has a line of credit with Merrill Lynch Business Financial Services, Inc. in the amount of $2,000,000, with an expiration date of July 31, 2000. The line is secured by a first lien on all of the business assets of the Company, and a personal guarantee of the shareholders of the company. The line bears interest at 2.65% above the "30-day Dealer Commercial Paper Rate" reported in the Wall Street Journal. The Company can borrow up to 80% of its accounts receivable less than 90 days old, and not due from an affiliated person or entity, or $2,000,000, whichever is less. At December 31, 1998, the Company did not have an outstanding loan balance on the line. The line requires the Company have a "tangible net worth" in excess of $1,000,000 and that the shareholders of the Company maintain personal liquidity of cash and unencumbered marketable securities in excess of $1,000,000. The Company is also required to maintain certain financial ratios during the term of the loan. 6 -- RELATED PARTY TRANSACTIONS The shareholders of the Company (Gem) also own two other companies, Communications Construction Incorporated (CCI) and Tower Erection Construction Co., Inc. (TEC). Until 1997, CCI subcontracted tower communication work from Gem. CCI is not presently performing any construction work and has loaned Gem $894,991 on an unsecured basis with interest payable at 8.5%. Total interest paid CCI for 1998 was $66,483. In addition, $66,483 was owed to CCI as a result of intercompany transactions including $34,640 for purchase of CCI's fixed assets during the year. TEC also subcontracted with Gem until 1997 for tower erection work. The Company was inactive until November, 1998 when operations were restarted. For the period ended December 31, 1998, intercompany subcontracting costs with TEC were $30,534. TEC also loaned Gem $410,642 during the year on an unsecured basis with interest payable at 8.5%. The balance on the loan at December 31, 1998 was $205,152 and interest paid for 1998 was $27,804. In addition, $13,985 was owed to TEC as a result of intercompany transactions including $43,440 for purchase of TEC's fixed assets during the year. 23 25 GEM ENGINEERING CO., INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7 -- CONCENTRATION OF CREDIT RISK The Company maintains cash deposits with a bank and one money market mutual fund. Funds on deposit with mutual funds are not insured in the case of the failure of any of the underlying financial instruments. At various times during the year the company had amounts on deposit with its banks in excess of the Federal Deposit Insurance Corporation limits of $100,000, such deposits would be unprotected in the case of a failure of the banking institution. Accounts receivable of the Company at December 31, 1998 are concentrated in the following categories:
CATEGORY % OF TOTAL - -------- ---------- Agencies of the State of Kansas........................... 22% National communications companies......................... 72%
8 -- PROFIT SHARING PLAN The Company terminated its profit sharing plan during the year. The Company elected not to make a contribution to the plan for the year ended December 31, 1998. 9 -- NOTE PAYABLE -- INSTALLMENT The Company was liable for the following notes payable at December 31, 1998:
MATURITY INTEREST MONTHLY LENDER COLLATERAL DATE RATE PAYMENT AMOUNT - ------ ---------- -------- -------- ------- ---------- Frost National Bank....................... Vehicle 7/01 8.50% $582 $ 16,129 Communications Construction, Inc. ........ Unsecured 2/99 8.50% 894,991 Tower Erection Company.................... Unsecured 1/99 8.50% 203,152 ---------- $1,114,272 ==========
Maturities of these notes as of December 31, 1998 are as follows: December 31, 1999........................................ $1,103,986 December 31, 2000........................................ 6,359 December 31, 2001........................................ 3,927 ---------- $1,114,272 ==========
10 -- LEASE OBLIGATIONS The Company leases some office facilities from its stockholders at a monthly rental of $3,000 per month under a year lease that expires February 29, 2000. Lease expense for 1998 was $30,000. The Company also leases some additional office facilities with a base monthly rental of $2,093 under a three-year lease that expires March 1, 2000. Rent expense for 1998 was $25,116. In addition, the Company has entered into a non-cancellable lease agreement for pickup trucks under a two-year agreement expiring in July, 1999. Rent expense for 1998 was $15,400. The following is a schedule by years of future minimum rentals under leases at December 31, 1998.
YEAR AMOUNT - ---- ------- 1999....................................................... $70,400 2000....................................................... 10,185 ------- $80,585 =======
24 26 GEM ENGINEERING CO., INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 11 -- CONTINGENCIES The Company generally warrants its work to the owners of its completed work for a period of one year. No allowance for warranty expense is provided, as historically, this expense has been immaterial and charged to expense as incurred. Contract payments on several jobs for the government have been reduced for possible assessment of liquidating damages. In the opinion of management, the government has no basis for the assessment when in fact the Company's claims for additional reimbursement far exceed the liquidating damages which does not include claims in revenues until the Company realization is probable and the amount can be reliably estimated. The attorney representing the Company on these claims has been engaged on a contingency fee arrangement so the Company should not incur any legal cost in the pursuit of these claims. During the year the Company settled its lawsuit with Sherwin-Williams that was filed on March 17, 1997. The suit alleged that Gem's subcontractor failed to pay for paint delivered at the Jim Creek Naval Project. The suit was filed as a Miller Act claim against Gem's bonding company. Gem was not a party, but contractually agreed to indemnify the bonding company. The Company was unsuccessful on its defense and incurred legal and settlement costs of $271,214, which are included in indirect and administrative expenses for the year ended December 31, 1998. Gem also incurred $103,170 in costs during the year to correct work performed by one of its subcontractors, involving a communication tower for the Kansas Department of Transportation. The tower suffered structural damage as a result of improper installation, and the Company corrected the problem and elected to avoid litigation with the subcontractor or its insurance company. 12 -- SUBSEQUENT EVENT TO AUDITOR'S REPORT (UNAUDITED) On May 28, 1999, the Company was acquired by Quanta Services, Inc. The Company intends to lease certain property from the Company's shareholder subsequent to the sale. 25 27 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To W.C. Communications, Inc.: We have audited the accompanying balance sheet of W.C. Communications, Inc., a California Subchapter S Corporation, as of December 31, 1998, and the related statements of operations, stockholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of W.C. Communications, Inc., as of December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas October 8, 1999 26 28 W.C. COMMUNICATIONS, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE INFORMATION) ASSETS
DECEMBER 31, MARCH 31, 1998 1999 ------------ ----------- (UNAUDITED) CURRENT ASSETS: Cash...................................................... $ 236 $ 374 Accounts receivable....................................... 2,060 2,360 Due from stockholder...................................... 246 262 Prepaid expenses and other current assets................. 78 135 ------ ------ Total current assets.............................. 2,620 3,131 PROPERTY AND EQUIPMENT, net................................. 1,183 1,284 OTHER ASSETS................................................ 13 6 ------ ------ Total assets...................................... $3,816 $4,421 ====== ====== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations............... $ 344 $ 381 Accounts payable and accrued liabilities.................. 486 632 ------ ------ Total current liabilities......................... 830 1,013 LONG-TERM OBLIGATIONS, net of current maturities............ 356 433 COMMITMENTS AND CONTINGENCIES STOCKHOLDER'S EQUITY: Common stock, no par value, 2,500 shares authorized, 1,000 shares issued and outstanding.......................... -- -- Additional paid-in capital................................ 10 10 Retained earnings......................................... 2,620 2,965 ------ ------ Total stockholder's equity........................ 2,630 2,975 ------ ------ Total liabilities and stockholder's equity........ $3,816 $4,421 ====== ======
The accompanying notes are an integral part of these financial statements. 27 29 W.C. COMMUNICATIONS, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS)
THREE MONTHS YEAR ENDED ENDED MARCH 31, DECEMBER 31, --------------- 1998 1998 1999 ------------ ------ ------ (UNAUDITED) REVENUES.................................................... $9,084 $1,412 $2,989 COSTS OF SERVICES, including depreciation................... 6,672 1,156 2,299 ------ ------ ------ Gross profit...................................... 2,412 256 690 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 986 142 329 ------ ------ ------ Income from operations............................ 1,426 114 361 ------ ------ ------ OTHER INCOME (EXPENSE): Interest expense.......................................... (23) (3) (17) Interest income and other, net............................ 2 3 1 ------ ------ ------ Other expense, net................................ (21) -- (16) ------ ------ ------ NET INCOME.................................................. $1,405 $ 114 $ 345 ====== ====== ======
The accompanying notes are an integral part of these financial statements. 28 30 W.C. COMMUNICATIONS, INC. STATEMENTS OF STOCKHOLDER'S EQUITY (IN THOUSANDS, EXCEPT SHARE INFORMATION)
COMMON STOCK ADDITIONAL --------------- PAID-IN RETAINED SHARES AMOUNT CAPITAL EARNINGS TOTAL ------ ------ ---------- -------- ------ BALANCE, December 31, 1997....................... 1,000 $ -- $10 $1,515 $1,525 Net income..................................... -- -- -- 1,405 1,405 Distributions to stockholder................... -- -- -- (300) (300) ----- ---- --- ------ ------ BALANCE, December 31, 1998....................... 1,000 -- 10 2,620 2,630 Net income (unaudited)......................... -- -- -- 345 345 ----- ---- --- ------ ------ BALANCE, March 31, 1999 (unaudited).............. 1,000 $ -- $10 $2,965 $2,975 ===== ==== === ====== ======
The accompanying notes are an integral part of these financial statements. 29 31 W.C. COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS (IN THOUSANDS)
THREE MONTHS ENDED YEAR ENDED MARCH 31, DECEMBER 31, ------------- 1998 1998 1999 ------------ ----- ----- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 1,405 $ 114 $ 345 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization.......................... 279 71 80 Changes in operating assets and liabilities, net of noncash transactions -- Accounts receivable.................................... (1,008) (203) (300) Prepaid expenses and other current assets.............. 11 48 (57) Other assets........................................... (12) (1) 7 Accounts payable and accrued liabilities............... 176 (17) 146 ------- ----- ----- Net cash provided by operating activities......... 851 12 221 ------- ----- ----- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (353) (51) (16) ------- ----- ----- Net cash used in investing activities............. (353) (51) (16) ------- ----- ----- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term obligations........... 340 -- 200 Principal payments on long-term obligations............... (199) (8) (251) Distributions to stockholder.............................. (300) -- -- Due from stockholder...................................... (246) -- (16) ------- ----- ----- Net cash used in financing activities............. (405) (8) (67) ------- ----- ----- NET INCREASE (DECREASE) IN CASH............................. 93 (47) 138 CASH, beginning of period................................... 143 143 236 ------- ----- ----- CASH, end of period......................................... $ 236 $ 96 $ 374 ======= ===== ===== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest.................. $ 12 $ 3 $ 10 ======= ===== ===== SUPPLEMENTAL DISCLOSURE OF NONCASH TRANSACTIONS: Property and equipment acquired with notes payable........ $ 478 $ 103 $ 165 ======= ===== =====
The accompanying notes are an integral part of these financial statements. 30 32 W.C. COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS) 1. BUSINESS AND ORGANIZATION W.C. Communications, Inc. (W.C. or the Company), a California Subchapter S Corporation, is primarily engaged in the installation of fiber optic lines and cables for the broadband industry in the continental United States. The Company performs a majority of its contract work under unit-price contracts, with contract terms generally ranging from three to 12 months. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information The unaudited interim financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with generally accepted accounting principles, have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary to fairly present the financial position, results of operations and cash flows with respect to the interim financial statements have been included. The results of operations for the interim periods are not necessarily indicative of the results of the entire year. Accounts Receivable and Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts based upon the specific identification of accounts receivable where collection is no longer deemed probable. As of December 31, 1998, management estimates all accounts to be collectible. Property and Equipment Property and equipment are stated at cost, and depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense was $279 for the year ended December 31, 1998. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of operations. Revenue Recognition The Company recognizes revenue when services are performed under unit-priced contracts. Such contracts generally provide that the customer accept completion of progress to date and compensate the Company for services which have been rendered, measured typically in terms of units installed, hours expended or some other measure of progress. Contract costs include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined. The balances billed but not paid by customers pursuant to retainage provisions in customer contracts will be due upon completion of the contracts and acceptance by the customer. Based on the Company's experience 31 33 W.C. COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) with similar contracts in recent years, the retention balance at each balance sheet date will be collected within the subsequent fiscal year. Fair Value of Financial Instruments The Company's financial instruments consist of cash, accounts receivable, accounts payable and long-term obligations. The Company believes that the carrying value of these instruments on the accompanying balance sheets approximates their fair value. Warranty Costs For certain contracts, the Company warrants labor for the first year after completion of the contract. An accrual for warranty costs is recorded based upon the historical level of warranty claims and management's estimate of future costs. Income Taxes The Company has elected S Corporation status as defined by the Internal Revenue Code, whereby the Company is not subject to taxation for federal purposes. Under S Corporation status, the stockholders report their shares of the Company's taxable earnings or losses in their personal tax returns. The Company terminated its S Corporation status concurrently with the effective date of its acquisition by Quanta Services, Inc. (see Note 8). Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS Accounts receivable at December 31, 1998, consists of the following: Trade....................................................... $1,709 Retainage................................................... 351 ------ $2,060 ======
Property and equipment at December 31, 1998, consists of the following:
ESTIMATED USEFUL LIVES IN YEARS ------------ Operating equipment and vehicles............................ 5-7 $1,615 Office equipment, furniture and fixtures.................... 5-7 49 ------ 1,664 Less -- Accumulated depreciation............................ (543) ------ Property and equipment, net....................... $1,121 ======
32 34 W.C. COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Accounts payable and accrued liabilities at December 31, 1998, consist of the following: Trade accounts payable...................................... $292 Accrued compensation and benefits........................... 170 Other accrued liabilities................................... 24 ---- $486 ====
4. LINE OF CREDIT AND LONG-TERM OBLIGATIONS The Company's line of credit and long-term obligations at December 31, 1998, consisted of the following: Line of credit with a bank with total borrowing capacity of $200, variable interest at prime rate plus 1.50% (9.25% at December 31, 1998), interest only payable monthly, maturing November 1999............................................... $200 Notes payable to various financial institutions, interest ranging from 11.90% to 19.00%, secured by certain vehicles and equipment, due in monthly installments, maturing at various dates through February 2003....................... 436 Capital leases.............................................. 64 ---- 700 Less -- Current maturities.................................. (344) ---- Total long-term obligations....................... $356 ====
The line of credit and notes payable to various financial institutions are subject to certain financial reporting and financial ratio requirements. At December 31, 1998, the Company was in compliance with all debt covenants. The maturities of long-term obligations, excluding capital leases, for the following five years as of December 31, 1998, are as follows: Year ending December 31 -- 1999...................................................... $317 2000...................................................... 127 2001...................................................... 129 2002...................................................... 60 2003...................................................... 3 ---- $636 ====
33 35 W.C. COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) The Company leases certain buildings and equipment under noncancelable lease agreements. The following schedule shows the future minimum lease payments under these leases as of December 31, 1998:
CAPITAL OPERATING LEASES LEASES ------- --------- Year ending December 31 -- 1999...................................................... $ 34 $ 180 2000...................................................... 35 180 2001...................................................... 6 180 2002...................................................... -- 180 2003...................................................... -- 180 Thereafter................................................ -- 540 ---- ------ Total minimum lease payments...................... 75 $1,440 ====== Less -- Amounts representing interest....................... (11) ---- Present value of minimum lease payments........... 64 Less -- Current portion..................................... (27) ---- Long-term obligation.............................. $ 37 ====
Rent expense for the year ended December 31, 1998, was $309. Assets under capital leases are included as part of property and equipment. 5. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK During 1998, the Company had sales greater than 10 percent of total sales to three customers, which accounted for 42 percent, 23 percent and 18 percent, respectively, of the Company's revenues. Approximately 38 percent, 26 percent and 2 percent of trade and retainage receivables at December 31, 1998, are due from each of these customers, respectively. The Company grants credit, generally without collateral, to its customers, which include real estate operators, general contractors and state and regulatory agencies located throughout the continental United States. Consequently, the Company is subject to potential credit risk related to changes in business and economic factors within these areas. However, management believes that its contract acceptance, billing and collection policies are adequate to minimize the potential credit risk. 6. RELATED-PARTY TRANSACTIONS During 1998, a receivable to the sole stockholder was recorded. The receivable balance at December 31, 1998, was $246 and was paid off in June 1999. 7. COMMITMENTS AND CONTINGENCIES Litigation The Company is involved in disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such legal actions will have a material adverse effect on the Company's financial position or results of operations. 8. SUBSEQUENT EVENT In June 1999, the Company was acquired by Quanta Services, Inc. 34 36 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To North Sky Communications and Affiliates: We have audited the accompanying combined balance sheet of North Sky Communications and affiliates (the Company), as of December 31, 1998 and the related combined statements of income and stockholders' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of North Sky Communications and affiliates as of December 31, 1998 and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Portland, Oregon July 9, 1999 35 37 NORTH SKY COMMUNICATIONS AND AFFILIATES COMBINED BALANCE SHEETS ASSETS
DECEMBER 31, JUNE 30, 1998 1999 ------------ ----------- (UNAUDITED) CURRENT ASSETS: Cash...................................................... $ 431,200 $ 827,959 Accounts receivable -- Trade.................................................. 2,552,950 5,020,728 Retainage.............................................. 455,112 360,443 Other current assets...................................... 76,497 145,027 ---------- ---------- Total current assets.............................. 3,515,759 6,354,157 PROPERTY AND EQUIPMENT, net................................. 1,679,372 2,218,280 ---------- ---------- Total assets...................................... $5,195,131 $8,572,437 ========== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term obligations............... $ 466,237 $ 616,243 Accounts payable.......................................... 626,345 972,592 Accrued payroll and related liabilities................... 289,581 467,306 Accrued liabilities....................................... 42,711 54,860 Notes payable, related party.............................. 1,214,185 1,055,585 ---------- ---------- Total current liabilities......................... 2,639,059 3,166,586 LONG-TERM OBLIGATIONS, net of current maturities............ 657,700 882,275 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Sky Antenna Systems, Inc. common stock, $1 par value, 50,000 shares authorized, 14,512 shares issued and outstanding............................................ 14,512 14,512 North Pacific Utility Contractors, Inc. common stock, $.001 par value, 100,000 shares authorized, 20,000 shares issued and outstanding.......................... 20 20 Sky Antenna Systems, Inc. additional paid-in capital...... 39,283 39,283 North Pacific Utility Contractors, Inc. additional paid-in capital................................................ 980 980 Retained earnings......................................... 1,843,577 4,468,781 ---------- ---------- Total stockholders' equity........................ 1,898,372 4,523,576 ---------- ---------- Total liabilities and stockholders' equity........ $5,195,131 $8,572,437 ========== ==========
The accompanying notes are an integral part of these combined balance sheets. 36 38 NORTH SKY COMMUNICATIONS AND AFFILIATES COMBINED STATEMENTS OF INCOME
SIX MONTHS SIX MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, JUNE 30, JUNE 30, 1998 1998 1999 ------------ ---------- ----------- (UNAUDITED) REVENUES............................................... $14,562,355 $6,180,316 $11,183,456 COST OF SERVICES, including depreciation............... 9,876,898 4,069,525 7,899,853 ----------- ---------- ----------- Gross profit................................. 4,685,457 2,110,791 3,283,603 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES........... 4,446,666 1,910,451 619,172 ----------- ---------- ----------- Income from operations....................... 238,791 200,340 2,664,431 ----------- ---------- ----------- OTHER INCOME (EXPENSE): Interest expense..................................... (107,600) (28,830) (56,578) Interest income...................................... 151,750 42,844 7,914 Other income (expense), net.......................... (390) 5,752 9,437 ----------- ---------- ----------- Other income (expense), net.................. 43,760 19,766 (39,227) ----------- ---------- ----------- NET INCOME............................................. $ 282,551 $ 220,106 $ 2,625,204 =========== ========== ===========
The accompanying notes are an integral part of these combined statements. 37 39 NORTH SKY COMMUNICATIONS AND AFFILIATES COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------------------------ NORTH PACIFIC ADDITIONAL PAID-IN CAPITAL SKY ANTENNA UTILITY --------------------------------- SYSTEMS, INC. CONTRACTORS, INC. NORTH PACIFIC ---------------- ----------------- SKY ANTENNA UTILITY RETAINED SHARES AMOUNT SHARES AMOUNT SYSTEMS, INC. CONTRACTORS, INC. EARNINGS TOTAL ------ ------- ------- ------- ------------- ----------------- ---------- ---------- BALANCE, December 31, 1997... 14,512 $14,512 20,000 $20 $39,283 $980 $1,561,026 $1,615,821 Net income................. -- -- -- -- -- -- 282,551 282,551 ------ ------- ------ --- ------- ---- ---------- ---------- BALANCE, December 31, 1998... 14,512 14,512 20,000 20 39,283 980 1,843,577 1,898,372 Net income (unaudited)..... -- -- -- -- -- -- 2,625,204 2,625,204 ------ ------- ------ --- ------- ---- ---------- ---------- BALANCE, June 30, 1999 (unaudited)................ 14,512 $14,512 20,000 $20 $39,283 $980 $4,468,781 $4,523,576 ====== ======= ====== === ======= ==== ========== ==========
The accompanying notes are an integral part of these combined statements. 38 40 NORTH SKY COMMUNICATIONS AND AFFILIATES COMBINED STATEMENTS OF CASH FLOWS
SIX MONTHS SIX MONTHS YEAR ENDED ENDED ENDED DECEMBER 31, JUNE 30, JUNE 30, 1998 1998 1999 ------------ ---------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................... $ 282,551 $ 220,106 $ 2,625,204 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization expense............. 512,746 223,500 305,796 Changes in operating assets and liabilities -- Accounts receivable............................... (1,198,719) (334,656) (2,373,109) Other current assets.............................. 34,747 (29,821) (68,530) Accounts payable.................................. 415,101 115,883 346,247 Accrued payroll and related liabilities........... 42,860 1,467,340 177,725 Accrued liabilities............................... 10,857 (1,587) 12,149 ----------- ---------- ----------- Net cash provided by operating activities.... 100,143 1,660,765 1,025,482 CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment.................. (842,483) (234,877) (844,704) ----------- ---------- ----------- Net cash used in investing activities........ (842,483) (234,877) (844,704) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of long-term obligations...... 773,630 277,569 656,567 Principal payments on long-term obligations.......... (380,387) (174,967) (281,986) Increase (decrease) in notes payable, related party............................................. 548,527 (567,854) (158,600) ----------- ---------- ----------- Net cash provided by (used in) financing activities................................. 941,770 (465,252) 215,981 ----------- ---------- ----------- NET INCREASE IN CASH................................... 199,430 960,636 396,759 CASH, beginning of period.............................. 231,770 231,770 431,200 ----------- ---------- ----------- CASH, end of period.................................... $ 431,200 $1,192,406 $ 827,959 =========== ========== =========== SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid during the period for interest............. $ 107,600 $ 28,830 $ 56,578 NONCASH TRANSACTIONS: Net book value of property and equipment traded in for new property and equipment.................... 48,152 -- --
The accompanying notes are an integral part of these combined statements. 39 41 NORTH SKY COMMUNICATIONS AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS DECEMBER 31, 1998 1. BUSINESS AND ORGANIZATION North Sky Communications (North Sky) was established in 1990 as a joint venture between North Pacific Utility Contractors, Inc. (North Pacific) and Sky Antenna Systems, Inc. (Sky Antenna), to enter into contracts for the construction, repair, maintenance and extension of cable, both aerial and underground. North Sky, North Pacific and Sky Antenna are collectively referred to as North Sky Communications and affiliates (the Company). The Company operates in one segment primarily in Oregon, Washington, California and Nevada. A majority of the Company's contract work is under unit-price contracts. The allocation of joint venture income or loss and distribution of cash flow is shared equally between North Pacific and Sky Antenna in accordance with the Joint Venture Agreement. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation The combined financial statements include the accounts of North Sky, North Pacific and Sky Antenna, which are under common ownership. Because of the common ownership and significant transactions between North Sky and the two corporations, combined financial statements are presented. All significant intercompany accounts and transactions have been eliminated. Interim Financial Information The unaudited interim financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with generally accepted accounting principles, have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustment necessary to fairly present the financial position, results of operations and cash flows with respect to the interim financial statements have been included. The results of operations for the interim periods are not necessarily indicative of the results of the entire year. Accounts Receivable and Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts based upon the specific identification of accounts receivable where collection is no longer deemed probable. As of December 31, 1998, there was no allowance for doubtful accounts. Property and Equipment Property and equipment are stated at cost, and depreciation is computed using the straight-line method over the estimated useful lives of the assets. Leasehold improvements are capitalized and amortized over the lesser of the lease term or the estimated useful life of the asset. Depreciation and amortization expense was $512,746 for the year ended December 31, 1998. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of income. 40 42 NORTH SKY COMMUNICATIONS AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition Generally, the terms of the Company's contracts are on a unit price basis, whereby payment is made based upon the units of work performed. The Company recognizes revenue on these contracts when services are performed. Occasionally, the Company will perform work under a fixed price or cost plus fee contracts. Revenues from such contracts are recognized under the percentage-of-completion method, measured by the percentage of costs incurred to date to total estimated costs for each contract. Contract costs include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined. The balances billed but not paid by customers pursuant to retainage provisions in certain contracts will be due upon completion of the contracts and acceptance by the customer. Based on the Company's experience with similar contracts, the retention balance at the balance sheet date will be collected within the subsequent fiscal year. Fair Value of Financial Instruments The Company's financial instruments consist of cash, accounts receivable, accounts payable and long-term obligations. The Company believes that the carrying value of these instruments on the accompanying balance sheet approximates their fair value. Income Taxes North Sky is a joint venture and is taxed as a partnership under the Internal Revenue Code. North Pacific and Sky Antenna have elected to file U.S. federal and state taxes pursuant to Subchapter "S" of the Internal Revenue Code. Thus, U.S. federal and state income taxes become the responsibility of the shareholders. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amount of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. PROPERTY AND EQUIPMENT Property and equipment at December 31, 1998, consists of the following:
ESTIMATED USEFUL LIVES IN YEARS ---------------- Transportation equipment.................................. 5 $2,219,802 Machinery and equipment................................... 5-7 1,449,580 Office furniture and computer equipment................... 3-5 59,757 Leasehold improvements.................................... 5 43,108 ---------- 3,772,247 Less -- Accumulated depreciation and amortization......... (2,092,875) ---------- Property and equipment, net..................... $1,679,372 ==========
41 43 NORTH SKY COMMUNICATIONS AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 4. LONG-TERM OBLIGATIONS The Company's long-term obligations at December 31, 1998, consisted of the following: Various notes payable with a bank; interest rates range from 8.28% to 8.90%; each note is payable in 36 equal monthly installments; maturity dates range from 12/00 to 12/01; secured by vehicles and equipment........................... $ 846,271 Various notes payable with a financing company; interest rates range from 6.90% to 9.00%; monthly principal and interest payments; maturity dates range from 5/99 to 12/01; secured by vehicles and equipment.................. 199,463 Various notes payable with a financing company; interest rates range from 8.00% to 9.25%; monthly principal and interest payments; maturity dates range from 1/99 to 7/01; secured by vehicles....................................... 78,203 ---------- 1,123,937 Less -- Current maturities.................................. (466,237) ---------- Total long-term obligations....................... $ 657,700 ==========
Maturities of long-term obligations as of December 31, 1998, are as follows:
YEAR ENDING DECEMBER 31, ------------ 1999..................................................... $ 466,237 2000..................................................... 456,944 2001..................................................... 200,756 ---------- $1,123,937 ==========
5. NOTES PAYABLE, RELATED PARTY Sky Antenna has a note payable to its sole shareholder of $641,685. North Pacific has a note payable to its sole shareholder of $572,500. These notes bear no interest, are due on demand and have been classified as current on the accompanying combined balance sheet as of December 31, 1998. These notes represent salaries due to the shareholders and were issued on December 31, 1998 (see Note 9). 6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK The Company's operations vary with the general economic conditions of the telecommunication and cable industry. Financial instruments which potentially expose the Company to concentration of credit risk consist primarily of trade accounts receivable. During 1998, the Company had one customer who accounted for 57% of the Company's revenues. This same customer represented $1,773,686 or 59% of the Company's accounts receivable as of December 31, 1998. 42 44 NORTH SKY COMMUNICATIONS AND AFFILIATES NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED) 7. COMMITMENTS AND CONTINGENCIES Leases The Company leases certain equipment under long-term operating lease agreements, which expire in various years through 2001. Rent expense for the year ended December 31, 1998, was $217,103. The minimum lease payments for operating leases in future years are as follows:
YEAR ENDING DECEMBER 31, - ------------ 1999.................................................... $144,812 2000.................................................... 98,189 2001.................................................... 33,385 -------- $276,386 ========
Litigation The Company is involved in disputes or legal actions arising in the ordinary course of business. Management does not believe the outcome of such legal actions will have a material adverse effect on the Company's financial position. Insurance The Company carries a broad range of premium-based insurance coverage, including workers' compensation, business auto liability, general liability and an umbrella policy. Performance Bonds Occasionally, the Company is required to provide performance bonds in connection with its contract commitments, which are personally guaranteed by the partners of the Company. 8. DISTRIBUTIONS/COMPENSATION During the year ended December 31, 1998, North Sky made cash distributions of $1,543,633 to Sky Antenna and $1,540,416 to North Pacific. These distributions were eliminated in the combined financial statements. Sky Antenna and North Pacific individually expensed $1,800,000 for salaries to the shareholders for the year ended December 31, 1998. 9. SUBSEQUENT EVENT (UNAUDITED) Effective July 1, 1999, the Company was acquired by Quanta Services, Inc. (Quanta). The related party notes payable were paid off by Quanta. After the acquisition, North Sky, North Pacific and Sky Antenna were dissolved and a new company was formed under Quanta. There were no material contingencies remaining from the acquisition. 43 45 INDEPENDENT AUDITORS' REPORT To Crown Fiber Communications, Inc.: We have audited the accompanying balance sheet of Crown Fiber Communications, Inc. (an S corporation) as of December 31, 1998, and the related statements of income and shareholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the management of Crown Fiber Communications, Inc. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Crown Fiber Communications, Inc. as of December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. Babush, Neiman, Kornman & Johnson, LLP Atlanta, Georgia July 30, 1999 44 46 CROWN FIBER COMMUNICATIONS, INC. BALANCE SHEETS ASSETS
DECEMBER 31, JUNE 30, 1998 1999 ------------ ----------- (UNAUDITED) CURRENT ASSETS Cash and cash equivalents................................. $1,352,389 $ 2,748,774 Accounts receivable -- trade.............................. 2,602,680 6,307,470 Accounts receivable -- other.............................. 23,500 -- Note receivable........................................... 27,499 -- Employee advances......................................... 19,572 27,589 Due from affiliates....................................... 111,232 150,619 ---------- ----------- Total Current Assets.............................. 4,136,872 9,234,452 PROPERTY AND EQUIPMENT, NET................................. 1,085,810 1,046,313 DEPOSITS.................................................... 10,849 19,094 ---------- ----------- Total Assets...................................... $5,233,531 $10,299,859 ========== =========== LIABILITIES AND SHAREHOLDER'S EQUITY CURRENT LIABILITIES Accounts payable -- trade................................. $1,330,500 $ 2,770,221 Accounts payable -- related parties....................... 1,571,923 2,074,769 Accrued expenses.......................................... 78,920 456,205 Current portion of long-term debt......................... 54,471 38,037 ---------- ----------- Total Current Liabilities......................... 3,035,814 5,339,232 LONG-TERM DEBT, LESS CURRENT PORTION........................ 325,231 308,931 SHAREHOLDER'S EQUITY........................................ 1,872,486 4,651,696 ---------- ----------- Total Liabilities and Shareholder's Equity........ $5,233,531 $10,299,859 ========== ===========
The accompanying notes are an integral part of these financial statements. 45 47 CROWN FIBER COMMUNICATIONS, INC. STATEMENTS OF INCOME
FOR THE YEAR FOR THE SIX MONTHS ENDED ENDED JUNE 30, DECEMBER 31, ------------------------- 1998 1998 1999 ------------ ----------- ----------- (UNAUDITED) REVENUES.............................................. $35,624,731 $16,161,544 $24,453,065 ----------- ----------- ----------- OPERATING EXPENSES Direct labor and costs.............................. 27,522,318 12,196,806 18,453,406 General and administrative expense.................. 2,451,027 1,173,116 1,191,565 Depreciation expense................................ 216,667 93,974 103,994 ----------- ----------- ----------- Total Operating Expenses.................... 30,190,012 13,463,896 19,748,965 ----------- ----------- ----------- OPERATING INCOME...................................... 5,434,719 2,697,648 4,704,100 INTEREST EXPENSE...................................... (22,915) (8,234) (17,551) INTEREST INCOME....................................... 53,644 13,462 18,974 ----------- ----------- ----------- NET INCOME............................................ $ 5,465,448 $ 2,702,876 $ 4,705,523 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 46 48 CROWN FIBER COMMUNICATIONS, INC. STATEMENTS OF SHAREHOLDER'S EQUITY
FOR THE FOR THE SIX YEAR ENDED MONTHS ENDED DECEMBER 31, JUNE 30, 1998 1999 ------------ ------------ (UNAUDITED) Common stock, par value $1, 1,000 shares issued and outstanding................................................. $ 100 $ 100 ----------- ----------- Additional paid-in capital.................................. 98,795 98,795 ----------- ----------- Retained earnings: Balance, beginning of period.............................. 1,177,495 1,773,591 Net income for period..................................... 5,465,448 4,705,523 Shareholder distributions................................. (4,869,352) (1,926,313) ----------- ----------- Balance, end of period.................................... 1,773,591 4,552,801 ----------- ----------- Total Shareholder's Equity........................ $ 1,872,486 $ 4,651,696 =========== ===========
The accompanying notes are an integral part of these financial statements. 47 49 CROWN FIBER COMMUNICATIONS, INC. STATEMENTS OF CASH FLOWS
FOR THE FOR THE SIX MONTHS ENDED YEAR ENDED JUNE 30, DECEMBER 31, ------------------------- 1998 1998 1999 ------------ ----------- ----------- (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income.......................................... $ 5,465,448 $ 2,702,876 $ 4,705,524 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation........................................ 216,667 93,974 103,994 Increase in accounts receivable..................... (425,907) (1,462,089) (3,704,791) Increase in employee advances....................... (5,188) (8,638) (8,018) (Increase) decrease in deposits..................... 4,312 3,035 (8,245) Increase in accounts payable and accrued expenses... 1,394,373 1,625,707 2,319,852 ----------- ----------- ----------- Net Cash Provided By Operating Activities... 6,649,705 2,954,865 3,408,316 ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES (Increase) decrease in notes receivable............. (18,499) (18,499) 50,999 Purchase of property and equipment.................. (642,803) (187,252) (64,497) ----------- ----------- ----------- Net Cash Used By Investing Activities....... (661,302) (205,751) (13,498) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES Increase in due from affiliates..................... (246,485) (201,194) (39,387) Proceeds from long-term debt........................ 355,150 -- -- Payments on long-term debt.......................... (38,849) (23,422) (32,733) Shareholder distributions........................... (4,869,352) (1,532,753) (1,926,313) ----------- ----------- ----------- Net Cash Used By Financing Activities....... (4,799,536) (1,757,369) (1,998,433) ----------- ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS......................................... 1,188,867 991,745 1,396,385 CASH AND CASH EQUIVALENTS, BEGINNING.................. 163,522 163,522 1,352,389 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, ENDING..................... $ 1,352,389 $ 1,155,267 $ 2,748,774 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. 48 50 CROWN FIBER COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS A. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Nature of Operations Crown Fiber Communications, Inc. ("the Company") incorporated in 1992 under the laws of the State of Virginia. The Company is engaged in the construction and installation of fiber optic and coaxial cable television and telephone systems. The Company does not install headend electronics and equipment. Its principal markets include Georgia, Virginia, Maryland, Alabama and Florida. Revenue Recognition The Company recognizes revenue from contracts on the completed-contract method. This method is used because contracts are billed weekly on a per foot basis and are cancelable at will. The results of this method on financial position and results of operations do not vary significantly from those which would result from use of the percentage-of-completion method. Interim Financial Information The unaudited interim financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with generally accepted accounting principles, have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, necessary to fairly present the financial position, results of operations and cash flows with respect to the interim financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. Accounts Receivable Management considers all accounts receivable to be collectible therefore no allowance for doubtful accounts has been provided. Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all instruments with an original maturity of three months or less to be cash equivalents. Property and Equipment Property and equipment are stated at cost. Depreciation is provided by the use of the straight-line and declining balance methods over the estimated useful lives of the assets. Maintenance and repairs are charged to expense as incurred; major renewals and betterments are capitalized. When items of property or equipment are sold or retired, the related cost and accumulated depreciation are removed from the accounts and any gain or loss is included in the results of operations. Income Taxes The Company has elected to be taxed under the provisions of Subchapter S of the Internal Revenue Code. Under those provisions the shareholder is liable for individual federal and state income taxes on the company's taxable income. Therefore no provision or liability for federal or state income taxes has been included in the financial statements. 49 51 CROWN FIBER COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Fair Value of Financial Instruments The Company's financial instruments include cash and cash equivalents, accounts receivable, accounts payable and notes payable. The carrying amount of these financial instruments have been estimated by management to approximate fair value. Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions. Those estimates and assumptions affect the reported amounts of assets, liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Deposits in Excess of Federally Insured Limits The Company maintains cash balances at several financial institutions. If the financial institutions were not to honor their contractual obligations to the Company, then the Company could incur losses. Management is of the opinion that there is no risk because of the financial strength of the financial institutions. Accounts at each institution are insured by the Federal Deposit Insurance Corporation up to $100,000. At December 31, 1998, the Company's uninsured cash bank balances total $2,220,427. Major Customers and Concentration of Credit Risk During 1998, the Company had greater than 10 percent of total sales to two customers, which accounted for 40 and 32 percent of the company's revenues. Approximately 14 percent of trade receivables at December 31, 1998, is due from these customers. These customers have historically accounted for a significant portion of the Company's business. Management anticipates the Company's relationship with these customers to continue. The Company grants credit, generally without collateral, to its customers, which include telecommunication utilities located throughout the southeastern United States. Consequently, the company is subject to potential credit risk related to changes in business and economic factors in the United States telecommunications industry. However, management believes that its contract acceptance, billing and collection policies are adequate to minimize the potential credit risk. B. PROPERTY AND EQUIPMENT, NET Major classifications of property, plant and equipment and their respective depreciable lives are summarized below:
DEPRECIABLE LIVES ----------- Leasehold improvements...................................... 7-39 years $ 34,561 Construction equipment...................................... 5-7 years 575,426 Transportation equipment.................................... 5 years 1,109,510 Office furniture and equipment.............................. 5-7 years 235,286 ---------- 1,954,783 Less accumulated depreciation............................... (868,973) ---------- $1,085,810 ==========
50 52 CROWN FIBER COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) C. LONG-TERM DEBT Long-term debt consists of the following: Note payable $2,852 monthly including interest at 9.7% through September, 1999. The note is secured by a vehicle................................................... $ 24,552 Note payable $744 monthly including interest at 9.0% through July, 2002. The note is secured by a vehicle.... 27,353 Note payable $4,196 monthly including interest at 8.5% through July, 2008. The note is secured by transportation equipment and personally guaranteed by the shareholder......................................... 327,797 -------- 379,702 Less Current Portion.................................... 54,471 -------- Total Long-Term Debt............................ $325,231 ========
Maturities on long-term debt are as follows: 1999...................................................... $ 54,471 2000...................................................... 32,600 2001...................................................... 35,521 2002...................................................... 34,916 2003...................................................... 32,481 Thereafter................................................ 189,713 -------- $379,702 ========
Interest paid and expense for the year ended December 31, 1998 was $22,915. D. RELATED PARTY TRANSACTIONS During 1998, the Company paid subcontractor service costs to an affiliated company owned by a related party of the shareholder of the Company. During the year ended December 31, 1998, the Company incurred expenses of $4,541,564 for these services which are reported in direct labor and costs on the accompanying statements of income. The amount owed to this subcontractor at December 31, 1998 is $1,103,475 and is included in accounts payable related parties. In prior periods, the Company incurred subcontractor service costs to a company owned by a related party to the shareholder. During the year ended December 31, 1998, the Company incurred no expenses for these services. The amount owed to this subcontractor at December 31, 1998 is $385,032 and is included in accounts payable related parties. During 1998, the Company paid subcontractor service costs and consulting fees to an affiliated company commonly owned by an officer of the Company. During the year ended December 31, 1998, the Company incurred expenses of $458,170 and $187,800, respectively for these services which are reported in direct labor and costs and general and administrative expense on the accompanying statements of income. The amount owed to this subcontractor at December 31, 1998 is $83,416 and is included in accounts payable related parties. During 1998, the Company paid consulting fees to an affiliated company commonly owned by the shareholder of the Company. During the year ended December 31, 1998, the Company incurred expenses of $50,000 for these services which are reported in direct labor and costs on the accompanying statement of income. 51 53 CROWN FIBER COMMUNICATIONS, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) E. OPERATING LEASE COMMITMENTS The Company has entered into a lease agreement for the rental of office space with the shareholder of the Company. The following is a schedule by year of future minimum rentals under the lease at December 31, 1998. 1999...................................................... $ 31,872 2000...................................................... 31,872 2001...................................................... 31,872 2002...................................................... 10,624 -------- Total........................................... $106,240 ========
The Company has entered into various lease agreements for vehicles. The following is a schedule by year of minimum rentals under the vehicle lease agreements at December 31, 1998. 1999...................................................... $308,584 2000...................................................... 219,623 2001...................................................... 95,729 2002...................................................... 12,469 -------- Total........................................... $636,405 ========
Rental expense for the year ended December 31, 1998 was $229,080. F. SUBSEQUENT EVENT In May 1999, the Company signed a letter of intent to merge with another company. 52 54 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Edwards Pipeline Company LLC: We have audited the accompanying balance sheet of Edwards Pipeline Company LLC, a North Carolina limited liability company, as of December 31, 1998, and the related statements of operations, members' equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Edwards Pipeline Company LLC as of December 31, 1998, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. ARTHUR ANDERSEN LLP Houston, Texas October 7, 1999 53 55 EDWARDS PIPELINE COMPANY LLC BALANCE SHEETS (IN THOUSANDS OF DOLLARS) ASSETS
DECEMBER 31, JUNE 30, 1998 1999 ------------ ----------- (UNAUDITED) CURRENT ASSETS: Cash...................................................... $ 279 $ 279 Accounts receivable....................................... 1,114 925 Prepaids and other........................................ 15 -- ------ ------ Total current assets.............................. 1,408 1,204 PROPERTY AND EQUIPMENT, net................................. 1,428 1,239 OTHER ASSETS, net........................................... 376 366 ------ ------ Total assets...................................... $3,212 $2,809 ====== ====== LIABILITIES AND MEMBERS' EQUITY CURRENT LIABILITIES: Notes payable............................................. $ 72 $ 30 Accounts payable and accrued liabilities.................. 577 362 ------ ------ Total current liabilities......................... 649 392 COMMITMENTS AND CONTINGENCIES MEMBERS' EQUITY............................................. 2,563 2,417 ------ ------ Total members' equity............................. 2,563 2,417 ------ ------ Total liabilities and members' equity............. $3,212 $2,809 ====== ======
The accompanying notes are an integral part of these financial statements. 54 56 EDWARDS PIPELINE COMPANY LLC STATEMENTS OF OPERATIONS (IN THOUSANDS OF DOLLARS)
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, --------------- 1998 1998 1999 ------------ ------ ------ (UNAUDITED) REVENUES.................................................... $10,669 $5,963 $4,996 COSTS OF SERVICES, including depreciation................... 6,552 2,815 3,195 ------- ------ ------ Gross profit...................................... 4,117 3,148 1,801 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES................ 2,628 1,113 1,100 ------- ------ ------ Income from operations............................ 1,489 2,035 701 ------- ------ ------ OTHER INCOME (EXPENSE): Interest expense.......................................... (6) (3) (6) Interest income and other, net............................ 49 25 11 ------- ------ ------ Other income (expense), net....................... 43 22 5 ------- ------ ------ NET INCOME.................................................. $ 1,532 $2,057 $ 706 ======= ====== ======
The accompanying notes are an integral part of these financial statements. 55 57 EDWARDS PIPELINE COMPANY LLC STATEMENTS OF MEMBERS' EQUITY (IN THOUSANDS OF DOLLARS)
EDWARDS UTILITY CO., INC. WCE, INC. TOTAL ----------------- --------- ------- BALANCE, December 31, 1997............................. $ 1,401 $1,418 $ 2,819 Net income........................................... 996 536 1,532 Distributions to members............................. (1,053) (735) (1,788) ------- ------ ------- BALANCE, December 31, 1998............................. 1,344 1,219 2,563 Net income (unaudited)............................... 459 247 706 Distributions to members (unaudited)................. (472) (380) (852) ------- ------ ------- BALANCE, June 30, 1999 (unaudited)..................... $ 1,331 $1,086 $ 2,417 ======= ====== =======
The accompanying notes are an integral part of these financial statements. 56 58 EDWARDS PIPELINE COMPANY LLC STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
SIX MONTHS YEAR ENDED ENDED JUNE 30, DECEMBER 31, ---------------- 1998 1998 1999 ------------ ------- ------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES: Net income................................................ $ 1,532 $ 2,057 $ 706 Adjustments to reconcile net income to net cash provided by operating activities -- Depreciation and amortization.......................... 661 329 329 Changes in operating assets and liabilities, net of noncash transactions -- Accounts receivable.................................... (139) 100 190 Other assets, net...................................... -- 15 15 Accounts payable and accrued liabilities............... 394 192 (216) ------- ------- ------ Net cash provided by operating activities......... 2,448 2,693 1,024 ------- ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property and equipment....................... (461) (344) (130) ------- ------- ------ Net cash used in investing activities............. (461) (344) (130) ------- ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES: Principal payments on notes payable....................... (270) (99) (42) Distributions to members.................................. (1,788) (1,655) (852) ------- ------- ------ Net cash used in financing activities............. (2,058) (1,754) (894) ------- ------- ------ NET INCREASE (DECREASE) IN CASH............................. (71) 595 -- CASH, beginning of period................................... 350 350 279 ------- ------- ------ CASH, end of period......................................... $ 279 $ 945 $ 279 ======= ======= ====== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for interest.................. $ 6 $ 3 $ 6 ======= ======= ======
The accompanying notes are an integral part of these financial statements. 57 59 EDWARDS PIPELINE COMPANY LLC NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS) 1. BUSINESS AND ORGANIZATION Edwards Pipeline Company LLC (Edwards or the Company) is a construction contractor primarily engaged in pipeline installation for its customers that are located primarily in North Carolina and South Carolina. Edwards performs a majority of its contract work under unit-price and fixed-price contracts, with contract terms generally ranging from six to 18 months. Edwards is a North Carolina limited liability company that is owned 65 percent by Edwards Utility Co., Inc., and 35 percent by WCE, Inc., and all profits and losses are allocated ratably among the members. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Interim Financial Information The unaudited interim financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with generally accepted accounting principles, have been omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments necessary to fairly present the financial position, results of operations and cash flows with respect to the interim financial statements have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. Accounts Receivable and Allowance for Doubtful Accounts The Company provides an allowance for doubtful accounts based upon the specific identification of accounts receivable where collection is no longer deemed probable. As of December 31, 1998, management estimates all accounts to be collectible. Property and Equipment Property and equipment are stated at cost, and depreciation is computed using the straight-line method over the estimated useful lives of the assets. Depreciation expense was $641 for the year ended December 31, 1998. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the statement of operations. Other Assets, Net Goodwill, resulting from the acquisition of the Company in March 1995, represents the excess of the acquisition cost over the fair value of the net assets acquired and is being amortized on a straight-line basis over 40 years. The net balance at December 31, 1998, was $364, and amortization expense for the year ended December 31, 1998, was $10. In addition, the Company entered into a noncompete agreement with an individual for $50, which is being amortized over the life of the agreement, five years. The net balance at December 31, 1998, was $12, and amortization expense for the year ended December 31, 1998, was $10. 58 60 EDWARDS PIPELINE COMPANY LLC NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Revenue Recognition The Company recognizes revenue when services are performed for unit-price contracts. Unit-price contracts generally provide that the customer accept completion of progress to date and compensate the Company for services which have been rendered, measured typically in terms of units installed or some other measure of progress. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to total estimated costs for each contract. Contract costs include all direct material, labor and subcontract costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are determined. Changes in job performance, job conditions, estimated profitability and final contract settlements may result in revisions to costs and income, and their effects are recognized in the period in which the revisions are determined. The balances billed but not paid by customers pursuant to retainage provisions in customer contracts will be due upon completion of the contracts and acceptance by the customer. Based on the Company's experience with similar contracts in recent years, the retention balance at each balance sheet date will be collected within the subsequent fiscal year. Fair Value of Financial Instruments The Company's financial instruments consist of cash, accounts receivable, accounts payable and long-term obligations. The Company believes that the carrying value of these instruments on the accompanying balance sheet approximates their fair value. Income Taxes The Company is filing its tax returns as a partnership for federal income tax purposes. Consequently, federal income taxes are not payable by, or provided for, the Company. Members are taxed individually on their shares of the Company's earnings. The Company's net income or loss is allocated among the members in accordance with an agreement between the members. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires the use of estimates and assumptions by management in determining the reported amounts of assets and liabilities, disclosures of contingent liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 3. DETAIL OF CERTAIN BALANCE SHEET ACCOUNTS Accounts receivable at December 31, 1998, consist of the following: Accounts receivable, trade.................................. $ 380 Unbilled receivable......................................... 623 Retainage................................................... 70 Employee advance............................................ 41 ------ $1,114 ======
59 61 EDWARDS PIPELINE COMPANY LLC NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Property and equipment at December 31, 1998, consist of the following:
ESTIMATED USEFUL LIVES IN YEARS ------------ Machinery and equipment..................................... 5-7 $2,923 Transportation equipment.................................... 5-7 277 ------ 3,200 Less -- Accumulated depreciation and amortization........... (1,772) ------ Property and equipment, net....................... $1,428 ======
Accounts payable and accrued expenses at December 31, 1998, consist of the following: Accounts payable, trade..................................... $502 Employee retirement plan.................................... 24 Other accrued expenses...................................... 51 ---- $577 ====
4. NOTES PAYABLE The Company's notes payable at December 31, 1998, consist of the following: Note payable to a bank, variable interest rate at the prime rate (7.75% at December 31, 1998) plus 1%, payable in equal monthly payments of $1, plus interest, maturing June 1999, secured by a vehicle........................................ $ 6 Note payable to a bank, 8.5% interest rate, due in installments of $6 plus interest, maturing in November 1999, secured by equipment................................ 66 --- $72 ===
5. RETIREMENT PLAN The Company has a deferred contribution profit sharing plan which covers substantially all employees who have completed six months of service. The Company follows the policy of funding retirement plan contributions annually as accrued. The Company's contributions are determined at the discretion of the members. The Company contributed $20 for 1998. 6. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK During 1998, the Company had greater than 10 percent of total sales to three customers, which accounted for 44 percent, 23 percent and 18 percent, respectively, of the Company's revenues. Approximately 0 percent, 24 percent and 66 percent of trade and retainage receivables at December 31, 1998, are due from each of these customers, respectively. The Company grants credit, generally without collateral, to its customers, which include real estate operators, general contractors and state and regulatory agencies located throughout the continental United States. Consequently, the Company is subject to potential credit risk related to changes in business and economic factors within these areas. However, management believes that its contract acceptance, billing and collection policies are adequate to minimize the potential credit risk. 60 62 EDWARDS PIPELINE COMPANY LLC NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) 7. RELATED-PARTY TRANSACTIONS The Company leases its operating facilities from a member under an operating lease payable at $3 per month. The lease is renewable on a month-to-month basis. Rent expense for the year ended December 31, 1998, was $36. The Company also paid its members management fees and consulting fees in the amount of $80 for the year ended December 31, 1998. 8. COMMITMENTS AND CONTINGENCIES Leases The Company leases certain equipment under month-to-month operating lease agreements. Rent expense for the year ended December 31, 1998, was $87. Performance Bonds In certain circumstances, the Company is required to provide performance bonds in connection with its contract commitments which are personally guaranteed by certain members of the Company. 9. SUBSEQUENT EVENTS In August 1999, the Company was acquired by Quanta Services, Inc. 61 63 INDEPENDENT AUDITOR'S REPORT To Haines Construction Co.: I have audited the accompanying balance sheet of Haines Construction Co. (an Oklahoma Corporation) as of March 31, 1999 and the related statements of income, stockholder's equity and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. My responsibility is to express an opinion on these financial statements based on my audit. I conducted my audit in accordance with generally accepted auditing standards. Those standards require that I plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. I believe that my audit provides a reasonable basis for my opinion. In my opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Haines Construction Co. as of March 31, 1999, and the results of operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. PAUL B. LEATHERS, INC. Oklahoma City, Oklahoma June 18, 1999 62 64 HAINES CONSTRUCTION CO. BALANCE SHEETS
MARCH 31, JUNE 30, 1999 1999 ----------- ----------- (UNAUDITED) ASSETS Current assets: Cash...................................................... $ 1,718,548 $ 1,409,620 Certificates of deposit................................... 800,000 800,000 Accounts receivable (Note 1) Due on contracts, including amounts retained by customers in accordance with contract provisions....... 635,750 2,898,557 Other receivable.......................................... 15,452 600,765 Unbilled contract receivable.............................. -- -- Due from employees........................................ 26,386 5,352 Notes receivable.......................................... 630,210 579,508 Accrued interest receivable............................... 3,768 15,048 Prepaid insurance......................................... 89,474 261,708 Prepaid taxes............................................. -- -- Costs and estimated earnings in excess of billings on uncompleted contracts (Note 1).......................... 3,787 18,523 Due from Haines Pipeline Construction, Inc. .............. 4,942 4,942 ----------- ----------- Total current assets............................... 3,928,317 6,594,023 ----------- ----------- Property and equipment, at cost (Note 1) Aircraft.................................................. 725,981 725,981 Heavy equipment........................................... 4,987,240 5,071,240 Light equipment and vehicles.............................. 1,212,385 1,392,269 Office furniture and equipment............................ 134,950 140,464 Tools and small equipment................................. 168,573 188,571 ----------- ----------- 7,229,129 7,518,525 Less accumulated depreciation............................. (2,691,762) (2,834,162) ----------- ----------- Total property and equipment, net.................. 4,537,367 4,684,363 ----------- ----------- Other assets: Deposits.................................................. 980 8,819 ----------- ----------- Total other assets................................. 980 8,819 ----------- ----------- Total assets....................................... $ 8,466,664 $11,287,205 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES: Accounts payable -- trade................................. $ 179,750 $ 1,265,761 Accrued and withheld payroll taxes........................ 7,651 60,019 Accrued wages payable..................................... 23,797 317,915 Accrued profit sharing payable............................ 59,014 -- Accrued insurance payable................................. 20,066 245,671 Accrued interest payable.................................. -- -- Income taxes payable...................................... 325,148 116,705 Dividends payable......................................... 6,000 6,000 Deferred Income Taxes..................................... 292,199 219,149 Billings in excess of costs and estimated earnings on uncompleted contracts (Note 1).......................... 1,201,675 1,867,576 Current maturities of long-term debt (Note 2)............. 867,754 1,025,636 Leases payable............................................ -- -- ----------- ----------- Total current liabilities.......................... 2,983,054 5,124,432 Long-term liabilities: Notes payable, net of current maturities (Note 2)......... 2,312,821 2,377,442 Leases payable............................................ -- -- Deferred Income taxes..................................... 903,819 917,653 ----------- ----------- Total liabilities.................................. 6,199,694 8,419,527 ----------- ----------- Stockholder's equity: Common stock, authorized 25,000 shares at $1.00 par value, 500 shares issued and 250 shares outstanding............ 500 500 Paid-in capital........................................... 5,500 5,500 Retained earnings......................................... 3,335,970 3,936,678 Treasury stock -- 250 shares, at cost..................... (1,075,000) (1,075,000) ----------- ----------- Total stockholder's equity......................... 2,266,970 2,867,678 ----------- ----------- Total liabilities and stockholder's equity......... $ 8,466,664 $11,287,205 =========== ===========
(See Accompanying Notes) 63 65 HAINES CONSTRUCTION CO. STATEMENTS OF INCOME
FOR THE FOR THE THREE MONTHS ENDED YEAR ENDED JUNE 30, MARCH 31, ----------------------- 1999 1998 1999 ----------- ---------- ---------- (UNAUDITED) Contract revenues....................................... $17,250,665 $4,397,462 $5,437,343 Costs of services, including depreciation............... 14,406,322 3,250,160 4,121,932 ----------- ---------- ---------- Gross profits from contracts............................ 2,844,343 1,147,302 1,315,411 Operating expenses...................................... 1,649,466 307,516 314,848 ----------- ---------- ---------- Income from operations.................................. 1,194,877 839,786 1,000,563 ----------- ---------- ---------- Other income (expense): Interest income....................................... 138,061 25,868 42,895 Miscellaneous income.................................. 1,001 487 199 Gain (loss) on sale of assets......................... (81,537) (15,232) 8,715 Interest expense...................................... (255,325) (69,581) (85,885) ----------- ---------- ---------- Total other income (expense).................. (197,800) (58,458) (34,076) ----------- ---------- ---------- Net income before income taxes................ 997,077 781,328 966,487 ----------- ---------- ---------- Provision for income tax (expense) benefit: Current............................................... (348,187) (149,327) (429,689) Deferred.............................................. (32,037) (147,297) 63,910 ----------- ---------- ---------- Total provision for income tax................ (380,224) (296,624) (365,779) ----------- ---------- ---------- Net income.................................... $ 616,853 $ 484,704 $ 600,708 =========== ========== ==========
(See Accompanying Notes) 64 66 HAINES CONSTRUCTION CO. STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK ADDITIONAL --------------- PAID-IN RETAINED TREASURY SHARES AMOUNT CAPITAL EARNINGS STOCK, AT COST TOTAL ------ ------ ---------- ---------- -------------- ---------- BALANCE, March 31, 1998...................... 500 $500 $5,500 $2,721,117 $(1,075,000) $1,652,117 Distributions.............................. -- -- -- (2,000) -- (2,000) Net Income................................. -- -- -- 616,853 -- 616,853 --- ---- ------ ---------- ----------- ---------- BALANCE, March 31, 1999...................... 500 500 5,500 3,335,970 (1,075,000) 2,266,970 Net Income (unaudited)..................... -- -- -- 600,708 -- 600,708 --- ---- ------ ---------- ----------- ---------- BALANCE, June 30, 1999 (unaudited)........... 500 $500 $5,500 $3,936,678 $(1,075,000) $2,867,678 === ==== ====== ========== =========== ==========
(See Accompanying Notes) 65 67 HAINES CONSTRUCTION CO. STATEMENTS OF CASH FLOWS
FOR THE YEAR FOR THE THREE MONTHS ENDED ENDED JUNE 30, MARCH 31, --------------------------- 1999 1998 1999 ------------ ------------ ------------ (UNAUDITED) CASH FLOWS FROM OPERATING ACTIVITIES Net income............................................. $ 616,853 $ 484,704 $ 600,708 ----------- ----------- ----------- Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization....................... 649,091 164,885 176,915 Receivables......................................... 128,367 (1,476,307) (2,827,086) Accrued interest receivable......................... (2,703) (1,074) (11,280) Prepaid expenses.................................... 47,622 (136,036) (172,234) Costs and estimated earnings in..................... 99,430 (284,016) (14,736) excess of billings Deposits............................................ (300) (300) (7,839) Payables............................................ (267,901) 388,842 1,086,011 Accrued liabilities................................. (61,822) 288,373 513,076 Deferred income taxes............................... 32,037 149,327 (59,215) Income taxes payable................................ 311,724 147,297 (208,443) Billings in excess of costs and estimated earnings.......................................... 1,201,675 191,915 665,901 Loss (gain) on sale of assets....................... 81,537 15,232 (8,715) ----------- ----------- ----------- Total adjustments.............................. 2,218,757 (551,862) (867,645) ----------- ----------- ----------- Net cash provided (used) by operating activities................................... 2,835,610 (67,158) (266,937) ----------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES Capital expenditures................................... (452,874) (8,874) (348,696) Proceeds from sale of assets........................... 374,353 248,400 33,500 Due from related companies............................. (1,275) -- -- Notes receivable -- other.............................. (580,511) (20,584) 50,702 ----------- ----------- ----------- Net cash provided (used) by investing activities................................... (660,307) 218,942 (264,494) ----------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES New borrowings: Short-term.......................................... 1,249,325 -- 103,340 Long-term........................................... 740,186 -- 309,965 Debt reductions: Short-term.......................................... (2,657,268) (26,147) -- Long-term........................................... (597,949) (183,794) (190,802) Lease payments...................................... (120,554) (7,340) -- ----------- ----------- ----------- Net cash provided (used) in financing activities................................... (1,386,260) (217,281) 222,503 ----------- ----------- ----------- Net increase (decrease) in cash and cash equivalents.................................. 789,043 (65,497) (308,928) Cash and cash equivalents at beginning of period......... 1,729,505 1,729,505 2,518,548 ----------- ----------- ----------- Cash and cash equivalents at end of period............... $ 2,518,548 $ 1,664,008 $ 2,209,620 =========== =========== ===========
(See Accompanying Notes) 66 68 HAINES CONSTRUCTION CO. NOTES TO FINANCIAL STATEMENTS MARCH 31, 1999 NOTE 1 -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES Haines Construction Co. (Haines or the Company) is a construction contractor primarily engaged in pipeline installation for its customers that are located primarily in Oklahoma, Texas and Kansas. Haines performs a majority of its contract work under unit-price and fixed-price contracts, with contract terms generally ranging from six to 12 months. A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows. Interim Consolidated Financial Information The unaudited interim consolidated financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission ("SEC"). Certain information and footnote disclosures, normally included in annual financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted pursuant to those rules and regulations, although the Company believes that the disclosures made are adequate to make the information presented not misleading. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the financial position, results of operations and cash flows with respect to the interim consolidated financial statements, have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire fiscal year. Accounting Basis for Recording Income Profits on contracts are recorded on the percentage of completion method, whereby recognition of earnings on contracts in progress is calculated based on the ratio of cost incurred to date to expected cost to be incurred on each contract. Contract costs include all direct material supplies, labor, subcontracts, equipment costs, travel and per diem, and insurance and bonding expense. Changes in job performance, job conditions, and estimated profitability, including those arising from contract penalty provisions and final contract settlements, may result in revisions to costs and income. Any required adjustments are recognized in the period in which the revisions become known. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss on the contract is accrued. Non-contract revenue and expenses are reported on the accrual method of accounting. Accounts Receivable The Company considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. If amounts become uncollectible, they will be charged to operations when that determination is made. Depreciation Depreciation is provided for in amounts sufficient to relate the cost of depreciable assets to operations over their estimated service lives using the straight-line method. Depreciation of $649,091 was reported for the current year. Accounting Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the 67 69 HAINES CONSTRUCTION CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2 -- INSTALLMENT NOTES PAYABLE
CURRENT LONG-TERM TOTAL -------- ---------- ---------- KDC Fin. Corp., installments of $4,352, interest at 7.85%, sec. by equipment, maturing in November 2001.............................................. $ 43,943 $ 82,039 $ 125,982 KDC Fin. Corp., installments of $5,116, interest at 6.99%, sec. by equipment, maturing in July 1999............................................ 35,063 -- 35,063 Assoc. Comm. Corp., installments of $43,606, interest at 7.5%, sec. by equipment, maturing in May 2001........................................ 457,778 622,514 1,080,292 Assoc. Comm. Corp., installments of $5,044, interest at 7.35%, sec. by equipment, maturing in January 2002................................. 46,988 158,473 205,461 SafeCo Credit Co., installments of $25,021, interest at 7.5%, sec. by equipment, maturing in September 2000............................................ 159,532 265,184 424,716 SafeCo Credit Co., installments of $13,626, interest at 7.5% w/lump sum sec. by equipment, maturing in July 2001........................... 73,425 459,611 533,036 First Capital Bank, line-of-credit, varying interest at prime (7.75% at March 31, 1999) secured by accounts receivable, equipment, and cont. rights, maturing in January 2000.......... 1,025 -- 1,025 Lana Haines, due September 2008, variable payment schedule........................................ 50,000 725,000 775,000 -------- ---------- ---------- Totals.................................. $867,754 $2,312,821 $3,180,575 ======== ========== ==========
The following summarizes future principal reductions of long-term notes payable: Year Ending March 31: 2000................................................... $ 867,754 2001................................................... 956,946 2002................................................... 421,951 2003................................................... 239,513 2004................................................... 192,413 Thereafter............................................. 501,998 ---------- $3,180,575 ==========
NOTE 3 -- STATEMENTS OF CASH FLOWS The Company considers all highly liquid debt instruments purchased with a maturity of three months or less and certificates of deposit to be cash equivalents. Noncash investing and financing activities for the year consisted of the purchase of equipment through long-term debt in the amount of $209,224. 68 70 HAINES CONSTRUCTION CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Cash paid during the year for: Interest.................................................. $263,842 Taxes..................................................... 6,032
NOTE 4 -- ACCOUNTS RECEIVABLE AGING
AMOUNT -------- Current................................................... $ 29,846 31-60 days................................................ 7,280 61-90 days................................................ 8,758 Over 90 days.............................................. -- Retainage................................................. 589,866 -------- Total........................................... $635,750 ========
NOTE 5 -- LEASES The Company leases commercial property and equipment from HCC Rental Services, LLC, a company owned by William B. Haines. The expense for the period ending March 31, 1999 was $279,173. Future lease expenses cannot be determined at this time. The Company also leased several vehicles under cancelable operating leases, which expired October 31, 1998. The payments were $6,384 per month. Rental expense that related to these operating leases was $44,687. NOTE 6 -- INCOME TAXES Effective April 1, 1993, Haines Construction Co. adopted SFAS No. 109, Accounting for Income Taxes, which requires an asset and liability approach to financial accounting and reporting for income taxes. The difference between the financial statement and tax basis of assets and liabilities is determined annually. Deferred income tax assets and liabilities are computed for those differences that have future tax consequences using the currently enacted tax laws and rates that apply to the periods in which they are expected to affect taxable income. Valuation allowances are established, if necessary, to reduce the deferred tax liability to the amount that will more likely than not be realized. Income tax expense is the current tax payable or refundable for the period plus or minus the net change in the deferred tax assets and liabilities. Since the Company uses the ACRS/MACRS methods of accounting for income tax purposes, the primary temporary differences between tax and financial statements are depreciation and deferred revenue related to a change in tax accounting method. SFAS 109 requires the following disclosure of the Company's total deferred tax assets and liabilities:
FEDERAL STATE TOTAL ---------- -------- ---------- Deferred short-term liabilities .................. $ 248,369 $ 43,830 $ 292,199 Deferred short-term assets........................ -- -- -- ---------- -------- ---------- Net short-term liability ......................... 248,369 43,830 292,199 ---------- -------- ---------- Deferred long-term liabilities ................... 768,246 135,573 903,819 Deferred long-term assets......................... -- -- -- ---------- -------- ---------- Net long-term liabilities ........................ 768,246 135,573 903,819 ---------- -------- ---------- Net deferred tax liability ....................... $1,016,615 $179,403 $1,196,018 ========== ======== ==========
69 71 HAINES CONSTRUCTION CO. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) After considering all of the evidence, both positive and negative, management has concluded it is more likely than not that all-future tax benefits will be realized. Therefore, a valuation allowance is not needed for the deferred tax liability. There was no prior balance in the valuation allowance and therefore there was no change in the valuation allowance this period. NOTE 7 -- CONCENTRATION OF CREDIT RISK The Company contracts to construct oil and natural gas pipelines primarily in Oklahoma, Texas, and Kansas. Credit is extended based on an evaluation of each customer's financial condition. Credit losses, if any, have been provided for in the financial statements and have been generally within management's expectations. The Company has concentrated its credit risk for cash by maintaining deposits in financial institutions located within the same Oklahoma region, which at times may exceed insured limits. The maximum loss that would have resulted from that risk totaled $2,149,470 at March 31, 1999 for the excess of the deposit liabilities reported by the financial institutions over the amounts that would have been covered by federal insurance. NOTE 8 -- EMPLOYEE BENEFIT PLAN The Company maintains a profit sharing plan covering substantially all full-time employees. The Board of Directors determines contributions to the plan. For the year ending March 31, 1999, the total profit sharing plan expense was $54,235. NOTE 9 -- CONTINGENT LIABILITIES The Company has one pending lawsuit in which it is named as the defendant. Management is of the opinion that the final settlement will be favorable to the Company. Therefore, no provision has been made in the financial statements for the outcome of the lawsuit. NOTE 10 -- NOTES RECEIVABLE Companies owned by William B. Haines owed the Company $580,029 in the form of notes receivable and $3,096 accrued interest receivable. NOTE 11 -- SUBSEQUENT EVENTS Subsequent to the balance sheet date, the Company incurred a note payable in the amount of $413,806 for the purchase of equipment. In September 1999, the Company was acquired by Quanta Services, Inc. and certain installment notes payable were repaid. (Unaudited). 70 72 INDEPENDENT AUDITORS' REPORT TO BONNEVILLE CONSTRUCTION COMPANY, INC. We have audited the accompanying balance sheet of Bonneville Construction Company, Inc. as of December 31, 1998, and the related statements of operations, stockholder's equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Bonneville Construction Company, Inc. as of December 31, 1998 and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. McGLADREY & PULLEN, LLP Las Vegas, Nevada February 5, 1999 71 73 BONNEVILLE CONSTRUCTION COMPANY, INC. BALANCE SHEETS ASSETS
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) CURRENT ASSETS Cash and cash equivalents................................. $ 1,499,853 $ 13,732 Accounts receivable....................................... 5,704,628 5,921,738 Advances to related parties............................... 128,471 -- Costs and estimated earnings in excess of billings on uncompleted contracts.................................. 279,805 423,023 Other assets.............................................. 112,222 81,675 ----------- ----------- Total current assets.............................. 7,724,979 6,440,168 Cash Value of Life Insurance................................ 167,951 -- Furniture and Equipment, net................................ 4,384,158 4,301,333 ----------- ----------- $12,277,088 $10,741,501 =========== =========== LIABILITIES AND STOCKHOLDER'S EQUITY CURRENT LIABILITIES Line of credit............................................ $ 35,321 $ 1,918,749 Current maturities of long-term debt...................... 374,980 642,376 Current portion of due to related parties................. 82,885 89,805 Accounts payable.......................................... 2,718,005 1,460,601 Accrued subcontractor expenses............................ 741,547 177,117 Accrued expenses.......................................... 346,359 508,201 Billings in excess of costs and estimated earnings on uncompleted contracts.................................. 575,609 487,632 ----------- ----------- Total current liabilities......................... 4,874,706 5,284,481 ----------- ----------- Long-Term Debt, less current maturities..................... 1,393,904 1,833,862 ----------- ----------- Due to Related Parties, less current portion................ 210,179 112,114 ----------- ----------- Commitments Stockholder's Equity Common stock, $100 par value; authorized 250 shares; 92 shares issued and 60.55 shares outstanding............. 9,200 9,200 Additional paid-in capital................................ 1,447,889 1,447,889 Retained earnings......................................... 5,543,407 3,256,152 ----------- ----------- 7,000,496 4,713,241 Less cost of 31.45 shares of treasury stock............... 1,202,197 1,202,197 ----------- ----------- 5,798,299 3,511,044 ----------- ----------- $12,277,088 $10,741,501 =========== ===========
See Notes to Financial Statements. 72 74 BONNEVILLE CONSTRUCTION COMPANY, INC. STATEMENTS OF OPERATIONS
FOR THE YEAR FOR THE NINE FOR THE NINE ENDED MONTHS ENDED MONTHS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1998 1999 ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) Contract revenue earned.............................. $39,864,996 $28,898,936 $21,885,896 Cost of services, including depreciation............. 33,824,638 24,631,904 19,343,919 ----------- ----------- ----------- Gross profit............................... 6,040,358 4,267,032 2,541,977 General and administrative expenses.................. 3,443,578 2,725,404 2,890,552 ----------- ----------- ----------- Operating income (loss).................... 2,596,780 1,541,628 (348,575) ----------- ----------- ----------- Nonoperating income (expense): Interest income.................................... 45,321 38,381 23,514 Interest expense................................... (239,076) (186,289) (193,383) Other, net......................................... (65,234) (100,090) 106,717 Gain (loss) on sale of equipment................... (273,862) (3,550) 115,877 ----------- ----------- ----------- (532,851) (251,548) 52,725 ----------- ----------- ----------- Net income (loss).......................... $ 2,063,929 $ 1,290,080 $ (295,850) =========== =========== ===========
See Notes to Financial Statements. 73 75 BONNEVILLE CONSTRUCTION COMPANY, INC. STATEMENTS OF STOCKHOLDER'S EQUITY
COMMON STOCK --------------------- ADDITIONAL SHARES PAID-IN RETAINED TREASURY OUTSTANDING DOLLARS CAPITAL EARNINGS STOCK TOTAL ----------- ------- ---------- ----------- ----------- ----------- BALANCE, December 31, 1997...... 66.54 $9,200 $1,447,889 $ 4,126,039 $ (768,887) $ 4,814,241 Purchase of common stock through issuance of note payable..................... (5.99) -- -- -- (433,310) (433,310) Distributions................. -- -- -- (646,561) -- (646,561) Net income.................... -- -- -- 2,063,929 -- 2,063,929 ----- ------ ---------- ----------- ----------- ----------- BALANCE, December 31, 1998...... 60.55 9,200 1,447,889 5,543,407 (1,202,197) 5,798,299 Distributions (unaudited)..... -- -- -- (1,991,405) -- (1,991,405) Net loss (unaudited).......... -- -- -- (295,850) -- (295,850) ----- ------ ---------- ----------- ----------- ----------- BALANCE, September 30, 1999 (unaudited)................... 60.55 $9,200 $1,447,889 $ 3,256,152 $(1,202,197) $ 3,511,044 ===== ====== ========== =========== =========== ===========
See Notes to Financial Statements. 74 76 BONNEVILLE CONSTRUCTION COMPANY, INC. STATEMENTS OF CASH FLOWS (NOTE 11)
FOR THE YEAR FOR THE NINE FOR THE NINE ENDED MONTHS ENDED MONTHS ENDED DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1998 1999 ------------ ------------- ------------- (UNAUDITED) Cash Flows from Operating Activities Cash received from customers..................... $ 39,213,039 $ 20,634,318 $ 21,437,591 Cash paid to suppliers and employees............. (35,324,012) (19,247,532) (23,128,886) Interest received................................ 45,321 38,381 23,514 Interest paid.................................... (239,076) (186,289) (193,383) Other income (expense)........................... (65,234) (100,090) 106,717 ------------ ------------ ------------ Net cash provided by (used in) operating activities............................. 3,630,038 1,138,788 (1,754,447) ------------ ------------ ------------ Cash Flows from Investing Activities Increase in cash value of life insurance......... (17,253) (9,768) -- Purchase of equipment............................ (2,044,603) (1,778,774) (732,870) Proceeds from sale of equipment.................. 187,323 160,624 367,360 Payments from (to) related parties, net.......... 136,896 146,399 (45,483) ------------ ------------ ------------ Net cash (used in) investing activities............................. (1,737,637) (1,481,519) (410,993) ------------ ------------ ------------ Cash Flows from Financing Activities Distributions.................................... (646,561) (597,161) (1,465,557) Payments on related parties notes, net........... (432,184) (399,636) (91,145) Proceeds on long-term borrowings................. 1,067,279 297,324 1,300,053 Principal payments on long-term borrowings....... (844,282) (326,128) (947,460) Proceeds on line of credit, net.................. 35,321 1,041,907 1,883,428 ------------ ------------ ------------ Net cash provided by (used in) financing activities............................. (820,427) 16,306 679,319 ------------ ------------ ------------ Net increase (decrease) in cash.......... 1,071,974 (326,425) (1,486,121) Cash and cash equivalents, beginning............... 427,879 427,879 1,499,853 ------------ ------------ ------------ Cash and cash equivalents, ending.................. $ 1,499,853 $ 101,454 $ 13,732 ============ ============ ============ Reconciliation of Net Income (Loss) to Net Cash Provided by (Used In) Operating Activities: Net income (loss)................................ $ 2,063,929 $ 1,290,080 $ (295,850) Depreciation..................................... 830,099 624,300 735,030 Bad debts........................................ 301,907 145,587 6,228 (Gain) Loss on sale of equipment................. 273,862 3,550 (115,877) Equity in loss of dissolved limited partnership................................... 15,232 -- -- Change in assets and liabilities: (Increase) in accounts receivable............. (1,807,105) (1,738,545) (223,338) (Increase) decrease in other assets........... (62,519) (53,491) 30,547 Increase (decrease) in accounts payable....... 307,657 532,912 (1,257,404) Increase (decrease) in accrued expenses....... 127,419 (6,985) 161,842 Increase (decrease) in accrued subcontractor expenses.................................... 741,547 -- (564,430) Net increase (decrease) in billings in excess of costs and estimated earnings on uncompleted contracts....................... 838,010 341,380 (231,195) ------------ ------------ ------------ Net cash provided by (used in) operating activities............................. $ 3,630,038 $ 1,138,788 $ (1,754,447) ============ ============ ============
See Notes to Financial Statements 75 77 BONNEVILLE CONSTRUCTION COMPANY, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES Nature of business Bonneville Construction Company, Inc. (the "Company") was organized under the laws of the State of Idaho on January 1, 1973. The Company leases its corporate headquarters located in Las Vegas, Nevada, on a month to month basis. The Company operates in the Western United States and the Pacific Island regions. The Company is principally engaged in the construction of communication cable systems. In connection with its normal construction activities, the Company may be required to acquire performance bonds. The surety issuing the bonds has recourse against the Company's assets in the event the surety is required to honor the bonds. The length of the Company's contracts varies but is typically less than one year. Billings are submitted as work progresses and the balance and retainages are due upon completion. (Unaudited) Interim financial statements The accompanying balance sheet as of September 30, 1999 and the statements of operations, stockholder's equity and cash flows for the nine months ended September 30, 1999 and 1998, have not been audited. However, those financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In management's opinion, the accompanying interim financial statements reflect all material adjustments (consisting only of normal recurring accruals) necessary for a fair presentation of the financial results for the interim periods presented. The financial results for the nine months ended September 30, 1999 and 1998 are not necessarily indicative of the financial results which will be reported for the entire year. A summary of the Company's significant accounting policies follows: Use of estimates in the preparation of financial statements The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. The Company's method of revenue recognition from construction contracts is based significantly on estimates. Actual results could differ from those estimates. Cash and cash equivalents For purposes of reporting cash flows, the Company considers investments held in a bank sweep account to be cash equivalents. At various times throughout the year, the Company maintained cash balances at financial institutions in excess of federally insured limits. Materials and supplies inventory Materials and supplies inventory are valued at the lower of cost (first-in, first-out method) or market. Furniture and equipment Furniture and equipment are stated at cost, less accumulated depreciation. Depreciation is provided primarily on the straight-line method over the estimated lives of the related assets which range from 3 to 10 years. 76 78 BONNEVILLE CONSTRUCTION COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) Income taxes The Company has elected, with the consent of its stockholders, to be taxed under the provisions of Subchapter "S" of the Internal Revenue Code. Under those provisions, the Company does not pay federal corporation income taxes on its taxable income. Instead the stockholders account for their pro rata share of the Company's income, losses, deductions and credits. As a result of this election, no provision for income tax for the Company has been made in the accompanying financial statements. The Company's tax basis in its assets and liabilities do not differ materially from the basis for financial reporting. Revenue and cost recognition Revenues from fixed-price and unit-based construction contracts are recognized on the percentage-of-completion method measured by the percentage of costs incurred to date to estimated total costs for each contract. These contracts generally provide that the customer accept completion of progress to date and compensate the Company for services rendered measured typically in terms of units installed or some other measure of progress. This method is used because management considers the cost-to-cost method to be the best available measure of progress on these contracts. No gross profit is recognized until a contract has reached a stage of completion sufficient to reasonably determine, in the opinion of management, the ultimate realizable profit. Provisions for estimated losses on uncompleted contracts are made in the period such losses become apparent. Contract costs include all direct material and labor costs and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs and depreciation costs. Also included in contract costs are prepaid materials that have been purchased and billed to the owner. No gross profit is recognized on these costs until used on the contract. General and administrative costs and unallocated equipment costs are charged to expense as incurred. Changes in job performance, job conditions, estimated profitability, including those arising from contract penalty provisions, and final contract settlements may result in revisions to costs and income and are recognized in the period in which the revisions are determined. The Company believes that the retentions receivable balance as shown will be collected within the next fiscal year. The asset, "Costs and estimated earnings in excess of billings on uncompleted contracts," represents revenues recognized in excess of amounts billed. The liability, "Billings in excess of costs and estimated earnings on uncompleted contracts," represents billings in excess of revenue recognized. Fair value of financial instruments The carrying amounts of financial instruments including cash, accounts receivable, advances to related parties and accounts payable approximate their fair values because of their short maturities. The carrying amounts of the line of credit, long-term debt, and due to related parties approximate their fair values because the interest rates on these instruments are at market rates. NOTE 2 -- ACCOUNTS RECEIVABLE Accounts receivable consist of the following at December 31, 1998: Contracts in progress................................... $2,305,360 Completed contracts..................................... 1,838,472 Retainages.............................................. 1,560,796 ---------- $5,704,628 ==========
77 79 BONNEVILLE CONSTRUCTION COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 3 -- COSTS AND BILLINGS ON UNCOMPLETED CONTRACTS Costs and billings on uncompleted contracts consist of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) Total amount of contracts in process....................... $26,165,506 $31,728,344 =========== =========== Cost incurred on uncompleted contracts..................... $ 9,670,553 $19,133,118 Estimated earnings......................................... 3,367,027 3,510,332 ----------- ----------- 13,037,580 22,643,450 Less billings to date...................................... 13,333,384 22,708,059 ----------- ----------- $ (295,804) $ (64,609) =========== ===========
Included in the accompanying balance sheets under the following captions:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) Costs and estimated earnings in excess of billings on uncompleted contracts....................................... $ 279,805 $ 423,023 Billings in excess of costs and estimated earnings on completed contracts....................................... (575,609) (487,632) --------- --------- $(295,804) $ (64,609) ========= =========
NOTE 4 -- OTHER ASSETS Other assets consist of the following at December 31, 1998: Prepaid expenses............................................ $101,558 Materials and supply inventory, net of customer advances.... 10,664 -------- $112,222 ========
Customer advances of approximately $621,000 received by the Company to allow for the purchases of certain materials have been netted against the associated inventory. NOTE 5 -- FURNITURE AND EQUIPMENT Furniture and equipment consist of the following at December 31, 1998: Equipment and vehicles...................................... $7,388,761 Furniture and fixtures...................................... 446,934 ---------- 7,835,695 Less accumulated depreciation............................... 3,451,537 ---------- $4,384,158 ==========
NOTE 6 -- JOINT VENTURE In February 1998, the Company entered into a joint venture arrangement with a subcontractor to manage certain construction contracts. As part of this agreement, the Company purchased existing receivables of the subcontractor in exchange for cash. The subcontractor subsequently collected on these receivables, but failed to remit the funds to the Company. As a result, the Company recognized a loss of approximately $182,000 which is included in bad debt expense at December 31, 1998. The agreement was rescinded in May 1998, with no further liability to the Company. 78 80 BONNEVILLE CONSTRUCTION COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- ACCOUNTS PAYABLE Accounts payable include amounts due to subcontractors, totaling $496,073 at December 31, 1998, which have been retained pending completion and customer acceptance of contract performance. NOTE 8 -- LONG-TERM DEBT AND LINE OF CREDIT Long-term debt and line of credit at December 31, 1998 are as follows: Notes payable to dealers, secured by equipment, due in aggregate monthly installments including interest at 12%(A)...................................................... $ 652,907 Notes payable to a bank, secured by equipment, due in aggregate monthly installments of $13,619 including interest at 7.95% to 8.19%, through various dates to May 2003...................................................... 513,410 Note payable to a bank, secured by equipment, interest at prime rate (7.75% at December 31, 1998) plus 1.25%, due in monthly installments of interest only through June 1999; beginning July 1999 principal and interest payments due in monthly installments ($8,664 at December 31, 1998) to amortize repayment by May 31, 2002(B)..................... 269,498 Note payable to a financial institution, secured by airplane, interest at 7.3%, due in monthly installments of $3,063 including interest through November 2005. This note is subject to a 5% prepayment penalty if paid in full prior to November 1999 and 1% to November 2000............ 198,153 Notes payable to a bank, secured by equipment, interest at 9%, due in monthly installments of $5,136 including interest through October 2000............................. 76,764 Note payable to a financial institution, secured by equipment and personally guaranteed by a stockholder, interest at 10.9%, due in annual installments of $11,966 including interest through August 2002.................... 37,499 Note payable to a bank, secured by equipment, interest at 10.25%, due in monthly installments of $832 including interest through April 2001............................... 20,653 ---------- 1,768,884 Less current maturities................................... (374,980) ---------- $1,393,904 ==========
Long-term debt at December 31, 1998 matures as follows: 1999..................................................... $ 374,980 2000..................................................... 406,136 2001..................................................... 412,945 2002..................................................... 308,025 2003..................................................... 202,684 Thereafter............................................... 64,114 ---------- $1,768,884 ==========
- --------------- (A) On January 11, 1999, the Company refinanced the dealers notes payable. Under the terms of the loan agreement, the Company was granted a term loan of $655,053 with interest at 7.54%. The term loan is payable in monthly installments of $13,158, including interest. The loan is secured by equipment and is subject to a 5% prepayment penalty if paid in full prior to January 2000 and 1% to January 2001. 79 81 BONNEVILLE CONSTRUCTION COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) (B) The note is a $300,000 non-revolving line of credit through May 31, 1999 with term note payable repayment terms. Note is subject to the same restrictive covenants disclosed below under the revolving line of credit. In addition, the Company has a revolving line of credit with a bank on which it may borrow the lesser of $2,000,000 or an amount equal to the sum of eligible accounts receivable and equipment as defined in the agreement. This line is guaranteed by the stockholders, and a corporation controlled by the Company's stockholders. Borrowings on the line of credit bear interest at the prime rate (7.75% at December 31, 1998) plus 0.75% due monthly. The line is secured by substantially all the assets of the Company. Balances outstanding were $35,321 at December 31, 1998. The line of credit is due on May 31, 1999. The line of credit agreement contains various financial covenants including 1) maintaining a debt to tangible net worth ratio not to exceed 2.0 to 1.0, 2) maintaining a current ratio of at least 1.2 to 1.0, 3) maintaining working capital in excess of $1,500,000 4) maintaining a minimum tangible net worth of not less than $4,500,000, and 5) maintaining a debt service coverage ratio of at least 1.25 to 1.0. The line of credit agreement also places restrictions on the amount of distributions which can be made on an annual basis. At September 30, 1999 the Company was in violation of certain of the financial covenants and the restriction placed on distributions (Note 13). NOTE 9 -- RELATED PARTY TRANSACTIONS Advances to related parties Advances to related parties consist of the amounts due from a corporation controlled by the Company's stockholders. Advances are unsecured and are due on demand. Advances totaled $128,471 at December 31, 1998. Due to related parties Included in due to related parties are the following balances at December 31, 1998: Unsecured note payable to a stockholder, subordinated to the bank line of credit and non-revolving line of credit (Note 8), due in bimonthly installments of $8,000, including interest at 8.32%, due March 2002........................... $293,064 Less current portion........................................ 82,885 -------- $210,179 ========
Interest expense to the stockholder was $16,058 for the year ended December 31, 1998. Note payable to stockholder matures as follows: 1999..................................................... $ 82,885 2000..................................................... 90,064 2001..................................................... 97,865 2002..................................................... 22,250 -------- $293,064 ========
NOTE 10 -- BENEFIT PLANS The Company maintains a 401(k) plan covering all qualified employees. Employees must have, at the fiscal year-end, one continuous year of service and 1,000 hours of employment to qualify for participation. The Company may make a matching contribution at any time and in any amount at the discretion of the Company's Board of Directors, up to a maximum contribution requirement of 10% of the gross salaries of qualified employees. In addition, the Company may make at its discretion non-elective profit-sharing 80 82 BONNEVILLE CONSTRUCTION COMPANY, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) contributions to the plan that are allocated based upon total compensation paid to qualified employees during the plan year. The Company made total contributions of $200,000 for the year ended December 31, 1998. The Company maintains a cafeteria plan covering all qualified employees. The plan provides eligible employees of the Company the opportunity to contribute toward the cost of coverage under the benefit plans of the Company. NOTE 11 -- SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES
FOR THE YEAR FOR THE NINE MONTHS ENDED ----------------------------- DECEMBER 31, SEPTEMBER 30, SEPTEMBER 30, 1998 1998 1999 ------------ ------------- ------------- (UNAUDITED) (UNAUDITED) Retirement of 5.99 shares of common stock at December 31, 1998, through the issuance of notes payable to a stockholder............................................. $433,310 $433,310 $ -- ======== ======== ======== Equipment acquired through financing agreements......... $751,600 $597,780 $563,541 ======== ======== ======== Cash surrender value of life insurance and related party receivable distributed to stockholder................. $ -- $ -- $341,905 ======== ======== ======== Net furniture and equipment and related debt distributed to stockholder........................................ $ -- $ -- $183,943 ======== ======== ========
NOTE 12 -- MAJOR CUSTOMERS Revenues for the Company include revenues to the following customers:
PERCENT TO TOTAL SALES YEAR ENDED CUSTOMER DECEMBER 31, 1998 - -------- ---------------------- A.................................................. 50% B.................................................. 16% C.................................................. 11%
NOTE 13 -- EVENTS SUBSEQUENT TO THE DATE OF THE INDEPENDENT AUDITORS' REPORT (UNAUDITED) FINANCING On July 27, 1999, the Company entered into a loan agreement with a bank. The Company borrowed $645,000 to be repaid in 60 monthly payments of $13,363, including interest at 8.85%. The loan is secured by certain existing equipment of the Company. In addition, subsequent to year end, the due date of the revolving line of credit with a bank in the maximum amount of $2,000,000 was extended through November 1999, under similar terms. CONTRACT NEGOTIATION Contracts in progress at September 30, 1999 include a contract with an unrelated third party where the resolution of certain change orders are under negotiation. The third party is withholding payment of remaining balances due on the contract totaling approximately $2,000,000 pending agreement on the costs and merits of the work performed. Management has reduced the amounts billed as of September 30, 1999 to the amount it expects to collect on resolution of these change orders with the third party. ACQUISITION On October 1, 1999, pursuant to an Acquisition Agreement and Plan of Reorganization, 100% of the Company's outstanding common stock was purchased by a subsidiary of Quanta Services, Inc. In anticipation of or concurrent with the purchase, the Company's treasury stock was retired and distributions were made to the shareholder of cash and certain Company assets of approximately $430,000 and $526,000, respectively. 81 83 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Trawick Construction Company Group: We have audited the accompanying combined balance sheet of Trawick Construction Company Group (the Group) as defined in Note 1 to the combined financial statements as of December 31, 1998 and the related combined statements of income, stockholders' equity, and cash flows for the year then ended. These combined financial statements are the representation of the Group's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free from material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the combined financial position of Trawick Construction Company Group as of December 31, 1998, and the results of their combined operations and their combined cash flows for the year then ended in conformity with generally accepted accounting principles. McDANIEL & ASSOCIATES, P.C. Dothan, Alabama November 5, 1999 82 84 TRAWICK CONSTRUCTION COMPANY GROUP COMBINED BALANCE SHEETS
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) ASSETS CURRENT ASSETS Cash and cash equivalents................................. $ 190,389 $ 3,423,001 Investment in marketable securities....................... 817,043 -- Accounts receivable, trade................................ 4,646,196 3,307,649 Accounts receivable, retainage............................ -- -- Accounts receivable, other................................ 1,782 30,858 Prepaid expenses.......................................... 600 2,595 Note receivable, current portion.......................... 8,087 -- ----------- ----------- Total current assets............................... 5,664,097 6,764,103 ----------- ----------- PROPERTY AND EQUIPMENT, at cost............................. 5,802,204.. 5,374,452 Less accumulated depreciation............................. (3,526,118) (3,387,296) ----------- ----------- Total property and equipment....................... 2,276,086.. 1,987,156 ----------- ----------- INVESTMENT PROPERTIES Commercial real estate, net of accumulated depreciation of $6,286 in 1998................................................. 33,714 -- Timber land............................................... 53,600 -- ----------- ----------- Total investment properties........................ 87,314 -- ----------- ----------- OTHER ASSETS Cash value of officers' life insurance, face amount $3,000,000.............................................. 217,618 -- Land...................................................... 30,128 -- Note receivable, long-term portion........................ 435,493 -- Investment in Lightwave, LLC.............................. -- 956,813 ----------- ----------- Total other assets................................. 683,239 956,813 ----------- ----------- Total assets....................................... $ 8,710,736 $ 9,708,072 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Notes payable, current portion............................ $ 179,757 $ 330,330 Accounts payable.......................................... 238,799 283,033 Customer deposits......................................... 2,019,808 -- Accrued dividends......................................... 500,000 2,600,000 Accrued profit sharing.................................... 245,505 -- Accrued expenses, other................................... 71,544 247,171 Accrued income taxes...................................... 6,441 -- ----------- ----------- Total current liabilities.......................... 3,261,854 3,460,534 ----------- ----------- LONG-TERM DEBT Notes payable, noncurrent portion......................... 1,045,214 1,773,778 ----------- ----------- STOCKHOLDERS' EQUITY Common stock.............................................. 51,000 51,000 Retained earnings......................................... 4,063,964 4,422,760 Accumulated other comprehensive income.................... 288,704 -- ----------- ----------- Total stockholders' equity......................... 4,403,668 4,473,760 ----------- ----------- Total liabilities and stockholders' equity......... $ 8,710,736 $ 9,708,072 =========== ===========
The accompanying notes are an integral part of these financial statements 83 85 TRAWICK CONSTRUCTION COMPANY GROUP COMBINED STATEMENTS OF INCOME
FOR THE FOR THE NINE MONTH PERIOD YEAR ENDED ENDED SEPTEMBER 30, DECEMBER 31, ------------------------- 1998 1998 1999 ------------ ----------- ----------- (UNAUDITED) REVENUES.............................................. $16,051,324 $11,977,591 $17,358,103 COSTS OF SERVICES, including depreciation............. 11,443,749 6,691,493 8,943,325 ----------- ----------- ----------- Gross profit................................ 4,607,575 5,286,098 8,414,778 GENERAL AND ADMINISTRATIVE EXPENSES................... 3,512,705 2,597,551 1,855,001 ----------- ----------- ----------- Income from operations...................... 1,094,870 2,688,547 6,559,777 ----------- ----------- ----------- OTHER INCOME (EXPENSE) Gain (loss) on sale of assets....................... 167,089 162,236 27,467 Gain on sale of investments......................... 62,922 55,882 332,862 Equity in loss on investment in Lightwave LLC. ..... -- -- (74,564) Interest income and other, net...................... 74,884 64,792 82,281 Interest expense.................................... (62,072) (29,712) (75,176) ----------- ----------- ----------- 242,823 253,198 292,870 ----------- ----------- ----------- Income before taxes on income............... 1,337,693 2,941,745 6,852,647 INCOME TAXES.......................................... 8,941 274 -- ----------- ----------- ----------- Net income.................................. $ 1,328,752 $ 2,941,471 $ 6,852,647 =========== =========== ===========
The accompanying notes are an integral part of these combined financial statements. 84 86 TRAWICK CONSTRUCTION COMPANY GROUP COMBINED STATEMENTS OF STOCKHOLDERS' EQUITY
ACCUMULATED COMMON STOCK OTHER ---------------- RETAINED COMPREHENSIVE COMPREHENSIVE SHARES AMOUNT EARNINGS INCOME INCOME ------ ------- ----------- ------------- ------------- BALANCE, December 31, 1997.......... 1,500 $51,000 $ 3,595,212 $ -- $222,863 Net income........................ -- -- 1,328,752 1,328,752 -- Other comprehensive income: Unrealized gains on securities................... -- -- -- 65,841 65,841 ---------- Comprehensive income.............. -- -- -- $1,394,593 -- ========== Dividends......................... -- -- (860,000) -- ----- ------- ----------- -------- BALANCE, December 31, 1998.......... 1,500 51,000 4,063,964 $ -- 288,704 Net income (unaudited)............ -- -- 6,852,647 6,852,647 -- Other comprehensive income: Reclassification adjustment for gains included in net income (unaudited).................. -- -- -- (288,704) (288,704) ---------- Comprehensive income (unaudited).................... -- -- -- $6,563,943 -- ========== Dividends (unaudited)............. -- -- (6,493,851) -- ----- ------- ----------- -------- BALANCE, September 30, 1999 (unaudited)....................... 1,500 $51,000 $ 4,422,760 $ -- ===== ======= =========== ========
The accompanying notes are an integral part of these combined financial statements. 85 87 TRAWICK CONSTRUCTION COMPANY GROUP COMBINED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTH FOR THE PERIOD ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ------------------------- 1998 1998 1999 ------------ ----------- ----------- (UNAUDITED) OPERATING ACTIVITIES Net income................................................ $ 1,328,752 $ 2,941,471 $ 6,852,647 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation............................................ 715,955 518,625 350,252 Gain on sale of assets.................................. (167,089) (162,236) (27,467) Bad debts............................................... 18,961 17,115 2,661 Gain on sale of investments............................. (62,922) (55,882) (332,862) Equity in loss of limited liability company............. -- -- 74,564 Changes in operating assets and liabilities: (Increase) decrease in: Trade receivables..................................... (3,273,266) (3,107,731) 1,335,886 Retainage receivables................................. -- -- -- Other receivables..................................... 21,404 19,953 (29,076) Prepaid expenses...................................... 16,168 10,355 (1,995) Increase (decrease) in: Customer deposits..................................... 2,019,808 -- (2,019,808) Accounts payable...................................... (275,868) 238,645 44,234 Accrued expenses...................................... 125,418 (56,739) 175,627 Accrued income taxes.................................. (19,513) (25,954) (6,441) Accrued dividends..................................... -- (430,000) 2,100,000 Accrued profit sharing................................ -- (202,337) (245,505) ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES........................................ 447,808 (294,715) 8,272,717 ----------- ----------- ----------- INVESTING ACTIVITIES Purchase of equipment..................................... (1,867,387) (586,941) (568,258) Purchase of investment assets............................. (672,571) (456,244) (485,460) Proceeds from sale of assets.............................. 117,240 36,847 61,536 Increase in cash value of life insurance.................. (54,960) (7,567) (15,600) Proceeds from note receivable............................. -- 4,251 5,988 Proceeds from sale of investments......................... 599,628 446,325 1,346,661 Investment in Lightwave, LLC.............................. -- -- (2,000,000) ----------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES............... (1,878,050) (563,329) (1,655,133) ----------- ----------- ----------- FINANCING ACTIVITIES Proceeds from new borrowings.............................. 1,210,000 100,000 2,000,000 Payments on notes payable................................. (45,499) (43,634) (1,277,025) Dividends to stockholders................................. (860,000) (360,000) (4,107,947) ----------- ----------- ----------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES........................................ 304,501 (303,634) (3,384,972) ----------- ----------- ----------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS............ (1,125,741) (1,161,678) 3,232,612 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. 1,316,130 1,316,130 190,389 ----------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ 190,389 $ 154,452 $ 3,423,001 =========== =========== =========== SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION Cash paid during the period for: Interest................................................ $ 62,162 $ 29,712 $ 75,176 Income taxes............................................ $ 26,228 $ 2,774 $ 3,882 SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING ACTIVITIES Purchase of property and equipment........................ $ 60,470 $ 1,178,640 $ 156,162 Short-term debt assumed................................... (60,470) (1,178,640) (156,162) ----------- ----------- ----------- Cash paid for acquisition........................... $ -- $ -- $ -- =========== =========== =========== Sale of assets, net....................................... $ 449,730 $ 449,730 $ -- Note received at closing.................................. 449,730 (449,730) -- ----------- ----------- ----------- Cash received from sale............................. $ -- $ -- $ -- =========== =========== =========== Noncash distributions to stockholders: Note receivable........................................... -- $ -- $ 437,592 Property and plant........................................ -- -- 746,471 Cash value of life insurance.............................. -- -- 233,218 Investment in Lightwave, L.L.C............................ -- -- 968,623 ----------- ----------- ----------- -- $ -- $ 2,385,904 =========== =========== ===========
The accompanying notes are an integral part of these combined financial statements. 86 88 TRAWICK CONSTRUCTION COMPANY GROUP NOTES TO THE COMBINED FINANCIAL STATEMENTS NOTE 1 -- BUSINESS AND ORGANIZATION Trawick Construction Company Group (the Group) includes the financial statements of the following companies under common control and ownership: Trawick Construction Company, Inc. (a Florida S-corporation) and Communication Manpower, Inc. (a Florida S-corporation.) Trawick Construction Company, Inc. operates in the telephone line installation industry. Communication Manpower, Inc. provides labor to telecommunication companies. Common Stock Common stock at December 31, 1998, is composed of the following: a. Trawick Construction Company, Inc. -- 500 shares authorized, issued, and outstanding at $100 par value per share b. Communication Manpower, Inc. -- 1,000 shares authorized, issued, and outstanding at $1 par value per share NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of Combination The combined financial statements of the Group include the accounts of the entities listed in Note 1. All significant intercompany accounts and transactions have been eliminated in combination. Interim Combined Financial Information The interim combined financial statements for the nine months ended September 30, 1998 and 1999, are unaudited and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnote disclosures required by generally accepted accounting principles for complete financial statements. In the opinion of the Group's management, the unaudited interim combined financial statements contain all adjustments, consisting of normal recurring adjustments considered necessary for a fair presentation. The combined results of operations for the combined interim periods are not necessarily indicative of the results for the entire fiscal year. Revenue Recognition The Group recognizes revenue when services are performed, except when work is being performed under a fixed-price contract. These fixed-price contracts generally provide that the customer accept completion of progress to date and compensate the Group for services which have been rendered, measured typically in terms of units installed, hours expended, or some other nature of progress. Revenues from fixed-price contracts are recognized on the percentage-of-completion method, measured by the percentage of costs incurred to date to total estimated costs for each contract. Contract costs include all direct material, labor and subcontract costs, and those indirect costs related to contract performance, such as indirect labor, supplies, tools, repairs, and depreciation costs. Provisions for the total estimated losses on uncompleted contracts are made in the period in which such losses are identified. Changes in job performance, job conditions, estimated profitability, and final contract settlements may result in revisions to estimated costs and revenues. The effects of these revisions are recognized in the period in which the changes occur. The balances billed but not paid by customers pursuant to retainage provisions in customer contracts will be due upon completion of the contracts and acceptance by the customer. The Group believes that the retention balance shown on the accompanying combined balance sheet will be collected within the next fiscal year. 87 89 TRAWICK CONSTRUCTION COMPANY GROUP NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED) Marketable Securities Marketable securities have been categorized as available for sale securities and as a result are stated at fair value. Unrealized holding gains and losses are included as a component of stockholders' equity until realized. Accounts Receivable The Group considers accounts receivable to be fully collectible; accordingly, no allowance for doubtful accounts is required. Cash and Cash Equivalents For purposes of the statement of cash flows, the Group considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash equivalents. Compensated Absences Employees of the Group are entitled to paid vacation, paid sick days, and personal days off, depending on job classification, length of service, and other factors. It is impractical to estimate the amount of compensation for future absences and, accordingly, no liability has been recorded in the accompanying financial statements. The Group's policy is to recognize the costs of compensated absences when actually paid to employees. Customer Deposits Advance payments for future work received from customers is recorded as customer deposits under current liabilities. The payments are recognized as income as the work is performed, which is believed to be within one year. Use of Estimates The Group is required to make estimates and assumptions in preparing financial statements in conformity with generally accepted accounting principles. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities, and the reported revenues and expenses. Actual results could differ from those estimates. Fair Value of Financial Instruments The Group's financial instruments consist of cash, accounts receivable, accounts payable, and debt. The Group believes that the carrying value of these instruments on the accompanying combined balance sheet approximates their fair value due to either the short-term nature of the instrument or the interest rates on the debt being comparable to rates currently available to the Group. NOTE 3 -- PROPERTY AND EQUIPMENT Property and equipment are recorded at cost and depreciated over the estimated useful lives of the various assets generally by accelerated methods. Expenditures for repairs and maintenance are charged to expense when incurred. Expenditures for major renewals and betterments, which extend the useful lives of existing equipment, are capitalized and depreciated. Upon retirement or disposition of property and equipment, the cost and related accumulated depreciation are removed from the accounts and any resulting gain or loss is recognized in the combined statements of operations. 88 90 TRAWICK CONSTRUCTION COMPANY GROUP NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED) The following is a summary of property and equipment and their estimated useful lives:
ASSET CLASS LIFE (YEARS) COST BASIS - ----------- ------------ ----------- Machinery and equipment.................................... 5-7 $ 3,526,092 Autos and trucks........................................... 5 1,484,461 Office furniture and equipment............................. 5-7 87,048 Building and improvements.................................. 15-39 704,603 ----------- 5,802,204 Less accumulated depreciation.............................. (3,526,118) ----------- $ 2,276,086 ===========
The total depreciation expense was $715,955 for 1998. NOTE 4 -- PROFIT SHARING PLAN The Group maintains a qualified profit sharing plan for substantially all full-time employees. The annual contribution to the plan, as determined by the Board of Directors, is discretionary but may not exceed 15% of the annual aggregate compensation paid to all participating employees. The contribution was $245,505 in 1998. NOTE 5 -- INCOME TAXES Both Trawick Construction Company, Inc. and Communication Manpower, Inc., with the consent of their stockholders, have elected S-corporation status under appropriate sections of the Internal Revenue Code and a similar section of the Florida income tax laws, which provide that in lieu of corporate income taxes, the stockholders have consented to include their proportionate share of each company's taxable income in their individual returns. Therefore, these statements do not include a provision for Federal or Florida income taxes. The income taxes shown on the statements of income represent income taxes due to the States of Alabama, Georgia, and Mississippi. NOTE 6 -- OPERATING LEASES The Group had an agreement with a party related to one of its stockholders for the rental of land and building on an annual basis. The lease was treated as an operating lease under generally accepted accounting principles. The total rent expense was $32,000 for 1998. During 1998, the Group purchased the real estate at its fair market value. The Group has other operating lease arrangements for temporary rental of equipment at its job site locations for lease terms of less than one year. The minimal lease payment for the next lease term will be approximately $174,000. 89 91 TRAWICK CONSTRUCTION COMPANY GROUP NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 7 -- NOTES PAYABLE Note payable to SunTrust Bank at prime, due on demand, secured by owners' assets, interest paid monthly............ $ 100,000 Note payable to SunTrust Bank at prime, due July 29, 2003, secured by real estate, interest paid monthly............. 500,000 Note payable to SunTrust Bank at prime, due $7,500 monthly, secured by equipment, matures September 1, 2013........... 589,666 Note payable to Caterpillar Credit at 0% interest, due $5,061 for 12 months, secured by equipment................ 25,305 Note payable to SouthTrust Bank at prime, due July 29, 1999, secured by equipment...................................... 10,000 ---------- Total notes payable............................... 1,224,971 Less current portion.............................. (179,757) ---------- Total long-term debt.............................. $1,045,214 ==========
Current maturities are as follows: 1999.................................................... $ 179,757 2000.................................................... 48,142 2001.................................................... 52,137 2002.................................................... 56,465 2003.................................................... 561,151 Thereafter.............................................. 327,319 ---------- $1,224,971 ==========
The Group has available lines of credit for a total of $1,125,000 with SunTrust Bank, at prime, secured by equipment through July 24, 2000. NOTE 8 -- CONCENTRATIONS OF CREDIT RISKS Financial instruments that potentially subject the Group to concentrations of credit risk consist principally of temporary cash investments and trade accounts receivables. At year end, the Group had deposits in excess of the $100,000 FDIC insured amount with SunTrust Bank. The Group performs ongoing credit evaluations of its customers' financial condition and, generally, requires no collateral from its customers. NOTE 9 -- RELATED PARTY TRANSACTIONS In addition to the leasing activities discussed in Note 5, the Group recorded the following related party transactions: Included in account receivable -- other on the balance sheet is $600 for 1998, which is due from stockholders. 90 92 TRAWICK CONSTRUCTION COMPANY GROUP NOTES TO THE COMBINED FINANCIAL STATEMENTS -- (CONTINUED) NOTE 10 -- INVESTMENTS IN MARKETABLE SECURITIES The aggregate fair value, gross unrealized holding gains, and amortized cost by major security is as follows: Equity securities: Aggregate fair value.................................. $ 817,043 Less cost basis....................................... (528,339) --------- Unrealized gain......................................... $ 288,704 =========
Proceeds from the sale of available-for-sale securities for 1998 were $599,628. Net realized gains for 1998 were $62,922. The specific identification method is used to determine cost. NOTE 11 -- COMMITMENTS AND CONTINGENCIES Litigation The Group is involved in disputes or legal actions in the ordinary course of business. Management does not believe the outcome of such legal actions will have a material adverse effect on the Group's financial position or results of operations. Insurance The Group carries a broad range of premium-based insurance coverage, including worker's compensation, business auto liability, equipment liability, general liability, and an umbrella policy. NOTE 12 -- SUBSEQUENT EVENTS (UNAUDITED) In April 1999, the Company formed a limited liability company, Lightwave LLC (Lightwave), with another company to acquire, hold, own, develop, utilize and exploit fiberoptic communication and telecommunication lines. The Company's initial investment was $2,000,000 and the Company owned 50% of Lightwave. In June 1999, the Company distributed 50%, or $968,623, of its investment in Lightwave to its stockholders, with the Company retaining a 25% ownership in Lightwave. Lightwave is accounted for by the Company under the equity method and summarized information on Lightwave at September 30, 1999 is as follows: Current assets.......................................... $1,457,990 Property and equipment, net............................. 2,369,260 ---------- 3,827,250 Less liabilities........................................ -- ---------- Net assets.............................................. $3,827,250 ========== Revenue................................................. $ 17,847 ========== Net loss................................................ $ (172,750) ==========
On October 1, 1999, the Group was sold to Quanta Services, Inc. (Quanta) for cash and Quanta stock. 91 93 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Conti Enterprises, Inc.: We have audited the accompanying statement of assets, liabilities and divisional equity of the Telecommunications Division of Conti Enterprises, Inc. as of December 31, 1998, and the related statements of divisional operating profit and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Telecommunications Division of Conti Enterprises, Inc. as of December 31, 1998, and its results of operations and cash flows for the year then ended, in conformity with generally accepted accounting principles. As discussed in Note 1 to the financial statements, the accompanying financial statements present the financial position, results of operations and cash flows of the Division and are not intended to present the financial position, results of operations and cash flows of Conti Enterprises, Inc. taken as a whole. J.H. COHN LLP Roseland, New Jersey April 9, 1999, except for Note 5 as to which the date is October 1, 1999 92 94 TELECOMMUNICATIONS DIVISION OF CONTI ENTERPRISES, INC. STATEMENTS OF ASSETS, LIABILITIES AND DIVISIONAL EQUITY ASSETS
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) Contracts receivable, including retainage of $169,493 and $249,465.................................................... $2,599,199 $3,238,555 Costs and estimated earnings in excess of billings.......... 115,343 569,276 Deposits.................................................... 13,796 13,096 Machinery and equipment, net of accumulated depreciation of $137,761 and $198,630..................................... 268,526 287,317 ---------- ---------- Totals............................................ $2,996,864 $4,108,244 ========== ========== LIABILITIES AND DIVISIONAL EQUITY Liabilities: Billings in excess of costs and estimated earnings........ $ 480,200 $ 779,966 Accounts payable -- trade................................. 759,047 750,672 Accrued expenses.......................................... 34,236 36,131 ---------- ---------- Total liabilities................................. 1,273,483 1,566,769 Divisional equity........................................... 1,723,381 2,541,475 ---------- ---------- Totals............................................ $2,996,864 $4,108,244 ========== ==========
See Notes to Financial Statements. 93 95 TELECOMMUNICATIONS DIVISION OF CONTI ENTERPRISES, INC. STATEMENTS OF DIVISIONAL OPERATING PROFIT
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ----------------------- 1998 1998 1999 ------------ ---------- ---------- (UNAUDITED) Construction revenue.................................... $12,422,117 9,013,782 $9,325,086 Construction costs, including depreciation.............. 8,771,765 6,335,077 6,806,091 ----------- ---------- ---------- Gross margin............................................ 3,650,352 2,678,705 2,518,995 General and administrative expenses..................... 1,513,007 1,090,475 1,283,733 ----------- ---------- ---------- Operating income........................................ 2,137,345 1,588,230 1,235,262 ----------- ---------- ---------- Allocated corporate expenses: General and administrative expenses................... 308,410 226,720 491,533 Executive compensation................................ 145,637 29,815 101,626 ----------- ---------- ---------- Totals........................................ 454,047 256,535 593,159 ----------- ---------- ---------- Net income.............................................. $ 1,683,298 1,331,695 $ 642,103 =========== ========== ==========
See Notes to Financial Statements. 94 96 TELECOMMUNICATIONS DIVISION OF CONTI ENTERPRISES, INC. STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED YEAR ENDED SEPTEMBER 30, DECEMBER 31, ------------------------ 1998 1998 1999 ------------ ---------- ----------- (UNAUDITED) Operating activities: Net income........................................... $1,683,298 $1,331,695 $ 642,103 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation...................................... 71,707 46,064 63,763 Changes in operating assets and liabilities: Contracts receivable............................ (1,335,943) (683,148) (639,356) Costs and estimated earnings in excess of billings..................................... (102,759) (104,043) (453,933) Deposits........................................ (8,570) (8,766) 700 Billings in excess of costs and estimated earnings..................................... 15,384 71,358 299,766 Accounts payable -- trade....................... 39,394 (84,760) (8,375) Accrued expenses................................ 10,651 5,034 1,895 ---------- ---------- ----------- Net cash provided by (used in) operating activities................................. 373,162 573,434 (93,437) ---------- ---------- ----------- Investing activities -- expenditures for machinery and equipment............................................ (124,781) (54,251) (82,554) ---------- ---------- ----------- Financing activities: Contributions from corporate......................... -- -- 175,991 Distributions to corporate........................... (248,381) (519,183) -- ---------- ---------- ----------- Net cash provided by (used in) financing activities................................. (248,381) (519,183) 175,991 ---------- ---------- ----------- Net increase in cash and cash balance.................. $ -- $ -- $ -- ========== ========== ===========
See Notes to Financial Statements. 95 97 TELECOMMUNICATIONS DIVISION OF CONTI ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS NOTE 1 -- BUSINESS AND SUMMARY OF ACCOUNTING POLICIES: Business: The Telecommunications Division (the "Division") of Conti Enterprises, Inc. (the "Company") is engaged primarily as a utility contractor for private entities located in the eastern United States. Basis of presentation: The accompanying financial statements present the financial position and results of operations and cash flows of the Division and are not intended to present the financial position, results of operations and cash flows of the Company taken as a whole. In addition, as discussed in Note 4, certain expenses have been allocated to the Division by the Company and, accordingly, the accompanying financial statements are not necessarily indicative of the financial position, results of operations or cash flows of the Division had it operated as a separate entity. The unaudited financial statements have been prepared pursuant to the rules of the Securities and Exchange Commission ("SEC"). In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to fairly present the financial position, results of operations and cash flows with respect to the unaudited financial statements of the Division, have been included. The results of operations for the interim periods are not necessarily indicative of the results for the entire year. Use of estimates: The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect certain reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Basis for recording income on construction contracts: Profits on contracts are credited to income under the percentage-of-completion method of accounting, based on the estimated stage of completion of individual contracts. At the time a loss on a contract becomes known, the entire amount of the estimated ultimate loss on both short and long-term contracts is recorded. Because of the inherent uncertainties in estimating costs, it is at least reasonably possible that the estimates used will change within the near term. Machinery and equipment: Machinery and equipment are stated at cost, net of depreciation to date. Depreciation is provided on the straight-line method at rates calculated to provide for the retirement of machinery and equipment at the end of their estimated useful lives. Income taxes: The Company, with the consent of its stockholders, has elected to be treated as an "S" Corporation under Sections 1371-1378 of the Internal Revenue Code. Under these sections, corporate income or loss, in general, is allocated to the stockholders for inclusion in their personal income tax returns. Accordingly, there is no provision for Federal income tax in the accompanying financial statements attributable to the operations of the Division. 96 98 TELECOMMUNICATIONS DIVISION OF CONTI ENTERPRISES, INC. NOTES TO FINANCIAL STATEMENTS -- (CONTINUED) NOTE 2 -- COSTS AND ESTIMATED EARNINGS ON CONTRACTS: Costs and estimated earnings on contracts consist of the following:
DECEMBER 31, SEPTEMBER 30, 1998 1999 ------------ ------------- (UNAUDITED) Costs incurred on contracts................................ $15,381,365 $16,246,647 Estimated contract profit.................................. 8,279,820 6,085,439 ----------- ----------- 23,661,185 22,332,086 Less billings to date...................................... 24,026,042 22,542,776 ----------- ----------- Totals........................................... $ (364,857) $ (210,690) =========== =========== Costs and estimated earnings in excess of billings on contracts................................................ $ 115,343 $ 569,276 Billings in excess of costs and estimated earnings on contracts................................................ 480,200 779,966 ----------- ----------- Totals........................................... $ (364,857) $ (210,690) =========== ===========
NOTE 3 -- MACHINERY AND EQUIPMENT: The cost of major classes of machinery and equipment and the range of estimated useful lives are as follows:
ESTIMATED USEFUL DECEMBER 31, SEPTEMBER 30, LIVES 1998 1999 --------- ------------ ------------- (UNAUDITED) Automobiles and trucks........................... 5 years $230,087 $287,968 Computer and office equipment.................... 5-7 years 158,548 180,327 Machinery and equipment.......................... 5 years 17,652 17,652 -------- -------- 406,287 485,947 Less accumulated depreciation.................... 137,761 198,630 -------- -------- Totals................................. $268,526 $287,317 ======== ========
NOTE 4 -- ALLOCATED COSTS AND EXPENSES: Common corporate general and administrative expenses, interest expense, other income and owner's compensation are allocated among each of the Company's divisions based primarily on a percentage of direct construction costs. Management considers its methodologies for specifically identifying or allocating costs and expenses to the Division to be reasonable and to present fairly the costs and expenses of the Division. NOTE 5 -- SUBSEQUENT EVENT: On October 1, 1999, the Company sold the Division to Quanta Services, Inc. ("Quanta") for cash and stock of Quanta. 97 99 ITEM 7. PRO FORMA FINANCIAL INFORMATION QUANTA SERVICES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED FINANCIAL STATEMENTS BASIS OF PRESENTATION The following unaudited pro forma combined financial statements include the consolidated financial statements of Quanta Services, Inc. and subsidiaries ("Quanta" or the "Company") as of September 30, 1999 and for the nine months then ended (unaudited) and for the year ended December 31, 1998 adjusted as follows: (i) the unaudited pro forma combined balance sheet at September 30, 1999 gives effect to the acquisition of nine businesses acquired by Quanta from October 1, 1999 through November 1, 1999 (the "Subsequent Acquisitions") as if they occurred on September 30, 1999; (ii) the unaudited pro forma combined statement of operations for the year ended December 31, 1998 gives effect to the following events as if they had occurred on January 1, 1998 (a) Quanta's initial public offering ("IPO"), (b) the pre-acquisition results of the four entities acquired concurrent with the IPO ("the Founding Companies") and eleven additional businesses acquired subsequent to the IPO through December 31, 1998 which were accounted for using the purchase method of accounting (together, the "1998 Acquisitions"), (c) the acquisition of 39 businesses accounted for using the purchase method of accounting from January 1, 1999 through November 1, 1999 (the "1999 Acquisitions"), (d) the issuance of the Convertible Subordinated Notes, (e) the follow-on public offering completed by Quanta in January of 1999 and (f) the issuance of Series A Convertible Preferred Stock in September of 1999; and (iii) the unaudited pro forma combined statement of operations for the nine months ended September 30, 1999 gives effect to the following events as if they had occurred on January 1, 1999 (a) the follow-on public offering, (b) the pre-acquisition results of the 1999 Acquisitions as if they occurred on January 1, 1999 and (c) the issuance of Series A Convertible Preferred Stock in September of 1999. Quanta has preliminarily analyzed the savings that it expects to realize from reductions in salaries, bonuses and certain benefits to the owners. To the extent the owners of the companies have contractually agreed to prospective reductions in salaries, bonuses, benefits and lease payments, these reductions have been reflected in the unaudited pro forma combined statements of operations. With respect to other potential cost savings, Quanta has not and cannot quantify these savings until a period subsequent to the acquisitions. It is anticipated that these savings will be partially offset by costs related to Quanta's new corporate infrastructure and by the costs associated with being a public company. However, because these costs cannot be accurately quantified at this time, they have not been included in the pro forma financial information of Quanta. The pro forma adjustments are based on preliminary estimates, available information and certain assumptions that Company management deems appropriate and may be revised as additional information becomes available. The pro forma financial data do not purport to represent what Quanta's financial position or results of operations would actually have been if such transactions in fact had occurred on those dates and are not necessarily representative of Quanta's financial position or results of operations for any future period. Since the acquired businesses were not under common control or management during the entire period covered by the pro forma financial statements, historical combined results may not be comparable to, or indicative of, future performance. The unaudited pro forma combined financial statements should be read in conjunction with the Company's historical consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K which was filed with the SEC on March 31, 1999 and additionally the Company's related financial statements on Form 8-K which was filed with the SEC on June 17, 1999 giving effect to a pooling-of-interests transaction which occurred in February 1999. 98 100 QUANTA SERVICES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED BALANCE SHEET SEPTEMBER 30, 1999 (IN THOUSANDS) ASSETS
QUANTA SERVICES, INC. AND SUBSEQUENT PRO FORMA PRO FORMA SUBSIDIARIES ACQUISITIONS ADJUSTMENTS(A) TOTAL -------------- ------------ -------------- ---------- CURRENT ASSETS: Cash and cash equivalents....................... $ 12,687 $ 3,920 $ -- $ 16,607 Accounts receivable, net........................ 212,308 16,816 (213) 228,911 Cost and estimated earnings in excess of billings on uncompleted contracts............. 55,741 1,351 -- 57,092 Inventories..................................... 9,012 135 -- 9,147 Prepaid expenses and other current assets....... 8,999 116 -- 9,115 ---------- ------- -------- ---------- Total current assets..................... 298,747 22,338 (213) 320,872 PROPERTY AND EQUIPMENT, net....................... 161,001 9,231 (204) 170,028 OTHER ASSETS...................................... 7,156 957 -- 8,113 GOODWILL, net..................................... 567,277 -- 64,843 632,120 ---------- ------- -------- ---------- Total assets............................. $1,034,181 $32,526 $ 64,426 $1,131,133 ========== ======= ======== ========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Current maturities of long-term debt............ $ 6,777 $ 4,178 $ -- $ 10,955 Accounts payable and accrued expenses........... 139,741 7,701 1,526 148,968 Billings in excess of costs and estimated earnings on uncompleted contracts............. 17,877 1,532 -- 19,409 ---------- ------- -------- ---------- Total current liabilities................ 164,395 13,411 1,526 179,332 LONG-TERM DEBT, net of current maturities......... 97,110 5,437 54,953 157,500 CONVERTIBLE SUBORDINATED NOTES.................... 49,350 -- -- 49,350 DEFERRED INCOME TAXES AND OTHER NON-CURRENT LIABILITIES..................................... 14,582 160 -- 14,742 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred Stock................................. -- -- -- -- Common Stock.................................... -- 112 (112) -- Limited Vote Common Stock....................... -- -- -- -- Treasury Stock.................................. -- (1,202) 1,202 -- Additional paid-in capital...................... 653,236 2,590 18,875 674,701 Retained earnings............................... 55,508 12,018 (12,018) 55,508 ---------- ------- -------- ---------- Total stockholders' equity............... 708,744 13,518 7,947 730,209 ---------- ------- -------- ---------- Total liabilities and stockholders' equity................................. $1,034,181 $32,526 $ 64,426 $1,131,133 ========== ======= ======== ==========
The accompanying notes are an integral part of these pro forma combined financial statements. 99 101 QUANTA SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED BALANCE SHEET (a) Reflects the adjustments related to the purchase of nine additional acquisitions that were consummated subsequent to September 30, 1999 and through November 1, 1999, including approximately $55.0 million of debt incurred under Quanta's line of credit to finance the cash portion of the purchase price paid upon acquisition, approximately 1.0 million shares of common stock issued, distribution of certain assets not acquired and certain S corporation distributions which were distributed subsequent to September 30, 1999, resulting in goodwill of approximately $64.8 million. 100 102 QUANTA SERVICES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
QUANTA SERVICES, INC. AND 1999 PRO FORMA PRO FORMA SUBSIDIARIES ACQUISITIONS ADJUSTMENTS TOTAL -------------- ------------ ----------- --------- REVENUES........................................ $593,388 $234,119 $ (11,628)(a) $815,879 COST OF SERVICES (including depreciation)....... 460,809 171,571 (11,628)(b) 620,752 -------- -------- --------- -------- Gross Profit.................................. 132,579 62,548 -- 195,127 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.... 53,481 29,317 (3,477)(c) 79,321 MERGER EXPENSES -- Pooling...................... 6,574 -- -- 6,574 GOODWILL AMORTIZATION........................... 6,911 4 5,135(d) 12,050 -------- -------- --------- -------- Income (loss) from Operations................. 65,613 33,227 (1,658) 97,182 OTHER INCOME (EXPENSE) Interest Expense.............................. (10,790) (1,493) 1,076(e) (11,207) Other, net.................................... 1,006 2,221 -- 3,227 -------- -------- --------- -------- INCOME (LOSS) BEFORE INCOME TAX EXPENSE......... 55,829 33,955 (582) 89,202 PROVISION FOR INCOME TAXES...................... 28,436 1,284 13,098(f) 42,818 -------- -------- --------- -------- NET INCOME (LOSS)............................... 27,393 32,671 (13,680) 46,384 DIVIDENDS ON PREFERRED STOCK.................... 25 -- 673(g) 698 -------- -------- --------- -------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK......................................... $ 27,368 $ 32,671 $ (14,353) $ 45,686 ======== ======== ========= ======== BASIC EARNINGS PER SHARE OF COMMON STOCK........ $ 1.25 ======== DILUTED EARNINGS PER SHARE OF COMMON STOCK...... $ 1.02 ======== DILUTED EARNINGS PER SHARE OF COMMON STOCK BEFORE MERGER EXPENSES........................ $ 1.18 ======== SHARES USED IN COMPUTING PRO FORMA COMBINED EARNINGS PER SHARE -- BASIC(h)...................................... 36,461 ======== DILUTED(h).................................... 46,932 ========
The accompanying notes are an integral part of these pro forma combined financial statements. 101 103 QUANTA SERVICES, INC. AND SUBSIDIARIES UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
QUANTA SERVICES, INC. AND 1998 1999 PRO FORMA PRO FORMA SUBSIDIARIES ACQUISITIONS ACQUISITIONS ADJUSTMENTS TOTAL -------------- ------------ ------------ ----------- --------- REVENUES............................ $319,259 $116,179 $521,126 $(13,446)(a) $943,118 COST OF SERVICES (including depreciation)..................... 257,270 94,565 389,261 (13,125)(b) 727,971 -------- -------- -------- -------- -------- Gross Profit...................... 61,989 21,614 131,865 (321) 215,147 SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.......................... 27,160 11,697 71,307 (19,822)(c) 90,342 MERGER EXPENSES -- Pooling.......... 231 -- -- -- 231 GOODWILL AMORTIZATION............... 2,513 2 -- 13,238(d) 15,753 -------- -------- -------- -------- -------- Income from Operations............ 32,085 9,915 60,558 6,263 108,821 OTHER INCOME (EXPENSE) Interest Expense.................. (4,855) (622) (3,394) (5,201)(e) (14,072) Other, net........................ 641 820 3,847 -- 5,308 -------- -------- -------- -------- -------- INCOME BEFORE INCOME TAX PROVISION......................... 27,871 10,113 61,011 1,062 100,057 PROVISION FOR INCOME TAXES.......... 11,683 572 7,082 24,790(f) 44,127 -------- -------- -------- -------- -------- NET INCOME (LOSS)................... 16,188 9,541 53,929 (23,728) 55,930 DIVIDENDS ON PREFERRED STOCK........ -- -- -- 930(g) 930 -------- -------- -------- -------- -------- NET INCOME (LOSS) ATTRIBUTABLE TO COMMON STOCK...................... $ 16,188 $ 9,541 $ 53,929 $(24,658) $ 55,000 ======== ======== ======== ======== ======== BASIC EARNINGS PER SHARE OF COMMON STOCK........................................................ $ 1.52 ======== DILUTED EARNINGS PER SHARE OF COMMON STOCK...................................................... $ 1.26 ======== DILUTED EARNINGS PER SHARE OF COMMON STOCK BEFORE MERGER EXPENSES............................... $ 1.26 ======== SHARES USED IN COMPUTING PRO FORMA COMBINED EARNINGS PER SHARE -- BASIC(h)...................................................................................... 36,277 ======== DILUTED(h).................................................................................... 46,221 ========
The accompanying notes are an integral part of these pro forma combined financial statements. 102 104 QUANTA SERVICES, INC. AND SUBSIDIARIES NOTES TO UNAUDITED PRO FORMA COMBINED STATEMENT OF OPERATIONS Nine Months Ended September 30, 1999 (a) Reflects the elimination of intercompany revenues between certain of the 1999 Acquisitions prior to their acquisition by Quanta. (b) Reflects the elimination of intercompany expenses between certain of the 1999 Acquisitions prior to their acquisition by Quanta. (c) Adjusts compensation expense to the level the previous owners of the 1999 Acquisitions have agreed to receive as employees of the Company subsequent to their acquisition. (d) Adjusts goodwill amortization expense to reflect the acquisitions of the 1999 Acquisitions over a 40 year estimated life. (e) Records incremental interest expense on the debt incurred to fund the cash portion of the consideration paid for the 1999 Acquisitions offset by the reduction in interest expense related to the repayment of debt from proceeds of the follow-on offering of common stock completed in January 1999 and from proceeds from the sale of Series A Convertible Preferred Stock in September 1999. The additional interest expense was calculated utilizing an annual effective interest rate of approximately 7.0%. (f) Reflects the incremental provision for federal and state income taxes at an approximate 44.0 percent overall tax rate. (g) Gives effect to the .5% dividend requirement on the Series A Convertible Preferred Stock issued in September 1999. (h) The computation of pro forma basic and diluted earnings per share for the nine months ended September 30, 1999 is based upon the historical shares of common stock outstanding at September 30, 1999, adjusted for the issuance of approximately 1.0 million shares related to the acquisition of nine businesses subsequent to September 30, 1999 and through November 1, 1999. Diluted earnings per share additionally includes the dilution attributable to the assumed conversion of the Convertible Subordinated Notes and the Series A Convertible Preferred Stock and dilution attributable to outstanding options to purchase common stock, using the treasury stock method. Year Ended December 31, 1998 (a) Reflects the elimination of intercompany revenues between certain of the 1998 and 1999 Acquisitions prior to their acquisition by Quanta and the elimination of the revenues for a division of one of the 1998 Acquisitions because the Company did not purchase that division. (b) Reflects the elimination of intercompany expenses between certain of the 1998 and 1999 Acquisitions prior to their acquisition by Quanta and the elimination of the expenses for a division of one of the 1998 Acquisitions because the Company did not purchase that division. (c) Adjusts compensation expense to the level the previous owners of the 1998 and 1999 Acquisitions have agreed to receive as employees of the Company subsequent to their acquisition. (d) Adjusts goodwill amortization expense to reflect the acquisitions of the 1998 and 1999 Acquisitions, over a 40 year estimated life. (e) Records incremental interest expense on the debt incurred to fund the cash portion of the consideration paid for the acquisition of the 1998 and 1999 Acquisitions, the incremental interest expense and amortization of deferred financing costs incurred as a result of the issuance of the Convertible Subordinated Notes, offset by the reduction in interest expense related to the repayment of debt from proceeds of the follow-on offering of common stock completed in January 1999 and from proceeds from the sale of Series A Preferred Stock in September 1999. The additional interest expense was calculated utilizing an annual effective interest rate of approximately 7.0%. (f) Reflects the incremental provision for federal and state income taxes at an approximate 44.0 percent overall tax rate. 103 105 (g) Gives effect to the .5% dividend requirement on Series A Preferred Stock issued in September 1999. (h) The computation of pro forma basic and diluted earnings per share for the year ended December 31, 1998 is based upon the historical shares of common stock outstanding at December 31, 1998, adjusted for the issuance of approximately 10.0 million shares related to the acquisition of 40 businesses from January 1, 1999 through November 1, 1999 and the issuance of 4.6 million shares of common stock from the follow-on offering completed in January 1999. Diluted earnings per share additionally includes the dilution attributable to the assumed conversion of the Convertible Subordinated Notes and the Series A Convertible Preferred Stock and dilution attributable to outstanding options to purchase common stock, using the treasury stock method. 104 106 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized. QUANTA SERVICES, INC. Date: November 15, 1999 By: /s/ DERRICK A. JENSEN ------------------------------------ Derrick A. Jensen Vice President, Controller and Chief Accounting Officer 105 EX-23.1 2 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports on the financial statements of the following businesses included in this Form 8-K of Quanta Services, Inc.: report dated October 8, 1999, on the financial statements of W.C. Communications, Inc. for the year ended December 31, 1998, and our report dated October 7, 1999, on the financial statements of Edwards Pipeline Company LLC for the year ended December 31, 1998. It should be noted that we have not audited any financial statements of W.C. Communications, Inc. or Edwards Pipeline Company LLC subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our reports. ARTHUR ANDERSEN LLP Houston, Texas November 12, 1999 EX-23.2 3 CONSENT OF ARTHUR ANDERSEN LLP 1 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated July 9, 1999 on the financial statements of North Sky Communications and Affiliates combined for the year ended December 31, 1998 included in this Form 8-K of Quanta Services, Inc. It should be noted that we have not audited any financial statements of North Sky Communications and Affiliates subsequent to July 9, 1999 or performed any audit procedures subsequent to the date of our report. Arthur Andersen LLP Portland, OR November 12, 1999 EX-23.3 4 CONSENT OF S.J. GALLINA & CO., LLP 1 EXHIBIT 23.3 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated October 14, 1999, on the financial statements of Western Directional, Inc. as of and for the year ended December 31, 1998 included in this Form 8-K of Quanta Services, Inc. It should be noted that we have not audited any financial statements of Western Directional, Inc. subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. S. J. Gallina & Co., LLP Sacramento, California November 12, 1999 EX-23.4 5 CONSENT OF JERRY T. PAUL, CPA 1 EXHIBIT 23.4 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANT As independent public accountants, we hereby consent to the use of our report dated April 28, 1999, on the financial statements of Gem Engineering Co., Inc. as of and for the year ended December 31, 1998 included in this Form 8-K of Quanta Services, Inc. It should be noted that we have not audited any financial statements of Gem Engineering Co., Inc. subsequent to April 28, 1999 or performed any audit procedures subsequent to the date of our report. Jerry T. Paul Certified Public Accountant Houston, Texas November 12, 1999 EX-23.5 6 CONSENT OF MCGLADREY & PULLEN, LLP 1 EXHIBIT 23.5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated February 5, 1999, on the financial statements of Bonneville Construction Company, Inc. as of and for the year ended December 31, 1998 included in this Form 8-K of Quanta Services, Inc. It should be noted that we have not audited any financial statements of Bonneville Construction Company, Inc. subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. McGladrey & Pullen, LLP Las Vegas, Nevada October 27, 1999 EX-23.6 7 CONSENT OF PAUL B. LEATHERS, INC. 1 EXHIBIT 23.6 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated June 18, 1999, on the financial statements of Haines Construction Co. as of and for the year ended March 31, 1999 included in this Form 8-K of Quanta Services, Inc. It should be noted that we have not audited any financial statements of Haines Construction Co. subsequent to March 31, 1999 or performed any audit procedures subsequent to the date of our report. Paul B. Leathers, Inc. Oklahoma City, Oklahoma November 12, 1999 EX-23.7 8 CONSENT OF BABUSH, NEIMAN, KORNMAN & JOHNSON LLP 1 EXHIBIT 23.7 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated July 30, 1999, on the financial statements of Crown Fiber Communications, Inc. as of and for the year ended December 31, 1998 included in this Form 8-K of Quanta Services, Inc. It should be noted that we have not audited any financial statements of Crown Fiber Communications, Inc. subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. BABUSH, NEIMAN, KORNMAN & JOHNSON, LLP Atlanta, Georgia November 12, 1999 EX-23.8 9 CONSENT OF MCDANIEL & ASSOCIATES, P.C. 1 EXHIBIT 23.8 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated November 5, 1999, on the combined financial statements of Trawick Construction Company Group as of and for the year ended December 31, 1998, included in this form 8-K of Quanta Services, Inc. It should be noted that we have not audited any financial statements of Trawick Construction Company Group subsequent to December 31, 1998, or performed any audit procedures subsequent to the date of our report. McDANIEL & ASSOCIATES, P.C. Dothan, Alabama November 12, 1999 EX-23.9 10 CONSENT OF J.H. COHN LLP 1 EXHIBIT 23.9 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our report dated April 9, 1999, except for Note 5, as to which the date is October 1, 1999, on the financial statements of the Telecommunications Division of Conti Enterprises, Inc. as of and for the year ended December 31, 1998 included in this Form 8-K of Quanta Services, Inc. It should be noted that we have not audited any financial statements of the Telecommunications Division of Conti Enterprises, Inc. subsequent to December 31, 1998 or performed any audit procedures subsequent to the date of our report. J.H. COHN LLP Roseland, New Jersey November 12, 1999 -----END PRIVACY-ENHANCED MESSAGE-----