<PAGE> 1
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM 10-Q
---------------------
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO .
COMMISSION FILE NO. 001-13831
QUANTA SERVICES, INC.
(Exact name of registrant as specified in its charter)
---------------------
<TABLE>
<S> <C>
DELAWARE 74-2851603
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
</TABLE>
1360 POST OAK BLVD.
SUITE 2100
HOUSTON, TEXAS 77056
(Address of principal executive offices)
Registrant's Telephone Number, Including Area Code: (713) 629-7600
---------------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
33,557,271 shares of Common Stock were outstanding as of November 11, 1999.
As of the same date, 2,911,966 shares of Limited Vote Common Stock were
outstanding.
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<PAGE> 2
QUANTA SERVICES, INC. AND SUBSIDIARIES
INDEX
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
QUANTA SERVICES, INC. AND SUBSIDIARIES SUPPLEMENTAL
COMBINED FINANCIAL INFORMATION
Supplemental Combined Financial Information............ 1
Supplemental Combined Statements of Operations for the
nine months ended September 30, 1998 and 1999......... 2
QUANTA SERVICES, INC. AND SUBSIDIARIES
Consolidated Balance Sheets............................ 4
Consolidated Statements of Operations.................. 5
Consolidated Statements of Cash Flows.................. 6
Notes to Condensed Consolidated Financial Statements... 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................... 13
PART II. OTHER INFORMATION
Item 2. Changes in Securities............................. 19
Item 6. Exhibits and Reports on Form 8-K.................. 19
Signature................................................. 20
</TABLE>
i
<PAGE> 3
PART I, ITEM 1 -- FINANCIAL INFORMATION
QUANTA SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED FINANCIAL INFORMATION
OVERVIEW AND BASIS OF PRESENTATION
Quanta Services, Inc., a Delaware corporation ("Quanta" or the "Company"),
was founded in August 1997 to create a leading provider of specialty contracting
and maintenance services primarily related to electric, utility,
telecommunications and cable television infrastructure in North America. In
February 1998, Quanta completed its initial public offering (the "Offering"),
concurrent with which Quanta acquired, in separate transactions, four entities
(the "Founding Companies"). Quanta acquired twelve additional businesses in 1998
and 31 additional businesses through September 30, 1999. Of these additional
acquired businesses, two were accounted for as poolings-of-interests and are
referred to herein as the "Pooled Companies". The remaining acquired businesses
were accounted for as purchases and are referred to herein as the "Purchased
Companies". Quanta intends to continue to acquire, through merger or purchase,
similar companies to expand its national and regional operations.
The financial statements of Quanta for periods prior to February 18, 1998
(the effective closing date of the acquisitions of the Founding Companies) are
the financial statements of PAR Electrical Contractors, Inc. ("PAR" or the
"Accounting Acquiror") as restated for the acquisitions of the Pooled Companies.
The operations of the other Founding Companies and Quanta, acquired by the
Accounting Acquiror, have been included in the Company's historical financial
statements beginning February 19, 1998, and the Purchased Companies from their
respective dates of acquisition.
The unaudited supplemental pro forma combined statement of operations for
the nine months ended September 30, 1998 assumes that the Offering and related
transactions were closed on January 1, 1998 and presents certain data for the
Company as adjusted for: 1) the acquisition of the Founding Companies; 2)
certain reductions in salaries, bonuses and benefits to former owners of the
Founding Companies; 3) amortization of goodwill resulting from the acquisition
of the Founding Companies; 4) a reduction in interest expense, net of interest
expense on borrowings to fund S corporation distributions by certain of the
Founding Companies; and 5) adjustments to the federal and state income tax
provision for the Founding Companies based on pro forma operating results.
The unaudited supplemental pro forma combined statement of operations for
the nine months ended September 30, 1998 is presented herein as the Company
believes certain investors find the information useful. This statement should be
read in conjunction with the Company's unaudited consolidated financial
statements and notes thereto included in this Form 10-Q. The pro forma financial
data does not purport to represent what the Company's combined results of
operations would actually have been if such transactions had in fact occurred on
those dates and are not necessarily representative of the Company's results of
operations for any future period. Since Quanta, the Founding Companies and the
Pooled Companies were not under common control or management for a portion of
the period presented, historical pro forma combined results may not be
comparable to, or indicative of, future performance.
Operating results for the interim periods are not necessarily indicative of
the results for full years. The results of the Company have historically been
subject to significant seasonal fluctuations. It is suggested that these
unaudited pro forma supplemental combined financial statements be read in
conjunction with the historical and pro forma combined financial statements and
the notes thereto included in the Company's Annual Report on Form 10-K which was
filed with the Securities and Exchange Commission (the "SEC") on March 31, 1999
and additionally the Company's restated 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.
1
<PAGE> 4
QUANTA SERVICES, INC. AND SUBSIDIARIES
SUPPLEMENTAL COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
1998 1999
----------- --------
(PRO FORMA)
<S> <C> <C>
Revenues.................................................... $215,548 $593,388
Cost of services (including depreciation)................... 174,341 460,809
-------- --------
Gross profit...................................... 41,207 132,579
Selling, general & administrative expenses.................. 18,120 53,481
Merger expenses -- pooling.................................. 231 6,574(a)
Goodwill amortization....................................... 1,753 6,911
-------- --------
Income from operations............................ 21,103 65,613
Other income (expense):
Interest expense.................................. (2,584) (10,790)
Other, net........................................ 511 1,006
-------- --------
Income before income tax provision.......................... 19,030 55,829
Provision for income taxes(b)............................... 8,019 28,436
-------- --------
Net income.................................................. 11,011 27,393
Dividends on preferred stock................................ -- 25
-------- --------
Net income attributable to common stock..................... $ 11,011 $ 27,368
======== ========
Basic earnings per share of common stock.................... $ 0.59 $ 0.92
======== ========
Diluted earnings per share of common stock.................. $ 0.58 $ 0.85
======== ========
Diluted earnings per share of common stock before merger
expenses(c)............................................... $ 0.60 $ 1.06
======== ========
Shares used in computing earnings per share(1) --
Basic..................................................... 18,775 29,770
======== ========
Diluted................................................... 18,891 34,268
======== ========
</TABLE>
- ---------------
(a) As a result of the termination of an Employee Stock Ownership Plan
associated with a company acquired in a pooling-of-interests transaction,
during the second quarter of 1999 the Company incurred a non-cash,
non-recurring compensation charge of $5.3 million and a non-recurring
excise tax charge of $1.1 million. This also reflects $137,000 in merger
expenses associated with a pooling-of-interests transaction which occurred
in the first quarter of 1999.
(b) Reflects the non-deductibility of the merger expenses -- pooling. In
addition, for the nine months ended September 30, 1999, it includes a
non-cash, non-recurring deferred tax charge of $677,000 as a result of a
change in the tax status from an S corporation to a C corporation of a
company acquired in a pooling transaction during the first quarter of 1999.
(c) Excludes the effect of all non-recurring, merger expenses -- pooling.
Additionally, for the nine months ended September 30, 1999, it excludes the
non-cash, non-recurring deferred tax charge of $677,000 described in (b)
above.
The accompanying notes are an integral part of these supplemental combined
financial statements.
2
<PAGE> 5
(1) Shares Used in Computing Earnings Per Share
The pro forma basic earnings per share calculation for the nine months
ended September 30, 1998 includes the pro forma effect of the shares issued to
the Founding Companies, the Pooled Companies, the Limited Vote Common Stock and
the Offering as though they were outstanding the entire period. Pro forma
diluted earnings per share include the shares described previously and the
dilution of 116,797 shares attributable to outstanding options to purchase
common stock, using the treasury stock method.
Basic earnings per share for the nine months ended September 30, 1999 are
based on the weighted average shares of common stock and Limited Vote Common
Stock outstanding. Diluted earnings per share are based on the weighted average
shares of common stock and Limited Vote Common Stock outstanding and the
dilution of 681,459 shares attributable to outstanding options to purchase
common stock, using the treasury stock method. In addition, it includes the
dilution attributable to the assumed conversion of the Convertible Subordinated
Notes and the Series A Convertible Preferred Stock. Included in net income used
in computing diluted earnings per share is approximately $1.6 million in reduced
interest expense, net of tax, attributable to the assumed conversion of the
Convertible Subordinated Notes and approximately $25,000 of dividends on Series
A Convertible Preferred Stock.
3
<PAGE> 6
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
(UNAUDITED)
<S> <C> <C>
CURRENT ASSETS:
Cash...................................................... $ 3,246 $ 12,687
Accounts receivable, net of allowance of $1,616 and
$4,843................................................. 76,040 212,308
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 22,620 55,741
Inventories............................................... 2,534 9,012
Prepaid expenses and other current assets................. 4,352 8,999
-------- ----------
Total current assets.............................. 108,792 298,747
PROPERTY AND EQUIPMENT, net................................. 74,212 161,001
OTHER ASSETS, net........................................... 5,190 7,156
GOODWILL, net............................................... 150,887 567,277
-------- ----------
Total assets...................................... $339,081 $1,034,181
======== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 4,357 $ 6,777
Accounts payable and accrued expenses..................... 40,298 139,741
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 7,031 17,877
-------- ----------
Total current liabilities......................... 51,686 164,395
LONG-TERM DEBT, net of current maturities................... 60,281 97,110
CONVERTIBLE SUBORDINATED NOTES.............................. 49,350 49,350
DEFERRED INCOME TAXES AND OTHER NON-CURRENT
LIABILITIES............................................... 6,261 14,582
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.00001 par value, 10,000,000 shares
authorized:
Series A Convertible Preferred Stock, -- and 1,860,000
shares issued and outstanding......................... -- --
Common Stock, $.00001 par value, 36,654,667 and
100,000,000 shares authorized, 18,557,949 and
32,147,025 shares issued and outstanding............... -- --
Limited Vote Common Stock, $.00001 par value, 3,345,333
shares authorized, 3,345,333 and 3,331,451 shares
issued and outstanding................................. -- --
Unearned ESOP shares...................................... (1,831) --
Additional paid-in capital................................ 145,194 653,236
Retained earnings......................................... 28,140 55,508
-------- ----------
Total stockholders' equity........................ 171,503 708,744
-------- ----------
Total liabilities and stockholders' equity........ $339,081 $1,034,181
======== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
4
<PAGE> 7
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1999 1998 1999
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues........................................... $103,737 $271,788 $201,012 $593,388
Cost of services (including depreciation).......... 82,923 205,689 162,168 460,809
-------- -------- -------- --------
Gross profit............................. 20,814 66,099 38,844 132,579
Selling, general & administrative expenses......... 7,898 23,604 17,164 53,481
Merger expenses -- pooling......................... -- -- 231 6,574(a)
Goodwill amortization.............................. 786 3,186 1,535 6,911
-------- -------- -------- --------
Income from operations................... 12,130 39,309 19,914 65,613
Other income (expense):
Interest expense......................... (1,504) (5,129) (2,621) (10,790)
Other, net............................... 276 328 465 1,006
-------- -------- -------- --------
Income before income tax provision................. 10,902 34,508 17,758 55,829
Provision for income taxes(b)...................... 4,542 15,345 7,442 28,436
-------- -------- -------- --------
Net income......................................... 6,360 19,163 10,316 27,393
Dividends on preferred stock....................... -- 25 -- 25
-------- -------- -------- --------
Net income attributable to common stock............ $ 6,360 $ 19,138 $ 10,316 $ 27,368
======== ======== ======== ========
Basic earnings per share of common stock........... $ 0.31 $ 0.58 $ 0.62 $ 0.92
======== ======== ======== ========
Diluted earnings per share of common stock......... $ 0.31 $ 0.52 $ 0.62 $ 0.85
======== ======== ======== ========
Diluted earnings per share of common stock before
merger expenses(c)............................... $ 0.31 $ 0.52 $ 0.63 $ 1.06
======== ======== ======== ========
Shares used in computing earnings per share --
Basic............................................ 20,211 33,214 16,551 29,770
======== ======== ======== ========
Diluted.......................................... 20,327 38,160 16,667 34,268
======== ======== ======== ========
</TABLE>
- ---------------
(a) As a result of the termination of an Employee Stock Ownership Plan
associated with a company acquired in a pooling-of-interests transaction,
during the second quarter of 1999 the Company incurred a non-cash,
non-recurring compensation charge of $5.3 million and a non-recurring
excise tax charge of $1.1 million. This also reflects $137,000 in merger
expenses associated with a pooling-of-interests transaction which occurred
in the first quarter of 1999.
(b) Reflects the non-deductibility of the merger expenses -- pooling. In
addition, for the nine months ended September 30, 1999, it includes a
non-cash, non-recurring deferred tax charge of $677,000 as a result of a
change in the tax status from an S corporation to a C corporation of a
company acquired in a pooling transaction during the first quarter of 1999.
(c) Excludes the effect of all non-recurring merger expenses -- pooling.
Additionally, for the nine months ended September 30, 1999, it excludes the
non-cash, non-recurring deferred tax charge of $677,000 described in (b)
above.
The accompanying notes are an integral part of these condensed consolidated
financial statements.
5
<PAGE> 8
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- --------------------
1998 1999 1998 1999
-------- --------- -------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 6,360 $ 19,163 $ 10,316 $ 27,393
Adjustments to reconcile net income to net cash
provided by (used in) operating activities --
Depreciation and amortization................ 3,277 10,526 6,666 23,290
Gain on sale of property and equipment....... (39) (45) (96) (198)
Non-cash compensation charge for issuance of
Common Stock (ESOP)........................ -- -- -- 5,319
Deferred income taxes........................ (522) 1,099 (330) 1,313
Changes in operating assets and liabilities,
net of non-cash transactions --
(Increase) decrease in --
Accounts receivable........................ (21,113) (15,129) (25,321) (47,222)
Inventories................................ (155) 94 (283) (1,672)
Costs and estimated earnings in excess of
billings on uncompleted contracts....... (4,800) (9,790) (10,443) (21,821)
Prepaid expenses and other current
assets.................................. (2,434) 1,565 (2,311) 949
Increase (decrease) in --
Accounts payable and accrued expenses...... 3,091 17,534 8,666 43,925
Billings in excess of costs and estimated
earnings on uncompleted contracts....... 1,587 2,366 1,773 332
Other, net................................. (98) 168 (510) 1,192
-------- --------- -------- ---------
Net cash provided by (used in) operating
activities................................. (14,846) 27,551 (11,873) 32,800
-------- --------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment.... 46 1,047 1,015 1,528
Additions of property and equipment............. (6,251) (24,859) (13,544) (49,742)
Purchase of other assets........................ (1,400) -- (1,400) --
Cash paid for acquisitions, net of cash
acquired..................................... (44,482) (84,766) (79,255) (259,811)
-------- --------- -------- ---------
Net cash used in investing activities........ (52,087) (108,578) (93,184) (308,025)
-------- --------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.................... 246 247 3,957 3,608
Payments on long-term debt...................... (7,115) (10,239) (34,521) (33,049)
Issuances of stock, net of costs................ (195) 182,179 44,914 283,298
Net borrowings (payments) under bank lines of
credit....................................... 74,803 (83,884) 101,172 29,881
Distributions to accounting acquiror............ -- -- (8,370) --
Exercise of stock options....................... -- 1,219 -- 2,587
Debt issuance costs............................. -- -- -- (1,659)
-------- --------- -------- ---------
Net cash provided by financing activities.... 67,739 89,522 107,152 284,666
-------- --------- -------- ---------
NET INCREASE IN CASH.............................. 806 8,495 2,095 9,441
CASH, beginning of period......................... 1,778 4,192 489 3,246
-------- --------- -------- ---------
CASH, end of period............................... $ 2,584 $ 12,687 $ 2,584 $ 12,687
======== ========= ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for --
Interest..................................... $ 1,271 $ 6,788 $ 2,274 $ 10,245
Income taxes................................. 4,077 4,805 4,876 15,117
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
6
<PAGE> 9
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
Quanta Services, Inc., a Delaware corporation ("Quanta" or the "Company"),
was founded in August 1997 to create a leading provider of specialty contracting
and maintenance services primarily related to electric, utility,
telecommunications and cable television infrastructure in North America.
In February 1998, Quanta completed its initial public offering (the
"Offering"), concurrent with which Quanta acquired, in separate transactions,
four entities (the "Founding Companies"). Quanta acquired twelve additional
businesses in 1998 and 31 additional businesses through September 30, 1999. Of
these additional acquired businesses, two were accounted for as
poolings-of-interests and are referred to herein as the "Pooled Companies". The
remaining acquired businesses were accounted for as purchases and are referred
to herein as the "Purchased Companies" (together with the Founding Companies and
the Pooled Companies, the "Acquired Businesses"). Quanta intends to continue to
acquire, through merger or purchase, similar companies to expand its national
and regional operations.
The financial statements of Quanta for periods prior to February 18, 1998
(the effective closing date of the acquisitions of the Founding Companies), are
the financial statements of PAR Electrical Contractors, Inc. ("PAR" or the
"Accounting Acquiror") as restated for the acquisitions of the Pooled Companies.
The operations of the other Founding Companies and Quanta, acquired by the
Accounting Acquiror, have been included in the Company's historical financial
statements beginning February 19, 1998, and the Purchased Companies beginning on
their respective dates of acquisition. References herein to the "Company"
include Quanta and its subsidiaries.
Interim Condensed Consolidated Financial Information
These unaudited condensed consolidated financial statements have been
prepared pursuant to the rules of the 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. The results of the Company have historically been subject to
significant seasonal fluctuations.
It is suggested that these condensed consolidated financial statements be
read in conjunction with the audited financial statements and notes thereto of
Quanta Services, Inc. and subsidiaries 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 restated financial statements on Form 8-K which was filed with the
SEC on June 17, 1999, giving effect to a pooling-of-interests transaction that
occurred in February 1999.
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.
7
<PAGE> 10
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. PER SHARE INFORMATION:
Basic earnings per share calculations are based on the weighted average
shares of common stock and Limited Vote Common Stock outstanding. Diluted
earnings per share calculations are based on the weighted average shares of
common stock and Limited Vote Common Stock outstanding and the dilution of
115,968 and 116,797 shares for three and nine months ended September 30, 1998,
respectively, and 682,756 and 681,459 shares for the three and nine months ended
September 30, 1999, respectively, attributable to outstanding options to
purchase common stock, using the treasury stock method. In addition, for the
three and nine months ended September 30, 1999, diluted earnings per share
includes the dilution attributable to the assumed conversion of the Convertible
Subordinated Notes and the Series A Convertible Preferred Stock. Included in the
net income used in computing diluted earnings per share for the three and nine
months ended September 30, 1999 are approximately $542,000 and $1.6 million,
respectively, in reduced interest expense, net of tax, attributable to the
assumed conversion of the Convertible Subordinated Notes and approximately
$25,000 of dividends on Series A Convertible Preferred Stock.
3. BUSINESS COMBINATIONS:
Poolings
During 1998 and the quarter ended March 31, 1999, the Company acquired all
of the outstanding stock of two companies in exchange for 1,162,572 shares of
common stock. These companies provide specialty contracting services to the
cable television and telecommunications industries. These acquisitions have been
accounted for as poolings-of-interests and the results of their operations are
included for all periods presented herein.
The Company issued shares of common stock to an Employee Stock Ownership
Plan (the "ESOP") in connection with the acquisition of one of the Pooled
Companies. The ESOP was terminated on July 31, 1998. In June 1999, after the
receipt of a favorable determination letter from the Internal Revenue Service, a
portion of the unallocated shares of the Company's common stock held by the ESOP
were sold to repay debt owed by the ESOP to the Company and the remaining
portion of the unallocated shares were distributed to the plan participants. The
cost of the unallocated ESOP shares was reflected as a reduction in the
Company's stockholders' equity. As a result of the above, the Company incurred
an excise tax of approximately $1.1 million equal to 10 percent of the value of
the Company's common stock to be distributed to the plan participants. In
addition, the Company eliminated the remaining balance reflected as Unearned
ESOP Shares on the Company's balance sheet and recognized a non-cash,
non-recurring compensation charge of approximately $5.3 million equal to the
value of the unallocated shares held by the ESOP.
Purchases
In the first nine months of 1999, the Company completed 30 acquisitions
accounted for as purchases. The aggregate consideration paid in these
transactions consisted of $273.6 million in cash and notes and 8.8 million
shares of common stock. The accompanying consolidated balance sheet as of
September 30, 1999 includes preliminary allocations of the respective purchase
prices and is subject to final adjustment. Set forth below are unaudited pro
forma combined revenue and income data reflecting the pro forma effect of these
acquisitions on the Company's consolidated results of operations for the year
ended December 31, 1998 and the nine months ended September 30, 1999. The
unaudited data presented below consists of statements of operations data as
presented in these condensed consolidated financial statements plus (i)
statements of operations data of the Founding Companies for the periods prior to
February 19, 1998, (ii) the effects of the Pooled
8
<PAGE> 11
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Companies and (iii) all Purchased Companies as if the acquisitions were
effective on the first day of the period being reported. The unaudited pro forma
revenue and net income data are in thousands.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
1998 1999
------------ -------------
<S> <C> <C>
Revenues.................................................... $860,461 $756,768
Net income attributable to common stock..................... $ 53,865 $ 42,287
Basic earnings per share of common stock.................... $ 1.53 $ 1.19
Diluted earnings per share of common stock.................. $ 1.26 $ 0.97
Diluted earnings per share of common stock before merger
expenses.................................................. $ 1.26 $ 1.13
</TABLE>
Pro forma adjustments included in the amounts above primarily relate to:
(a) contractually agreed reductions in salaries and benefits for former owners,
and certain key employees; (b) adjustments to amortization expense due to the
purchase price allocations; (c) the assumed reductions in interest expense due
to unassumed debt and the refinancing of the outstanding indebtedness in
conjunction with the acquisition of the Founding Companies and Purchased
Companies, offset by an assumed increase in interest expense incurred in
connection with financing the acquisitions; (d) the incremental interest expense
and amortization of deferred financing costs incurred as a result of the
issuance of the Convertible Subordinated Notes (as defined in Note 7), net of
the repayment of outstanding indebtedness of the Company; (e) the reduction in
interest expense related to the repayment of debt from proceeds of the secondary
offering of common stock completed in January 1999, as if the offering had been
completed at the beginning of all periods presented; (f) the reduction in
interest expense related to the repayment of debt from proceeds from the
issuance of Series A Convertible Preferred Stock in September 1999, as if the
issuance had occurred at the beginning of all periods presented, including the
impact of dividends associated with the Series A Convertible Preferred Stock;
and (g) adjustment to the federal and state income tax provisions based on the
combined operations. The diluted earnings per share before merger expenses
excludes the effect of all non-recurring merger expenses. Additionally, for the
nine months ended September 30, 1999, it excludes the non-cash, non-recurring
deferred tax charge of $677,000 recorded as a result of a change in the tax
status from an S corporation to a C corporation of a company acquired in a
pooling transaction during the first quarter of 1999. The pro forma financial
data does not purport to represent what the Company's combined results of
operations would actually have been if such transactions had in fact occurred on
those dates and are not necessarily representative of the Company's results of
operations for any future period.
4. INCOME TAXES:
Certain of the Acquired Businesses were S corporations for income tax
purposes and, accordingly, any income tax liabilities for the periods prior to
the acquisitions are the responsibility of the respective stockholders.
Effective with the acquisitions, the S corporations converted to C corporations.
Accordingly, an estimated deferred tax liability has been recorded to provide
for the estimated future income tax liability as a result of the difference
between the book and tax bases of the net assets of these former S corporations.
For purposes of these consolidated financial statements, federal and state
income taxes have been provided for the post-acquisition periods. In addition,
during the first quarter of 1999, a non-cash, non-recurring tax charge of
$677,000 was recorded as a result of a change in the tax status from an S
Corporation to a C Corporation of a company acquired in a pooling transaction.
5. NEW PRONOUNCEMENTS:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which becomes effective for financial
statements beginning January 1, 2000. SFAS No. 133
9
<PAGE> 12
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
requires a company to recognize all derivative instruments (including certain
derivative instruments embedded in other contracts) as assets or liabilities in
its balance sheet and measure them at fair value. The statement requires that
changes in the derivatives' fair value be recognized currently in earnings
unless specific hedge accounting criteria are met. The Company is evaluating
SFAS No. 133 and the impact on existing accounting policies and financial
reporting disclosures. However, the Company has not to date engaged in
activities or entered into arrangements normally associated with derivative
instruments. In June 1999, the FASB issued SFAS No. 137, "Accounting for
Derivative Instruments and Hedging Activities -- Deferral of the Effective Date
of FASB Statement No. 133 -- An Amendment of FASB Statement No. 133". SFAS No.
137 delayed the effective date of the requirements of SFAS No. 133 to all fiscal
quarters of fiscal years beginning after June 15, 2000.
6. DEBT:
Credit Facility
In June 1999, the Company expanded its bank group from nine to 14 banks and
amended its $175.0 million revolving credit facility (the "Credit Facility") to
$350.0 million. The Credit Facility is secured by a pledge of all of the capital
stock of the Company's material operating subsidiaries and the majority of the
Company's assets, and is to provide funds to be used for working capital, to
finance acquisitions and for other general corporate purposes. Amounts borrowed
under the Credit Facility bear interest at a rate equal to either (a) the London
Interbank Offered Rate ("LIBOR" which was 5.44 percent at September 30, 1999)
plus 1.00 percent to 2.00 percent, as determined by the ratio of the Company's
total funded debt to EBITDA (as defined in the Credit Facility) or (b) the
bank's prime rate (which was 8.25 percent at September 30, 1999) plus up to 0.25
percent, as determined by the ratio of the Company's total funded debt to
EBITDA. Commitment fees of 0.25 percent to 0.50 percent (based on certain
financial ratios) are due on any unused borrowing capacity under the Credit
Facility. The Credit Facility matures June 2004. The Company's existing
subsidiaries guarantee and future subsidiaries will guarantee the repayment of
all amounts due under the Credit Facility and the Credit Facility restricts
pledges on all material assets. The Credit Facility contains usual and customary
covenants for a credit facility of this nature including a prohibition on the
payment of dividends, certain financial ratios and indebtedness covenants and a
requirement to obtain the consent of the lenders for acquisitions exceeding a
certain level of cash consideration. As of September 30, 1999, $86.7 million was
borrowed under the Credit Facility, and the Company had $4.1 million of letters
of credit outstanding, resulting in a borrowing availability of $259.2 million
under the Credit Facility.
Strategic Investment
In October 1998, the Company entered into a strategic investment agreement
with Enron Capital & Trade Resources Corp. ("Enron Capital"), a subsidiary of
Enron Corp., pursuant to which Enron Capital and one of its affiliates made an
investment of $49.4 million in Quanta. The investment is in the form of
Convertible Subordinated Notes bearing interest at 6 7/8 percent and convertible
into Quanta common stock at a price of $13.75 per share. Additionally, Quanta
and Enron Capital entered into a strategic alliance under which Enron Capital
and Quanta will exchange information regarding the design, construction and
maintenance of electric power transmission and distribution systems and fiber
optic communications systems. The Convertible Subordinated Notes require
quarterly interest payments and equal semi-annual principal payments beginning
in 2006 until the notes are paid in full in 2010. The Company has the option to
redeem the notes at a premium beginning in 2002. In certain circumstances, Enron
Capital has the right to purchase additional securities from the Company to
maintain the percentage ownership of the Company represented by the Convertible
Subordinated Notes.
10
<PAGE> 13
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
7. SERIES A CONVERTIBLE PREFERRED STOCK
In September 1999, the Company entered into a securities purchase agreement
with UtiliCorp United Inc. ("UtiliCorp") pursuant to which the Company issued
1,860,000 shares of Series A Convertible Preferred Stock (the "Series A
Preferred Stock"), at $.00001 par value per share for an initial investment of
$186,000,000, before transaction costs. The holders of the Series A Preferred
Stock are entitled to receive dividends in cash at a rate of 0.5% per annum on
an amount equal to $100.00 per share, plus all unpaid dividends accrued. In
addition to the preferred dividend, the holders are entitled to participate in
any cash or non-cash dividends or distributions declared and paid on the shares
of common stock, as if each share of Series A Preferred Stock had been converted
into one share of common stock immediately prior to the record date for payment
of such dividends or distributions. At any time after the sixth anniversary of
the issuance of the Series A Preferred Stock, if the closing price per share of
the Company's common stock is greater than $30.00, then the Company may
terminate the preferred dividend. At any time after the sixth anniversary of the
issuance of the Series A Preferred Stock, if the closing price per share of the
Company's common stock is equal to or less than $30.00, then the preferred
dividend may, at the option of UtiliCorp, be adjusted to the then "market coupon
rate", which shall equal the Company's after-tax cost of obtaining financing,
excluding common stock, to replace UtiliCorp's investment in the Company.
UtiliCorp is entitled to that number of votes equal to the number of shares
of common stock into which the outstanding shares of Series A Preferred Stock
are then convertible. Subject to certain limitations, UtiliCorp will be entitled
to elect two of the total number of directors of the Company. All or any portion
of the outstanding shares of Series A Preferred Stock may, at the option of
UtiliCorp, be converted at any time into fully paid and nonassessable shares of
common stock. The conversion price shall initially be $30.00 and may be adjusted
under certain circumstances. Also in certain circumstances, UtiliCorp has the
right to purchase additional securities from the Company to maintain the
percentage ownership of the Company represented by the Series A Preferred Stock.
In addition to the securities purchase agreement, the Company entered into
a strategic alliance agreement (the "Strategic Alliance Agreement") with
UtiliCorp. Under the terms of the Strategic Alliance Agreement, UtiliCorp will
use the Company, subject to the Company's ability to perform the required
services, as a preferred contractor in outsourced transmission and distribution
infrastructure construction and maintenance and natural gas distribution
construction and maintenance in all areas serviced by UtiliCorp, provided that
the Company provides such services at a competitive cost. The Strategic Alliance
Agreement has a term of six years.
The Company also entered into a management services agreement (the
"Management Services Agreement") with UtiliCorp. Under the Management Services
Agreement, to the extent mutually agreed upon by the parties, UtiliCorp will
provide advice and services including financing activities; corporate strategic
planning; research on the restructuring of the utility industries; the
development, evaluation and marketing of the Company's products, services and
capabilities; identification of and evaluation of potential acquisition
candidates and other merger and acquisition advisory services; and other
services that the Company's Board of Directors may reasonably request. In
consideration of the advice and services rendered by UtiliCorp, the Company will
pay UtiliCorp on a quarterly basis in arrears a fee of $2,325,000. The
Management Services Agreement has a term of six years. The Company has the right
to terminate the Management Services Agreement at any time if, in the reasonable
judgement of the Company's Board of Directors, changes in the nature of the
relationship between the Company and UtiliCorp make effective provision of the
services to be provided unlikely.
8. SEGMENT INFORMATION:
The Company operates in one reportable segment as a specialty contractor.
The Company provides contracting and maintenance services including services for
electric, utility, telecommunications and cable
11
<PAGE> 14
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
television infrastructure, transportation control and lighting systems and
commercial and industrial services. Each of these services is provided by
various of the Company's subsidiaries and discrete financial information is not
provided to management at the service level. The following table presents
information regarding revenues derived from the services noted above.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1998 1999
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Electric utility infrastructure............................. $107,119 $202,850
Telecommunications infrastructure........................... 50,730 215,157
Transportation control and lighting systems................. 18,287 35,611
Commercial, industrial and other............................ 19,218 89,131
Cable television infrastructure............................. 5,658 50,639
-------- --------
$201,012 $593,388
======== ========
</TABLE>
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
9. SUBSEQUENT EVENTS:
Business Combinations
Subsequent to September 30, 1999 and through November 12, 1999, the Company
has acquired nine additional companies for an aggregate consideration of $55.0
million in cash and notes and 982,723 shares of common stock. The cash portion
of such consideration was provided by borrowings under the Company's Credit
Facility.
12
<PAGE> 15
ITEM 2.MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
INTRODUCTION
The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes thereto included elsewhere
in this Quarterly Report on Form 10-Q. Except for the historical financial
information contained herein, the matters discussed in this Quarterly Report on
Form 10-Q may be considered "forward-looking" statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. Such statements include
declarations regarding the intent, belief or current expectations of the Company
and its management, statements regarding the future results of the Acquired
Businesses, the Company's gross margins and the Company's expectations regarding
Year 2000 issues. Prospective investors are cautioned that any such
forward-looking statements are not guarantees of future performance and involve
a number of risks and uncertainties. Actual results could differ materially from
those indicated by such forward-looking statements. Among the important factors
that could cause actual results to differ materially from those indicated by
such forward-looking statements are the risk factors identified 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 restated 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, which are available at the SEC's
Web site at www.sec.gov.
Quanta derives its revenues from one reportable segment by providing
specialty contracting and maintenance services related to electric, utility,
telecommunications and cable television infrastructure, installing
transportation control and lighting systems, and providing specialty contracting
services to the commercial and industrial markets. Costs of services consist
primarily of salaries and benefits to employees, depreciation, insurance, fuel
and other vehicle expenses, equipment rentals, subcontracted services,
materials, parts and supplies. Quanta's gross margin, which is gross profit
expressed as a percentage of revenues, is typically higher on projects where
labor, rather than materials, constitutes a greater portion of the cost of
services. Labor costs can be predicted with relatively less accuracy than
materials costs. Therefore, to compensate for the potential variability of labor
costs, we seek to maintain higher margins on our labor-intensive projects.
Certain of our subsidiaries previously were subject to deductibles ranging from
$100,000 to $1,000,000 for workers' compensation insurance. Fluctuations in
insurance accruals related to this deductible could have an impact on gross
margins in the period in which such adjustments are made. Selling, general and
administrative expenses consist primarily of compensation and related benefits
to management, administrative salaries and benefits, marketing, office rent and
utilities, communications and professional fees.
13
<PAGE> 16
RESULTS OF OPERATIONS
The unaudited consolidated statements of operations for the three and nine
months ended September 30, 1998 and 1999 reflect the operations of PAR and the
Pooled Companies. The operations of the Founding Companies have been included in
the Company's consolidated financial statements beginning February 19, 1998 and
the operations of the Purchased Companies have been included from their
respective acquisition dates.
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------------- -----------------------------------
1998 1999 1998 1999
---------------- ---------------- ---------------- ----------------
(IN THOUSANDS) (IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues.......................... $103,737 100.0% $271,788 100.0% $201,012 100.0% $593,388 100.0%
Cost of services.................. 82,923 79.9 205,689 75.7 162,168 80.7 460,809 77.7
-------- ----- -------- ----- -------- ----- -------- -----
Gross profit...................... 20,814 20.1 66,099 24.3 38,844 19.3 132,579 22.3
Selling, general and
administrative expenses......... 7,898 7.6 23,604 8.7 17,164 8.5 53,481 9.0
Merger expenses-pooling........... -- 0.0 -- 0.0 231 0.1 6,574 1.1
Goodwill amortization............. 786 0.8 3,186 1.1 1,535 0.8 6,911 1.1
-------- ----- -------- ----- -------- ----- -------- -----
Income from operations............ 12,130 11.7 39,309 14.5 19,914 9.9 65,613 11.1
Interest expense.................. (1,504) 1.4 (5,129) 1.9 (2,621) 1.3 (10,790) 1.8
Other income, net................. 276 0.2 328 0.1 465 0.2 1,006 0.1
-------- ----- -------- ----- -------- ----- -------- -----
Income before income tax
provision....................... 10,902 10.5 34,508 12.7 17,758 8.8 55,829 9.4
Provision for income taxes........ 4,542 4.4 15,345 5.6 7,442 3.7 28,436 4.8
-------- ----- -------- ----- -------- ----- -------- -----
Net income........................ 6,360 6.1 19,163 7.1 10,316 5.1 27,393 4.6
Dividends on preferred stock...... -- 0.0 25 0.0 -- 0.0 25 0.0
-------- ----- -------- ----- -------- ----- -------- -----
Net income attributable to common
stock........................... $ 6,360 6.1% $ 19,138 7.1% $ 10,316 5.1% $ 27,368 4.6%
======== ===== ======== ===== ======== ===== ======== =====
</TABLE>
Consolidated Results For The Three and Nine Months Ended September 30, 1998,
Compared To The Three and Nine Months Ended September 30, 1999
Revenues. Revenues increased $168.1 million and $392.4 million, or 162.0%
and 195.2%, to $271.8 million and $593.4 million for the three and nine months
ended September 30, 1999. This increase in revenues was primarily attributable
to the contribution of $134.5 million and $254.2 million in revenues for the
three and nine months ended September 30, 1999 due to the acquisition of
Purchased Companies subsequent to September 30, 1998 and increased demand for
the Company's services in 1999.
Gross profit. Gross profit increased $45.3 million and $93.7 million, or
217.6% and 241.3%, to $66.1 million and $132.6 million for the three and nine
months ended September 30, 1999. As a percentage of revenues, gross profit
increased from 20.1% for the three months ended September 30, 1998 to 24.3% for
the three months ended September 30, 1999. Gross margins increased from 19.3%
for the nine months ended September 30, 1998 to 22.3% for the nine months ended
September 30, 1999. The increase in gross margin for both periods was primarily
due to a higher mix of higher margin telecommunication and cable TV contracts in
1999 compared to 1998 and due to the acquisition of certain of the Purchased
Companies subsequent to September 30, 1998.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $15.7 million and $36.3 million, or 198.9% and
211.6%, to $23.6 million and $53.5 million for the three and nine months ended
September 30, 1999, due to the acquisition of certain of the Purchased Companies
subsequent to September 30, 1998, increases in selling and administrative
salaries required to support the higher level of revenues generated from an
increased volume of projects and the increased costs related to the Company's
corporate infrastructure. As a percentage of revenues, selling, general and
administrative expenses increased for the three and nine months ended September
30, 1999 primarily due to the implementation of a company-wide management
incentive program in 1999.
14
<PAGE> 17
Merger expenses-pooling. Merger expenses increased $6.3 million, or
2,745.9% to $6.6 million for the nine months ended September 30, 1999, due to
the recording of $1.1 million of excise tax charges and $5.3 million of non-cash
compensation charges related to the allocation of shares of common stock to
participants of an ESOP associated with one of the Pooled Companies.
Interest Expense. Interest expense increased $3.6 million and $8.2 million,
or 241.0% and 311.7%, to $5.1 million and $10.8 million for the three and nine
months ended September 30, 1999. This increase in interest expense is
attributable to higher levels of debt resulting from cash paid and debt assumed
with the acquisition of certain of the Purchased Companies subsequent to
September 30, 1998. In addition, the Company borrowed funds under the Credit
Facility for equipment purchases and other operating activities in connection
with the addition of certain of the Purchased Companies subsequent to September
30, 1998. Also, the issuance of the Convertible Subordinated Notes increased
interest expense, while lower overall effective borrowing rates in 1999 versus
1998 partially offset this increase.
LIQUIDITY AND CAPITAL RESOURCES
In February 1999, the Company completed a follow-on public offering of
common stock, which included the issuance of 4,600,000 shares of common stock
(including 600,000 shares pursuant to the underwriters' over-allotment option)
at a price of $23.25 per share (before deducting underwriting discounts and
commissions). The Company realized proceeds from this transaction, net of the
discounts and after deducting the expenses of the offering, of approximately
$101.1 million. Of this amount, the Company used $57.8 million to repay
outstanding indebtedness under the Credit Facility and the remainder to acquire
additional businesses.
As of September 30, 1999, Quanta had cash of $12.7 million, working capital
of $134.4 million and long-term debt of $97.1 million, net of current
maturities, including borrowings of $86.7 million under the Credit Facility. The
Company also had $4.1 million of letters of credit outstanding under the Credit
Facility. In addition, the Company had $49.4 million of Convertible Subordinated
Notes.
During the nine months ended September 30, 1999, operating activities
provided net cash flow of $32.8 million. Changes in working capital accounts are
driven predominantly by the acquisitions throughout the year and as such are not
comparable to prior periods. We used net cash in investing activities of $308.0
million, including $259.8 million used for the purchase of businesses, net of
cash acquired. Financing activities provided a net cash flow of $284.7 million,
resulting primarily from $29.9 million from net borrowings under our Credit
Facility, $101.1 million of net proceeds from the follow-on offering and $182.2
million of net proceeds from the issuance of the Series A Preferred Stock,
partially offset by $33.0 million in repayments of debt assumed in connection
with acquisitions.
In June 1999, the Company expanded its bank group from nine to 14 banks and
amended its $175.0 million revolving Credit Facility to $350.0 million. The
Credit Facility is secured by a pledge of all of the capital stock of the
Company's material operating subsidiaries and the majority of the Company's
assets and is to provide funds to be used for working capital, to finance
acquisitions and for other general corporate purposes. Amounts borrowed under
the Credit Facility bear interest at a rate equal to either (a) LIBOR plus 1.00
percent to 2.00 percent, as determined by the ratio of the Company's total
funded debt to EBITDA (as defined in the Credit Facility) or (b) the bank's
prime rate plus up to 0.25 percent, as determined by the ratio of the Company's
total funded debt to EBITDA. Commitment fees of 0.25 percent to 0.50 percent
(based on certain financial ratios) are due on any unused borrowing capacity
under the Credit Facility. The Company's existing subsidiaries guarantee and
future subsidiaries will guarantee the repayment of all amounts due under the
Credit Facility, and the Credit Facility restricts pledges of material assets.
The Credit Facility contains usual and customary covenants for a credit facility
of this nature including a prohibition on the payment of dividends, certain
financial ratios and indebtedness covenants and a requirement to obtain the
consent of the lenders for acquisitions exceeding a certain level of cash
consideration. As of November 11, 1999 the Company had approximately $154.7
million in outstanding borrowings under the Credit Facility and $4.1 million of
letters of credit outstanding, resulting in a borrowing availability of $191.2
million under the revolving Credit Facility.
15
<PAGE> 18
On October 5, 1998, we issued and sold $49.4 million of Convertible
Subordinated Notes bearing interest at 6 7/8% to Enron Capital and one of its
affiliates. We used the proceeds of the Convertible Subordinated Notes to reduce
outstanding borrowings under the Credit Facility. The Convertible Subordinated
Notes include restrictive covenants substantially similar to those included in
the Credit Facility. The Convertible Subordinated Notes are convertible into
common stock at any time at the option of the holder at a conversion price of
$13.75 per share, subject to adjustment. The Convertible Subordinated Notes are
nonredeemable for four years and are redeemable thereafter at the Company's
option at a redemption price which is initially $103.50 per $100.00 in principal
amount, with the redemption price declining ratably over the succeeding four
years. The Convertible Subordinated Notes are mandatorily redeemable in nine
semi-annual installments beginning in June 2006. Upon a change in control, the
Convertible Subordinated Notes are mandatorily redeemable at a redemption price
which is initially $107.00 per $100.00 in principal amount, with the redemption
price declining ratably over eight years following the date of issuance.
During 1999 and through November 11, 1999 the Company has acquired 40
companies for an aggregate consideration of 10.0 million shares of common stock
and $328.5 million in cash and notes. The cash portion of such consideration was
provided by borrowings under the Company's Credit Facility and proceeds from the
Offering and our second public offering of common stock. The timing, size or
success of any acquisition effort and the associated potential capital
commitments cannot be predicted.
The Company expects to continue its aggressive acquisition program. The
Company intends to continue to use a combination of cash, notes and common stock
to finance the principal part of the consideration payable in acquisitions. If
the common stock does not maintain a sufficient value, or potential acquisition
candidates are unwilling to accept common stock as part of the consideration for
the sale of their businesses, the Company could be required to utilize more cash
to complete acquisitions. If sufficient funds were not available from operating
cash flow or through borrowings under the Company's Credit Facility, the Company
may seek additional financing through the public or private sale of equity or
debt securities. There can be no assurance that the Company could secure such
financing if and when it is needed or on terms the Company would deem
acceptable. If the Company is unable to secure acceptable financing, its
acquisition program could be negatively affected. The Company anticipates that
its cash flow from operations and the Credit Facility will provide sufficient
cash to enable the Company to meet its working capital needs, debt service
requirements and planned capital expenditures for property and equipment for at
least the next 12 months.
In September 1999, we issued 1,860,000 shares of Series A Preferred Stock
to UtiliCorp for an initial investment of $186,000,000, before transaction
costs. The Series A Preferred Stock bears a dividend rate of 0.5% per annum and
is convertible into common stock at any time at the option of UtiliCorp at
$30.00 per share, subject to adjustment for certain dilutive events. We used the
net proceeds from the investment to reduce outstanding borrowings under the
Credit Facility.
The Company also entered into a Management Services Agreement with
UtiliCorp for advice and services including financing activities; corporate
strategic planning; research on the restructuring of the utility industries; the
development, evaluation and marketing of the Company's products, services and
capabilities; identification of and evaluation of potential U.S. acquisition
candidates and other merger and acquisition advisory services; and other
services that the Company's Board of Directors may reasonably request. In
consideration of the advice and services rendered by UtiliCorp, we agreed to pay
UtiliCorp, on a quarterly basis in arrears, a fee of $2,325,000. The Management
Services Agreement lasts for six years, but can be extended by mutual agreement
of the parties. The Company has the right to terminate the Management Services
Agreement at any time if, in the reasonable judgement of our Board of Directors,
changes in the nature of the relationship between the Company and UtiliCorp make
effective provision of the services to be provided unlikely.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
The Company's results of operations can be subject to seasonal variations.
Generally, during the winter months, demand for new projects and maintenance
services may be lower due to reduced construction activity during such months,
while demand for electrical service and repairs may be higher due to damage
caused by
16
<PAGE> 19
inclement weather. Additionally, the industry can be highly cyclical. As a
result, the Company's volume of business may be adversely affected by declines
in new projects in various geographic regions in the United States Typically,
the Company experiences lower gross margins and operating margins during the
winter months. Quarterly results may also be materially affected by the timing
of acquisitions, variations in the margins of projects performed during any
particular quarter, the timing and magnitude of acquisition assimilation costs
and regional economic conditions. Accordingly, the Company's operating results
in any particular quarter may not be indicative of the results that can be
expected for any other quarter or for the entire year.
YEAR 2000
Impact of Year 2000. Many currently installed computer systems and software
products are coded to accept only two-digit entries in the date code field.
Beginning in the year 2000, these date code fields will need to accept
four-digit entries to distinguish 21st century dates from 20th century dates. As
a result, computer systems and software used by many companies may need to be
upgraded to comply with such "Year 2000" requirements. Significant uncertainty
exists concerning the potential effects associated with such compliance, but
systems that do not properly recognize such information could generate erroneous
data or cause a system to fail.
State of Readiness. We have assessed our Year 2000 issues and have
developed a plan to address both the information technology ("IT") and non-IT
systems issues. We did not develop any of the systems we use in our business;
consequently, our Year 2000 issues relate to systems that different vendors
developed and sold to us. We assess Year 2000 issues relating to the operating
and other systems of all businesses we may acquire. Because our acquisition
program is ongoing, our assessment of potential Year 2000 issues is not complete
for our most recent acquisitions. Year 2000 readiness is reviewed regularly and
action plans are revised accordingly.
We have circulated a formal questionnaire to all of our significant
suppliers, customers and service providers to determine the extent to which
Quanta is vulnerable to those third parties' failure to remediate the Year 2000
problem. We have received assurances of Year 2000 compliance from many of our
suppliers, customers and service providers, including the providers of most of
our computer systems and the providers of financial services to us. In addition,
we have hired a consultant to assist us in evaluating the responses we receive
from our suppliers, customers and service providers. Because of the nature of
our business and the number of vendors available to us, we believe that our
operations will not be significantly disrupted even if third parties with whom
we have relationships are not Year 2000 compliant.
Costs to Address the Year 2000 Issue. We have not identified any material
systems that are not Year 2000 compliant, although nine of our Acquired
Businesses had systems which were not Year 2000 compliant. Five of these systems
required only minor software upgrades to current versions which have been
completed. Two of the companies have installed new applications which are Year
2000 compliant. For the remaining two companies, we plan to have replacements
for these systems operational by December 31, 1999. We expect to incur estimated
costs of approximately $400,000, of which approximately $360,000 has been
incurred to date as part of our previously planned systems integration program,
which costs have been and will be funded from cash flows from operations. To
date, costs incurred to address Year 2000 compliance have been internal in
nature and have been charged to income as incurred. We have not delayed any IT
projects due to our Year 2000 compliance program.
Risks to the Company and Contingency Plan. In the worst case scenario, if
the replacements and modifications are not completed, our operating subsidiaries
may experience temporary problems with certain computer systems that contain
date critical functions. We believe that any temporary disruptions from the
failures of our own systems would not be material to our overall business or
results of operations. However, should our customers experience a sustained
period of unanticipated disruption because of Year 2000 problems, our customers
may delay the award of new contracts or payment for work already completed, and
our business, results of operations and financial condition may be materially
and adversely affected. As a contingency plan, immediately prior to January 1,
2000, we intend to maintain an adequate supply of fuel and
17
<PAGE> 20
spare parts so that we can continue to operate normally until such time as any
temporary Year 2000 problems related to our operations are remedied. The Company
will continue throughout 1999 to consider the likelihood of a material business
interruption due to the Year 2000 issue.
While we have made a careful assessment of both our own internal operating
systems and the Year 2000 compliance of our suppliers, customers and service
providers, because of the complexity of the problem, we cannot be certain that
all of our own systems and those of third parties with whom we operate will be
made Year 2000 complaint in a timely manner or that any such failure to be Year
2000 complaint will not materially and adversely affect our business, results of
operations or financial condition.
18
<PAGE> 21
PART II -- OTHER INFORMATION
QUANTA SERVICES, INC. AND SUBSIDIARIES
ITEM 2. CHANGES IN SECURITIES.
(c) Unregistered Sales of Securities.
Set forth below is certain information concerning all sales of securities
by the Company during the three month period ended September 30, 1999 that were
not registered under the Securities Act of 1933, as amended (the "Securities
Act").
Between July 1, 1999 and September 30, 1999, the Company issued 4,416,679
shares of common stock as part of the consideration for certain acquisitions.
These shares of common stock were issued without registration under the
Securities Act in reliance on the exemption provided by Section 4(2) of the
Securities Act.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation(1)
3.2 -- Amended and Restated Bylaws(1)
3.3 -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation(2)
3.4 -- Certificate of Designations for Series A Preferred
Stock(3)
10.10 -- Securities Purchase Agreement between Quanta Services,
Inc. and UtiliCorp United Inc. dated as of September 21,
1999(3)
10.11 -- Investor's Rights Agreement by and between Quanta
Services, Inc. and UtiliCorp United Inc. dated September
21, 1999(3)
10.12 -- Management Services Agreement by and between Quanta
Services, Inc. and UtiliCorp United Inc.(3)
10.13 -- Letter Agreement by and between Quanta Services, Inc. and
UtiliCorp United Inc. dated September 21, 1999(3)
10.14 -- Strategic Alliance Agreement by and between Quanta
Services, Inc. and UtiliCorp United Inc. dated as of
September 21, 1999(3)
10.15 -- Form of Stockholders Voting Agreement(3)
10.16 -- First Amendment to Third Amended and Restated Secured
Credit Agreement(3)
10.17 -- Letter Agreement by and among ECT Merchant Investments
Corp., Joint Energy Development Investments II Limited
Partnership, Quanta Services, Inc. and UtiliCorp United
Inc. dated September 21, 1999(3)
10.18 -- First Amendment to Securities Purchase Agreement and
Registration Rights Agreement(3)
27.1 -- Financial data schedule
</TABLE>
- ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-42957) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3 (No. 333-81419).
(3) Filed as an exhibit to the Company's Registration Statement on Form S-3
filed with the Commission on November 15, 1999.
(b) Reports on Form 8-K:
On November 15, 1999, the Company filed a Current Report on Form 8-K.
19
<PAGE> 22
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Quanta Services, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
QUANTA SERVICES, INC.
By: /s/ DERRICK A. JENSEN
----------------------------------
Derrick A. Jensen
Vice President, Controller and
Chief Accounting Officer
Dated: November 15, 1999
20
<PAGE> 23
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.1 -- Amended and Restated Certificate of Incorporation(1)
3.2 -- Amended and Restated Bylaws(1)
3.3 -- Certificate of Amendment to the Amended and Restated
Certificate of Incorporation(2)
3.4 -- Certificate of Designations for Series A Preferred
Stock(3)
10.10 -- Securities Purchase Agreement between Quanta Services,
Inc. and UtiliCorp United Inc. dated as of September 21,
1999(3)
10.11 -- Investor's Rights Agreement by and between Quanta
Services, Inc. and UtiliCorp United Inc. dated September
21, 1999(3)
10.12 -- Management Services Agreement by and between Quanta
Services, Inc. and UtiliCorp United Inc.(3)
10.13 -- Letter Agreement by and between Quanta Services, Inc. and
UtiliCorp United Inc. dated September 21, 1999(3)
10.14 -- Strategic Alliance Agreement by and between Quanta
Services, Inc. and UtiliCorp United Inc. dated as of
September 21, 1999(3)
10.15 -- Form of Stockholders Voting Agreement(3)
10.16 -- First Amendment to Third Amended and Restated Secured
Credit Agreement(3)
10.17 -- Letter Agreement by and among ECT Merchant Investments
Corp., Joint Energy Development Investments II Limited
Partnership, Quanta Services, Inc. and UtiliCorp United
Inc. dated September 21, 1999(3)
10.18 -- First Amendment to Securities Purchase Agreement and
Registration Rights Agreement(3)
27.1 -- Financial data schedule
</TABLE>
- ---------------
(1) Previously filed as an exhibit to the Company's Registration Statement on
Form S-1 (No. 333-42957) and incorporated herein by reference.
(2) Previously filed as an exhibit to the Company's Registration Statement on
Form S-3 (No. 333-81419).
(3) Filed as an exhibit to the Company's Registration Statement on Form S-3
filed with the Commission on November 15, 1999.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 12,687
<SECURITIES> 0
<RECEIVABLES> 217,151
<ALLOWANCES> 4,843
<INVENTORY> 9,012
<CURRENT-ASSETS> 298,747
<PP&E> 286,592
<DEPRECIATION> 125,591
<TOTAL-ASSETS> 1,034,181
<CURRENT-LIABILITIES> 164,395
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 708,744
<TOTAL-LIABILITY-AND-EQUITY> 1,034,181
<SALES> 593,388
<TOTAL-REVENUES> 593,388
<CGS> 460,809
<TOTAL-COSTS> 527,775
<OTHER-EXPENSES> 1,006
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,790
<INCOME-PRETAX> 55,829
<INCOME-TAX> 28,436
<INCOME-CONTINUING> 27,393
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 27,368
<EPS-BASIC> 0.92
<EPS-DILUTED> 0.85
</TABLE>