<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, 2000
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
incorporation or organization) Identification No.)
</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 [ ]
55,345,273 shares of Common Stock were outstanding as of November 9, 2000.
As of the same date, 1,766,964 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
Consolidated Balance Sheets............................... 1
Consolidated Statements of Operations..................... 2
Consolidated Statements of Cash Flows..................... 3
Notes to Condensed Consolidated Financial Statements...... 4
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations....................... 9
PART II. OTHER INFORMATION
Item 2. Changes in Securities............................... 13
Item 4. Submission of Matters to a Vote of Security
Holders................................................... 13
Item 6. Exhibits and Reports on Form 8-K.................... 14
Signature................................................... 15
</TABLE>
i
<PAGE> 3
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ -------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 10,775 $ 18,295
Accounts receivable, net of allowance of $5,947 and
$15,316................................................ 253,881 411,958
Costs and estimated earnings in excess of billings on
uncompleted contracts.................................. 45,963 65,525
Inventories............................................... 8,741 15,569
Prepaid expenses and other current assets................. 15,703 22,759
---------- ----------
Total current assets.............................. 335,063 534,106
PROPERTY AND EQUIPMENT, net................................. 191,854 317,416
OTHER ASSETS, net........................................... 7,962 14,738
GOODWILL, net............................................... 624,757 846,230
---------- ----------
Total assets...................................... $1,159,636 $1,712,490
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt...................... $ 6,664 $ 11,395
Accounts payable and accrued expenses..................... 141,025 202,270
Billings in excess of costs and estimated earnings on
uncompleted contracts.................................. 23,234 28,304
---------- ----------
Total current liabilities......................... 170,923 241,969
LONG-TERM DEBT, net of current maturities................... 150,308 228,632
CONVERTIBLE SUBORDINATED NOTES.............................. 49,350 172,500
DEFERRED INCOME TAXES AND OTHER NON-CURRENT LIABILITIES..... 32,130 45,947
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred Stock, $.00001 par value, 10,000,000 shares
authorized: Series A Convertible Preferred Stock,
1,860,000 and 3,444,961 shares issued and outstanding,
respectively........................................... -- --
Common Stock, $.00001 par value, 100,000,000 and
300,000,000 shares authorized, respectively, 51,035,283
and 55,229,490 shares issued and outstanding,
respectively........................................... -- --
Limited Vote Common Stock, $.00001 par value, 3,345,333
shares authorized, 3,746,020 and 1,768,164 shares
issued and outstanding, respectively................... -- --
Additional paid-in capital................................ 675,106 850,990
Retained earnings......................................... 81,819 172,452
---------- ----------
Total stockholders' equity........................ 756,925 1,023,442
---------- ----------
Total liabilities and stockholders' equity........ $1,159,636 $1,712,490
========== ==========
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
1
<PAGE> 4
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,
-------------------- ----------------------
1999 2000 1999 2000
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
REVENUES................................................. $271,788 $487,845 $593,388 $1,245,108
COST OF SERVICES (including depreciation)................ 205,689 368,462 460,809 954,408
-------- -------- -------- ----------
Gross profit.................................... 66,099 119,383 132,579 290,700
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES............. 23,604 36,040 53,481 99,506
MERGER RELATED CHARGES................................... -- -- 6,574(a) --
GOODWILL AMORTIZATION.................................... 3,186 5,337 6,911 14,164
-------- -------- -------- ----------
Income from operations.......................... 39,309 78,006 65,613 177,030
OTHER INCOME (EXPENSE):
Interest expense....................................... (5,129) (6,928) (10,790) (17,871)
Other, net............................................. 328 816 1,006 2,203
-------- -------- -------- ----------
INCOME BEFORE INCOME TAX PROVISION....................... 34,508 71,894 55,829 161,362
PROVISION FOR INCOME TAXES............................... 15,345 31,202 28,436(b) 70,031
-------- -------- -------- ----------
NET INCOME............................................... 19,163 40,692 27,393 91,331
DIVIDENDS ON PREFERRED STOCK............................. 25 234 25 698
-------- -------- -------- ----------
NET INCOME ATTRIBUTABLE TO COMMON STOCK.................. $ 19,138 $ 40,458 $ 27,368 $ 90,633
======== ======== ======== ==========
BASIC EARNINGS PER SHARE(c).............................. $ 0.38 $ 0.64 $ 0.61 $ 1.53
======== ======== ======== ==========
DILUTED EARNINGS PER SHARE(c)............................ $ 0.34 $ 0.53 $ 0.57 $ 1.23
======== ======== ======== ==========
DILUTED EARNINGS PER SHARE BEFORE MERGER CHARGES(c)(d)... $ 0.34 $ 0.53 $ 0.71 $ 1.23
======== ======== ======== ==========
SHARES USED IN COMPUTING EARNINGS PER SHARE:
Basic(c)............................................... 49,821 63,351 44,655 59,410
======== ======== ======== ==========
Diluted(c)............................................. 57,239 78,696 51,402 75,571
======== ======== ======== ==========
</TABLE>
---------------
(a) As a result of the termination in June 1999 of an employee stock ownership
plan associated with a company acquired in a pooling transaction, the
Company incurred a non-cash, non-recurring compensation charge of $5.3
million and a non-recurring excise tax charge of $1.1 million. In addition,
the Company incurred $137,000 in merger charges associated with a pooling
transaction in the first quarter of 1999.
(b) Reflects the non-deductibility of the merger related charges. 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) Share and earnings per share data have been restated to give effect to a
3-for-2 stock split as discussed in Note 1 to these condensed consolidated
financial statements.
(d) Excludes the effect of all non-recurring merger related charges.
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.
2
<PAGE> 5
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,
--------------------- ---------------------
1999 2000 1999 2000
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income attributable to common stock.................. $ 19,138 $ 40,458 $ 27,368 $ 90,633
Adjustments to reconcile net income attributable to
common stock to net cash provided by operating
activities --
Depreciation and amortization......................... 10,526 14,972 23,290 40,377
Gain on sale of property and equipment................ (45) (249) (198) (192)
Non-cash compensation charge for issuance of common
stock (ESOP)........................................ -- -- 5,319 --
Deferred income tax provision......................... 1,099 3,652 1,313 5,998
Preferred stock dividend.............................. 25 234 25 698
Changes in operating assets and liabilities, net of
non-cash transactions --
(Increase)decrease in --
Accounts receivable, net............................ (15,129) (29,173) (47,222) (96,164)
Costs and estimated earnings in excess of billings
on uncompleted contracts......................... (9,790) (10,811) (21,821) (11,419)
Inventories......................................... 94 (3,436) (1,672) (6,680)
Prepaid expenses and other current assets........... 1,565 (156) 949 37
Increase (decrease) in --
Accounts payable and accrued expenses............... 17,534 3,171 43,925 14,735
Billings in excess of costs and estimated earnings
on uncompleted contracts......................... 2,366 3,990 332 3,823
Other, net.......................................... 168 (438) 1,192 (375)
--------- --------- --------- ---------
Net cash provided by operating activities........ 27,551 22,214 32,800 41,471
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment............. 1,047 301 1,528 1,186
Additions of property and equipment...................... (24,859) (21,881) (49,742) (65,203)
Cash paid for acquisitions, net of cash acquired......... (84,766) (128,827) (259,811) (214,486)
Net proceeds from sale of business....................... -- -- -- 2,410
--------- --------- --------- ---------
Net cash used in investing activities............ (108,578) (150,407) (308,025) (276,093)
--------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net borrowings (payments) under bank lines of credit..... (83,884) (85,760) 29,881 (138,946)
Proceeds from other long-term debt....................... 247 232,588 3,608 384,270
Payments on other long-term debt......................... (10,239) (5,984) (33,049) (23,059)
Debt issuance costs...................................... -- (5,854) (1,659) (7,958)
Issuances of stock, net of offering costs................ 182,179 8,696 283,298 18,069
Exercise of stock options................................ 1,219 429 2,587 9,766
--------- --------- --------- ---------
Net cash provided by financing activities........ 89,522 144,115 284,666 242,142
--------- --------- --------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS.................. 8,495 15,922 9,441 7,520
CASH AND CASH EQUIVALENTS, beginning of period............. 4,192 2,373 3,246 10,775
--------- --------- --------- ---------
CASH AND CASH EQUIVALENTS, end of period................... $ 12,687 $ 18,295 $ 12,687 $ 18,295
========= ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for --
Interest.............................................. $ 6,788 $ 6,207 $ 10,245 $ 13,453
Income taxes.......................................... 4,805 20,814 15,117 58,069
</TABLE>
The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
<PAGE> 6
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BUSINESS AND ORGANIZATION:
Quanta Services, Inc. is a leading provider of specialized contracting
services, offering end-to-end network solutions to the telecommunications, cable
television and electric power industries. References herein to the "Company"
include Quanta and its subsidiaries. The consolidated financial statements of
the Company include the accounts of Quanta and its wholly owned subsidiaries.
All significant intercompany accounts and transactions have been eliminated in
consolidation.
Since its inception and through 1999, Quanta acquired 52 businesses. The
Company has acquired 20 additional businesses through September 30, 2000 for an
aggregate consideration of 3.3 million shares of common stock and $218.3 million
in cash. The Company intends to continue to acquire, through merger or purchase,
similar companies to expand its national and regional operations.
In the course of its operations, the Company is subject to certain risk
factors, including but not limited to: rapid technological and structural
changes in the Company's industries, risks related to internal growth and
operating strategies, risks related to acquisition financing and integration,
significant fluctuations in quarterly results, risks associated with contracts,
management of growth, dependence on key personnel, availability of qualified
employees, unionized workforce, competition, recoverability of goodwill,
potential exposure to environmental liabilities and anti-takeover measures.
All share amounts and per share amounts in these notes to condensed
consolidated financial statements have been adjusted to give effect to a 3-for-2
stock split declared by the board of directors on March 8, 2000 and paid on
April 7, 2000 to stockholders of record as of March 27, 2000.
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 accounting principles generally accepted in the United States,
have been condensed or omitted pursuant to those rules and regulations. 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 30, 2000.
Use of Estimates and Assumptions
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect (i) the reported amounts of assets and
liabilities, (ii) the disclosure of contingent assets and liabilities known to
exist as of the date the financial statements are published and (iii) the
reported amount of net sales and expenses recognized during the periods
presented. The Company reviews all significant estimates affecting its
consolidated financial statements on a recurring basis and records the effect of
any necessary adjustments prior to their publication. Adjustments made with
respect to the use of estimates often relate to improved information not
previously available. Uncertainties with respect to such estimates and
assumptions are inherent in the preparation of financial statements. The
accompanying consolidated balance sheets include preliminary allocations of the
4
<PAGE> 7
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respective purchase price paid for the companies acquired during the latest 12
months using the "purchase" method of accounting and, accordingly, are subject
to final adjustment.
Self-Insurance
As of August 1, 2000, the Company entered into agreements to insure the
Company for workers' compensation, employer's liability, auto liability and
general liability, subject to a deductible of $500,000 per accident or
occurrence. Losses up to the deductible amounts are accrued based upon the
Company's estimates of the ultimate liability for claims incurred and an
estimate of claims incurred but not reported. The accruals are based upon known
facts and historical trends and management believes such accruals to be
adequate.
2. PER SHARE INFORMATION:
Earnings per share amounts are based on the weighted average number of
shares of common stock and common stock equivalents outstanding during the
period. The weighted average number of shares used to compute basic and diluted
earnings per share for the three and nine months ended September 30, 1999 and
2000 is illustrated below (in thousands):
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1999 2000 1999 2000
-------- -------- ------- -------
<S> <C> <C> <C> <C>
NET INCOME:
Net income for basic earnings per
share -- income attributable to common
stockholders.............................. $19,138 $40,458 $27,368 $90,633
Effect of Convertible Subordinated Notes
under the "if converted"
method -- interest expense addback, net of
taxes..................................... 554 847 1,662 1,838
Dividends on Preferred Stock................. 25 234 25 698
------- ------- ------- -------
Net income for diluted earnings per
shares............................. $19,717 $41,539 $29,055 $93,169
======= ======= ======= =======
WEIGHTED AVERAGE SHARES:
Weighted average shares outstanding for basic
earnings per share........................ 49,821 63,351 44,655 59,410
Effect of dilutive stock options............. 1,024 2,529 1,022 2,459
Effect of Convertible Subordinated Notes
under the "if converted"
method -- weighted convertible shares
issuable.................................. 5,383 2,482 5,383 4,055
Effect of conversion of Preferred Stock into
common stock -- weighted convertible
shares issuable........................... 1,011 10,334 342 9,647
------- ------- ------- -------
Weighted average shares outstanding for
diluted earnings per share................ 57,239 78,696 51,402 75,571
======= ======= ======= =======
</TABLE>
3. INCOME TAXES:
Certain of the businesses the Company has acquired 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
5
<PAGE> 8
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
4. NEW ACCOUNTING PRONOUNCEMENTS:
In December 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin No. 101 (SAB 101). The staff has deferred the implementation
date of SAB 101 until no later than the fourth quarter of fiscal years beginning
after December 15, 1999. SAB 101 reflects the basic principles of revenue
recognition in existing U.S. generally accepted accounting principles. SAB 101
does not supersede any existing authoritative literature. Management has
reviewed the staff's views presented in SAB 101 and does not believe the
adoption of SAB 101 will have a material impact on the financial position or
results of operations of the Company.
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, is required to be adopted for fiscal years beginning after June 15,
2000. Management has reviewed the provisions of the statement and does not
believe that the adoption of this statement will have a material impact on the
financial position or results of operations of the Company.
5. DEBT:
Credit Facility
We currently have a $350 million credit facility with 14 banks. The credit
facility is secured by a pledge of all of the capital stock of the Company's
subsidiaries and the majority of the Company's assets and is to provide funds to
be used for working capital, to finance acquisitions and for other general
corporate purposes. Amounts borrowed under the credit facility bear interest at
a rate equal to either (a) the London Interbank Offered Rate (the 30 day LIBOR
rate was 7.69% at September 30, 2000) plus 1.00% to 2.00%, as determined by the
ratio of the Company's total funded debt to EBITDA (as defined in the credit
facility) or (b) the bank's prime rate (which was 9.5% at September 30, 2000)
plus up to 0.25%, as determined by the ratio of the Company's total funded debt
to EBITDA. Commitment fees of 0.25% to 0.50% (based on certain financial ratios)
are due on any unused borrowing capacity under the credit facility. The credit
facility matures June 14, 2004. The Company's subsidiaries guarantee the
repayment of all amounts due under the facility and the facility restricts
pledges on all material assets. The credit facility contains usual and customary
covenants for a credit facility of this nature including the prohibition of the
payment of dividends on common stock, certain financial ratio covenants and the
consent of the lenders for acquisitions exceeding a certain level of cash
consideration. As of September 30, 2000, there were no amounts borrowed under
the credit facility, and the Company had $6.3 million of letters of credit
outstanding, resulting in a borrowing availability of $343.7 million under the
credit facility.
Senior Secured Notes
In March 2000, the Company closed a senior secured notes private placement
primarily with insurance companies for $150.0 million. In September 2000, the
Company issued $60.0 million of additional notes for an aggregate total of
$210.0 million. The senior secured notes have maturities ranging from five to
ten years with a weighted average interest rate of 8.41% and rank pari passu in
right of repayment to Quanta's credit facility. The senior secured notes have
financial covenants similar to the credit facility. Proceeds from the private
placements were used to reduce outstanding borrowings under the credit facility.
6
<PAGE> 9
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Convertible Subordinated Notes
On July 19, 2000, the Company issued $150.0 million of convertible
subordinated notes, plus an additional $22.5 million on August 7, 2000 which
represents the exercise of the underwriters' over-allotment option. Net proceeds
from the offering were used to repay outstanding indebtedness under the credit
facility. The convertible subordinated notes bear interest at 4.0% and are
convertible into shares of the Company's common stock at a price of $54.53 per
share. The convertible subordinated notes require semi-annual interest payments
beginning December 31, 2000, until the notes are due on July 1, 2007. The
Company has the option to redeem the notes beginning July 3, 2003.
6. SERIES A CONVERTIBLE PREFERRED STOCK:
In September 1999, the Company entered into a securities purchase agreement
with UtiliCorp pursuant to which the Company issued 1,860,000 shares of Series A
Convertible Preferred Stock, $.00001 par value per share, for an initial
investment of $186.0 million, before transaction costs. In September 2000,
UtiliCorp converted 7,924,805 shares of common stock into an additional
1,584,961 shares of Series A Convertible Preferred Stock at a rate of one share
of Series A Convertible Preferred Stock for five shares of common stock. The
holders of the Series A Convertible Preferred Stock are entitled to receive
dividends in cash at a rate of 0.5% per annum on an amount equal to $53.99 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 Convertible Preferred Stock had been converted into common stock at
the applicable conversion price immediately prior to the record date for payment
of such dividends or distributions. However, holders of Series A Convertible
Preferred Stock will not participate in non-cash dividends or distributions if
such dividends or distributions cause an adjustment in the price at which Series
A Convertible Preferred Stock converts into common stock. At any time after the
sixth anniversary of the issuance of the Series A Convertible Preferred Stock,
if the closing price per share of the Company's common stock is greater than
$20.00, then the Company may terminate the preferred dividend. At any time after
the sixth anniversary of the issuance of the Series A Convertible Preferred
Stock, if the closing price per share of the Company's common stock is equal to
or less than $20.00, then the preferred dividend may, at the option of
UtiliCorp, be adjusted to the then "market coupon rate," which shall equal the
Company's after-tax cost of obtaining financing, excluding common stock, to
replace UtiliCorp's investment in the Company.
UtiliCorp is entitled to that number of votes equal to the number of shares
of common stock into which the outstanding shares of Series A Convertible
Preferred Stock are then convertible. Subject to certain limitations, UtiliCorp
will be entitled to elect three of the total number of directors of the Company.
All or any portion of the outstanding shares of Series A Convertible 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 currently is
$20.00, yielding 17,224,805 shares of common stock upon conversion of all
outstanding shares of Series A Convertible Preferred Stock. The conversion price
may be adjusted under certain circumstances. Also in certain circumstances,
UtiliCorp had the right to purchase additional securities from the Company to
maintain the percentage ownership of the Company represented by the Series A
Convertible Preferred Stock. During the nine months ended September 30, 2000,
UtiliCorp purchased 519,182 shares of common stock pursuant to these rights. In
October 2000, UtiliCorp's right to purchase additional securities from the
Company to maintain a percentage ownership of the Company represented by the
Series A Convertible Preferred Stock terminated.
7. SEGMENT INFORMATION:
The Company operates in one reportable segment as a specialty contractor.
The Company provides comprehensive network solutions to the telecommunications,
cable and electric power industries, including
7
<PAGE> 10
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
designing, installing, repairing and maintaining network infrastructure. Each of
these services is provided by several 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. Certain reclassifications have been made to the prior
period in order to conform to the current period.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
SEPTEMBER 30,
-----------------------------
1999 2000
------------- -------------
(IN THOUSANDS)
<S> <C> <C>
Telecommunications........................................ $221,288 $ 525,536
Cable television.......................................... 44,041 204,994
Electric power............................................ 211,464 349,260
Ancillary................................................. 116,595 165,318
-------- ----------
$593,388 $1,245,108
======== ==========
</TABLE>
The Company does not have significant operations or long-lived assets in
countries outside of the United States.
8. RELATED PARTY TRANSACTIONS:
In September 1999, the Company entered into a 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 installation and maintenance and natural gas distribution
installation 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.
In addition to the strategic alliance agreement, the Company entered into a
management services agreement with UtiliCorp in September 1999. Under the
management services agreement, to the extent mutually agreed upon by the
parties, UtiliCorp will provide advice and services including financing
activities; corporate strategic planning; research on the restructuring of the
utility industries; the development, evaluation and marketing of the Company's
products, services and capabilities; identification of and evaluation of
potential acquisition candidates and other merger and acquisition advisory
services; and other services that the board of directors may reasonably request.
In consideration of the advice and services rendered by UtiliCorp, the Company
will pay UtiliCorp on a quarterly basis in arrears a fee of $2,325,000. The
management services agreement has a term of six years. The Company has the right
to terminate the management services agreement at any time if, in the reasonable
judgment of the board of directors, changes in the nature of the relationship
between the Company and UtiliCorp make effective provision of the services to be
provided unlikely. As of September 30, 2000, payments owed to UtiliCorp under
this arrangement were approximately $9.6 million.
8
<PAGE> 11
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 Condensed
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 and Section 21E of the Securities
Exchange Act of 1934. Such statements include declarations regarding our intent,
belief or current expectations, statements regarding the future results of
acquired companies and our gross margins. 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 our Annual Report on Form 10-K,
which was filed with the SEC on March 30, 2000, which is available at the SEC's
Web site at www.sec.gov.
We derive our revenues from one reportable segment by providing specialized
contracting services and offering comprehensive network solutions. Our customers
include telecommunications, cable television and electric power companies, as
well as commercial, industrial and governmental entities.
We enter into contracts principally on the basis of competitive bids, the
final terms and prices of which we frequently negotiate with the customer.
Although the terms of our contracts vary considerably, most are either a lump
sum or unit price basis in which we agree to do the work for a fixed amount for
the entire project (lump sum) or for units of work performed (unit price). We
also perform services on a cost-plus or time and materials basis. We are
generally able to achieve higher margins on lump sum and unit price contracts
than on cost-plus contracts as a result of our experience in bidding and
performance. Our exposure to loss on fixed price contracts has historically been
limited by the high volume and relatively short duration of the fixed price
contracts we undertake. However, as we perform larger projects, our reported
margins may be significantly affected by actual results on these projects.
We complete most installation projects within one year, while we frequently
provide maintenance and repair work under open-ended, unit price master service
agreements which are renewable annually. We generally record revenues from lump
sum contracts on a percentage-of-completion basis, using the cost-to-cost method
based on the percentage of total cost incurred to date in proportion to total
estimated costs to complete the contract. We recognize revenue when services are
performed except when work is being performed under fixed price or cost-plus
contracts. Such contracts generally require that the customer accept completion
of progress to date and compensate us for services rendered, measured typically
in terms of units installed, hours expended or some other measure of progress.
Some of our customers require us to post performance and payment bonds upon
execution of the contract, depending upon the nature of the work to be
performed. Our fixed price contracts often include payment provisions pursuant
to which the customer withholds a 5% to 10% retainage from each progress payment
and forwards the retainage to us upon completion and approval of the work.
Costs of services consist primarily of salaries and benefits to employees,
depreciation, fuel and other vehicle expenses, equipment rentals, subcontracted
services, materials, parts and supplies. Our gross margin, which is gross profit
expressed as a percentage of revenues, is typically higher on projects where
labor, rather than materials, constitutes a greater portion of the cost of
services. We can predict material costs more accurately than labor 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 were previously subject to deductibles ranging from $100,000 to
$1,000,000 for workers' compensation insurance and, as of August 1, 2000, we
have a deductible of $500,000 per occurrence related to workers' compensation,
automobile and general liability claims. Fluctuations in insurance accruals
related to these deductibles could have an impact on gross margins in the period
in which such adjustments are made. Selling, general and administrative expenses
consist primarily of compensation and related benefits to management,
administrative salaries and benefits, marketing, office rent and utilities,
communications and professional fees.
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<PAGE> 12
RESULTS OF OPERATIONS
The following table sets forth selected unaudited statements of operations
data and such data as a percentage of revenues for the periods indicated:
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------- -------------------------------------
1999 2000 1999 2000
---------------- ---------------- ---------------- ------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues........................... $271,788 100.0% $487,845 100.0% $593,388 100.0% $1,245,108 100.0%
Cost of services (including
depreciation).................. 205,689 75.7 368,462 75.5 460,809 77.7 954,408 76.7
-------- ----- -------- ----- -------- ----- ---------- -----
Gross profit..................... 66,099 24.3 119,383 24.5 132,579 22.3 290,700 23.3
Selling, general and
administrative expenses........ 23,604 8.7 36,040 7.4 53,481 9.0 99,506 8.0
Merger related charges........... -- -- -- -- 6,574 1.1 -- --
Goodwill amortization............ 3,186 1.1 5,337 1.1 6,911 1.1 14,164 1.1
-------- ----- -------- ----- -------- ----- ---------- -----
Income from operations.... 39,309 14.5 78,006 16.0 65,613 11.1 177,030 14.2
Interest expense................. (5,129) (1.9) (6,928) (1.4) (10,790) (1.8) (17,871) (1.4)
Other income, net................ 328 0.1 816 0.1 1,006 0.1 2,203 0.1
-------- ----- -------- ----- -------- ----- ---------- -----
Income before income tax
provision...................... 34,508 12.7 71,894 14.7 55,829 9.4 161,362 12.9
Provision for income taxes....... 15,345 5.6 31,202 6.4 28,436 4.8 70,031 5.6
-------- ----- -------- ----- -------- ----- ---------- -----
Net income................ $ 19,163 7.1% $ 40,692 8.3% $ 27,393 4.6% $ 91,331 7.3%
======== ===== ======== ===== ======== ===== ========== =====
</TABLE>
Consolidated Results for the Three and Nine Months Ended September 30, 1999,
Compared to the Three and Nine Months Ended September 30, 2000.
Revenues. Revenues increased $216.1 million and $651.7 million, or 79.5%
and 109.8% to $487.8 million and $1.2 billion for the three and nine months
ended September 30, 2000. This increase was primarily attributable to revenues
of $92.1 million and $151.1 million for the three and nine months ended
September 30, 2000 from platform companies acquired subsequent to September 30,
1999 which continued to exist as separate reporting subsidiaries, as well as a
full period of contributed revenues for the nine months ended September 30, 2000
for those companies acquired through September 30, 1999. In addition, we have
experienced strong growth in key business areas as a result of greater demand
for bandwidth, increased outsourcing, deregulation and industry convergence.
Gross profit. Gross profit increased $53.3 million and $158.1 million, or
80.6% and 119.3%, to $119.4 million and $290.7 million for the three and nine
months ended September 30, 2000. As a percentage of revenues, gross margin
increased from 24.3% for the three months ended September 30, 1999 to 24.5% for
the three months ended September 30, 2000. Gross margin increased from 22.3% for
the nine months ended September 30, 1999 to 23.3% for the nine months ended
September 30, 2000. This increase in our gross margin for the nine months ended
September 30, 2000 resulted from a shift in our revenue mix to higher margin
cable television and telecommunications services. We also experienced improved
margins in our electric power network services as a result of better asset
utilization and more favorable pricing.
Selling, general and administrative expenses. Selling, general and
administrative expenses increased $12.4 million and $46.0 million, or 52.7% and
86.1%, to $36.0 million and $99.5 million for the three and nine months ended
September 30, 2000. Of this increase, $6.5 million and $11.3 million for the
three and nine months ended September 30, 2000, respectively, was attributable
to the platform companies we acquired subsequent to September 30, 1999. Selling,
general and administrative expenses also included a full period of costs in 2000
associated with those companies acquired during the first nine months of 1999.
The remainder of the increase was attributable to tuck-in acquisitions and the
continued establishment of infrastructure to facilitate our growth and to
integrate our acquired businesses. As a percentage of revenues, selling, general
and
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<PAGE> 13
administrative expenses decreased due to better absorption of the fixed
component of overhead costs by the higher level of revenues.
Interest expense. Interest expense increased $1.8 million and $7.1
million, or 35.1% and 65.6%, to $6.9 million and $17.9 million for the three and
nine months ended September 30, 2000 due to higher levels of debt resulting from
the acquisitions of the companies we purchased subsequent to September 30, 1999.
In addition, we borrowed funds under our credit facility for equipment purchases
and other operating activities in connection with the addition of certain of the
companies purchased subsequent to September 30, 1999 and to support higher
levels of revenue. These increases were partially offset by lower interest rates
on the convertible subordinated notes issued in July 2000 than those converted
in June 2000.
Provision for income taxes. The provision for income taxes was $70.0
million for the nine months ended September 30, 2000 with an effective tax rate
of 43.4% compared to $28.4 million for the nine months ended September 30, 1999
and an effective tax rate of 50.9%. In 1999, the provision reflects the
non-deductibility of the merger related charges and a non-cash non-recurring tax
charge of $677,000 as a result of a change in the tax status of a company
acquired in a pooling-of-interest transaction from an S corporation to a C
corporation.
Net Income. Net income increased $21.5 million and $63.9 million, or
112.3% and 233.4%, to $40.7 million and $91.3 million for the three and nine
months ended September 30, 2000 compared to $19.2 million and $27.4 million for
the three and nine months ended September 30, 1999.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, we had cash and cash equivalents of $18.3
million, working capital of $292.1 million and long-term debt of $228.6 million,
net of current maturities, with no amounts borrowed under the credit facility.
We had $6.3 million of letters of credit outstanding under the credit facility.
In addition, we had $172.5 million of Convertible Subordinated Notes.
During the nine months ended September 30, 2000, operating activities
provided net cash flow of $41.5 million. Changes in working capital accounts are
affected by the acquisitions throughout the year and as such are not comparable
to prior periods. We used net cash in investing activities of $276.1 million,
including $214.5 million used for the purchase of businesses, net of cash
acquired. Financing activities provided a net cash flow of $242.1 million,
resulting primarily from $210.0 million from the private placement of senior
secured notes and the issuance of $172.5 million of Convertible Subordinated
Notes, partially offset by $138.9 million in repayments of our credit facility.
We currently have a $350 million credit facility with 14 banks. The credit
facility is secured by a pledge of all of the capital stock of our operating
subsidiaries and the majority of our assets. We use the credit facility to
provide funds to be used for working capital, to finance acquisitions and for
other general corporate purposes. Amounts borrowed under the credit facility
bear interest at a rate equal to either (a) LIBOR plus 1.00% to 2.00%, as
determined by the ratio of our total funded debt to EBITDA (as defined in the
credit facility) or (b) the bank's prime rate plus up to 0.25%, as determined by
the ratio of our total funded debt to EBITDA. We owe commitment fees of 0.25% to
0.50% (based on total funded debt to EBITDA) on any unused borrowing capacity
under the credit facility. Our subsidiaries guarantee repayment of all amounts
due under the credit facility, and the credit facility restricts pledges of
material assets. We agreed to usual and customary covenants for a credit
facility of this nature, including a prohibition on the payment of dividends on
common stock, certain financial ratios and indebtedness covenants and a
requirement to obtain the consent of the lenders for acquisitions exceeding a
certain level of cash consideration. As of November 9, 2000 we had no
outstanding borrowings under the credit facility and $17.0 million of letters of
credit outstanding, resulting in a borrowing availability of $333.0 million
under the revolving credit facility.
In September 1999, we issued 1,860,000 shares of Series A Convertible
Preferred Stock to UtiliCorp for an initial investment of $186.0 million, before
transaction costs. The Series A Convertible Preferred Stock bears a dividend
rate of 0.5% per annum and is convertible into common stock at any time at the
option of UtiliCorp at $20.00 per share, subject to customary adjustments for
certain dilutive events. We used the net proceeds from the investment to reduce
outstanding borrowings under our credit facility.
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<PAGE> 14
We also entered into a management services agreement in September 1999 with
UtiliCorp for advice and services including financing activities; corporate
strategic planning; research on the restructuring of the power industries; the
development, evaluation and marketing of our products, services and
capabilities; identification of and evaluation of potential U.S. acquisition
candidates and other merger and acquisition advisory services; and other
services that we may reasonably request. In consideration of the advice and
services rendered by UtiliCorp, we agreed to pay UtiliCorp, on a quarterly basis
in arrears, a fee of $2,325,000. The UtiliCorp management services agreement
lasts for six years, but can be extended by mutual agreement of the parties. We
have the right to terminate the management services agreement at any time if, in
our reasonable judgment, changes in the nature of our relationship with
UtiliCorp make effective provision of the services to be provided unlikely.
In March 2000, we closed a private placement of senior secured notes
primarily with insurance companies for $150.0 million. In September 2000, the
Company issued $60.0 million of additional notes for an aggregate total of
$210.0 million. The senior secured notes have maturities ranging from five to
ten years with a weighted average interest rate of 8.41% and, pursuant to an
intercreditor agreement, rank pari passu in right of repayment with our credit
facility indebtedness. The senior secured notes have financial covenants similar
to the credit facility. We used the proceeds from this private placement to
reduce outstanding borrowings under the credit facility.
On July 19, 2000, we issued $150.0 million of convertible subordinated
notes, plus an additional $22.5 million on August 7, 2000 which represents the
exercise of the underwriters' over-allotment option. We used the net proceeds
from the offering to repay outstanding indebtedness under the credit facility.
The convertible subordinated notes bear interest at 4.0% and are convertible
into shares of common stock at a price of $54.53 per share. The convertible
subordinated notes require semi-annual interest payments beginning December 31,
2000, until the notes are due on July 1, 2007. We have the option to redeem the
notes beginning July 3, 2003.
Between January 1, 2000 and September 30, 2000, we acquired 20 companies
for an aggregate consideration of 3.3 million shares of common stock and $218.3
million in cash. The cash portion of such consideration was provided by
borrowings under our senior notes credit facility. The timing, size or success
of any acquisition effort and the associated potential capital commitments
cannot be predicted.
We anticipate that our cash flow from operations and our credit facility
will provide sufficient cash to enable us to meet our working capital needs,
debt service requirements, and planned capital expenditures for property and
equipment for at least the next 12 months. However, if companies we wish to
acquire are unwilling to accept our common stock as part of the consideration
for the sale of their businesses, we could be required to utilize more cash to
complete acquisitions. If sufficient funds were not available from operating
cash flow or through borrowings under the credit facility, we may be required to
seek additional financing through the public or private sale of equity or debt
securities. There can be no assurance that we could secure such financing if and
when we need it or on terms we would deem acceptable.
SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS
Our results of operations can be subject to seasonal variations. During the
winter months, demand for new projects and new maintenance service arrangements
may be lower due to reduced construction activity. However, demand for repair
and maintenance services attributable to damage caused by inclement weather
during the winter months may partially offset the loss of revenues from lower
demand for new projects and new maintenance service arrangements. Additionally,
our industry can be highly cyclical. As a result, our volume of business may be
adversely affected by declines in new projects in various geographic regions in
the United States. Typically, we experience lower gross and operating margins
during the winter months. The timing of acquisitions, variations in the margins
of projects performed during any particular quarter, the timing and magnitude of
acquisition assimilation costs and regional economic conditions may also
materially affect quarterly results. Accordingly, our operating results in any
particular quarter may not be indicative of the results that can be expected for
any other quarter or for the entire year.
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<PAGE> 15
PART II -- OTHER INFORMATION
QUANTA SERVICES, INC. AND SUBSIDIARIES
ITEM 2. CHANGES IN SECURITIES
(b) Registered Sales of Securities
On July 19, 2000, the Company sold $150 million principal amount of 4%
Convertible Subordinated Notes due 2007 in an underwritten public offering. The
Convertible Subordinated Notes are convertible into shares of the Company's
common stock at a price of $54.53 per share and require semi-annual interest
payments beginning December 31, 2000, until the notes are due on July 1, 2007.
The Company has the option to redeem the notes beginning July 3, 2003. The notes
are subordinated to the Company's senior secured debt including the Company's
revolving credit facility and senior secured notes. On August 7, 2000, the
underwriters fully exercised their over-allotment option resulting in the
Company issuing an additional $22.5 million principal amount of Convertible
Subordinated Notes.
(c) Unregistered Sales of Securities.
On September 11, 2000, the Company sold $60 million principal of senior
secured notes with maturities of five to ten years and a weighted average
interest rate of 8.13%. The senior secured notes require semi-annual interest
payments beginning March 1, 2001, until the notes are due. The senior secured
notes are pari passu to the Company's revolving credit facility and other senior
secured notes. The Company relied on Section 4(2) of the Securities Act of 1933,
as amended, as the basis for exemption from registration as all the purchasers
were "accredited investors" as defined in Rule 501 promulgated pursuant to the
Securities Act of 1933, as amended.
Between July 1, 2000, and September 30, 2000, the Company completed four
acquisitions in which some or all of the consideration was unregistered
securities of the Company. The aggregate consideration paid in these
transactions was $64.4 million in cash and 715,707 shares of common stock. None
of these acquisitions were affiliated with each other prior to acquisition by
the Company.
All securities listed on the following table were shares of common stock.
The Company relied on Section 4(2) of the Securities Act of 1933, as amended, as
the basis for exemption from registration. For all issuances, the purchasers
were "accredited investors" as defined in Rule 501 promulgated pursuant to the
Securities Act of 1933, as amended. All issuances were to the owners of
businesses acquired in privately negotiated transactions or to UtiliCorp, not
pursuant to public solicitation. The issuance to UtiliCorp was made pursuant to
certain preemptive rights negotiated with UtiliCorp at the time of its initial
investment in Series A Convertible Preferred Stock of the Company.
<TABLE>
<CAPTION>
NUMBER OF
DATE SHARES PURCHASERS CONSIDERATION
---- --------- ---------- -------------
<S> <C> <C> <C>
07/01/00 21,297 7 owners of Tjader & Highstrom, Inc. Acquisition of Tjader & Highstrom,
Inc.
08/01/00 50,245 2 owners of Logical Link, Inc. Acquisition of Logical Link, Inc.
08/14/00 124,013 UtiliCorp United Inc. $6,004,173.56
08/23/00 21,943 1 owner of Pinnacle Construction, Acquisition of Pinnacle
Inc. Construction, Inc.
08/29/00 622,222 3 owners of Mears Group, Inc. Acquisition of Mears Group, Inc.
</TABLE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a special meeting of stockholders in Houston, Texas on
September 15, 2000. At the special meeting the stockholders approved the
proposal to increase the number of authorized shares of common stock from
100,000,000 shares to 300,000,000 shares. The stockholders approved the proposal
with a vote of (i) 57,320,887 votes of the Series A Preferred Stock, common
stock, and Limited Vote Common Stock voting together, representing a majority of
the aggregate votes entitled to be cast by holders of all issued and outstanding
shares of Series A Preferred Stock, common stock and Limited Vote Common Stock,
voting together, (ii) 47,898,462 votes of the common stock, voting as a separate
class, representing a majority of the
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<PAGE> 16
aggregate votes entitled to be cast by holders of all issued and outstanding
shares of common stock, and (iii) 9,300,000 votes of the Series A Preferred
Stock, voting as a separate class, representing a majority of the aggregate
votes entitled to be cast by the holder of all issued and outstanding shares of
Series A Preferred Stock. Holders of 3,549,412 shares of common stock voted
against this proposal and holders of 271,717 shares of common stock abstained on
this proposal. Holders of 365,091 shares of Limited Vote Common Stock voted
against this proposal.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.2 -- Amended and Restated Bylaws
10.2 -- Amended and Restated 1997 Stock Option Plan
27.1 -- Financial data schedule
</TABLE>
(b) Reports on Form 8-K.
On July 12, 2000, the Company filed a current report on Form 8-K regarding
certain acquisitions by the Company.
On July 26, 2000, the Company filed a current report on Form 8-K regarding
the issuance of 4% Convertible Subordinated Notes.
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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 14, 2000
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INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
3.2 -- Amended and Restated Bylaws
10.2 -- Amended and Restated 1997 Stock Option Plan
27.1 -- Financial data schedule
</TABLE>
