UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
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(Mark One)
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þ
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended June 30, 2005 |
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or |
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o
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period
from to . |
Commission file no. 001-13831
Quanta Services, Inc.
(Exact name of registrant as specified in its charter)
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Delaware |
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74-2851603 |
(State or other jurisdiction of
Incorporation or organization) |
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(I.R.S. Employer
Identification No.) |
1360 Post Oak Blvd.
Suite 2100
Houston, Texas 77056
(Address of principal executive offices, including zip
code)
Registrants 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 þ No o
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the Exchange
Act). Yes þ No o
116,968,661 shares of Common Stock were outstanding as of
August 1, 2005. As of the same date, 1,011,780 shares
of Limited Vote Common Stock were outstanding.
QUANTA SERVICES, INC. AND SUBSIDIARIES
INDEX
1
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share information)
(Unaudited)
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December 31, | |
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June 30, | |
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2004 | |
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2005 | |
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ASSETS |
Current Assets:
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Cash and cash equivalents
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$ |
265,560 |
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$ |
240,737 |
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Accounts receivable, net of allowances of $9,607 and $9,242,
respectively
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348,828 |
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363,074 |
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Costs and estimated earnings in excess of billings on
uncompleted contracts
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42,092 |
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57,755 |
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Inventories
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18,849 |
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23,751 |
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Prepaid expenses and other current assets
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24,707 |
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23,310 |
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Total current assets
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700,036 |
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708,627 |
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Property and equipment, net
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314,983 |
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313,222 |
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Accounts and notes receivable, net of an allowance of $42,953
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19,920 |
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21,949 |
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Other assets, net
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36,438 |
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36,854 |
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Goodwill and other intangibles, net
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388,620 |
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388,489 |
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Total assets
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$ |
1,459,997 |
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$ |
1,469,141 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
Current Liabilities:
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Current maturities of long-term debt
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$ |
6,236 |
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$ |
1,838 |
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Accounts payable and accrued expenses
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203,656 |
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218,998 |
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Billings in excess of costs and estimated earnings on
uncompleted contracts
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11,166 |
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12,057 |
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Total current liabilities
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221,058 |
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232,893 |
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Long-term debt, net of current maturities
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21,863 |
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16,569 |
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Convertible subordinated notes
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442,500 |
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442,500 |
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Deferred income taxes and other non-current liabilities
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111,329 |
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112,704 |
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Total liabilities
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796,750 |
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804,666 |
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Commitments and Contingencies Stockholders Equity:
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Common stock, $.00001 par value, 300,000,000 shares
authorized, 117,396,252 and 118,327,357 shares issued and
116,127,551 and 116,714,925 outstanding, respectively
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Limited Vote Common Stock, $.00001 par value,
3,345,333 shares authorized, 1,011,780 shares issued
and outstanding, respectively
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Additional paid-in capital
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1,083,796 |
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1,091,858 |
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Deferred compensation
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(7,217 |
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(9,510 |
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Accumulated deficit
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(398,679 |
) |
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(400,464 |
) |
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Treasury stock, 1,268,701 and 1,612,432 common shares, at cost
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(14,653 |
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(17,409 |
) |
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Total stockholders equity
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663,247 |
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664,475 |
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Total liabilities and stockholders equity
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$ |
1,459,997 |
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$ |
1,469,141 |
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
2
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share information)
(Unaudited)
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Three Months Ended | |
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Six Months Ended | |
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June 30, | |
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June 30, | |
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2004 | |
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2005 | |
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2004 | |
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2005 | |
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Revenues
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$ |
389,194 |
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$ |
439,287 |
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$ |
744,191 |
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$ |
811,792 |
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Cost of services (including depreciation)
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342,853 |
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385,471 |
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671,126 |
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721,884 |
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Gross profit
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46,341 |
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53,816 |
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73,065 |
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89,908 |
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Selling, general and administrative expenses
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40,589 |
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43,874 |
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84,131 |
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86,336 |
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Income (loss) from operations
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5,752 |
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9,942 |
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(11,066 |
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3,572 |
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Other income (expense):
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Interest expense
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(6,228 |
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(5,904 |
) |
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(12,594 |
) |
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(11,922 |
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Interest income
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410 |
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1,696 |
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853 |
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3,215 |
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Other, net
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(161 |
) |
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97 |
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(131 |
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262 |
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Income (loss) before income tax provision (benefit)
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(227 |
) |
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5,831 |
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(22,938 |
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(4,873 |
) |
Provision (benefit) for income taxes
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3,265 |
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2,488 |
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(7,752 |
) |
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(3,088 |
) |
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Net income (loss)
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$ |
(3,492 |
) |
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$ |
3,343 |
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$ |
(15,186 |
) |
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$ |
(1,785 |
) |
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Earnings (loss) per share:
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Basic
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$ |
(0.03 |
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$ |
0.03 |
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$ |
(0.13 |
) |
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$ |
(0.02 |
) |
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Diluted
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$ |
(0.03 |
) |
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$ |
0.03 |
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$ |
(0.13 |
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$ |
(0.02 |
) |
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Shares used in computing earnings (loss) per share:
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Basic
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114,425 |
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115,713 |
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114,171 |
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115,472 |
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Diluted
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114,425 |
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116,341 |
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114,171 |
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115,472 |
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The accompanying notes are an integral part of these condensed
consolidated financial statements.
3
QUANTA SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Three Months Ended | |
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Six Months Ended | |
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June 30, | |
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June 30, | |
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2004 | |
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2005 | |
|
2004 | |
|
2005 | |
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Cash Flows from Operating Activities:
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Net income (loss)
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$ |
(3,492 |
) |
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$ |
3,343 |
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$ |
(15,186 |
) |
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$ |
(1,785 |
) |
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Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities
Depreciation and amortization
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14,791 |
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14,016 |
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29,767 |
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28,231 |
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Loss (gain) on sale of property and equipment
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(1,427 |
) |
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47 |
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(1,255 |
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213 |
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Provision for doubtful accounts
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|
100 |
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51 |
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|
183 |
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|
472 |
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Deferred income tax provision (benefit)
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1,469 |
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253 |
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(11,445 |
) |
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(7,760 |
) |
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Amortization of deferred compensation
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1,390 |
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|
890 |
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2,290 |
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|
2,128 |
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Changes in operating assets and liabilities, net of non-cash
transactions
(Increase) decrease in
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Accounts receivable
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(10,637 |
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(33,663 |
) |
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28,915 |
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(16,747 |
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Costs and estimated earnings in excess of billings on
uncompleted contracts
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(6,257 |
) |
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(6,935 |
) |
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(10,324 |
) |
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(15,798 |
) |
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Inventories
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(483 |
) |
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(759 |
) |
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(2,716 |
) |
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(4,902 |
) |
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Prepaid expenses and other current assets
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|
2,949 |
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5,294 |
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4,691 |
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|
3,883 |
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Increase (decrease) in
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Accounts payable and accrued expenses and other non-current
liabilities
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|
6,140 |
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|
16,790 |
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|
16,019 |
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|
21,416 |
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|
Billings in excess of costs and estimated earnings on
uncompleted contracts
|
|
|
(434 |
) |
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|
835 |
|
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|
(1,736 |
) |
|
|
891 |
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Other, net
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|
872 |
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|
(291 |
) |
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|
429 |
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(401 |
) |
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Net cash provided by (used in) operating activities
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4,981 |
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(129 |
) |
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|
39,632 |
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|
9,835 |
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Cash Flows from Investing Activities:
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Proceeds from sale of property and equipment
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|
2,711 |
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|
1,844 |
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|
3,270 |
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|
2,406 |
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|
Additions of property and equipment
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|
(7,901 |
) |
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(16,688 |
) |
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(19,492 |
) |
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|
(28,908 |
) |
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Cash released for self-insurance programs
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|
2,779 |
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|
6,027 |
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Net cash used in investing activities
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|
(2,411 |
) |
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|
(14,844 |
) |
|
|
(10,195 |
) |
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|
(26,502 |
) |
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|
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Cash Flows from Financing Activities:
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|
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|
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Net proceeds (payments) under bank line of credit
|
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|
|
|
|
|
5,500 |
|
|
|
(10,700 |
) |
|
|
(4,800 |
) |
|
Proceeds from other long-term debt
|
|
|
114 |
|
|
|
|
|
|
|
244 |
|
|
|
127 |
|
|
Payments on other long-term debt
|
|
|
(1,116 |
) |
|
|
(3,793 |
) |
|
|
(3,057 |
) |
|
|
(5,020 |
) |
|
Issuances of stock, net of offering costs
|
|
|
|
|
|
|
|
|
|
|
1,650 |
|
|
|
1,530 |
|
|
Debt issuance and amendments costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(41 |
) |
|
Exercise of stock options
|
|
|
69 |
|
|
|
1 |
|
|
|
117 |
|
|
|
48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net cash provided by (used in) financing activities
|
|
|
(933 |
) |
|
|
1,708 |
|
|
|
(11,746 |
) |
|
|
(8,156 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
|
|
1,637 |
|
|
|
(13,265 |
) |
|
|
17,691 |
|
|
|
(24,823 |
) |
Cash and Cash Equivalents, beginning of period
|
|
|
195,680 |
|
|
|
254,002 |
|
|
|
179,626 |
|
|
|
265,560 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents, end of period
|
|
$ |
197,317 |
|
|
$ |
240,737 |
|
|
$ |
197,317 |
|
|
$ |
240,737 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Supplemental Disclosure of Cash Flow Information
|
|
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|
|
|
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|
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|
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|
|
Interest paid
|
|
$ |
(6,206 |
) |
|
$ |
(6,309 |
) |
|
$ |
(7,027 |
) |
|
$ |
(6,672 |
) |
|
|
Income taxes paid
|
|
$ |
(410 |
) |
|
$ |
(347 |
) |
|
$ |
(750 |
) |
|
$ |
(1,430 |
) |
|
|
Income tax refunds
|
|
$ |
667 |
|
|
$ |
247 |
|
|
$ |
1,206 |
|
|
$ |
509 |
|
The accompanying notes are an integral part of these condensed
consolidated financial statements.
4
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
1. |
BUSINESS AND ORGANIZATION: |
Quanta Services, Inc. (Quanta) is a leading provider of
specialized contracting services, offering end-to-end network
solutions to the electric power, gas, telecommunications and
cable television industries. Quantas comprehensive
services include designing, installing, repairing and
maintaining network infrastructure.
In the course of its operations, Quanta is subject to certain
risk factors including, but not limited to, risks related to
significant fluctuations in quarterly results, economic
downturns, competition, collectibility of receivables, being
self-insured against potential liabilities or for claims that
its insurance carrier fails to pay, occupational health and
safety matters, use of percentage-of-completion accounting,
contract terms, rapid technological and structural changes in
the industries Quanta serves, ability to provide surety bonds,
replacing cancelled or completed contracts, acquisition
integration and financing, dependence on key personnel,
unionized workforce, availability of qualified employees,
management of growth, potential exposure to environmental
liabilities, the pursuit of work in the government arena, the
requirements of the Sarbanes-Oxley Act of 2002, access to
capital, internal growth and operating strategies,
recoverability of goodwill and anti-takeover measures.
|
|
|
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. Quanta 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 state 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 Quanta historically have been
subject to significant seasonal fluctuations.
Quanta recommends that these unaudited condensed consolidated
financial statements be read in conjunction with the audited
consolidated financial statements and notes thereto of Quanta
and its subsidiaries included in Quantas Annual Report on
Form 10-K, which was filed with the SEC on March 16,
2005.
|
|
|
Use of Estimates and Assumptions |
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States
requires the use of estimates and assumptions by management in
determining the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities known to exist
as of the date the financial statements are published and the
reported amount of revenues and expenses recognized during the
periods presented. Quanta 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. Judgments and estimates are based on
Quantas beliefs and assumptions derived from information
available at the time such judgments and estimates are made.
Uncertainties with respect to such estimates and assumptions are
inherent in the preparation of financial statements. Estimates
are primarily used in Quantas assessment of the allowance
for doubtful accounts, valuation of inventory, useful lives of
property and equipment, fair value assumptions in analyzing
goodwill and long-lived asset impairments, self-insured claims
liabilities, revenue recognition under percentage-of-completion
accounting and provision for income taxes.
5
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Current and Long-Term Accounts and Notes Receivable and
Provision for Doubtful Accounts |
Quanta provides an allowance for doubtful accounts when
collection of an account or note receivable is considered
doubtful. Inherent in the assessment of the allowance for
doubtful accounts are certain judgments and estimates including,
among others, the customers access to capital, the
customers willingness or ability to pay, general economic
conditions and the ongoing relationship with the customer. Under
certain circumstances such as foreclosures or negotiated
settlements, Quanta may take title to the underlying assets in
lieu of cash in settlement of receivables. As of June 30,
2005, Quanta has provided allowances for doubtful accounts of
approximately $52.2 million. Certain of Quantas
customers, several of them large public telecommunications
carriers and utility customers, have been experiencing financial
difficulties in recent years. Should any major customers file
for bankruptcy or continue to experience difficulties, or should
anticipated recoveries relating to receivables in existing
bankruptcies or other workout situations fail to materialize,
Quanta could experience reduced cash flows and losses in excess
of current allowances provided. In addition, material changes in
Quantas customers revenues or cash flows could
affect its ability to collect amounts due from them.
During 2004, Quanta sold its prepetition receivable due from
Adelphia Communications Corporation and its affiliated companies
(Adelphia) to a third party with a portion of the proceeds held
by the buyer pending the resolution of certain preferential
payment claims. The account receivable associated with the
holdback is recorded in Accounts and Notes Receivable as of
June 30, 2005 as it is uncertain whether the balance will
be collected within one year. Also included in Accounts and
Notes Receivable are amounts due from a customer relating
to the construction of independent power plants. Quanta has
agreed to long-term payment terms for this customer. The notes
receivable due from this customer are partially secured. Quanta
has provided allowances for a significant portion of these notes
receivable due to a change in the economic viability of the
plants securing them. The collectibility of these notes
receivable may ultimately depend on the value of the collateral
securing these notes receivable. In addition, Quanta is involved
in negotiations with one of its customers and is uncertain
whether the balance will be collected within one year;
therefore, as of June 30, 2005, Quanta has included the
balance in Accounts and Notes Receivable. As of
June 30, 2005, the total balance due from these customers
was $60.8 million, net of an allowance for doubtful
accounts of $42.8 million.
|
|
|
Concentration of Credit Risk |
Quanta grants credit under normal payment terms, generally
without collateral, to its customers, which include electric
power and gas companies, telecommunications and cable television
system operators, governmental entities, general contractors and
builders, owners and managers of commercial and industrial
properties located primarily in the United States. Consequently,
Quanta is subject to potential credit risk related to changes in
business and economic factors throughout the United States;
however, Quanta generally has certain lien rights with respect
to the services provided. No customer accounted for more than
10% of accounts receivable as of June 30, 2005 or revenues
for the three and six months ended June 30, 2005.
|
|
|
Goodwill and Other Intangibles |
In accordance with Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible
Assets, material amounts of recorded goodwill attributable
to each of Quantas reporting units are tested for
impairment by comparing the fair value of each reporting unit
with its carrying value. Fair value is determined using a
combination of the discounted cash flow, market multiple and
market capitalization valuation approaches. These impairment
tests are performed annually during the fourth quarter and upon
the occurrence of any impairment indicators. Significant
estimates used in the above methodologies include estimates of
future cash flows, future short-term and long-term growth rates,
the weighted average
6
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
cost of capital and estimates of market multiples for each of
the reportable units. Any future impairment adjustments would be
recognized as operating expenses.
Quanta follows the liability method of accounting for income
taxes in accordance with SFAS No. 109,
Accounting for Income Taxes. Under this method,
deferred assets and liabilities are recorded for future tax
consequences of temporary differences between the financial
reporting and tax bases of assets and liabilities, and are
measured using the enacted tax rates and laws that are expected
to be in effect when the underlying assets or liabilities are
recovered or settled.
Quanta regularly evaluates valuation allowances established for
deferred tax assets for which future realization is uncertain,
and Quanta maintains an allowance for tax contingencies that
Quanta believes is adequate. The estimation of required
valuation allowances includes estimates of future taxable
income. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during
the periods in which those temporary differences become
deductible. Quanta considers projected future taxable income and
tax planning strategies in making this assessment. If actual
future taxable income differs from estimates, Quanta may not
realize deferred tax assets to the extent estimated.
During 2004, the American Jobs Creation Act of 2004 was signed
into law. The primary effect of this legislation will be to
permit potentially favorable federal income tax treatment
related to certain of Quantas construction-related
activities. However, Quanta currently does not expect any
benefit from the new law for 2005.
Through June 30, 2005, Quanta accounted for its stock-based
compensation under APB Opinion No. 25, Accounting for
Stock Issued to Employees. Under this accounting method,
no compensation expense is recognized in the consolidated
statements of operations if no intrinsic value of the
stock-based compensation award exists at the date of grant.
SFAS No. 123, Accounting for Stock-Based
Compensation, encourages companies to account for
stock-based compensation awards based on the fair value of the
awards at the date they are granted. The resulting compensation
cost would be shown as an expense in the consolidated statements
of operations. Companies can choose not to apply the new
accounting method and continue to apply current accounting
requirements; however, disclosure is required as to what net
income and earnings per share would have been had
SFAS No. 123 been followed. For the disclosure, the
fair market value of each stock option grant was estimated on
the date of grant using the Black-Scholes option-pricing model.
During 2003, Quanta began using restricted stock rather than
stock options for Quantas various incentive programs. The
last stock option grant to an employee was in November 2002. The
expense recognition for the restricted stock awards is the same
under APB Opinion No. 25 and SFAS No. 123 with
expense being recognized in the financial statements. In
addition, Quanta has an Employee Stock Purchase Plan (ESPP).
SFAS No. 123 requires the inclusion of stock issued
pursuant to the ESPP in the as adjusted disclosure. For the
disclosure, compensation expense related to the ESPP
approximates the difference between the fair value of
Quantas common stock and the actual common stock purchase
price. Had compensation expense for the 2001 Stock Incentive
Plan and the ESPP been determined consistent with
SFAS No. 123, Quantas net income and
7
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
earnings per share would have been reduced to the following as
adjusted amounts (in thousands, except per share information):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
Net income (loss) as reported
|
|
$ |
(3,492 |
) |
|
$ |
3,343 |
|
|
$ |
(15,186 |
) |
|
$ |
(1,785 |
) |
|
Add: stock-based employee compensation expense included in net
income (loss), net of tax
|
|
|
1,390 |
|
|
|
890 |
|
|
|
2,290 |
|
|
|
2,128 |
|
|
Deduct: total stock-based employee compensation expense
determined under fair value based method for all awards, net of
tax
|
|
|
(1,497 |
) |
|
|
(1,193 |
) |
|
|
(2,740 |
) |
|
|
(2,589 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As adjusted Basic and Diluted
|
|
$ |
(3,599 |
) |
|
$ |
3,040 |
|
|
$ |
(15,636 |
) |
|
$ |
(2,246 |
) |
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.03 |
) |
|
$ |
0.03 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.02 |
) |
|
|
Diluted
|
|
$ |
(0.03 |
) |
|
$ |
0.03 |
|
|
$ |
(0.13 |
) |
|
$ |
(0.02 |
) |
|
As adjusted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$ |
(0.03 |
) |
|
$ |
0.03 |
|
|
$ |
(0.14 |
) |
|
$ |
(0.02 |
) |
|
|
Diluted
|
|
$ |
(0.03 |
) |
|
$ |
0.03 |
|
|
$ |
(0.14 |
) |
|
$ |
(0.02 |
) |
The effects of applying SFAS No. 123 in the as
adjusted disclosure may not be indicative of future amounts as
additional stock-based compensation awards may or may not be
awarded, and, as discussed in Note 7, the ESPP will be
terminated prior to the end of 2005.
|
|
|
New Accounting Pronouncements |
In December 2004, the Financial Accounting Standards Board
(FASB) issued SFAS No. 123 (revised 2004),
Share-Based Payment (SFAS No. 123(R)),
which is a revision of SFAS No. 123.
Statement 123(R) supersedes APB Opinion No. 25 and
amends SFAS No. 95, Statement of Cash
Flows. SFAS No. 123(R) requires companies to
account for stock-based compensation awards based on the fair
value of the awards at the date they are granted. The resulting
compensation cost would be shown as an expense in the
consolidated statements of operations. This statement is
effective for Quanta as of the beginning of the first quarter of
2006. SFAS No. 123(R) permits adoption using one of
two methods: 1) a modified prospective method,
in which compensation cost is recognized beginning on the
effective date (a) based on the requirements of
SFAS No. 123(R) for all share-based payments granted
after the effective date and (b) based on the requirements
of SFAS No. 123 for all awards granted to employees
prior to the effective date of SFAS No. 123(R) that
remain unvested on the effective date and 2) a
modified retrospective method that includes the
requirements above, but also permits entities to restate based
on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures of
all prior periods presented. Quanta plans to adopt
SFAS No. 123(R) using the modified
prospective method. As discussed above, Quanta currently
accounts for share-based payments to employees using the
intrinsic value method and, as such, generally recognizes no
compensation cost for stock option awards and stock issued
pursuant to the ESPP. Accordingly, the adoption of
SFAS No. 123(R) could have a significant impact on the
Quantas reported results of operations; however, the
ultimate impact of the adoption of SFAS No. 123(R)
cannot be predicted at this time because it will depend on
levels of share-based payments granted in the future. However,
had Quanta adopted SFAS No. 123(R) in the periods
presented, the impact on results of operations would have
approximated the impact of SFAS No. 123 as presented
above. SFAS No. 123(R) also requires
8
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the benefits of tax deductions in excess of recognized
compensation cost to be reported as a financing cash flow,
rather than as an operating cash flow as required under current
literature. This requirement will reduce net operating cash
flows and increase net financing cash flows in periods after
adoption.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets an amendment
of APB Opinion No. 29, which modifies the existing
guidance on accounting for nonmonetary transactions to eliminate
an exception under which certain exchanges of similar productive
nonmonetary assets were not accounted for at fair value.
SFAS No. 153 instead provides a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. This statement must be applied to nonmonetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. Quanta does not anticipate that the adoption
of SFAS No. 153 will have a material impact on
Quantas financial position, results of operations or cash
flows.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3 (SFAS No. 154).
SFAS No. 154 requires retrospective application to
prior periods financial statements for changes in
accounting principles unless it is impracticable to determine
either the period-specific effects or the cumulative effect of
the change. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning
after December 15, 2005. Quanta will adopt the provisions
of SFAS No. 154, as applicable, beginning in fiscal
year 2006.
In June 2005, the FASBs Emerging Issues Task Force reached
a consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements
(EITF 05-6). The guidance requires that leasehold
improvements acquired in a business combination or purchased
subsequent to the inception of a lease be amortized over the
lesser of the useful life of the assets or a term that includes
renewals that are reasonably assured at the date of the business
combination or purchase. The guidance is effective for periods
beginning after June 29, 2005. Quanta does not believe that
the adoption of EITF 05-6 will have a significant effect on
its financial position, results of operations or cash flows.
9
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
2. |
PER SHARE INFORMATION: |
Basic earnings (loss) per share is computed using the weighted
average number of common shares outstanding during the period,
and diluted earnings (loss) per share is computed using the
weighted average number of common shares outstanding during the
period adjusted for all potentially dilutive common stock
equivalents, except in cases where the effect of the common
stock equivalent would be antidilutive. The weighted average
number of shares used to compute the basic and diluted earnings
(loss) per share for the three and six months ended
June 30, 2004 and 2005 is illustrated below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
NET INCOME (LOSS):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(3,492 |
) |
|
$ |
3,343 |
|
|
$ |
(15,186 |
) |
|
$ |
(1,785 |
) |
|
Effect of convertible subordinated notes under the if
converted method interest expense addback, net
of taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) for diluted earnings (loss) per share
|
|
$ |
(3,492 |
) |
|
$ |
3,343 |
|
|
$ |
(15,186 |
) |
|
$ |
(1,785 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE SHARES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for basic earnings (loss)
per share
|
|
|
114,425 |
|
|
|
115,713 |
|
|
|
114,171 |
|
|
|
115,472 |
|
|
Effect of dilutive stock options and restricted stock
|
|
|
|
|
|
|
628 |
|
|
|
|
|
|
|
|
|
|
Effect of convertible subordinated notes under the if
converted method weighted convertible shares
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding for diluted earnings (loss)
per share
|
|
|
114,425 |
|
|
|
116,341 |
|
|
|
114,171 |
|
|
|
115,472 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the three and six months ended June 30, 2004,
approximately 1.2 million and 749,000 stock options
were excluded from the computation of diluted earnings (loss)
per share because the options exercise prices were greater
than the average market price of Quantas common stock. For
the three and six months ended June 30, 2004, approximately
9,000 and 42,000 stock options with exercise prices
lower than the average market price of Quantas common
stock also were excluded from the computation of diluted
earnings (loss) per share because the effect of including them
would be antidilutive as Quanta incurred a net loss for the
periods. For the three and six months ended June 30, 2004,
the effect of assuming conversion of the convertible
subordinated notes would be antidilutive, and they were
therefore excluded from the calculation of diluted earnings
(loss) per share. For the three and six months ended
June 30, 2004, approximately 573,000 and
553,000 shares of non-vested restricted stock, computed
under the treasury stock method, were excluded from the
calculation of diluted earnings (loss) per share as the impact
would have been antidilutive.
For the three and six months ended June 30, 2005,
approximately 449,000 and 548,000 stock options were
excluded from the computation of diluted earnings (loss) per
share because the options exercise prices were greater
than the average market price of Quantas common stock. For
the six months ended June 30, 2005, approximately
71,000 stock options with exercise prices lower than the
average market price of Quantas common stock also were
excluded from the computation of diluted earnings (loss) per
share because the effect of including them would be antidilutive
as Quanta incurred a net loss for the period. For the three and
six months ended June 30, 2005, the effect of assuming
conversion of the convertible subordinated notes would be
antidilutive, and they were therefore excluded from the
calculation of diluted earnings (loss) per share. For the six
months ended June 30, 2005, approximately
420,000 shares of non-vested restricted stock, computed
10
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
under the treasury stock method, were excluded from the
calculation of diluted earnings (loss) per share as the impact
would have been antidilutive.
As of June 30, 2005, Quanta had a $183.5 million
credit facility with various lenders. The credit facility
consisted of a $148.5 million letter of credit facility
maturing on June 19, 2008, which also provides for term
loans, and a $35.0 million revolving credit facility
maturing on December 19, 2007, which provides for revolving
loans and letters of credit. The maximum availability under the
letter of credit facility will be automatically reduced by
$1.5 million on December 31 of each year until
maturity.
As of June 30, 2005, Quanta was required to maintain total
borrowings outstanding under the letter of credit facility equal
to the $148.5 million available through a combination of
letters of credit or term loans. Quanta had approximately
$131.9 million of letters of credit issued under the letter
of credit facility and $16.0 million of the letter of
credit facility outstanding as a term loan. The remaining
$0.6 million was available for issuing new letters of
credit. In the event that Quanta desires to issue additional
letters of credit under the letter of credit facility, Quanta is
required to make cash repayments of debt outstanding under the
term loan portion of the letter of credit facility in an amount
that approximates the additional letters of credit to be issued.
The weighted average interest rate for the six months ended
June 30, 2005 associated with amounts outstanding under the
term loan was 5.81%.
Under the letter of credit facility, Quanta is subject to a fee
equal to 3.00% to 3.25% of the letters of credit outstanding,
depending upon the occurrence of certain events, plus an
additional 0.15% of the amount outstanding to the extent the
funds in the deposit account do not earn interest equal to the
London Interbank Offering Rate (LIBOR). Term loans under the
letter of credit facility bear interest at a rate equal to
either (a) the Eurodollar Rate (as defined in the credit
facility) plus 3.00% to 3.25% or (b) the Base Rate (as
described below) plus 3.00% to 3.25%, depending upon the
occurrence of certain events. The Base Rate equals the higher of
(i) the Federal Funds Rate (as defined in the credit
facility) plus 1/2 of 1% and (ii) the banks prime
rate.
Quanta had approximately $3.6 million of letters of credit
issued under the revolving credit facility, and borrowing
availability under the revolving credit facility was
$31.4 million, as of June 30, 2005. Amounts borrowed
under the revolving credit facility bear interest at a rate
equal to either (a) the Eurodollar Rate plus 1.75% to
3.00%, as determined by the ratio of Quantas total funded
debt to EBITDA, or (b) the Base Rate plus 0.25% to 1.50%,
as determined by the ratio of Quantas total funded debt to
EBITDA. Letters of credit issued under the revolving credit
facility are subject to a letter of credit fee of 1.75% to
3.00%, based on the ratio of Quantas total funded debt to
EBITDA. If Quanta chooses to cash collateralize letters of
credit issued under the revolving credit facility, those letters
of credit will be subject to a letter of credit fee of 0.50%.
Quanta is also subject to a commitment fee of 0.375% to 0.625%,
based on the ratio of its total funded debt to EBITDA, on any
unused availability under the revolving credit facility.
The credit facility contains certain covenants, including a
maximum funded debt to EBITDA ratio, a maximum senior debt to
EBITDA ratio, a minimum interest coverage ratio, a minimum asset
coverage ratio and a minimum consolidated net worth covenant. As
of June 30, 2005, Quanta was in compliance with all of its
covenants. However, other conditions such as, but not limited
to, unforeseen project delays or cancellations, adverse weather
conditions or poor contract performance, could adversely affect
Quantas ability to comply with its covenants in the
future. The credit facility also limits acquisitions, capital
expenditures and asset sales and, subject to some exceptions,
prohibits liens on material assets. The credit facility allows
Quanta to pay dividends and engage in stock repurchase programs
in an aggregate amount up to $25.0 million in 2005 and in
any fiscal year thereafter in an aggregate amount up to
twenty-five percent of Quantas consolidated net
11
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
income (plus the amount of non-cash charges that reduced such
consolidated net income) for the prior fiscal year. However, the
credit facility does not limit dividend payments or other
distributions payable solely in capital stock. The credit
facility carries cross-default provisions with all of
Quantas other debt instruments exceeding $2.0 million
in borrowings and Quantas continuing indemnity and
security agreement with its surety.
The credit facility is secured by a pledge of all of the capital
stock of Quantas U.S. subsidiaries, 65% of the
capital stock of Quantas foreign subsidiaries and
substantially all of Quantas assets. Borrowings under the
credit facility are to be used for working capital, capital
expenditures and for other general corporate purposes.
Quantas U.S. subsidiaries guarantee the repayment of
all amounts due under the credit facility. Quantas
obligations under the credit facility constitute designated
senior indebtedness under its 4.0% and 4.5% convertible
subordinated notes.
|
|
|
4.0% Convertible Subordinated Notes |
As of June 30, 2005, Quanta had $172.5 million of
4.0% convertible subordinated notes outstanding. These
4.0% convertible subordinated notes are registered and
convertible into shares of Quantas common stock at a price
of $54.53 per share, subject to adjustment as a result of
certain events. These 4.0% convertible subordinated notes
require semi-annual interest payments on July 1 and
December 31 until the notes mature on July 1, 2007.
Quanta has the option to redeem some or all of the
4.0% convertible subordinated notes beginning July 3,
2003 at specified redemption prices, together with accrued and
unpaid interest; however, early redemption is prohibited by
Quantas credit facility. If certain fundamental changes
occur, as described in the indenture under which Quanta issued
the 4.0% convertible subordinated notes, holders of the
4.0% convertible subordinated notes may require Quanta to
purchase all or part of the notes at a purchase price equal to
100% of the principal amount, plus accrued and unpaid interest.
|
|
|
4.5% Convertible Subordinated Notes |
As of June 30, 2005, Quanta had $270.0 million of
4.5% convertible subordinated notes outstanding. These
4.5% convertible subordinated notes are registered and
convertible into shares of Quantas common stock at a price
of $11.14 per share, subject to adjustment as a result of
certain events. The 4.5% convertible subordinated notes
require semi-annual interest payments on April 1 and
October 1 until they mature on October 1, 2023.
The 4.5% convertible subordinated notes are convertible by
the holder if (i) during any fiscal quarter the last
reported sale price of Quantas common stock is greater
than or equal to 120% of the conversion price for at least 20
trading days in the period of 30 consecutive trading days ending
on the first trading day of such fiscal quarter,
(ii) during the five business day period after any five
consecutive trading day period in which the trading price per
note for each day of that period was less than 98% of the
product of the last reported sale price of Quantas common
stock and the conversion rate, (iii) upon Quanta calling
the notes for redemption or (iv) upon the occurrence of
specified corporate transactions. If the notes become
convertible under one of these circumstances, Quanta has the
option to deliver cash, shares of Quantas common stock or
a combination thereof, with a value equal to the par value of
the notes divided by the conversion price multiplied by the
average trading price of Quantas common stock. The maximum
number of shares of common stock that could be issued under
these circumstances is equal to the par value of the notes
divided by the conversion price. During the six months ended
June 30, 2005, none of the circumstances permitting
conversion had occurred.
Beginning October 8, 2008, Quanta may redeem for cash some
or all of the 4.5% convertible subordinated notes at par
value plus accrued and unpaid interest; however, early
redemption is prohibited by Quantas credit facility. The
holders of the 4.5% convertible subordinated notes may
require Quanta to repurchase all or some of the notes at par
value plus accrued and unpaid interest on October 1, 2008,
2013 or 2018, or upon the
12
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
occurrence of a fundamental change, as defined by the indenture
under which Quanta issued the notes. Quanta must pay any
required repurchases on October 1, 2008 in cash. For all
other required repurchases, Quanta has the option to deliver
cash, shares of its common stock or a combination thereof to
satisfy its repurchase obligation. Quanta presently does not
anticipate using stock to satisfy any future repurchase
obligations. If Quanta were to satisfy the obligation with
shares of its common stock, the number of shares delivered would
equal the dollar amount to be paid in common stock divided by
98.5% of the market price of Quantas common stock, as
defined by the indenture. The number of shares to be issued
under this circumstance is not limited. The right to settle for
shares of common stock can be surrendered by Quanta. The
4.5% convertible subordinated notes carry cross-default
provisions with Quantas credit facility and any of
Quantas other debt instruments exceeding
$10.0 million in borrowings.
Pursuant to the 2001 Stock Incentive Plan, Quanta issues
restricted common stock at the fair market value of the common
stock as of the date of issuance. The shares of restricted
common stock issued pursuant to the 2001 Stock Incentive Plan
are subject to restrictions on transfer and certain other
conditions. During the restriction period, the plan participants
are entitled to vote and receive dividends on such shares. Upon
issuance of the restricted stock, an unamortized compensation
expense equivalent to the market value of the shares on the date
of grant is charged to stockholders equity and is
amortized over the restriction period, typically three years.
During the first six months of 2005, approximately
720,000 shares of additional restricted stock, with
$5.4 million in market value, were granted to Quanta
employees and eligible consultants. This restricted stock vests
over three years in equal annual installments on each of the
anniversary dates of the grants assuming the employee or
consultant continues to meet the requirements for vesting.
As of June 30, 2004 and 2005, 2.6 million and
2.0 million shares of restricted stock were outstanding.
The compensation expense recognized with respect to restricted
stock for the three and six months ended June 30, 2005 was
approximately $0.9 million and $2.1 million, and for
the three and six months ended June 30, 2004 was
approximately $1.4 million and $2.3 million.
Pursuant to the 2001 Stock Incentive Plan, employees may elect
to satisfy their tax withholding obligations upon vesting of
restricted stock by having Quanta make such tax payments and
withhold a number of vested shares having a value on the date of
vesting equal to their tax withholding obligation. As a result
of such employee elections, during the first six months of 2005,
Quanta withheld a total of 343,731 shares at a total market
value of $2.8 million to satisfy the tax withholding
obligations, and these shares were accounted for as Treasury
Stock.
Quanta has aggregated each of its individual operating units
into one reportable segment as a specialty contractor. Quanta
provides comprehensive network solutions to the electric power,
gas, telecommunications and cable television industries,
including designing, installing, repairing and maintaining
network infrastructure. In addition, Quanta provides ancillary
services such as inside electrical wiring, intelligent traffic
networks, cable and control systems for light rail lines,
airports and highways, and specialty rock trenching, directional
boring and road milling for industrial and commercial customers.
Each of these services is provided by various Quanta
subsidiaries and discrete financial information is not provided
to management at the service level. The following table presents
information regarding revenues derived from the industries noted
above.
13
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Telecommunications and cable television network services were
presented separately in prior periods but have been combined
herein in order to conform to the current presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended | |
|
Six Months Ended | |
|
|
June 30, | |
|
June 30, | |
|
|
| |
|
| |
|
|
2002 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(In thousands) | |
Electric power and gas network services
|
|
$ |
245,342 |
|
|
$ |
278,893 |
|
|
$ |
464,375 |
|
|
$ |
525,005 |
|
Telecommunications and cable television network services
|
|
|
71,119 |
|
|
|
73,144 |
|
|
|
133,954 |
|
|
|
127,491 |
|
Ancillary services
|
|
|
72,733 |
|
|
|
87,250 |
|
|
|
145,862 |
|
|
|
159,296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
389,194 |
|
|
$ |
439,287 |
|
|
$ |
744,191 |
|
|
$ |
811,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quanta does not have significant operations or long-lived assets
in countries outside of the United States. Quanta derived
$8.3 million and $9.5 million of its revenue from
foreign operations during the six months ended June 30,
2004 and 2005.
|
|
6. |
COMMITMENTS AND CONTINGENCIES: |
Quanta is from time to time party to various lawsuits, claims
and other legal proceedings that arise in the ordinary course of
business. These actions typically seek, among other things,
compensation for alleged personal injury, breach of contract
and/or property damages, punitive damages, civil penalties or
other losses, or injunctive or declaratory relief. With respect
to all such lawsuits, claims and proceedings, Quanta records
reserves when it is probable that a liability has been incurred
and the amount of loss can be reasonably estimated. Quanta does
not believe that any of these proceedings, separately or in the
aggregate, would be expected to have a material adverse effect
on Quantas results of operations, cash flow or financial
position.
Quanta is insured for employers liability and general
liability claims, subject to a deductible of $1.0 million
per occurrence and for auto liability and workers
compensation, subject to a deductible of $2.0 million per
occurrence. In addition, Quanta maintains a non-union employee
health care benefit plan that is subject to a deductible of
$250,000 per claimant per year. Losses up to the deductible
amounts are accrued based upon Quantas 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. At December 31, 2004 and
June 30, 2005, the amounts accrued for self-insurance
claims were $92.6 million and $94.0 million, with
$56.3 million and $61.3 million considered to be
long-term and included in Other Non-Current Liabilities. Related
insurance recoveries/receivables as of December 31, 2004
and June 30, 2005 were $7.0 million and
$7.4 million, of which $4.1 million and
$4.5 million are included in Prepaid Expenses and Other
Current Assets and $2.9 million is included in Other
Assets, net.
Quantas casualty insurance carrier for the policy periods
from August 1, 2000 to February 28, 2003 has been
experiencing financial distress but is currently paying valid
claims. In the event that this insurers financial
situation deteriorates, Quanta may be required to pay certain
obligations that otherwise would have been paid by this insurer.
Quanta estimates that the total future claim amount that this
insurer is currently obligated to pay on Quantas behalf
for the abovementioned policy periods is approximately
$5.3 million, and Quanta has recorded a receivable and
corresponding liability for such amount as of June 30,
2005. However, Quantas estimate of the potential range of
these future claim amounts is between $2.0 million and
$9.0 million. The actual amounts ultimately paid by Quanta
related to these claims, if any, may vary materially from the
above range and could be impacted by further claims development
and the extent to which
14
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
the insurer could not honor its obligations. Quanta continues to
monitor the financial situation of this insurer and analyze any
alternative actions that could be pursued. In any event, Quanta
does not expect any failure by this insurer to honor its
obligations to Quanta, or any alternative actions Quanta may
pursue, to have a material adverse impact on Quantas
financial condition; however, the impact could be material to
Quantas results of operations or cash flows in a given
period.
In certain circumstances, Quanta is required to provide
performance bonds in connection with its contractual
commitments. Quanta has indemnified the surety for any expenses
paid out under these performance bonds. As of June 30,
2005, an aggregate of approximately $552.6 million in
original face amount of bonds issued by the surety were
outstanding.
Quanta leases certain land, buildings and equipment under
non-cancelable lease agreements including related party leases.
The terms of these agreements vary from lease to lease,
including some with renewal options and escalation clauses. The
following schedule shows the future minimum lease payments under
these leases as of June 30, 2005 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital | |
|
Operating | |
|
|
Leases | |
|
Leases | |
|
|
| |
|
| |
Year Ending December 31 2005
|
|
$ |
482 |
|
|
$ |
11,714 |
|
2006
|
|
|
616 |
|
|
|
16,030 |
|
2007
|
|
|
|
|
|
|
11,532 |
|
2008
|
|
|
|
|
|
|
10,143 |
|
2009
|
|
|
|
|
|
|
8,959 |
|
Thereafter
|
|
|
|
|
|
|
15,409 |
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
$ |
1,098 |
|
|
$ |
73,787 |
|
|
|
|
|
|
|
|
|
Less Amounts representing interest
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
|
1,080 |
|
|
|
|
|
|
Less Current portion
|
|
|
482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term obligations
|
|
$ |
598 |
|
|
|
|
|
|
|
|
|
|
|
|
Quanta has guaranteed the residual value on certain equipment
operating leases. Quanta guarantees the difference between this
residual value and the fair market value of the underlying asset
at the date of termination of the leases. At June 30, 2005,
the maximum guaranteed residual value would have been
approximately $97.2 million. Quanta believes that no
significant payments will be made as a result of the difference
between the fair market value of the leased equipment and the
guaranteed residual value. However, there can be no assurance
that future significant payments will not be required.
Quanta has entered into various employment agreements with
certain executives that provide for compensation and certain
other benefits and for severance payments under certain
circumstances. In addition, certain employment agreements
contain clauses that become effective upon a change of control
of Quanta. Upon any of the defined events in the various
employment agreements, Quanta will pay certain amounts to the
employee, which vary with the level of the employees
responsibility.
15
QUANTA SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
Collective Bargaining Agreements |
Certain of Quantas subsidiaries are party to various
collective bargaining agreements with certain of their union
employees. These agreements require such subsidiaries to pay
specified wages and provide certain benefits to their union
employees. These agreements expire at various times.
Quanta has received federal tax refunds in the amounts of
$38.1 million in 2003 and $30.2 million in 2004 from
the Internal Revenue Service (IRS) due to the carry back of
taxable losses reported on Quantas 2002 and 2003 income
tax returns. The IRS is required by law to review Quantas
refund claims. An examination of Quantas 2002 income tax
return began in 2004 and remains ongoing. Quantas 2003
income tax return will be subject to a comparable review. Quanta
fully cooperates with all audits but defends existing positions
vigorously. To provide for potential tax exposures, Quanta
maintains an allowance for tax contingencies, which management
believes is adequate. The results of future audit assessments,
if any, could have a material effect on Quantas cash flows
as these audits are completed. However, management does not
believe that any of these matters will have a material adverse
effect on Quantas consolidated results of operations.
Quanta has indemnified various parties against specified
liabilities that those parties might incur in the future in
connection with Quantas previous acquisitions of certain
companies. These indemnities usually are contingent upon the
other party incurring liabilities that reach specified
thresholds. As of June 30, 2005, Quanta is not aware of
circumstances that would lead to future indemnity claims against
it for material amounts in connection with these transactions.
|
|
7. |
LONG-TERM INCENTIVE PLANS: |
|
|
|
Employee Stock Purchase Plan |
On May 26, 2005, Quantas board of directors approved
the termination of the ESPP, to be effective upon the close of
the offering period ending November 30, 2005. The
termination of Quantas ESPP will not affect purchase
rights previously granted under Quantas ESPP.
16
|
|
Item 2. |
Managements Discussion and Analysis of Financial
Condition and Results of Operations. |
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with our
condensed consolidated financial statements and related notes
included elsewhere in this Quarterly Report on Form 10-Q
and with our Annual Report on Form 10-K, which was filed
with the SEC on March 16, 2005 and is available on the
SECs website at www.sec.gov. The discussion below contains
forward-looking statements that are based upon our current
expectations and are subject to uncertainty and changes in
circumstances. Actual results may differ materially from these
expectations due to inaccurate assumptions and known or unknown
risks and uncertainties, including those identified in
Uncertainty of Forward-Looking Statements and
Information.
Introduction
We are a leading national provider of specialty contracting
services, offering end-to-end network solutions to the electric
power, gas, telecommunications, cable television and specialty
services industries. We believe that we are the largest
contractor servicing the transmission and distribution sector of
the North American electric utility industry. We derive our
revenues from one reportable segment. Our customers include
electric power, gas, telecommunications and cable television
companies, as well as commercial, industrial and governmental
entities. We had consolidated revenues for the six months ended
June 30, 2005 of $811.8 million, of which 65% was
attributable to electric power and gas customers, 16% to
telecommunications and cable television customers and 19% to
ancillary services, such as inside electrical wiring,
intelligent traffic networks, cable and control systems for
light rail lines, airports and highways, and specialty rock
trenching, directional boring and road milling for industrial
and commercial customers.
Our customers include many of the leading companies in the
industries we serve. We have developed strong strategic
alliances with numerous customers and strive to develop and
maintain our status as a preferred vendor to our customers. We
enter into various types of contracts, including competitive
unit price, cost-plus (or time and materials basis), and fixed
price (or lump sum basis), the final terms and prices of which
we frequently negotiate with the customer. Although the terms of
our contracts vary considerably, most are made on either a unit
price or fixed price basis in which we agree to do the work for
a price per unit of work performed (unit price) or for a fixed
amount for the entire project (fixed price). We complete a
substantial majority of our fixed price projects within one
year, while we frequently provide maintenance and repair work
under open-ended, unit price or cost-plus master service
agreements that are renewable annually. 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.
We generally recognize revenue on our unit price and cost-plus
contracts when units are completed or services are performed.
For our fixed price contracts, we typically record revenues as
work on the contract progresses on a percentage-of-completion
basis. Under this valuation method, revenue is recognized based
on the percentage of total costs incurred to date in proportion
to total estimated costs to complete the contract. Fixed price
contracts generally include retainage provisions under which a
percentage of the contract price is withheld until the project
is complete and has been accepted by our customer.
Seasonality; Fluctuations of Results
Our revenues and results of operations can be subject to
seasonal variations. These variations are influenced by weather,
customer spending patterns, bidding seasons and holidays.
Typically, our revenues are lowest in the first quarter of the
year because cold, snowy or wet conditions cause delays. The
second quarter is typically better than the first, as some
projects begin, but continued cold and wet weather can often
impact second quarter productivity. The third quarter is
typically the best of the year, as a greater number of projects
are underway and weather is more accommodating to work on
projects. Revenues during the fourth quarter of the year are
typically lower than the third quarter but higher than the
second quarter. Many projects are completed in the fourth
quarter and revenues often are impacted positively by customers
seeking to spend their capital budget before the end of the
year; however, the holiday season and inclement weather
sometimes can cause delays.
17
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.
The financial condition of our customers and their access to
capital, variations in the margins of projects performed during
any particular quarter, regional economic conditions, timing of
acquisitions and the timing and magnitude of acquisition
assimilation costs may also materially affect quarterly results.
Accordingly, our operating results in any particular quarter or
year may not be indicative of the results that can be expected
for any other quarter or for any other year. You should read
Outlook and Understanding Margins for
additional discussion of trends and challenges that may affect
our financial condition and results of operations.
Understanding Margins
Our gross margin is gross profit expressed as a percentage of
revenues. Cost of services consists primarily of salaries, wages
and benefits to employees, depreciation, fuel and other
equipment expenses, equipment rentals, subcontracted services,
insurance, facilities expenses, materials and parts and
supplies. Various factors some controllable, some
not impact our gross margins on a quarterly or
annual basis.
Seasonal & Geographical. As discussed above,
seasonal patterns can have a significant impact on gross
margins. Generally, business is slower in the winter months
versus the warmer months of the year. This can be offset
somewhat by increased demand for electrical service and repair
work from severe weather. In addition, the mix of business
conducted in different parts of the country will affect margins,
as some parts of the country offer the opportunity for higher
gross margins than others.
Weather. Adverse or favorable weather conditions can
impact gross margins in a given period. For example, in the
first half of 2004, parts of the country experienced record snow
or rainfall that negatively impacted our revenue and gross
margin. In many cases, projects were delayed or had to be
temporarily placed on hold. Conversely, in periods where weather
remains dry and temperatures are accommodating, more work can be
done, sometimes with less cost, which would have a favorable
impact on gross margins. In some cases, as in the second half of
2004, strong storms or hurricanes can provide us with high
margin emergency service restoration work, which can have a
positive impact on margins.
Revenue Mix. The mix of revenue derived from the
industries we serve will impact gross margins. Changes in our
customers spending patterns in each of the industries we
serve can cause an imbalance in supply and demand and,
therefore, affect margins and mix of revenue by industry served.
Service and Maintenance versus Installation. In general,
installation work has a higher gross margin than maintenance
work. This is because installation work is often obtained on a
fixed price basis which has higher risk than other types of
pricing arrangements. We typically derive approximately 50% of
our revenue from maintenance work, which is performed under
pre-established or negotiated prices or cost-plus pricing
arrangements. Thus, a higher portion of installation work in a
given quarter may lead to a higher gross margin.
Subcontract Work. Work that is subcontracted to other
service providers generally has lower gross margins. An increase
in subcontract work in a given period may contribute to a
decrease in gross margin. We typically subcontract approximately
10% - 15% of our work to other service providers.
Materials versus Labor. Margins may be lower on projects
on which we furnish materials as material prices are generally
more predictable than labor costs. Consequently, we generally
are not able to mark up materials as much as labor costs. In a
given period, a higher percentage of work that has a higher
materials component may decrease overall gross margin.
Depreciation. We include depreciation in cost of
services. This is common practice in our industry, but can make
comparability to other companies difficult. This must be taken
into consideration when comparing us to other companies.
Insurance. Operating margins could be impacted by
fluctuations in insurance accruals related to our deductibles in
the period in which such adjustments are made. As of
June 30, 2005, we had a deductible of $1.0 million per
occurrence related to employers and general liability
insurance and a deductible of
18
$2.0 million per occurrence for automobile liability and
workers compensation insurance. We also have a non-union
employee health care benefit plan that is subject to a
deductible of $250,000 per claimant per year.
Selling, General and Administrative Expenses. Selling,
general and administrative expenses consist primarily of
compensation and related benefits to management, administrative
salaries and benefits, marketing, office rent and utilities,
communications, professional fees, bad debt expense, letter of
credit fees and gains and losses on the sale of property and
equipment.
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, | |
|
Six Months Ended June 30, | |
|
|
| |
|
| |
|
|
2004 | |
|
2005 | |
|
2004 | |
|
2005 | |
|
|
| |
|
| |
|
| |
|
| |
|
|
(Dollars in thousands) | |
Revenues
|
|
$ |
389,194 |
|
|
|
100.0 |
% |
|
$ |
439,287 |
|
|
|
100.0 |
% |
|
$ |
744,191 |
|
|
|
100.0 |
% |
|
$ |
811,792 |
|
|
|
100.0 |
% |
Cost of services (including depreciation)
|
|
|
342,853 |
|
|
|
88.1 |
|
|
|
385,471 |
|
|
|
87.7 |
|
|
|
671,126 |
|
|
|
90.2 |
|
|
|
721,884 |
|
|
|
88.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
46,341 |
|
|
|
11.9 |
|
|
|
53,816 |
|
|
|
12.3 |
|
|
|
73,065 |
|
|
|
9.8 |
|
|
|
89,908 |
|
|
|
11.1 |
|
Selling, general and administrative expenses
|
|
|
40,589 |
|
|
|
10.4 |
|
|
|
43,874 |
|
|
|
10.0 |
|
|
|
84,131 |
|
|
|
11.3 |
|
|
|
86,336 |
|
|
|
10.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
|
|
|
5,752 |
|
|
|
1.5 |
|
|
|
9,942 |
|
|
|
2.3 |
|
|
|
(11,066 |
) |
|
|
(1.5 |
) |
|
|
3,572 |
|
|
|
0.4 |
|
Interest expense
|
|
|
(6,228 |
) |
|
|
(1.7 |
) |
|
|
(5,904 |
) |
|
|
(1.3 |
) |
|
|
(12,594 |
) |
|
|
(1.7 |
) |
|
|
(11,922 |
) |
|
|
(1.5 |
) |
Interest income
|
|
|
410 |
|
|
|
0.1 |
|
|
|
1,696 |
|
|
|
0.3 |
|
|
|
853 |
|
|
|
0.1 |
|
|
|
3,215 |
|
|
|
0.4 |
|
Other income, net
|
|
|
(161 |
) |
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
(131 |
) |
|
|
|
|
|
|
262 |
|
|
|
0.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income tax provision (benefit)
|
|
|
(227 |
) |
|
|
(0.1 |
) |
|
|
5,831 |
|
|
|
1.3 |
|
|
|
(22,938 |
) |
|
|
(3.1 |
) |
|
|
(4,873 |
) |
|
|
(0.6 |
) |
Provision (benefit) for income taxes
|
|
|
3,265 |
|
|
|
0.8 |
|
|
|
2,488 |
|
|
|
0.5 |
|
|
|
(7,752 |
) |
|
|
(1.1 |
) |
|
|
(3,088 |
) |
|
|
(0.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(3,492 |
) |
|
|
(0.9 |
)% |
|
$ |
3,343 |
|
|
|
0.8 |
% |
|
$ |
(15,186 |
) |
|
|
(2.0 |
)% |
|
$ |
(1,785 |
) |
|
|
(0.2 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2005 Compared to the
Three Months Ended June 30, 2004 |
Revenues. Revenues increased $50.1 million, or
12.9%, to $439.3 million for the three months ended
June 30, 2005, with revenues derived from the electric
power and gas network services industry increasing by
approximately $33.6 million, revenues from the
telecommunications and cable television network services
industry increasing by approximately $2.0 million and
revenues from ancillary services increasing by approximately
$14.5 million. These increases are a result of a higher
volume of work from increased spending by our customers in all
industries we serve due to the improving financial health of our
customers.
Gross profit. Gross profit increased $7.5 million,
or 16.1%, to $53.8 million for the three months ended
June 30, 2005. As a percentage of revenues, gross margin
increased from 11.9% for the three months ended June 30,
2004 to 12.3% for the three months ended June 30, 2005. The
increase in gross margins for the three months ended
June 30, 2005 over the three months ended June 30,
2004 is attributable to higher margins on work from our electric
power and gas network services customers, partially due to our
margin enhancement initiatives, and better overall fixed cost
absorption as a result of higher revenues.
Selling, general and administrative expenses. Selling,
general and administrative expenses increased $3.3 million,
or 8.1%, to $43.9 million for the three months ended
June 30, 2005. Selling, general and administrative expenses
in the three months ended June 30, 2004 were reduced by net
gains on the sale of property and equipment in the amount of
$1.4 million, compared to $0.1 million in net losses
on the sale of property and equipment during the three months
ended June 30, 2005. Excluding net gains and losses on the
sale of property and equipment, selling, general and
administrative expenses would have increased $1.9 million.
This increase was primarily due to incurring $1.7 million
in consulting fees in the second quarter of 2005 associated with
a margin enhancement program, which were not incurred in the
second quarter of 2004. As a percentage of revenues, excluding
net gains and losses on the sale of property and equipment,
19
selling, general and administrative expenses decreased from
10.8% to 10.0% for the three months ended June 30, 2005,
due to better absorption of the fixed cost component of selling,
general and administrative expenses as a result of higher
revenues.
Interest expense. Interest expense decreased
$0.3 million, or 5.2%, to $5.9 million for the three
months ended June 30, 2005, due to lower levels of debt
outstanding, partially offset by higher interest rates as the
weighted average interest rate for our credit facility increased
to 6.19% for the three months ended June 30, 2005 from
4.22% for the three months ended June 30, 2004.
Interest income. Interest income was $0.4 million
for the three months ended June 30, 2004, compared to
$1.7 million for the three months ended June 30, 2005.
The increase in interest income relates to a higher average cash
balance and higher average interest rates for the second quarter
of 2005 as compared to the second quarter of 2004.
Provision (benefit) for income taxes. The provision for
income taxes was $3.3 million for the three months ended
June 30, 2004, which equals the amount of income tax needed
to bring the year-to-date effective tax rate to the period rate
of 33.8% for the six months ended June 30, 2004. A period
rate was used for the six months ended June 30, 2004
because estimates of our income before taxes for the year ended
December 31, 2004 were at levels such that small
fluctuations in estimated income before taxes produced large
changes in the estimated annual effective tax rate. The
provision for income taxes was $2.5 million for the three
months ended June 30, 2005, with an effective tax rate of
42.7%, which was the rate required to bring the effective tax
rate for the six months ended June 30, 2005 to the
estimated annual effective tax rate for the fiscal year 2005.
Also, the provision for the three months ended June 30,
2005 included a $200,000 credit related to the favorable
settlement of an income tax audit that previously had been
accrued.
|
|
|
Six Months Ended June 30, 2005 Compared to the Six
Months Ended June 30, 2004 |
Revenues. Revenues increased $67.6 million, or 9.1%,
to $811.8 million for the six months ended June 30,
2005, with revenues derived from the electric power and gas
network services industry increasing by approximately
$60.6 million and revenues from ancillary services
increasing by approximately $13.5 million, partially offset
by revenues from the telecommunications and cable television
network services industry decreasing by approximately
$6.5 million. The increase in revenues derived from the
electric power and gas network services industry and ancillary
services is a result of a higher volume of work from increased
spending by our customers in these industries due to the
improving financial health of these customers. Our
telecommunications and cable television network service
customers also have increased the volume of work during the
three months ended June 30, 2005, but this did not result
in an increase in revenues for the six months ended
June 30, 2005 as compared to the six months ended
June 30, 2004.
Gross profit. Gross profit increased $16.8 million,
or 23.1%, to $89.9 million for the six months ended
June 30, 2005. As a percentage of revenues, gross margin
increased from 9.8% for the six months ended June 30, 2004
to 11.1% for the six months ended June 30, 2005. Consistent
with second quarter results, the increase in margins for the six
months ended June 30, 2005 over the six months ended
June 30, 2004 is attributable to higher margins on work
from our electric power and gas network services customers,
partially due to our margin enhancement initiatives, better
weather in certain areas and better overall fixed cost
absorption as a result of higher revenues.
Selling, general and administrative expenses. Selling,
general and administrative expenses increased $2.2 million,
or 2.6%, to $86.3 million for the six months ended
June 30, 2005. Selling, general and administrative expenses
in the six months ended June 30, 2004 were reduced by net
gains on the sale of property and equipment in the amount of
$1.3 million, compared to $0.2 million in net losses
on the sale of property and equipment during the six months
ended June 30, 2005. Excluding the net gains and losses on
the sale of property and equipment, selling, general and
administrative expenses would have increased $0.7 million.
This increase relates to various other selling, general and
administrative costs. As a percentage of revenues, excluding net
gains and losses on the sale of property and equipment, selling,
general and administrative expenses decreased from 11.5% to
10.6% for the six months ended June 30, 2005, due to better
20
absorption of the fixed cost component of selling, general and
administrative expenses as a result of higher revenues.
Interest expense. Interest expense decreased
$0.7 million, or 5.3%, to $11.9 million for the six
months ended June 30, 2005, due to lower levels of debt
outstanding, partially offset by higher interest rates as the
weighted average interest rate for the credit facility increased
to 5.81% for the six months ended June 30, 2005 from 4.19%
for the six months ended June 30, 2004.
Interest income. Interest income was $0.9 million
for the six months ended June 30, 2004, compared to
$3.2 million for the six months ended June 30, 2005.
The increase in interest income primarily relates to a higher
average cash balance and higher average interest rates for the
six months ended June 30, 2005 as compared to the six
months ended June 30, 2004.
Provision (benefit) for income taxes. The benefit for
income taxes was $7.8 million for the six months ended
June 30, 2004, with an effective tax rate of 33.8%,
compared to a benefit of $3.1 million for the six months
ended June 30, 2005, with an effective tax rate of 63.4%.
The higher effective tax rate in 2005 is primarily due to the
impact of estimated non-deductible items on estimated 2005
annual income, as compared to a period rate for taxes for
June 30, 2004 based upon the year-to-date loss without
regard to year end estimates.
Liquidity and Capital Resources
We anticipate that our cash on hand, which totaled
$240.7 million as of June 30, 2005, our credit
facility and our future cash flow from operations will provide
sufficient cash to enable us to meet our future operating needs,
debt service requirements and planned capital expenditures and
to ensure our future ability to grow. Momentum in deployment of
fiber to the premises and fiber to the node or initiatives to
rebuild the United States electric power grid might require a
significant amount of additional working capital. However, we
believe that we have adequate cash and availability under our
credit facility to meet such needs.
As of June 30, 2005, we had cash and cash equivalents of
$240.7 million, working capital of $475.7 million and
long-term debt of $459.1 million, net of current
maturities. Our long-term debt balance at that date included
borrowings of $442.5 million of convertible subordinated
notes and $16.6 million of other debt. We also had
$135.5 million of letters of credit outstanding under our
credit facility.
During the six months ended June 30, 2005, operating
activities provided net cash flow of $9.8 million. Cash
flow from operations is primarily influenced by demand for our
services, operating margins and the type of services we provide.
We used net cash in investing activities of $26.5 million,
including $28.9 million used for capital expenditures. We
used net cash in financing activities of $8.2 million,
resulting primarily from a $4.8 million repayment under the
term loan portion of our credit facility in order to be able to
issue additional letters of credit and maintain our total
borrowing requirement of $148.5 million as discussed below
coupled with $5.0 million in repayments of other long-term
debt.
As of June 30, 2005, we had a $183.5 million credit
facility with various lenders. The credit facility consisted of
a $148.5 million letter of credit facility maturing on
June 19, 2008, which also provides for term loans, and a
$35.0 million revolving credit facility maturing on
December 19, 2007, which provides for revolving loans and
letters of credit. The maximum availability under the letter of
credit facility will be automatically reduced by
$1.5 million on December 31 of each year until
maturity.
As of June 30, 2005, we were required to maintain total
borrowings outstanding under the letter of credit facility equal
to the $148.5 million available through a combination of
letters of credit or term loans. We had
21
approximately $131.9 million of letters of credit issued
under the letter of credit facility and $16.0 million of
the letter of credit facility outstanding as a term loan. The
remaining $0.6 million was available for issuing new
letters of credit. In the event that we desire to issue
additional letters of credit under the letter of credit
facility, we are required to make cash repayments of debt
outstanding under the term loan portion of the letter of credit
facility in an amount that approximates the additional letters
of credit to be issued. The weighted average interest rate for
the six months ended June 30, 2005 associated with amounts
under the term loan was 5.81%.
Under the letter of credit facility, we are subject to a fee
equal to 3.00% to 3.25% of the letters of credit outstanding,
depending upon the occurrence of certain events, plus an
additional 0.15% of the amount outstanding to the extent the
funds in the deposit account do not earn interest equal to the
London Interbank Offering Rate (LIBOR). Term loans under the
letter of credit facility bear interest at a rate equal to
either (a) the Eurodollar Rate (as defined in the credit
facility) plus 3.00% to 3.25% or (b) the Base Rate (as
described below) plus 3.00% to 3.25% depending upon the
occurrence of certain events. The Base Rate equals the higher of
(i) the Federal Funds Rate (as defined in the credit
facility) plus 1/2 of 1% and (ii) the banks prime
rate.
We had approximately $3.6 million of letters of credit
issued under the revolving credit facility, and borrowing
availability under the revolving credit facility was
$31.4 million, as of June 30, 2005. Amounts borrowed
under the revolving credit facility bear interest at a rate
equal to either (a) the Eurodollar Rate plus 1.75% to
3.00%, as determined by the ratio of our total funded debt to
EBITDA, or (b) the Base Rate plus 0.25% to 1.50%, as
determined by the ratio of our total funded debt to EBITDA.
Letters of credit issued under the revolving credit facility are
subject to a letter of credit fee of 1.75% to 3.00%, based on
the ratio of our total funded debt to EBITDA. If we choose to
cash collateralize letters of credit issued under the revolving
credit facility, those letters of credit will be subject to a
letter of credit fee of 0.50%. We are also subject to a
commitment fee of 0.375% to 0.625%, based on the ratio of our
total funded debt to EBITDA, on any unused availability under
the revolving credit facility.
The credit facility contains certain covenants, including a
maximum funded debt to EBITDA ratio, a maximum senior debt to
EBITDA ratio, a minimum interest coverage ratio, a minimum asset
coverage ratio and a minimum consolidated net worth covenant. As
of June 30, 2005, we were in compliance with all of its
covenants. However, other conditions such as, but not limited
to, unforeseen project delays or cancellations, adverse weather
conditions or poor contract performance, could adversely affect
our ability to comply with its covenants in the future. The
credit facility also limits acquisitions, capital expenditures
and asset sales and, subject to some exceptions, prohibits liens
on material assets. The credit facility allows us to pay
dividends and engage in stock repurchase programs in an
aggregate amount up to $25.0 million in 2005 and in any
fiscal year thereafter in an aggregate amount up to twenty-five
percent of our consolidated net income (plus the amount of
non-cash charges that reduced such consolidated net income) for
the prior fiscal year. However, the credit facility does not
limit dividend payments or other distributions payable solely in
capital stock. The credit facility carries cross-default
provisions with all of our other debt instruments exceeding
$2.0 million in borrowings and our continuing indemnity and
security agreement with our surety.
The credit facility is secured by a pledge of all of the capital
stock of our U.S. subsidiaries, 65% of the capital stock of
our foreign subsidiaries and substantially all of our assets.
Borrowings under the credit facility are to be used for working
capital, capital expenditures and for other general corporate
purposes. Our U.S. subsidiaries guarantee the repayment of
all amounts due under the credit facility. Our obligations under
the credit facility constitute designated senior indebtedness
under our 4.0% and 4.5% convertible subordinated notes.
|
|
|
4.0% Convertible Subordinated Notes |
As of June 30, 2005, we had $172.5 million in 4.0%
convertible subordinated notes outstanding. These 4.0%
convertible notes are convertible into shares of our common
stock at a price of $54.53 per share, subject to adjustment as a
result of certain events. These 4.0% convertible subordinated
notes require semi-annual interest payments on July 1 and
December 1 until the notes mature on July 1, 2007. We have
the option to
22
redeem some or all of the 4.0% convertible subordinated notes
beginning July 3, 2003 at specified redemption prices,
together with accrued and unpaid interest; however, early
redemption is prohibited by our credit facility. If certain
fundamental changes occur, as described in the indenture under
which we issued the 4.0% convertible subordinated notes, holders
of the 4.0% convertible subordinated notes may require us to
purchase all or part of their notes at a purchase price equal to
100% of the principal amount, plus accrued and unpaid interest.
|
|
|
4.5% Convertible Subordinated Notes |
As of June 30, 2005, we had $270.0 million of
4.5% convertible subordinated notes outstanding. These
4.5% convertible subordinated notes are convertible into
shares of our common stock at a price of $11.14 per share,
subject to adjustment as a result of certain events. The
4.5% convertible subordinated notes require semi-annual
interest payments on April 1 and October 1 until the
notes mature on October 1, 2023.
The 4.5% convertible subordinated notes are convertible by
the holder if (i) during any fiscal quarter the last
reported sale price of our common stock is greater than or equal
to 120% of the conversion price for at least 20 trading days in
the period of 30 consecutive trading days ending on the first
trading day of such fiscal quarter, (ii) during the five
business day period after any five consecutive trading day
period in which the trading price per note for each day of that
period was less than 98% of the product of the last reported
sale price of our common stock and the conversion rate,
(iii) upon us calling the notes for redemption or
(iv) upon the occurrence of specified corporate
transactions. If the notes become convertible under one of these
circumstances, we have the option to deliver cash, shares of our
common stock or a combination thereof, with a value equal to the
par value of the notes divided by the conversion price
multiplied by the average trading price of our common stock. The
maximum number of shares of common stock that could be issued
under these circumstances is equal to the par value of the notes
divided by the conversion price. During the six months ended
June 30, 2005, none of the circumstances permitting
conversion had occurred.
Beginning October 8, 2008, we can redeem for cash some or
all of the 4.5% convertible subordinated notes at par value
plus accrued and unpaid interest; however, early redemption is
prohibited by our credit facility. The holders of the
4.5% convertible subordinated notes may require us to
repurchase all or some of their notes at par value plus accrued
and unpaid interest on October 1, 2008, 2013 or 2018, or
upon the occurrence of a fundamental change, as defined by the
indenture under which we issued the notes. We must pay any
required repurchase on October 1, 2008 in cash. For all
other required repurchases, we have the option to deliver cash,
shares of our common stock or a combination thereof to satisfy
our repurchase obligation. We presently do not anticipate using
stock to satisfy any future repurchase obligations. If we were
to satisfy the obligation with shares of our common stock, the
number of shares delivered would equal the dollar amount to be
paid in common stock divided by 98.5% of the market price of our
common stock, as defined by the indenture. The number of shares
to be issued under this circumstance is not limited. The right
to settle for shares of common stock can be surrendered by us.
The 4.5% convertible subordinated notes carry cross-default
provisions with our credit facility and any of our other debt
instruments exceeding $10.0 million in borrowings.
Off-Balance Sheet Transactions
As is common in our industry, we have entered into certain
off-balance sheet arrangements in the ordinary course of
business that result in risks not directly reflected in our
balance sheets. Our significant off-balance sheet transactions
include liabilities associated with non-cancelable operating
leases, letter of credit obligations and surety guarantees. We
have not engaged in any off-balance sheet financing arrangements
through special purpose entities.
We enter into non-cancelable operating leases for many of our
facility, vehicle and equipment needs. These leases allow us to
conserve cash by paying a monthly lease rental fee for use of
facilities, vehicles and equipment rather than purchasing them.
At the end of the lease, we have no further obligation to the
lessor.
23
We may decide to cancel or terminate a lease before the end of
its term, in which case we are typically liable to the lessor
for the remaining lease payments under the term of the lease.
We have guaranteed the residual value of the underlying assets
under certain of our equipment operating leases at the date of
termination of such leases. We have agreed to pay any difference
between this residual value and the fair market value of the
underlying asset as of the lease termination date. At
June 30, 2005, the maximum guaranteed residual value would
have been approximately $97.2 million. We believe that no
significant payments will be made as a result of the difference
between the fair market value of the leased equipment and the
guaranteed residual value. However, there can be no assurance
that future significant payments will not be required.
Certain of our vendors require letters of credit to ensure
reimbursement for amounts they are disbursing on our behalf,
such as to beneficiaries under our self-funded insurance
programs. In addition, from time to time some customers require
us to post letters of credit to ensure payment to our
subcontractors and vendors under those contracts and to
guarantee performance under our contracts. Such letters of
credit are generally issued by a bank or similar financial
institution. The letter of credit commits the issuer to pay
specified amounts to the holder of the letter of credit if the
holder demonstrates that we have failed to perform specified
actions. If this were to occur, we would be required to
reimburse the issuer of the letter of credit. Depending on the
circumstances of such a reimbursement, we may also have to
record a charge to earnings for the reimbursement. We do not
believe that it is likely that any claims will be made under a
letter of credit in the foreseeable future.
As of June 30, 2005, we had $135.5 million in letters
of credit outstanding under our credit facility primarily to
secure obligations under our casualty insurance program. These
are irrevocable stand-by letters of credit with maturities
expiring at various times throughout 2005 and 2006. Upon
maturity, it is expected that the majority of these letters of
credit will be renewed for subsequent one-year periods. As of
August 4, 2005, we have agreed to issue up to
$9.0 million in additional letters of credit during 2005
and 2006 relating to our casualty insurance program.
Many customers, particularly in connection with new
construction, require us to post performance and payment bonds
issued by a financial institution known as a surety. These bonds
provide a guarantee to the customer that we will perform under
the terms of a contract and that we will pay subcontractors and
vendors. If we fail to perform under a contract or to pay
subcontractors and vendors, the customer may demand that the
surety make payments or provide services under the bond. We must
reimburse the surety for any expenses or outlays it incurs.
Under our continuing indemnity and security agreement with the
surety, we have posted a letter of credit in the amount of
$10.0 million in favor of the surety and, pursuant to the
consent of the lenders under our credit facility, we have
granted security interests in certain of our assets to
collateralize our obligations to the surety. We may be required
to post additional letters of credit or other collateral in
favor of the surety in the future. Posting letters of credit in
favor of the surety also will reduce the borrowing availability
under our credit facility. To date, we have not had any
reimbursements to the surety for bond-related costs. We believe
that it is unlikely that we will have to fund significant claims
under our surety arrangements in the foreseeable future. As of
June 30, 2005, an aggregate of approximately
$552.6 million in original face amount of bonds issued by
the surety were outstanding. Our estimated cost to complete
these bonded projects was approximately $155.7 million as
of June 30, 2005.
24
As of June 30, 2005, our future contractual obligations,
including interest under capital leases, are as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total | |
|
2005 | |
|
2006 | |
|
2007 | |
|
2008 | |
|
2009 | |
|
Thereafter | |
|
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
Long-term debt principal
|
|
$ |
459,827 |
|
|
$ |
865 |
|
|
$ |
370 |
|
|
$ |
172,592 |
|
|
$ |
286,000 |
|
|
$ |
|
|
|
$ |
|
|
Long-term debt interest
|
|
|
53,288 |
|
|
|
9,525 |
|
|
|
19,050 |
|
|
|
15,600 |
|
|
|
9,113 |
|
|
|
|
|
|
|
|
|
Capital lease obligations, including interest
|
|
|
1,098 |
|
|
|
482 |
|
|
|
616 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating lease obligations
|
|
|
73,787 |
|
|
|
11,714 |
|
|
|
16,030 |
|
|
|
11,532 |
|
|
|
10,143 |
|
|
|
8,959 |
|
|
|
15,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
588,000 |
|
|
$ |
22,586 |
|
|
$ |
36,066 |
|
|
$ |
199,724 |
|
|
$ |
305,256 |
|
|
$ |
8,959 |
|
|
$ |
15,409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Excluded from the above table is interest associated with
borrowings under our credit facility because both the amount
borrowed and applicable interest rate are variable. The
principal amount borrowed under our credit facility included in
the above table is $16.0 million due in 2008, which bears
interest at a rate of 6.19% as of June 30, 2005. In
addition, our multi-employer pension plan contributions are
determined annually based on our union employee payrolls, which
cannot be determined for future periods in advance.
Concentration of Credit Risk
We grant credit under normal payment terms, generally without
collateral, to our customers, which include electric power and
gas companies, telecommunications and cable television system
operators, governmental entities, general contractors and
builders, owners and managers of commercial and industrial
properties located primarily in the United States. Consequently,
we are subject to potential credit risk related to changes in
business and economic factors throughout the United States.
However, we generally have certain lien rights with respect to
services provided. Under certain circumstances such as
foreclosures or negotiated settlements, we may take title to the
underlying assets in lieu of cash in settlement of receivables.
As previously discussed herein, certain of our customers have
been experiencing significant financial difficulties in recent
years. These economic conditions expose us to increased risk
related to collectibility of receivables for services we have
performed. No customer accounted for more than 10% of accounts
receivable as of June 30, 2005 or revenues for the three
and six months ended June 30, 2005.
Litigation
We are from time to time a party to various lawsuits, claims and
other legal proceedings that arise in the ordinary course of
business. These actions typically seek, among other things,
compensation for alleged personal injury, breach of contract
and/or property damages, punitive damages, civil penalties or
other losses, or injunctive or declaratory relief. With respect
to all such lawsuits, claims and proceedings, we record reserves
when it is probable a liability has been incurred and the amount
of loss can be reasonably estimated. We do not believe that any
of these proceedings, separately or in the aggregate, would be
expected to have a material adverse effect on our results of
operations, cash flow or financial position.
Related Party Transactions
In the normal course of business, we enter into transactions
from time to time with related parties. These transactions
typically take the form of facility leases with prior owners of
certain acquired companies.
New Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
(SFAS) No. 123 (revised 2004), Share-Based
Payment (SFAS No. 123(R)), which is a revision
of SFAS No. 123, Accounting for Stock-Based
Compensation. SFAS No. 123(R) supersedes APB Opinion
No. 25, Accounting for Stock Issued to
Employees, and amends SFAS No. 95,
Statement of Cash Flows. SFAS No. 123(R)
requires companies to account for stock-based compensation
25
awards based on the fair value of the awards at the date they
are granted. The resulting compensation cost would be shown as
an expense in the consolidated statements of operations. This
statement is effective for us as of the beginning of the first
quarter of 2006. SFAS No. 123(R) permits adoption
using one of two methods: 1) a modified
prospective method, in which compensation cost is
recognized beginning on the effective date (a) based on the
requirements of SFAS No. 123(R) for all share-based
payments granted after the effective date and (b) based on
the requirements of SFAS No. 123 for all awards
granted to employees prior to the effective date of
SFAS No. 123(R) that remain unvested on the effective
date and 2) a modified retrospective method
that includes the requirements above, but also permits entities
to restate based on the amounts previously recognized under
SFAS No. 123 for purposes of pro forma disclosures of
all prior periods presented. We plan to adopt
SFAS No. 123(R) using the modified
prospective method. As discussed above, we currently
account for share-based payments to employees using the
intrinsic value method and, as such, generally recognize no
compensation cost for stock option awards and stock issued
pursuant to our Employee Stock Purchase Plan (ESPP).
Accordingly, the adoption of SFAS No. 123(R) could
have a significant impact on our reported results of operations
and cash flows; however, the ultimate impact of the adoption of
SFAS No. 123(R) cannot be predicted at this time
because it will depend on the levels of share-based payments
granted in the future. However, had we adopted
SFAS No. 123(R) in the periods presented, the impact
on results of operations would have approximated the impact of
SFAS No. 123 as presented in Note 1 to Notes to
Condensed Consolidated Financial Statements.
SFAS No. 123(R) also requires the benefits of tax
deductions in excess of recognized compensation cost to be
reported as a financing cash flow, rather than as an operating
cash flow as required under current literature. This requirement
will reduce net operating cash flows and increase net financing
cash flows in periods after adoption.
In December 2004, the FASB issued SFAS No. 153,
Exchanges of Nonmonetary Assets an amendment
of APB Opinion No. 29, which modifies the existing
guidance on accounting for nonmonetary transactions to eliminate
an exception under which certain exchanges of similar productive
nonmonetary assets were not accounted for at fair value.
SFAS No. 153 instead provides a general exception for
exchanges of nonmonetary assets that do not have commercial
substance. This statement must be applied to nonmonetary asset
exchanges occurring in fiscal periods beginning after
June 15, 2005. Quanta does not anticipate that the adoption
of SFAS No. 153 will have a material impact on
Quantas results of operations or financial position.
In May 2005, the FASB issued SFAS No. 154,
Accounting Changes and Error Corrections A
Replacement of APB Opinion No. 20 and FASB Statement
No. 3 (SFAS No. 154).
SFAS No. 154 requires retrospective application to
prior periods financial statements for changes in
accounting principles unless it is impracticable to determine
either the period-specific effects or the cumulative effect of
the change. SFAS No. 154 is effective for accounting
changes and corrections of errors made in fiscal years beginning
after December 15, 2005. We will adopt the provisions of
SFAS No. 154, as applicable, beginning in fiscal year
2006.
In June 2005, the FASBs Emerging Issues Task Force reached
a consensus on Issue No. 05-6, Determining the
Amortization Period for Leasehold Improvements
(EITF 05-6). The guidance requires that leasehold
improvements acquired in a business combination or purchased
subsequent to the inception of a lease be amortized over the
lesser of the useful life of the assets or a term that includes
renewals that are reasonably assured at the date of the business
combination or purchase. The guidance is effective for periods
beginning after June 29, 2005. We do not believe that the
adoption of EITF 05-6 will have a significant effect on our
financial statements.
Critical Accounting Policies
The discussion and analysis of our financial condition and
results of operations are based on our consolidated financial
statements, which have been prepared in accordance with
accounting principles generally accepted in the United States.
The preparation of these consolidated financial statements
requires us to make certain estimates and assumptions that
affect the reported amounts of assets and liabilities,
disclosures of contingent assets and liabilities known to exist
at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting
period. We evaluate our
26
estimates on an ongoing basis, based on historical experience
and on various other assumptions that are believed to be
reasonable under the circumstances. There can be no assurance
that actual results will not differ from those estimates.
Management has reviewed its development and selection of
critical accounting estimates with the audit committee of our
board of directors. We believe the following accounting policies
affect our more significant judgments and estimates used in the
preparation of our consolidated financial statements:
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Revenue Recognition. We recognize revenue when services
are performed except when work is being performed under a fixed
price contract. Revenues from fixed price contracts are
recognized using the percentage-of-completion method, measured
by the percentage of costs incurred-to-date to total estimated
costs for each contract. Such contracts generally provide that
the customer accept completion of progress to date and
compensate us for services rendered, measured typically in terms
of units installed, hours expended or some other measure of
progress. Contract costs typically include all direct material,
labor and subcontract costs and those indirect costs related to
contract performance, such as indirect labor, supplies, tools,
repairs and depreciation costs. Provisions for the total
estimated losses on uncompleted contracts are made in the period
in which such losses are determined. Changes in job performance,
job conditions, estimated profitability and final contract
settlements may result in revisions to costs and income and
their effects are recognized in the period in which the
revisions are determined. |
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Self-Insurance. We are insured for employers
liability and general liability claims, subject to a deductible
of $1.0 million per occurrence, and for auto liability and
workers compensation subject to a deductible of
$2.0 million per occurrence. We also have a non-union
employee health care benefit plan that is subject to a
deductible of $250,000 per claimant per year. Losses up to
the deductible amounts are accrued based upon our estimates of
the ultimate liability for claims incurred and an estimate of
claims incurred but not reported. However, insurance liabilities
are difficult to assess and estimate due to unknown factors,
including the severity of an injury, the determination of our
liability in proportion to other parties, the number of
incidents not reported and the effectiveness of our safety
program. The accruals are based upon known facts and historical
trends and management believes such accruals to be adequate. |
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Our casualty insurance carrier for the policy periods from
August 1, 2000 to February 28, 2003 has been
experiencing financial distress but is currently paying valid
claims. In the event that this insurers financial
situation further deteriorates, we may be required to pay
certain obligations that otherwise would have been paid by this
insurer. We estimate that the total future claim amount that
this insurer is currently obligated to pay on our behalf for the
abovementioned policy periods is approximately
$5.3 million; however, our estimate of the potential range
of these future claim amounts is between $2.0 million and
$9.0 million. The actual amounts ultimately paid by us in
connection with such claims, if any, may vary materially from
the above range and could be impacted by further claims
development and the extent to which the insurer could not honor
its obligations. In any event, we do not expect any failure by
this insurer to honor its obligations to us to have a material
adverse impact on our financial condition; however, the impact
could be material to our results of operations or cash flow in a
given period. We continue to monitor the financial situation of
this insurer and analyze any alternative actions that could be
pursued. |
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Valuation of Intangibles and Long-Lived Assets.
SFAS No. 142 provides that goodwill and other
intangible assets that have indefinite useful lives not be
amortized but, instead, must be tested at least annually for
impairment, and intangible assets that have finite useful lives
should continue to be amortized over their useful lives.
SFAS No. 142 also provides specific guidance for
testing goodwill and other nonamortized intangible assets for
impairment. SFAS No. 142 does not allow increases in
the carrying value of reporting units that may result from our
impairment test; therefore, we may record goodwill impairments
in the future, even when the aggregate fair value of our
reporting units and the company as a whole may increase.
Goodwill of a reporting unit will be tested for impairment
between annual tests if an event occurs or circumstances change
that would more likely than not reduce the fair value of a
reporting unit below its carrying amount. Examples of such
events or circumstances may include a significant change in
business climate or a loss of key personnel, among others.
SFAS No. 142 |
27
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requires that management make certain estimates and assumptions
in order to allocate goodwill to reporting units and to
determine the fair value of reporting unit net assets and
liabilities, including, among other things, an assessment of
market conditions, projected cash flows, cost of capital and
growth rates, which could significantly impact the reported
value of goodwill and other intangible assets. Estimating future
cash flows requires significant judgment, and our projections
may vary from cash flows eventually realized. |
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We review long-lived assets for impairment whenever events or
changes in circumstances indicate that the carrying amount may
not be realizable. If an evaluation is required, the estimated
future undiscounted cash flows associated with the asset are
compared to the assets carrying amount to determine if an
impairment of such asset is necessary. Estimating future cash
flows requires significant judgment, and our projections may
vary from cash flows eventually realized. The effect of any
impairment would be to expense the difference between the fair
value of such asset and its carrying value. In addition, we
estimate the useful lives of our long-lived assets and other
intangibles. We periodically review factors to determine whether
these lives are appropriate. Net gains or losses from the sale
of property and equipment are reflected in Selling, General and
Administrative Expenses. |
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Current and Non-Current Accounts and Notes Receivable
and Provision for Doubtful Accounts. We provide an allowance
for doubtful accounts when collection of an account or note
receivable is considered doubtful. Inherent in the assessment of
the allowance for doubtful accounts are certain judgments and
estimates relating to, among others, our customers access
to capital, our customers willingness or ability to pay,
general economic conditions and the ongoing relationship with
the customer. Certain of our customers, several of them large
public telecommunications carriers and utility customers, have
been experiencing financial difficulties. Should any major
customers file for bankruptcy or continue to experience
difficulties, or should anticipated recoveries relating to the
receivables in existing bankruptcies and other workout
situations fail to materialize, we could experience reduced cash
flows and losses in excess of current reserves. In addition,
material changes in our customers revenues or cash flows
could affect our ability to collect amounts due from them. |
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Stock-Based Compensation. Through June 30, 2005,
Quanta accounted for its stock-based compensation under APB
Opinion No. 25 Accounting for Stock Issued to
Employees. Under this accounting method, no compensation
expense is recognized in the consolidated statements of
operations if no intrinsic value of the stock-based compensation
award exists at the date of grant. As discussed previously, in
December 2004, the FASB issued SFAS No. 123(R),
requiring companies to account for stock-based compensation
awards based on the fair value of the awards at the date they
are granted. The resulting compensation cost would be shown as
an expense in the consolidated statements of operations.
SFAS No. 123(R) is effective for us as of the
beginning of the first quarter of 2006. Until effective,
disclosure is required as to what net income and earnings per
share would have been had the fair value method been followed
for our stock option awards outstanding under the 2001 Stock
Incentive Plan and stock issued pursuant to our ESPP. Our
existing pro forma disclosure is included in Note 1 to
Notes to Condensed Consolidated Financial Statements. For the
stock options, the fair market value of each grant was estimated
on the date of grant using the Black-Scholes option-pricing
model. The last stock option grant to an employee was in
November 2002. For the ESPP, compensation cost approximates the
difference between the fair value of our common stock and the
actual common stock purchase price. The expense recognition for
the restricted stock awards is the same under APB Opinion
No. 25 and SFAS No. 123(R) with expense being
recognized in the financial statements. |
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Income Taxes. We follow the liability method of
accounting for income taxes in accordance with
SFAS No. 109, Accounting for Income Taxes.
Under this method, deferred assets and liabilities are recorded
for future tax consequences of temporary differences between the
financial reporting and tax bases of assets and liabilities, and
are measured using the enacted tax rates and laws that are
expected to be in effect when the underlying assets or
liabilities are recovered or settled. |
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We regularly evaluate valuation allowances established for
deferred tax assets for which future realization is uncertain
and we maintain an allowance for tax contingencies that we
believe is adequate. |
28
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The estimation of required valuation allowances includes
estimates of future taxable income. The ultimate realization of
deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary
differences become deductible. We consider projected future
taxable income and tax planning strategies in making this
assessment. If actual future taxable income differs from our
estimates, we may not realize deferred tax assets to the extent
we have estimated. |
Outlook
The following statements are based on current expectations.
These statements are forward-looking, and actual results may
differ materially.
Like many companies that provide installation and maintenance
services to the electric power, gas, telecommunications and
cable television industries, we are facing a number of
challenges. Our markets experienced substantial change during
2002 and 2003 as evidenced by an increased number of
bankruptcies in the telecommunications market, continued
devaluation of many of our customers debt and equity
securities and pricing pressures resulting from challenges faced
by major industry participants. These factors have contributed
to the delay of projects and reduction of capital spending that
have impacted our operations and ability to grow at historical
levels.
We believe the historic downturn of the telecommunications
industry has reached bottom and that the industry has
stabilized. Further, there are several telecommunications
initiatives currently in discussion and underway by several
wireline carriers and government organizations that could
provide us with pockets of opportunity in the future,
particularly from fiber to the premises (FTTP) and fiber to
the node (FTTN) initiatives. Such initiatives have been
announced by Verizon and SBC, and municipalities and other
government jurisdictions have also become active in these
initiatives.
We believe the impact of mergers within the wireless industry on
our wireless customers has begun to lessen. As a result, we
anticipate increased spending by our wireless customers on their
wireless networks. In addition, several wireless companies have
announced plans to increase their cell site deployment plans
over the next year.
Utilities across the country are regaining their financial
health and, we believe, are making plans to increase spending on
their transmission and distribution systems. As a result, we
anticipate more extensive pole change outs, line upgrades and
maintenance projects on many systems over the next several
quarters. Further, the President recently signed a comprehensive
energy bill that will require the power industry to meet federal
reliability standards for their transmission and distribution
systems and provides further incentives to the industry to
invest in and improve maintenance on their systems. While this
bill is likely to stimulate spending by our customers, we do not
expect to see the effects on our business for twelve to
twenty-four months.
Spending in the cable television industry remains flat. However,
with several telecom companies increasing the pace of their FTTP
and FTTN projects that will enable them to offer TV services via
fiber to their customers, such initiatives could serve as a
catalyst for the cable industry to begin a new network upgrade
cycle to expand its service offerings in an effort to retain and
attract customers.
With the stabilization of several of our markets, we have begun
to see our gross margins generally stabilize as well. While
operating conditions are still abnormal and many challenges
remain, we are also beginning to see some opportunity for
margins to improve, but they are not expected to return to
historical levels in the near term. To the extent that our
primary markets remain stable or begin to improve, margins
gradually could continue to improve.
We continue to focus on the elements of the business we can
control, including cost control, the margins we accept on
projects, collecting receivables, ensuring quality service and
rightsizing initiatives to match the markets we serve. These
initiatives include aligning our workforce with our current
revenue base, evaluating opportunities to reduce the number of
field offices and evaluating our non-core assets for potential
sale. Such initiatives could result in future charges related
to, among others, severance, facilities shutdown and
consolidation, property disposal and other exit costs.
29
Capital expenditures in 2005 are expected to be approximately
$40.0 million. A majority of the expenditures will be
for operating equipment. We expect expenditures for 2005 to be
funded substantially through internal cash flows and, to the
extent necessary, from cash on hand.
We believe that we are adequately positioned to capitalize upon
opportunities in the industries we serve because of our proven
full-service operating units with broad geographic reach,
financial capability and technical expertise.
Uncertainty of Forward-Looking Statements and Information
This Quarterly Report on Form 10-Q includes statements
reflecting assumptions, expectations, projections, intentions or
beliefs about future events that are intended as
forward-looking statements under the Private
Securities Litigation Reform Act of 1995. You can identify these
statements by the fact that they do not relate strictly to
historical or current facts. They use words such as
anticipate, estimate,
project, forecast, may,
will, should, could,
expect, believe and other words of
similar meaning. In particular, these include, but are not
limited to, statements relating to the following:
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Projected operating or financial results; |
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Expectations regarding capital expenditures; |
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The effects of competition in our markets; |
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The current and expected economic conditions in the industries
we serve; |
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Our ability to achieve cost savings; and |
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The effects of any acquisitions and divestitures we may make. |
Any or all of our forward-looking statements may turn out to be
wrong. They can be affected by inaccurate assumptions and by
known or unknown risks and uncertainties, including the
following:
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Quarterly variations in our operating results due to seasonality
and adverse weather conditions; |
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Adverse changes in economic conditions in the markets served by
us or by our customers; |
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Our ability to effectively compete for market share; |
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Beliefs and assumptions about the collectibility of receivables; |
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The inability of our customers to pay for services following
bankruptcy or other financial difficulty; |
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The financial distress of our casualty insurance carrier that
may require payment for losses that would otherwise be insured; |
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Liabilities for claims that are not self-insured or for claims
that our casualty insurance carrier fails to pay; |
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Potential liabilities relating to occupational health and safety
matters; |
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Estimates relating to our use of percentage-of-completion
accounting; |
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Our dependence on fixed price contracts; |
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Rapid technological and structural changes that could reduce the
demand for the services we provide; |
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Our ability to obtain performance bonds; |
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Cancellation provisions within our contracts and the risk that
contracts expire and are not renewed; |
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Replacement of our contracts as they are completed or expire; |
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Our ability to effectively integrate the operations of our
companies; |
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Retention of key personnel and qualified employees; |
30
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The impact of our unionized workforce on our operations and on
our ability to complete future acquisitions; |
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Our growth outpacing our infrastructure; |
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Potential exposure to environmental liabilities; |
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Requirements relating to governmental regulation; |
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Our ability to meet the requirements of the Sarbanes-Oxley Act
of 2002; |
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The cost of borrowing, availability of credit, debt covenant
compliance and other factors affecting our financing activities; |
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Our ability to generate internal growth; and |
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The adverse impact of goodwill impairments. |
Many of these factors will be important in determining our
actual future results. Consequently, no forward-looking
statement can be guaranteed. Our actual future results may vary
materially from those expressed or implied in any
forward-looking statements.
All of our forward-looking statements, whether written or oral,
are expressly qualified by these cautionary statements and any
other cautionary statements that may accompany such
forward-looking statements. In addition, we disclaim any
obligation to update any forward-looking statements to reflect
events or circumstances after the date of this report.
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Item 4. |
Controls and Procedures |
Our management evaluated, with the participation of our Chairman
and Chief Executive Officer and Chief Financial Officer, the
effectiveness of our disclosure controls and procedures, as of
June 30, 2005. Based on their evaluation, our Chairman and
Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective as of
June 30, 2005.
Our management, including the Chief Executive Officer and Chief
Financial Officer, does not expect that our disclosure controls
or our internal control over financial reporting will prevent or
detect all errors and all fraud. A control system, no
matter how well designed and operated, can provide only
reasonable, not absolute, assurance that the control
systems objectives will be met. The design of a control
system must reflect the fact that there are resource
constraints, and the benefits of controls must be considered
relative to their costs. Further, because of the inherent
limitations in all control systems, no evaluation of controls
can provide absolute assurance that misstatements due to error
or fraud will not occur or that all control issues and instances
of fraud, if any, within the company have been detected. These
inherent limitations include the realities that judgments in
decision-making can be faulty and that breakdowns can occur
because of simple errors or mistakes. Controls can also be
circumvented by the individual acts of some persons, by
collusion of two or more people, or by management override of
the controls. The design of any system of controls is based in
part on certain assumptions about the likelihood of future
events, and there can be no assurance that any design will
succeed in achieving its stated goals under all potential future
conditions. Over time, controls may become inadequate because of
changes in conditions or deterioration in the degree of
compliance with policies or procedures.
31
There has been no change in our internal control over financial
reporting that occurred during the quarter ended June 30,
2005, that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
QUANTA SERVICES, INC. AND SUBSIDIARIES
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Item 1. |
Legal Proceedings. |
We are from time to time a party to various lawsuits, claims and
other legal proceedings that arise in the ordinary course of
business. These actions typically seek, among other things,
compensation for alleged personal injury, breach of contract
and/or property damages, punitive damages, civil penalties or
other losses, or injunctive or declaratory relief. With respect
to all such lawsuits, claims and proceedings, we record reserves
when it is probable a liability has been incurred and the amount
of loss can be reasonably estimated. We do not believe that any
of these proceedings, separately or in the aggregate, would be
expected to have a material adverse effect on our results of
operations, cash flow or financial position.
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Item 2. |
Unregistered Sales of Equity Securities and Use of
Proceeds. |
On May 28, 2005, 37,013 shares of restricted stock
that had been issued pursuant to our 2001 Stock Incentive Plan
vested. Pursuant to the 2001 Stock Incentive Plan, employees may
elect to satisfy their tax withholding obligations upon vesting
by having Quanta make such tax payments and withhold a number of
vested shares having a value on the date of vesting equal to
their tax withholding obligation. As a result of such employee
elections, Quanta withheld shares as follows:
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(d) Maximum | |
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(c) Total Number | |
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Number of Shares | |
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of Shares Purchased | |
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that may yet be | |
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as Part of Publicly | |
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Purchased Under | |
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(a) Total Number of | |
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(b) Average Price | |
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Announced Plans | |
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the Plans or | |
Period |
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Shares Purchased | |
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Paid Per Share | |
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or Programs | |
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Programs | |
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June 1, 2005 June 30, 2005
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5,841 |
(i) |
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$ |
9.05 |
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None |
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None |
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(i) |
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These shares were not purchased through a publicly announced
plan or program. |
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Item 4. |
Submission of Matters to a Vote of Security
Holders. |
We held our annual meeting of stockholders in Houston, Texas on
May 26, 2005. Nine members were elected to the board of
directors, each to serve until our next annual meeting of
stockholders and until their respective successors have been
elected and qualified.
The following eight individuals were elected to the board of
directors by the holders of our Common Stock, with no
abstentions or broker non-votes:
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Nominee |
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For | |
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Withheld | |
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James R. Ball
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100,489,030 |
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3,158,253 |
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John R. Colson
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99,771,690 |
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3,875,593 |
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Bernard Fried
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100,469,505 |
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3,177,778 |
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Louis C. Golm
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100,169,572 |
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3,477,711 |
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Worthing F. Jackman
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100,490,019 |
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3,157,264 |
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Bruce Rank
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100,490,469 |
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3,156,814 |
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Gary A. Tucci
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99,501,379 |
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4,145,904 |
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John R. Wilson
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99,510,262 |
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4,137,021 |
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32
The holders of our Limited Vote Common Stock elected
Vincent D. Foster to the board of directors by a vote of
553,023 shares of Limited Vote Common Stock, with no
shares withheld and no abstentions or broker non-votes.
The stockholders ratified the appointment of
PricewaterhouseCoopers LLP as our independent registered public
accounting firm for the fiscal year ending December 31,
2005 by a vote of 104,007,969 shares of Common Stock and
Limited Vote Common Stock, voting together, with
(i) 128,915 shares of Common Stock and no shares of
Limited Vote Common Stock voting against and
(ii) 63,421 shares of Common Stock and no shares of
Limited Vote Common Stock abstaining. There were no broker
non-votes for this item.
|
|
|
|
|
|
|
Exhibit | |
|
|
|
|
No | |
|
|
|
Description |
| |
|
|
|
|
|
3.1 |
|
|
|
|
Restated Certificate of Incorporation (previously filed as
Exhibit 3.3 to the Companys Form 10-Q (No.
001-13831) filed August 14, 2003 and incorporated herein by
reference) |
|
3.2 |
|
|
|
|
Amended and Restated Bylaws (previously filed as
Exhibit 3.2 to the Companys 2000 Form 10-K (No.
001-13831) filed April 2, 2001 and incorporated herein by
reference) |
|
10.1 |
|
|
|
|
Form of Indemnity Agreement (previously filed as
Exhibit 10.1 to the Companys Form 8-K (No.
001-13831) filed May 31, 2005 and incorporated herein by
reference) |
|
31.1 |
|
|
|
|
Certification of Periodic Report by Chief Executive Officer
pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith) |
|
31.2 |
|
|
|
|
Certification of Periodic Report by Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith) |
|
32.1 |
|
|
|
|
Certification of Periodic Report by Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith) |
33
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.
|
|
|
|
|
James H. Haddox |
|
Chief Financial Officer |
Dated: August 9, 2005
34
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit |
|
|
|
|
No |
|
|
|
Description |
|
|
|
|
|
|
3 |
.1 |
|
|
|
Restated Certificate of Incorporation (previously filed as
Exhibit 3.3 to the Companys Form 10-Q
(No. 001-13831) filed August 14, 2003 and incorporated
herein by reference) |
|
3 |
.2 |
|
|
|
Amended and Restated Bylaws (previously filed as
Exhibit 3.2 to the Companys 2000 Form 10-K
(No. 001-13831) filed April 2, 2001 and incorporated
herein by reference) |
|
10 |
.1 |
|
|
|
Form of Indemnity Agreement (previously filed as
Exhibit 10.1 to the Companys Form 8-K
(No. 001-13831) filed May 31, 2005 and incorporated
herein by reference) |
|
31 |
.1 |
|
|
|
Certification of Periodic Report by Chief Executive Officer
pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith) |
|
31 |
.2 |
|
|
|
Certification of Periodic Report by Chief Financial Officer
pursuant to Rule 13a-14(a)/15d-14(a) and pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 (filed
herewith) |
|
32 |
.1 |
|
|
|
Certification of Periodic Report by Chief Executive Officer and
Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 (furnished herewith) |
35