QUANTA SERVICES INC - 10-Q Quarterly Report

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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-Q

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(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO .

COMMISSION FILE NO. 001-13831

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QUANTA SERVICES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE 74-2851603
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)

1360 POST OAK BLVD.
SUITE 2100
HOUSTON, TEXAS 77056
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
(713) 629-7600

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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

59,799,848 shares of Common Stock were outstanding as of August 9, 2002. As
of the same date, 1,083,750 shares of Limited Vote Common Stock were
outstanding.

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QUANTA SERVICES, INC. AND SUBSIDIARIES

INDEX

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QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE INFORMATION)

The accompanying notes are an integral part of these condensed
consolidated financial statements.

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QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
(UNAUDITED)

The accompanying notes are an integral part of these condensed
consolidated financial statements.

2

QUANTA SERVICES, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

The accompanying notes are an integral part of these condensed
consolidated financial statements.

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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. Our
comprehensive services include designing, installing, repairing and maintaining
network infrastructure. Reference herein to the "Company" includes Quanta and
its subsidiaries. The consolidated financial statements of the Company include
the accounts of Quanta and its wholly owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.

Since its inception and through 2001, Quanta acquired 86 businesses. The
Company has acquired two additional businesses through June 30, 2002 for an
aggregate consideration of 251,079 shares of common stock and approximately $8.0
million in cash, net of cash acquired.

In the course of its operations, the Company is subject to certain risk
factors, including but not limited to risks related to: rapid technological and
structural changes in the industries the Company serves, internal growth and
operating strategies, economic downturn, the collectibility of receivables,
acquisition integration and financing, significant fluctuations in quarterly
results, contracts, management of growth, dependence on key personnel,
availability of qualified employees, unionized workforce, competition,
recoverability of goodwill, potential exposure to environmental liabilities and
anti-takeover measures.

On May 20, 2002, the Company and Aquila, Inc. (Aquila) announced that they
reached an agreement for Aquila to terminate its proxy contest for control of
Quanta's board of directors. Under the terms of the settlement, Aquila withdrew
all pending litigation and arbitration against Quanta. The companies also agreed
to a standstill whereby Aquila agreed not to purchase shares of Quanta's common
stock on the open market, not to wage another proxy fight for control of Quanta
and Quanta agreed to terminate the Stock Employee Compensation Trust (SECT). We
recorded approximately $5.9 million and $10.5 million in proxy costs for the
three and six months ended June 30, 2002 which are included in selling, general
and administrative expenses.

Interim Condensed Consolidated Financial Information

These unaudited condensed consolidated financial statements have been
prepared pursuant to the rules of the SEC. Certain information and footnote
disclosures, normally included in annual financial statements prepared in
accordance with accounting principles generally accepted in the United States,
have been condensed or omitted pursuant to those rules and regulations. The
Company believes that the disclosures made are adequate to make the information
presented not misleading. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to fairly present the
financial position, results of operations and cash flows with respect to the
interim consolidated financial statements have been included. The results of
operations for the interim periods are not necessarily indicative of the results
for the entire fiscal year. The results of the Company have historically been
subject to significant seasonal fluctuations.

It is suggested that these condensed consolidated financial statements be
read in conjunction with the audited financial statements and notes thereto of
Quanta Services, Inc. and subsidiaries included in the Company's Annual Report
on Form 10-K, which was filed with the SEC on April 1, 2002.

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
net revenues and expenses recognized during the periods presented. The Company
reviews all significant estimates affecting its consolidated financial
statements on a recurring basis and records the effect of any necessary
adjustments prior to their publication. Judgments and estimates are based on the
Company's beliefs and assumptions derived from information available at the time
such judgments and estimates are made. Adjustments made with respect to the use
of these estimates often relate to improved information not previously
available. Uncertainties with respect to such estimates and assumptions are
inherent in the preparation of financial statements. Estimates are primarily
used in the Company's assessment of the allowance for doubtful accounts, fair
value assumptions

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in analyzing goodwill impairment, revenue recognition under
percentage-of-completion accounting and self-insured claims liabilities. The
accompanying consolidated balance sheets include preliminary allocations of the
respective purchase price paid for the companies acquired during the latest 12
months using the "purchase" method of accounting and, accordingly, are subject
to final adjustment.

As of June 30, 2002, the Company has provided allowances for doubtful
accounts of approximately $41.4 million. Certain of the Company's customers,
several of them large public telecommunications carriers, have filed for
bankruptcy in the quarter ended June 30, 2002 or have been experiencing
financial difficulties. Also, a number of the Company's utility customers are
experiencing financial difficulties in the current business climate. Should
additional 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, the Company could
experience reduced cash flows and losses in excess of current allowances
provided. In addition, material changes in our customers revenues or cash flows
could affect our ability to collect amounts due from them.

2. PER SHARE INFORMATION:

Earnings (loss) per share amounts are based on the weighted average number
of shares of common stock and common stock equivalents outstanding during the
period. The weighted average number of shares used to compute basic and diluted
earnings per share for the three and six months ended June 30, 2001 and 2002 is
illustrated below (in thousands):

Pursuant to EITF Topic D-95, "Effect of Participating Convertible Securities
on the Computation of Basic Earnings Per Share," the impact of the Series A
Convertible Preferred Stock has been included in the computation of basic
earnings per share. For the three and six months ended June 30, 2001, stock
options of approximately 1.1 million were excluded from the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the Company's common stock. For the three and
six months ended June 30, 2002, stock options of approximately 8.1 million and
7.9 million, respectively, were excluded from the computation of diluted
earnings per share, as the effect would have been antidilutive. For the three
and six months ended June 30, 2001 and June 30, 2002, the effect of assuming
conversion of the convertible subordinated notes would be antidilutive and they
were therefore excluded from the calculation of diluted earnings per share.

3. INCOME TAXES:

Certain of the businesses the Company has acquired were S corporations for
income tax purposes and, accordingly, any income tax liabilities for the periods
prior to the acquisitions are the responsibility of the respective stockholders.
Effective with the acquisitions, the S corporations converted to C corporations.
Accordingly, an estimated deferred tax liability has been recorded to provide
for the estimated future income tax liability as a result of the difference
between the book and tax bases of the net assets of these former S corporations.
For purposes of these consolidated financial statements, federal and state
income taxes have been provided for the post-acquisition periods.

4. NEW ACCOUNTING PRONOUNCEMENTS:

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 (Opinion No. 30). Applying the

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provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent and
meet the criteria for classification as an extraordinary item. SFAS No. 145 is
effective for the Company beginning January 1, 2003. Upon the adoption of SFAS
No. 145, if the Company records any extraordinary items related to the
extinguishment of debt, the Company will have to reclassify such items in its
prior period statements of operations to conform to the presentation required by
SFAS No. 145. Under SFAS No. 145, the Company will report gains and losses on
the extinguishment of debt in pre-tax earnings rather than in extraordinary
items.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities, such as
restructurings, involuntarily terminating employees and consolidating
facilities, initiated after December 31, 2002.

5. GOODWILL AND OTHER INTANGIBLES:

Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets," which establishes new accounting and reporting
requirements for goodwill and other intangible assets. Under SFAS No. 142, all
goodwill amortization ceased effective January 1, 2002.

Material amounts of recorded goodwill attributable to each of the Company's
reporting units were tested for impairment by comparing the fair value of each
reporting unit with its carrying value. Fair value was determined using a
combination of the discounted cash flow, market multiple and market
capitalization valuation approaches. These impairment tests are required to be
performed at adoption of SFAS No. 142 and at least annually thereafter.
Significant estimates used in the methodologies include estimates of future cash
flows, future short-term and long-term growth rates, weighted average cost of
capital and estimates of market multiples for each of the reportable units. On
an ongoing basis (absent any impairment indicators), the Company expects to
perform impairment tests annually during the fourth quarter after the annual
budgeting process.

Based on the Company's transitional impairment test performed upon adoption
of SFAS No. 142, it recognized a $488.5 million charge, ($445.4 million, net of
tax) to reduce the carrying value of goodwill to the implied fair value of the
Company's reporting units. This impairment is a result of adopting a fair value
approach, under SFAS No. 142, to testing impairment of goodwill as compared to
the previous method utilized, as permitted under accounting standards existing
at that time, in which evaluations of goodwill impairment were made by the
Company using estimated future undiscounted cash flows to determine if goodwill
would be recoverable. Under SFAS No. 142, the impairment adjustment recognized
at adoption of the new rules was reflected as a cumulative effect of change in
accounting principle, net of tax, in the six months ended June 30, 2002.

The Company further recognized an interim non-cash goodwill impairment
charge of approximately $166.6 million for the three months ended June 30, 2002.
Impairment adjustments recognized after adoption are required to be recognized
as operating expenses. The primary factor contributing to the interim impairment
charge was the overall deterioration of the business climate during 2002 in the
markets the Company serves as evidenced by an increased number of bankruptcies
in the telecommunications industry, continued devaluation of several of our
customers debt and equity securities and pricing pressures resulting from
challenges faced by major industry participants. Fair value was determined using
a combination of the discounted cash flow, market multiple and market
capitalization valuation approaches.

A summary of changes in the Company's goodwill for the six months ended June
30, 2002 is as follows (in thousands):

Balance, January 1, 2002 ........... $ 1,036,982
Acquisitions and adjustments ....... 11,826
Transitional impairment ............ (488,472)
Interim impairment ................. (166,580)
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Balance, June 30, 2002 ............. $ 393,756
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The Company has also recorded an Other Intangible Asset of $2.1 million
related to customer relationships. The weighted average life of this intangible
is eight years and accumulated amortization as of June 30, 2002 was
approximately $0.1 million. Estimated annual amortization expense for future
periods is approximately $0.3 million.

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The unaudited results of operations presented below for the three and six
months ended June 30, 2002 and adjusted results of operations for the three and
six months ended June 30, 2001, reflect the operations of the Company had the
non-amortization provisions of SFAS No. 142 been adopted effective January 1,
2001 (in thousands):

6. DEBT:

Credit Facility

The Company has a credit facility with 14 participating banks which matures
on June 14, 2004. As of June 30, 2002, the commitment level of the banks was
$350.0 million. The credit facility is secured by a pledge of all of the capital
stock of the Company's subsidiaries and the majority of the Company's assets and
is to provide funds to be used for working capital and for other general
corporate purposes. The Company's subsidiaries guarantee the repayment of all
amounts due under the facility and the facility restricts pledges on all
material assets. As of June 30, 2002, amounts borrowed under the credit facility
bore interest at a rate equal to either (a) the London Interbank Offered Rate
(the 30 day LIBOR rate was 1.88% at June 30, 2002) plus 1.00% to 2.00%, as
determined by the ratio of the Company's total funded debt to EBITDA (as defined
in the credit facility) or (b) the bank's prime rate (which was 4.75% at June
30, 2002) plus up to 0.25%, as determined by the ratio of the Company's total
funded debt to EBITDA. Commitment fees of 0.25% to 0.50%, based on the Company's
total funded debt to EBITDA, were due on any unused borrowing capacity under the
credit facility. The credit facility contained usual and customary covenants for
a credit facility of its nature, including the prohibition of the payment of
dividends on common stock, certain financial ratios and indebtedness covenants
and the consent of the lenders for acquisitions exceeding a certain level of
cash consideration. As of June 30, 2002, $123.0 million was borrowed under the
credit facility, and the Company had $62.3 million of letters of credit
outstanding, resulting in a borrowing availability of $164.7 million under the
credit facility.

On August 12, 2002, the Company amended the credit facility. As of August
12, 2002, the commitment of the banks under the credit facility was reduced to
$275.0 million. The commitment will remain in effect at $275.0 million through
March 31, 2003, then reduce to $250.0 million and remain in effect at such
amount through December 31, 2003. Effective January 1, 2004, the credit facility
will reduce to $225.0 million and remain in effect at such amount through the
remainder of the term of the credit facility, which matures on June 14, 2004.
Amounts borrowed under the credit facility will bear interest at a rate equal to
either (a) LIBOR plus 1.50% to 3.50%, as determined by the ratio of the
Company's total funded debt to EBITDA or (b) the bank's prime rate plus up to
2.00%, as determined by the ratio of the Company's total funded debt to EBITDA.
Commitment fees of 0.375% to 0.50%, based the Company's total funded debt to
EBITDA, are due on any unused borrowing capacity under the credit facility. The
amended credit

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facility is less restrictive with respect to certain financial ratios and
indebtedness covenants, including the maximum funded debt to EBITDA, maximum
senior debt to EBITDA and minimum interest coverage ratios. However, the
amendment is more restrictive with respect to the Company's capital expenditures
and asset sales, prohibits any stock repurchase programs or acquisitions, and
requires a mandatory reduction in the banks' commitment by a portion of the
proceeds from asset sales or upon the issuance of additional debt in excess of
$15.0 million. As of August 9, 2002, we had approximately $131.9 million in
outstanding borrowings under the credit facility and $62.3 million of letters of
credit outstanding, resulting in a borrowing availability of $80.8 million under
the credit facility, as amended.

Senior Secured Notes

In 2000, the Company closed a private placement of $210.0 million principal
amount of senior secured notes primarily with insurance companies. The senior
secured notes have maturities ranging from three to eight years and, as of June
30, 2002, had a weighted average interest rate of 8.41%. On August 12, 2002, the
Company amended the senior secured notes. The senior secured notes, as amended,
have financial covenants and restrictions substantially identical to the credit
facility and a weighted average interest rate of 9.91%. The amendment also
requires a mandatory prepayment of a portion of the proceeds of any asset sales
or upon the issuance of additional debt in excess of $15.0 million. In addition,
the senior secured notes carry a make-whole provision customary for this type of
debt instrument on prepayment of principal, including any mandatory prepayments.
Pursuant to an intercreditor agreement, the senior secured notes rank equally in
right of repayment with indebtedness under the Company's credit facility.

In connection with the amendments of both the credit facility and the senior
secured notes completed in August 2002, the Company incurred additional debt
issuance costs estimated at approximately $3.5 million. The Company will account
for these costs in accordance with EITF 98-14 for the credit facility and EITF
96-19 for the senior secured notes. Accordingly, a majority of these costs will
be capitalized and amortized over the remaining term of the respective
agreements, as amended. As a result of the amendment decreasing the commitment
amount of the credit facility, in accordance with EITF 98-14, the Company will
be expensing a portion of the unamortized debt issuance costs as interest
expense in the third quarter of 2002.

The Company has specifically provided for non-cash goodwill impairment
charges of up to $800 million in its credit facility and senior secured notes
resulting from the adoption of SFAS No. 142. Goodwill impairment charges do not
violate any covenants in the Company's convertible subordinated notes.

Convertible Subordinated Notes

During the third quarter of 2000, the Company issued $172.5 million
principal amount of convertible subordinated notes. The convertible subordinated
notes bear interest at 4.0% per year and are convertible into shares of the
Company's common stock at a price of $54.53 per share. The convertible
subordinated notes require semi-annual interest payments beginning December 31,
2000, until the notes mature on July 1, 2007. The Company has the option to
redeem the notes beginning July 3, 2003; however, redemption is currently
prohibited by the Company's credit facility and senior secured notes.

7. STOCKHOLDERS' EQUITY:

Series A Convertible Preferred Stock

In September 1999, the Company entered into a securities purchase agreement
with Aquila pursuant to which the Company issued 1,860,000 shares of Series A
Convertible Preferred Stock, $.00001 par value per share, for an initial
investment of $186.0 million, before transaction costs. In September 2000,
Aquila converted 7,924,805 shares of common stock into an additional 1,584,961
shares of Series A Convertible Preferred Stock at a rate of one share of Series
A Convertible Preferred Stock for five shares of common stock. The holders of
the Series A Convertible Preferred Stock are entitled to receive dividends in
cash at a rate of 0.5% per annum on an amount equal to $53.99 per share, plus
all unpaid dividends accrued. In addition to the preferred dividend, the holders
are entitled to participate in any cash or non-cash dividends or distributions
declared and paid on the shares of common stock, as if each share of Series A
Convertible Preferred Stock had been converted into common stock at the
applicable conversion price immediately prior to the record date for payment of
such dividends or distributions. However, holders of Series A Convertible
Preferred Stock will not participate in non-cash dividends or distributions if
such dividends or distributions cause an adjustment in the price at which Series
A Convertible Preferred Stock converts into common stock. At any time after the
sixth anniversary of the issuance of the Series A Convertible Preferred Stock,
if the closing price per share of the Company's common stock is greater than
$20.00, then the Company may terminate the preferred dividend. At any time after
the sixth anniversary of the issuance of the Series A Convertible Preferred
Stock, if the closing price per share of the Company's common stock is equal to
or less than $20.00, then the preferred dividend may, at the option of Aquila,
be adjusted to the then "market coupon rate," which shall equal the Company's
after-tax cost of obtaining financing, excluding common stock, to replace
Aquila's investment in the Company.

Aquila is entitled to that number of votes equal to the number of shares of
common stock into which the outstanding shares of Series A Convertible Preferred
Stock are then convertible on any matter voted on by the holders of common
stock. Subject to certain limitations, Aquila is entitled to elect up to three
of the total number of directors of the Company. All or any portion of the
outstanding shares of Series A Convertible Preferred Stock may, at the option of
Aquila, be converted at any time into fully paid and non-assessable

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shares of common stock. The conversion price currently is $20.00, yielding
17,224,805 shares of common stock upon conversion of all outstanding shares of
Series A Convertible Preferred Stock. The conversion price may be adjusted under
certain circumstances.

Stockholder Rights Plan

On March 8, 2000, the board of directors of the Company adopted a
Stockholder Rights Plan. On November 15, 2001, the board of directors amended
the Stockholder Rights Plan and on November 18, 2001 and December 1, 2001, the
board of directors ratified such amendments to the Stockholder Rights Plan.
Under the Stockholder Rights Plan, a dividend of one Preferred Stock Purchase
Right (the Rights) was declared on each outstanding share of the Company's
common stock and Series A Convertible Preferred Stock (on an as-converted basis)
for holders of record as of the close of business on March 27, 2000. The Rights
also attach to all common stock and Series A Convertible Preferred Stock issued
after March 27, 2000. No separate certificates evidencing the Rights will be
issued unless and until they become exercisable. Each Right has an initial
exercise price of $153.33. The Rights will be exercisable if a person or group
(other than Aquila) becomes the beneficial owner of, or tenders for, 15% or more
of the Company's common shares. The Rights also will be exercisable if Aquila,
together with any affiliates or associates, becomes the beneficial owner of, or
tenders for more than 39.0% of the outstanding shares of the Company's common
stock on an as-converted basis, or if there is a change of control of Aquila.
Upon a "Flip-In Event" as defined in the Stockholder Rights Plan, the Rights
issued pursuant to the Stockholder Rights Plan would be exercisable for Series B
Junior Participating Preferred Stock of the Company at a discount. In addition,
the Rights held by an "Acquiring Person" as defined in the Stockholder Rights
Plan will become exercisable upon a Flip-In Event for Series C Junior
Convertible Preferred Stock. The Rights will expire in ten years.

On February 12, 2002, the board of directors further amended the Stockholder
Rights Plan to provide that only outstanding shares of the Company's common
stock and Series A Convertible Preferred Stock are to be counted in calculating
the number of shares that Aquila could acquire while remaining an exempt person
under the Stockholder Rights Plan. As amended, the Stockholder Rights Plan
permits Aquila to beneficially own up to 39.0% of the outstanding shares of the
Company's common stock (assuming conversion of all outstanding shares of the
Company's Series A Convertible Preferred Stock) or such greater percentage as it
may own as of the earlier of notice to Aquila of, or public announcement of, the
February 2002 amendment.

On March 13, 2002, the board of directors further amended the Stockholder
Rights Plan to render the Rights inapplicable to an offer for all outstanding
shares of the Company's common stock in a manner that treats all stockholders
equally if upon completion of the offer, the offeror owns shares of the
Company's voting stock representing 75% or more of the then outstanding voting
stock. The Stockholder Rights Plan as so amended would also require the bidder
to commit irrevocably to purchase all shares not tendered at the same price paid
to the tendering stockholders.

As part of the settlement of the proxy contest with Aquila, the Company
agreed with Aquila to amend and restate the Stockholder Rights Plan (or to adopt
a new rights plan) so that the Rights will become exercisable if a person or
group (other than Aquila) becomes the beneficial owner of 15% of the voting
power of the Company's capital stock, or if Aquila's beneficial ownership level
in the Company increases from its level of beneficial ownership as of May 20,
2002.

Restricted Stock

Under the 2001 Stock Incentive Plan, 72,701 shares of the Company's common
stock were issued in 2001 at a price of $27.51 per share, which reflected the
fair market value of the common stock at the date of issuance. The shares of
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 72,701 shares of the Company's common stock pursuant to
the 2001 Stock Incentive Plan, an unamortized compensation expense equivalent to
the market value of the shares on the date of grant was charged to stockholders'
equity and will be amortized over the six year restriction period. The
compensation expense taken with respect to the restricted shares during the
three and six months ended June 30, 2002 was approximately $62,000 and $125,000,
respectively.

Stock Employee Compensation Trust

On March 13, 2002, the Company's board of directors approved the creation of
a SECT, to fund certain of the Company's future employee benefit obligations
using the Company's common stock. The SECT was established by selling 8.0
million shares of the Company's common stock, including the 986,000 shares of
treasury stock the Company purchased in 2001 pursuant to the Company's

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Stock Repurchase Plan, to the SECT in exchange for a promissory note plus an
amount in cash equal to the aggregate par value of the shares. As part of the
settlement of the proxy contest with Aquila, on May 20, 2002, the Company
terminated the SECT and repurchased the 7,911,069 shares of common stock
remaining in the SECT by canceling the promissory note. The 7,911,069 shares
were transferred into treasury stock on May 21, 2002, and were retired on June
28, 2002.

Treasury Stock

The board of directors of the Company authorized a Stock Repurchase Plan
under which up to $75.0 million of the Company's common stock could be
repurchased. Under the Stock Repurchase Plan, the Company could conduct
purchases through open market transactions in accordance with applicable
securities laws. During the second quarter of 2002, the Company purchased
924,500 shares of its common stock for approximately $11.8 million under the
Stock Repurchase Plan. As of July 1, 2002, the independent committee of Quanta's
board of directors determined to cease the Stock Repurchase Plan. As a result of
the credit facility and senior secured notes amendments, any further stock
repurchases are prohibited.

8. SEGMENT INFORMATION:

The Company operates in one reportable segment as a specialty contractor.
The Company provides comprehensive network solutions to the electric power, gas,
telecommunications and cable television industries, including designing,
installing, repairing and maintaining network infrastructure. Each of these
services is provided by various Company 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.

The Company does not have significant operations or long-lived assets in
countries outside of the United States.

9. RELATED PARTY TRANSACTIONS:

In September 1999, the Company entered into a strategic alliance agreement
with Aquila. Under the terms of the strategic alliance agreement, Aquila will
use the Company, subject to the Company's ability to perform the required
services, as a preferred contractor in outsourced transmission and distribution
infrastructure installation and maintenance and natural gas distribution,
installation and maintenance in all areas serviced by Aquila, provided that the
Company provides such services at a competitive cost. The strategic alliance
agreement has a term of six years.

10. COMMITMENTS AND CONTINGENCIES:

Litigation

On December 21, 2001, a purported stockholder of Quanta filed a putative
class action and derivative complaint against directors Vincent D. Foster, Jerry
J. Langdon, Louis C. Golm, James R. Ball, John R. Colson, John R. Wilson and
Gary A. Tucci. The complaint also named Quanta as a nominal defendant. The
complaint alleged that the named directors breached their fiduciary duties by
taking certain actions, including the Stockholder Rights Plan amendment, in
response to the announcement by Aquila that it intended to acquire control of
Quanta through open market purchases of the Company's shares. The complaint
sought an order rescinding any actions taken by the named directors in response
to the announcement by Aquila and requiring the directors to take steps
necessary to maximize the value of Quanta. The complaint further sought damages
from the named directors on behalf of a class of stockholders and purportedly on
behalf of Quanta for the alleged harm inflicted by the actions of the named
directors. On January 22, 2002, Quanta and the named directors filed a motion to
dismiss the stockholder complaint. There has been no activity since January
2002. Although the ultimate outcome and liability, if any, cannot be determined,
management, after consultation and review with counsel, believes that the facts
do not support the plaintiff's claims and that the Company and the named
directors have meritorious defenses.

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On March 21, 2002, Aquila filed a complaint in the Delaware Court of
Chancery naming Quanta and each member of the special committee of the Company's
board of directors, consisting of all directors other than those designated by
Aquila, as defendants. The Aquila complaint alleged that the special committee
breached its fiduciary duty in connection with the March 13, 2002 adoption of
the Company's SECT and the new employment agreements entered into with certain
of the Company's employees and that under Delaware statutory law the shares sold
to the SECT were not entitled to vote. As part of the settlement of Aquila's
proxy contest, this lawsuit was dismissed with prejudice.

In addition, certain subsidiaries of the Company are involved in disputes or
legal actions arising in the ordinary course of business. Management does not
believe the outcome of such legal actions will have a material adverse effect on
the Company's financial position or results of operations.

Self-Insurance

The Company is insured for workers' compensation, employer's liability, auto
liability and general liability claims, subject to a deductible, as of June 30,
2002, of $500,000 per accident or occurrence. On August 1, 2002, upon renewal of
the Company's policies, the deductible was increased to $1,000,000 per
occurrence. In addition, effective January 1, 2002, the Company consolidated the
various non-union employee related health care benefits plans that existed at
certain of its subsidiaries into one corporate plan that is subject to a
deductible of $250,000 per claimant per year. Losses up to the deductible
amounts are accrued based upon the Company's estimates of the ultimate liability
for claims incurred and an estimate of claims incurred but not reported. The
accruals are based upon known facts and historical trends and management
believes such accruals to be adequate. At December 31, 2001 and June 30, 2002,
the amounts accrued for self-insured claims were $28.3 million and $39.6
million, respectively, with $14.7 million and $24.4 million, respectively,
considered to be long-term and included in Other Non-Current Liabilities.

Derivatives

SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended, was effective for the Company on January 1, 2001. These
statements establish accounting and reporting standards requiring that all
derivative instruments be recorded as either assets or liabilities measured at
fair value. These statements also require that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met.

In October 2001, the Company entered into a forward purchase contract
(Contract A) with settlements through 2006, in order to secure pricing on
anticipated gas requirements related to a project in process at December 31,
2001 that was substantially complete at March 31, 2002. The objective was to
mitigate the variability in the price of natural gas by securing the price the
Company will have to pay the Contract A counterparty. On March 29, 2002, the
Company entered into a sub-services agreement with one of its customers (the
Counterparty Contract) whereby the customer assumed all obligations associated
with Contract A. If the customer is unable to fulfill its obligations under the
Counterparty Contract, the Company will be responsible for settling the
obligations of Contract A. As of June 30, 2002, the fair value of Contract A and
the Counterparty Contract was a receivable of $1.2 million and a payable of $1.2
million, respectively.

In April 2002, the Company entered into another forward purchase contract
(Contract B) with settlements through March 2003, in order to secure pricing on
anticipated gas requirements related to a project in process at June 30, 2002.
The objective was to mitigate the variability in the price of natural gas by
securing the price the Company will have to pay the Contract B counterparty. As
of June 30, 2002, the fair value of Contract B was $354,000.

Performance Bonds

In certain circumstances, the Company is required to provide performance
bonds in connection with its contractual commitments.

Contingent Consideration

The Company is subject to an agreement with the former owners of an
operating unit that was acquired in 2000. Under the terms of this agreement, and
depending upon the ultimate profitability of certain contracts obtained by the
operating unit, the Company may be required to pay additional consideration to
such former owners with a combination of common stock and cash. At June 30,
2002, the amount of additional consideration based on performance to date was
approximately $16.9 million. This amount could be adjusted significantly higher
or lower over the term of the agreement.

11

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

INTRODUCTION

The following discussion should be read in conjunction with the Condensed
Consolidated Financial Statements and related notes thereto included elsewhere
in this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K,
which was filed with the SEC on April 1, 2002, which is available at the SEC's
Web site at www.sec.gov.

We derive our revenues from one reportable segment by providing specialized
contracting services and offering comprehensive network solutions. Our customers
include electric power, gas, telecommunications and cable television companies,
as well as commercial, industrial and governmental entities.

We enter into contracts principally on the basis of competitive unit price
or fixed price bids, 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 also perform services on a cost-plus or
time and materials basis. We complete most installation projects within one
year, while we frequently provide maintenance and repair work under open-ended,
unit price master service agreements which are renewable annually. We generally
recognize revenue when services are performed except when work is being
performed under fixed price contracts. We typically record revenues from fixed
price contracts on a percentage-of-completion basis, using the cost-to-cost
method based on the percentage of total costs incurred to date in proportion to
total estimated costs to complete the contract. Some of our customers require us
to post performance and payment bonds upon execution of the contract, depending
upon the nature of the work to be performed. Our fixed price contracts often
include payment provisions pursuant to which the customer withholds a 5% to 10%
retainage from each progress payment and remits the retainage to us upon
completion and approval of the work.

Cost of services consists primarily of salaries, wages and benefits to
employees, depreciation, fuel and other vehicle expenses, equipment rentals,
subcontracted services, insurance, facilities expenses, materials and parts and
supplies. Our gross margin, which is gross profit expressed as a percentage of
revenues, is typically higher on projects where labor, rather than materials,
constitutes a greater portion of the cost of services. We can predict materials
costs more accurately than labor costs. Therefore, to compensate for the
potential variability of labor costs, we seek to maintain higher margins on our
labor-intensive projects. As of June 30, 2002, we had a deductible of $500,000
per accident or occurrence related to workers' compensation, employer's
liability, automobile and general liability claims. On August 1, 2002, upon
renewal of our policies, the deductible was increased to $1,000,000 per
occurrence. In addition, effective January 1, 2002, we consolidated the various
non-union employee related health care benefits plans that existed at certain of
our subsidiaries into one corporate plan that is subject to a deductible of
$250,000 per claimant per year. Fluctuations in insurance accruals related to
these deductibles could have an impact on operating margins in the period in
which such adjustments are made.

Selling, general and administrative expenses consist primarily of
compensation and related benefits to management, administrative salaries and
benefits, marketing, office rent and utilities, communications, professional
fees and bad debt expense. Selling, general and administrative expenses can be
impacted by our customers' inability to pay for services performed.

12

SIGNIFICANT BALANCE SHEET CHANGES

Total assets decreased approximately $636.3 million as of June 30, 2002
compared to December 31, 2001. This decrease is primarily due to the following:

o Goodwill and other intangibles, net decreased $641.3 million due to
impairments of goodwill pursuant to Statement of Financial Accounting
Standard (SFAS) No. 142, "Goodwill and Other Intangible Assets," which
requires goodwill to be tested for impairment by comparing the fair
value of each subsidiary with its carrying value.

o Accounts receivable and costs and estimated earnings in excess of
billings on uncompleted contracts decreased $30.3 million primarily due
to lower levels of revenue during the first six months of 2002,
collections on accounts that were outstanding at December 31, 2001 and
an increase of $5.6 million in the allowance for doubtful accounts to
reserve for certain customers that have declared bankruptcy during 2002.

o Inventories increased $6.1 million due primarily to $5.0 million paid
for deposits for turbines to be used in future projects, and $1.1
million due to the purchase of cable to perform work on master service
contracts.

o Property and equipment, net increased $4.3 million due to expenditures
for equipment necessary to perform contracts and equipment obtained
through the acquisition of two companies during the first six months of
2002, offset by depreciation expense recorded during the period.

o Other assets, net increased $22.2 million due primarily to notes
receivable from one of our customers. We have agreed to long-term
payment terms until this customer is able to secure alternative
financing. The receivables are partially secured and bear interest at 9%
per year. At June 30, 2002, the total amount due under these
arrangements was $45.6 million, with $40.6 million classified as
non-current.

As of June 30, 2002, total liabilities decreased approximately $21.7 million
and stockholders' equity decreased approximately $614.6 million. These
fluctuations were primarily due to the following:

o Deferred income taxes and other non-current liabilities decreased $33.9
million primarily as a result of the recording of a deferred tax asset
for the tax benefit related to the impairments of goodwill pursuant to
SFAS No. 142, partially offset by increases in the
long-term portion of self-insurance reserves.

o Long-term debt, net of current maturities increased $10.9 million due
primarily to borrowings made against our credit facility for the
purchase of two companies during the first six months of 2002.

o Stockholders' equity decreased $614.6 million during the first six
months of 2002. This was primarily the result of a net loss attributable
to common stock of $612.8 million associated with the impairments of
goodwill recorded pursuant to SFAS No. 142 and the purchase of
approximately $11.8 million of treasury stock under the Company's Stock
Repurchase Plan, partially offset by the issuance of approximately $3.7
million in shares of common stock pursuant to the employee stock
purchase plan and the acquisition of two companies which resulted in
increased additional paid in capital of $3.4 million.

13

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 AND SIX MONTHS ENDED JUNE 30, 2002, COMPARED TO THE THREE AND SIX MONTHS
ENDED JUNE 30, 2001.

Revenues. Revenues decreased $70.8 million and $140.6 million or, 14.1% and
13.8%, to $432.5 million and $881.7 million for the three and six months ended
June 30, 2002. The decrease was attributable to lower revenues, primarily from
telecommunications and cable customers, due in part to the continued decrease in
capital spending by our customers, the inability of certain of these customers
to raise new capital, bankruptcies of certain customers and the overall downturn
in the national economy, which have negatively impacted the award of work to
specialty contractors. This decrease was partially offset by a full period of
contributed revenues for the three and six months ended June 30, 2002 for those
companies acquired during 2001.

Gross profit. Gross profit decreased $62.6 million and $95.9 million, or
56.5% and 43.6%, to $48.2 million and $123.8 million for the three and six
months ended June 30, 2002. As a percentage of revenues, gross margin decreased
from 22.0% for the three months ended June 30, 2001, to 11.1% for the three
months ended June 30, 2002. This decrease in gross margin resulted primarily
from declining volumes due to economic factors noted above, significantly lower
margins on work performed due to increased pricing pressures and lower asset
utilization. Gross margin decreased from 21.5% for the six months ended June 30,
2001, to 14.0% for the six months ended June 30, 2002. The decrease in gross
margins for the six months ended June 30, 2002, resulted from the factors noted
above for the three months ended June 30, 2002, and higher than normal
transition costs on one telecommunications outsourcing contract.

Selling, general and administrative expenses. Selling, general and
administrative expenses decreased $1.0 million and increased $7.7 million, or
1.7% and 7.5%, to $59.5 million and $110.2 million for the three and six months
ended June 30, 2002. During the three months ended June 30, 2002, we recorded
$8.4 million in bad debt expense and $5.9 million in additional proxy costs.
During the three months ended June 30, 2001, we recorded $19.4 million in
charges including $16.2 million in bad debt expense and $3.2 million in charges
associated with the realignment of field personnel and discontinuance of
negotiations regarding certain acquisitions. Absent the charges discussed above,
selling, general and administrative expenses for the three months ended June 30,
2002 increased approximately $4.1 million, primarily due to the inclusion of a
full three months of costs associated with companies acquired after June 2001,
higher professional fees due to increased collection efforts on troubled
accounts and higher advertising and travel costs associated with increased
marketing efforts. For the six months ended June 30, 2002, selling, general and
administrative expenses increased due to the impact of the costs previously
described and proxy costs incurred in the first quarter of 2002 of $4.6 million.

Goodwill impairment. During the second quarter of 2002, we recognized an
interim non-cash SFAS No. 142 goodwill impairment charge of $166.6 million. Any
interim impairment adjustments recognized after adoption are required to be
recognized as operating expenses. The primary factor contributing to the interim
impairment charge was the overall deterioration of the business climate during
2002 in the markets we serve.

14

Interest expense. Interest expense decreased $1.1 million and $2.5 million,
or 12.1% and 13.5%, to $8.0 million and $15.9 million, for the three and six
months ended June 30, 2002, due to lower average levels of debt outstanding
under the credit facility for the three and six months ended June 30, 2002 and
lower average interest rates.

Provision (benefit) for income taxes. The benefit for income taxes was $7.6
million and $0.3 million for the three and six months ended, June 30, 2002, with
an effective tax rate of (4.1%) and 0.2%, respectively, compared to a provision
of $17.3 million and $39.4 million for the three and six months ended June 30,
2001, with effective tax rates of 50.9% and 46.1%, respectively. The lower tax
rate in 2002 reflects the elimination of goodwill amortization expense according
to the current accounting standard, the majority of which had been
non-deductible in 2001. Our 2002 annual tax rate is expected to be approximately
0.0% due to the net realizable benefit relating to the goodwill impairment
charge offset by tax expense on permanent differences.

Cumulative effect of change in accounting principle, net of tax. Based on
our transitional impairment test performed upon adoption of SFAS No. 142, we
recognized a charge, net of tax, of $445.4 million to reduce the carrying value
of the goodwill of our reporting units to its implied fair value. Under SFAS No.
142, the impairment adjustment recognized at adoption of the new rule was
reflected as a cumulative effect of change in accounting principle in the six
months ended June 30, 2002.

Net Income (loss). Net income decreased $193.9 million and $658.3 million to
net losses of $177.2 million and $612.4 million for the three and six months
ended June 30, 2002, compared to net income of $16.7 million and $46.0 million
for the three and six months ended June 30, 2001, primarily due to impairments
of goodwill recorded pursuant to SFAS No. 142 and decreased gross profit as
described above.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2002, we had cash and cash equivalents of $4.6 million,
working capital of $312.8 million and long-term debt of $511.2 million, net of
current maturities. Our long-term debt balance at that date included borrowings
of $123.0 million under our credit facility, $210.0 million of senior secured
notes, $172.5 million of convertible subordinated notes and $5.7 million of
other debt. In addition, we had $62.3 million of letters of credit outstanding
under the credit facility.

During the six months ended June 30, 2002, operating activities provided net
cash flow of $52.8 million. We used net cash in investing activities of $56.8
million, including $33.4 million used for capital expenditures, $8.0 million
used for the purchase of two businesses, net of cash acquired, and $17.2 million
in additional notes receivable issued during the six months. Financing
activities provided a net cash flow of $2.3 million, resulting primarily from
$13.7 million of borrowings under our credit facility, partially offset by $11.8
million from the purchase of common stock under the Stock Repurchase Plan.

On August 12, 2002, we amended our credit facility. As of August 12, 2002,
the commitment of the banks under the credit facility was reduced to $275.0
million. The commitment will remain in effect at $275.0 million through March
31, 2003, then reduce to $250.0 million and remain in effect at such amount
through December 31, 2003. Effective January 1, 2004, the credit facility will
reduce to $225.0 million and remain in effect at such amount through the
remainder of the term of the credit facility, which matures on June 14, 2004.
Amounts borrowed under the credit facility will bear interest at a rate equal to
either (a) LIBOR plus 1.50% to 3.50%, as determined by the ratio of our total
funded debt to EBITDA or (b) the bank's prime rate plus up to 2.00%, as
determined by the ratio of our total funded debt to EBITDA. Commitment fees of
0.375% to 0.50%, based on our total funded debt to EBITDA, are due on any unused
borrowing capacity under the credit facility. The amended credit facility is
less restrictive with respect to certain financial ratios and indebtedness
covenants, including the maximum funded debt to EBITDA, maximum senior debt to
EBITDA and minimum interest coverage. However, the amendment is more restrictive
with respect to our capital expenditures and asset sales, prohibits any stock
repurchase programs or acquisitions, and requires mandatory reduction in the
banks' commitment by a portion of the proceeds from asset sales or upon the
issuance of additional debt in excess of $15.0 million. As of August 9, 2002, we
had approximately $131.9 million in outstanding borrowings under the credit
facility and $62.3 million of letters of credit outstanding, resulting in a
borrowing availability of $80.8 million under the credit facility, as amended.
Our current borrowing rate is LIBOR plus 3.50%.

As of June 30, 2002, we had $210.0 million of senior secured notes which
have maturities ranging from three to eight years with a weighted average
interest rate of 8.41%. On August 12, 2002, we amended the senior secured notes.
The senior secured notes, as amended, have financial covenants and restrictions
substantially identical to those under the credit facility and a weighted
average interest rate of 9.91%. The amendment also requires a mandatory
prepayment of a portion of the proceeds of any asset sales or upon the issuance
of additional debt in excess of $15.0 million. In addition, the senior secured
notes carry a make-whole provision customary for this type of debt instrument on
prepayment of principal, including, any mandatory prepayments. Pursuant to an
intercreditor agreement, the senior secured notes rank equally in right of
repayment with indebtedness under our credit facility.

15

In connection with the amendments of both the credit facility and the senior
secured notes in August 2002, we incurred additional debt issuance costs
estimated at approximately $3.5 million. We will account for these costs in
accordance with EITF 98-14 for the credit facility and EITF 96-19 for the senior
secured notes. Accordingly, a majority of these costs will be capitalized and
amortized over the remaining term of the respective agreements, as amended. As a
result of the amendment decreasing the commitment amount of the credit facility,
in accordance with EITF 98-14, we will be expensing a portion of the unamortized
debt issuance costs as interest expense in the third quarter of 2002.

As of June 30, 2002, we had $172.5 million in convertible subordinated notes
that bear interest at 4.0% per year and 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. The convertible subordinated notes require semi-annual
interest payments until the notes mature on July 1, 2007. We have the option to
redeem some or all of the convertible subordinated notes beginning July 3, 2003
at specified redemption prices, together with accrued and unpaid interest. If
certain fundamental changes occur, as described in the indenture under which we
issued the convertible subordinated notes, holders of the convertible
subordinated notes may require us to purchase all or part of their notes at a
purchase price equal to 100% of the principle amount, plus accrued and unpaid
interest.

We anticipate that our cash flow from operations and our credit facility
will provide sufficient cash to enable us to meet our working capital needs,
debt service requirements and planned capital expenditures for property and
equipment for at least the next 12 months. However, further deterioration in the
markets we serve, coupled with the lowered capacity under our credit facility,
may negatively impact our ability to meet such needs.

We have specifically provided for non-cash goodwill impairment charges up to
$800 million in our credit facility and senior secured notes resulting from the
adoption of SFAS No. 142. Goodwill impairment charges do not violate any
covenants in our convertible subordinated notes.

Other Commitments. 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. We may decide to cancel or terminate a lease before the end of its
term. Typically we are liable to the lessor for the remaining lease payments
under the term of the lease.

Some customers require us to post letters of credit to guarantee performance
under our contracts and to ensure payment to our subcontractors and vendors
under those contracts. Certain of our vendors also require letters of credit to
ensure reimbursement for amounts they are disbursing on behalf of us, such as to
beneficiaries under our self-funded insurance programs. 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. To date, we
have not had a claim made against a letter of credit that resulted in payments
by the issuer of the letter of credit or by us and do not believe that it is
likely that any claims will be made under a letter of credit in the foreseeable
future.

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. To
date, we have not had any significant reimbursements to our 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.

Our future contractual obligations, including interest under capital leases,
are as follows (in thousands):

16

We also had $62.3 million in letters of credit outstanding under our credit
facility primarily to secure obligations under our casualty insurance program at
June 30, 2002. While not actual borrowings, letters of credit do reflect
potential liabilities under our credit facility and therefore are treated as a
use of borrowing capacity under our credit facility. These are irrevocable
stand-by letters of credit with maturities expiring at various times throughout
2002. Upon maturity, it is expected that the majority of these letters of credit
will be renewed for subsequent one year periods. Borrowing availability under
our credit facility was $164.7 million as of June 30, 2002 and was $80.8 under
the credit facility, as amended, as of August 9, 2002.

Stock Repurchase Plan. Our board of directors authorized a Stock Repurchase
Plan under which up to $75.0 million of our common stock could be repurchased.
Under the Stock Repurchase Plan, we could conduct purchases through open market
transactions in accordance with applicable securities laws. During 2001, we
purchased 986,000 shares of common stock for approximately $15.3 million. On
March 13, 2002, the 986,000 shares of common stock were sold to the Stock
Employee Compensation Trust (SECT), and were no longer considered treasury
stock. These shares were subsequently retired on June 28, 2002, after we
terminated the SECT. During the second quarter of 2002, Quanta purchased 924,500
shares of its common stock for approximately $11.8 million under the Stock
Repurchase Plan. As of July 1, 2002, the independent committee of our board of
directors determined to cease the Stock Repurchase Plan. As a result of the
credit facility and senior secured notes amendments, any further stock
repurchases are prohibited.

Stock Employee Compensation Trust. On March 13, 2002, our board of directors
approved the creation of a SECT, to fund certain of our future employee benefit
obligations using our common stock. The SECT was established by selling 8.0
million shares of our common stock, including the 986,000 shares of treasury
stock we purchased during 2001 pursuant to our Stock Repurchase Plan, to the
SECT in exchange for a promissory note plus an amount in cash equal to the
aggregate par value of the shares. As part of the settlement of the proxy
contest with Aquila, on May 20, 2002, we terminated the SECT and repurchased the
7,911,069 shares of common stock remaining in the SECT by canceling the
promissory note. The 7,911,069 shares transferred into treasury stock on May 21,
2002 and were retired on June 28, 2002.

Litigation. On December 21, 2001, a purported stockholder of Quanta filed a
putative class action and derivative complaint against directors Vincent D.
Foster, Jerry J. Langdon, Louis C. Golm, James R. Ball, John R. Colson, John R.
Wilson and Gary A. Tucci. The complaint also named Quanta as a nominal
defendant. The complaint alleged that the named directors breached their
fiduciary duties by taking certain actions, including the Stockholder Rights
Plan amendment, in response to the announcement by Aquila that it intended to
acquire control of Quanta through open market purchases of our shares. The
complaint sought an order rescinding any actions taken by the named directors in
response to the announcement by Aquila and requiring the directors to take steps
necessary to maximize the value of Quanta. The complaint further sought damages
from the named directors on behalf of a class of stockholders and purportedly on
behalf of Quanta for the alleged harm inflicted by the actions of the named
directors. On January 22, 2002 Quanta and the named directors filed a motion to
dismiss the stockholder complaint. There has been no activity since January
2002. Although the ultimate outcome and liability, if any, cannot be determined,
management, after consultation and review with counsel, believes that the facts
do not support the plaintiff's claims and that Quanta and the named directors
have meritorious defenses.

On March 21, 2002, Aquila filed a complaint in the Delaware Court of
Chancery naming Quanta and each member of the special committee of our board of
directors, consisting of all directors other than those designated by Aquila, as
defendants. The Aquila complaint alleged that the special committee breached its
fiduciary duty in connection with the March 13, 2002 adoption of the SECT and
the new employment agreements entered into with certain of our employees and
that under Delaware statutory laws the shares sold to the SECT were not entitled
to vote. As part of the settlement of Aquila's proxy contest, this lawsuit was
dismissed with prejudice.

In addition, certain of our subsidiaries are involved in disputes or legal
actions arising in the ordinary course of business. We do not believe the
outcome of such legal actions will have a material adverse effect on our
financial position or results of operations.

Acquisitions. During the first six months of 2002, we acquired two companies
for an aggregate consideration of 251,079 shares of common stock and
approximately $8.0 million in cash, net of cash acquired. The cash portion of
such consideration was provided by proceeds from borrowings under the credit
facility. In connection with the amendment of our credit facility and senior
secured notes, we are prohibited from making additional acquisitions.

Concentration of Credit Risk. We grant credit, generally without collateral,
to our customers, which include electric power and gas companies,
telecommunications and cable television system operators, governmental entities,
general contractors, builders and owners and managers of commercial and
industrial properties located primarily in the United States. Consequently, we
are subject to

17

potential credit risk related to changes in business and economic factors
throughout the United States. We generally are entitled for work performed and
have certain lien rights on our services provided. As previously discussed
herein, our customers in the telecommunications business have experienced
significant financial difficulties and, in several instances, filed for
bankruptcy. Also, our utility customers are experiencing business challenges in
the current business climate. These economic conditions expose us to increased
risk related to collectibility on services we have performed. No customer
accounted for more than 10% of accounts receivable or revenues for the six
months ended June 30, 2001 or 2002.

Related Party Transactions. In the normal course of business, we from time
to time enter into transactions with related parties. These transactions
typically take the form of network service work for Aquila or facility leases
with prior owners. See additional discussion in Note 9 of Notes to Condensed
Consolidated Financial Statements.

SEASONALITY; FLUCTUATIONS OF QUARTERLY RESULTS

Our results of operations can be subject to seasonal variations. During the
winter months, demand for new projects and new maintenance service arrangements
may be lower due to reduced construction activity. However, demand for repair
and maintenance services attributable to damage caused by inclement weather
during the winter months may partially offset the loss of revenues from lower
demand for new projects and new maintenance service arrangements. Additionally,
our industry can be highly cyclical. As a result, our volume of business may be
adversely affected by declines in new projects in various geographic regions in
the U.S. Typically, we experience lower gross and operating margins during the
winter months. The timing of acquisitions, variations in the margins of projects
performed during any particular quarter, the timing and magnitude of acquisition
assimilation costs, regional economic conditions and our customer's access to
capital may also materially affect quarterly results. Accordingly, our operating
results in any particular quarter may not be indicative of the results that can
be expected for any other quarter or for the entire year.

NEW ACCOUNTING PRONOUNCEMENTS

In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 requires that gains and losses from extinguishment of
debt be classified as extraordinary items only if they meet the criteria in
Accounting Principles Board Opinion No. 30 (Opinion No. 30). Applying the
provisions of Opinion No. 30 will distinguish transactions that are part of an
entity's recurring operations from those that are unusual and infrequent and
meet the criteria for classification as an extraordinary item. SFAS No. 145 is
effective for us beginning January 1, 2003. Upon the adoption of SFAS No. 145,
if we record any extraordinary items related to the extinguishment of debt, we
will have to reclassify such items in our prior period statements of operations
to conform to the presentation required by SFAS No. 145. Under SFAS No. 145, we
will report gains and losses on the extinguishment of debt in pre-tax earnings
rather than in extraordinary items.

In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities, such as
restructurings, involuntarily terminating employees and consolidating facilities
initiated after December 31, 2002.

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 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 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:

Accounts Receivable and Provision for Doubtful Accounts. We provide an
allowance for doubtful accounts when collection of an account receivable is
considered doubtful. Inherent in the assessment of the allowance for
doubtful accounts are certain judgments and estimates including, among
others, our customer's access to capital, our customer's willingness or
ability to pay, general economic conditions and the ongoing relationship
with the customer. For example, certain of our customers, primarily large
public telecommunications carriers, have filed for bankruptcy in the quarter
ended June 30, 2002, or have been experiencing financial difficulties, and
as a result we increased our reserves in June 2002 to reflect that certain
customers may be unable to meet

18

their obligations to us in the future. Should additional customers file for
bankruptcy or 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.

Goodwill. As stated in Note 5 of Notes to Condensed Consolidated
Financial Statements, FASB Statement No. 142 provides that goodwill and
other intangible assets that have indefinite useful lives will 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. Statement No. 142 also provides specific
guidance for testing goodwill and other nonamortized intangible assets for
impairment. Goodwill of a reporting unit shall 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. The Statement 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, as compared to our accounting policy for the assessment of goodwill
impairment in 2001, which was based on an undiscounted cash flow model.
Estimating future cash flows requires significant judgment and our
projections may vary from cash flows eventually realized.

Revenue Recognition. We typically record revenues from fixed price
contracts on a percentage-of-completion basis, using the cost-to-cost method
based on the percentage of total costs incurred to date in proportion to
total estimated costs to complete the contract. Changes in job performance,
job conditions and final contract settlements, among others, are factors
that influence the assessment of the total estimated costs to complete these
contracts.

Self-Insurance. We are insured for workers' compensation, employer's
liability, auto liability and general liability claims, subject to a
deductible of $500,000 per accident or occurrence. On August 1, 2002, upon
renewal of our policies, the deductible was increased to $1,000,000 per
occurrence. In addition, effective January 1, 2002, we consolidated the
various non-union employee related health care benefits plans that existed
at certain of our subsidiaries into one corporate plan which 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.

OUTLOOK

The following statements are based on current expectations. These
statements are forward looking, and actual results may differ materially.

Like many companies who provide installation and maintenance services to
the electrical power, gas, telecommunications and cable television industries,
we are facing a number of challenges. Our operating environment has changed
dramatically. The telecommunications and utility markets have experienced
substantial change in just the past few months as evidenced by an increased
number of bankruptcies in the telecommunications market, continued devaluation
of several of our utility clients debt and equity securities and pricing
pressures resulting from challenges faced by major industry participants. These
factors have contributed to the delay and cancellation of projects and reduction
of capital spending that have impacted our operations and ability to grow at
historical levels.

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 right sizing initiatives to match the
markets we serve. These initiatives include aligning our work force 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, facility
and other exit costs as we execute upon these initiatives.

We expect continued demand for our services from our utility and gas
customers throughout 2002 with continued weakness in demand for our services
from our telecommunications and cable customers and relatively level demand for
our services from our ancillary customers. Competitive pressures on our
customers caused by deregulation, return to core competencies and cost
reductions have caused an increased focus on outsourcing services. We believe
that we are adequately positioned to provide these services with our proven
full-service providers 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," "expect" and other words of similar meaning. In particular,
these include, but are not limited to, statements relating to the following:
- - Projected operating or financial results;
- - Expectations regarding capital expenditures;
- - The effects of competition in our markets;
- - The duration and extent of the current economic downturn;
- - Materially adverse changes in economic conditions in the markets served
by us or by our customers, and;
- - Our ability to achieve cost savings.
- - Any or all of Quanta's forward-looking statements may turn out to be wrong.
They can be affected by inaccurate assumptions and or by known or unknown
risks and uncertainties, including the following:
- - Beliefs or assumptions about the outlook for markets we serve;
- - The Company's ability to effectively compete for market share;
- - The duration and extent of the current economic downturn;
- - Beliefs and assumptions about the collectibility of receivables;
- - Material adverse changes in economic conditions in the markets served by us
or by our customers;
- - Rapid technological and structural changes that could reduce the demand for
the services we provide;
- - Replacement of our contracts as they are completed or expire;
- - Retention of key personnel and;
- - The cost of borrowing, availability of credit and other factors affecting
Quanta's financing activities.

Many of these factors will be important in determining Quanta's actual future
results. Consequently, no forward-looking statement can be guaranteed. Quanta's
actual future results may vary materially from those expressed or implied in any
forward-looking statements.

All of Quanta's 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,
Quanta disclaims any obligation to update any forward-looking statements to
reflect events or circumstances after the date of this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are exposed to market risk primarily related to potential adverse changes
in interest rates and, to a certain extent, commodity prices, as discussed
below. Management does not generally use derivative financial instruments for
trading or to speculate on changes in interest rates or commodity prices. As of
June 30, 2002, however, we had two derivative contracts outstanding which
related to anticipated exposure in the price of natural gas. We are exposed to
credit risk in the event of non-performance by the derivative counterparty.
However, we monitor our derivative positions by regularly evaluating our
positions and the credit worthiness of the counterparties, which we consider
credit worthy at June 30, 2002. Management is actively involved in monitoring
exposure to market

19

risk and continues to develop and utilize appropriate risk management
techniques. We are not exposed to any other significant market risks, foreign
currency exchange risk or interest rate risk from the use of derivative
financial instruments.

The sensitivity analyses below, which illustrates our hypothetical potential
market risk exposure, estimates the effects of hypothetical sudden and sustained
changes in the applicable market conditions on 2002 earnings. The sensitivity
analyses presented do not consider any additional actions we may take to
mitigate our exposure to such changes. The hypothetical changes and assumptions
may be different from what actually occurs in the future.

Interest Rates. As of June 30, 2002, we had no derivative financial
instruments to manage interest rate risk. As such, we are exposed to earnings
and fair value risk due to changes in interest rates with respect to our
long-term obligations. As of June 30, 2002, approximately 23.7% of our long-term
obligations were floating rate obligations. As of June 30, 2002, the fair value
of our variable rate debt of $123.0 million approximated book value, and the
fair value of our fixed-rate debt of $395.8 million was approximately $334.4
million based upon discounted future cash flows using incremental borrowing
rates and current market prices. The detrimental effect on our pretax earnings
of a hypothetical 50 basis point increase in both variable and fixed interest
rates would be approximately $0.6 million and $2.0 million, respectively.

Commodity Price Exposure. In October 2001, we entered into a forward
purchase contract (Contract A) with settlements through 2006, in order to secure
pricing on anticipated gas requirements related to a project in process at
December 31, 2001 that was substantially complete at March 31, 2002. Our
objective was to mitigate the variability in the price of natural gas by
securing the price we will have to pay the Contract A counterparty. On March 29,
2002, we entered into a sub-services agreement with one of our customers (the
Counterparty Contract) whereby the customer assumed all obligations associated
with Contract A. If the customer is unable to fulfill its obligations under the
Counterparty Contract, we will be responsible for settling the obligations of
Contract A. As of June 30, 2002, the fair value of Contract A and the
Counterparty Contract was a receivable of $1.2 million and a payable of $1.2
million, respectively.

In April 2002, we entered into another forward purchase contract (Contract
B) with settlements through March 2003, in order to secure pricing on
anticipated gas requirements related to a project in process at June 30, 2002.
Our objective was to mitigate the variability in the price of natural gas by
securing the price we will have to pay the Contract B counterparty. As of June
30, 2002, the fair value of Contract B was $354,000.

20

PART II -- OTHER INFORMATION

QUANTA SERVICES, INC. AND SUBSIDIARIES

ITEM 2. CHANGES IN SECURITIES.

(c) Unregistered Sales of Securities.

Between March 31, 2002, and June 30, 2002, the Company completed one
acquisition in which some of the consideration was unregistered securities of
the Company. The consideration paid in this transaction was $7.6 million in cash
and 211,200 shares of common stock. This acquisition was not affiliated with any
other acquisition prior to such transaction.

All securities listed on the following table were shares of common stock.
The Company relied on Section 4(2) of the Securities Act of 1933, as amended, as
the basis for exemption from registration. All issuances were to the owners of
businesses acquired in privately negotiated transactions, not pursuant to public
solicitation.

On March 13, 2002, the Company sold 8.0 million shares of common stock to
the SECT in exchange for a promissory note, plus an amount equal to the
aggregate par value of the shares. As part of the settlement of the proxy
contest with Aquila, on May 20, 2002, the Company terminated the SECT and
repurchased the 7,911,069 shares of common stock remaining in the SECT by
canceling the promissory note.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

On May 20, 2002, the Company and Aquila announced that they reached an
agreement for Aquila to terminate its proxy contest for control of Quanta's
board of directors. The Company's definitive proxy statement filed on June 4,
2002, contains a discussion of the terms of the settlement. The costs associated
with the proxy contest and negotiations with Aquila were approximately $11.6
million.

The Company held its annual meeting of stockholders in Houston, Texas on
June 28, 2002. Ten members were elected to the board of directors, each to serve
until the next annual meeting of the Company and until their respective
successors have been elected and qualified.

The following six individuals were elected to the board of directors by the
holders of the common stock and the Series A Convertible Preferred Stock of the
Company, voting together:

The following three individuals were elected to the board of directors by
the holders of the Series A Convertible Preferred Stock of the Company: Robert
K. Green, Edward K. Mills and Keith G. Stamm. Each of these individuals was
elected by a vote of 3,444,961 shares of the Series A Convertible Preferred
Stock, being all of the outstanding shares of Series A Convertible Preferred
Stock cast for or against, with no shares voted against or abstaining.

The holders of Limited Vote Common stock of the Company elected Vincent D.
Foster to the board of directors. Mr. Foster was elected by a vote of 625,932
shares of the Limited Vote Common Stock, being more than a plurality of the
outstanding shares of Limited Vote Common Stock cast for or against, with no
shares voted against or abstaining.

No other matters were submitted to a vote of the stockholders.

21

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits.

EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
3.1 -- Amended and Restated Certificate of Incoporation (previously
filed as Exhibit 3.1 to the Company's Registration Statement on
Form S-1 (No. 333-42957) and incorporated herein by reference)
3.2 -- Amended and Restated Bylaws (previously filed as Exhibit 3.2 to
the Company's 2000 Form 10-K (No. 001-13831) filed April 2, 2001
and incorporated herein by reference)
3.3 -- Certificate of Amendment to the Amended and Restated Certificate
of Incorporation (previously filed as Exhibit 3.3 to the
Company's Registration Statement on Form S-3 (No. 333-81419)
filed June 23, 1999 and incorporated herein by reference)
3.4 -- Certificate of Designation for the Series A Preferred Stock
(previously filed as Exhibit 3.4 to the Company's Registration
Statement of Form S-3 (No. 333- 90961) filed November 15, 1999
and incorporated herein by reference)
3.5 -- Certificate of Designation for the Series B Preferred Stock
(previously filed as Exhibit 3.5 to the Company's 1999 Form 10-K
(No. 001-13831) filed March 30, 2000 and incorporated herein by
reference)
3.6 -- Certificate of Correction to Certificate of Designation for the
Series A Preferred Stock (previously filed as Exhibit 3.6 to the
Company's 1999 Form 10-K (No. 001-13831) filed March 30, 2000
and incorporated herein by reference)
3.7 -- Certificate of Amendment of the Certificate of Designation,
Rights and Limitations of the Series A Convertible Preferred
Stock (previously filed as Exhibit 3.7 to the Company's 2001
Form 10-K (No. 001-13831) filed April 1, 2002 and incorporated
herein by reference)
3.8 -- Certificate of Amendment to the Amended and Restated Certificate
of Incorporation (previously filed as Exhibit 3.8 to the
Company's 2001 Form 10-K (No. 001-13831) filed April 1, 2002 and
incorporated herein by reference)
3.9 -- Certificate of Designation of Series C Junior Convertible
Preferred Stock (previously filed as Exhibit 3.9 to the
Company's 2001 Form 10-K (No. 001- 13831) filed April 1, 2002
and incorporated herein by reference)
3.10 -- Certificate of Increase of Series B Junior Participating
Preferred Stock (previously filed as Exhibit 3.10 to the
Company's 2001 Form 10-K (No. 001- 13831) filed April 1, 2002
and incorporated herein by reference)
4.14 -- Eighth Amendment and Consent to Third Amended and Restated
Secured Credit Agreement (filed herewith)
10.30 -- Employment Agreement, dated as of March 13, 2002, by and between
Quanta Services, Inc. and James F. O'Neill, III (filed herewith)
10.31 -- Settlement and Governance Agreement between Quanta Services,
Inc. and Aquila, Inc., dated as of May 20, 2002 (previously
filed as Exhibit 10.1 to the Company's Form 8-K (No. 001-13831)
filed May 22, 2002 and incorporated herein by reference)
10.32 -- Amended and Restated Investors' Rights Agreement between Quanta
Services, Inc. and Aquila, Inc., dated as of May 20, 2002
(previously filed as Exhibit 10.2 to the Company's Form 8-K (No.
001-13831) filed May 22, 2002 and incorporated herein by
reference)
10.33 -- Amendment No. 1 to Note Purchase Agreement dated as of March 1,
2000 between Quanta Services, Inc. and the Purchasers named
therein (filed herewith)
99.1 -- Certification of Periodic Report by Chief Executive Officer
(filed herewith)
99.2 -- Certification of Periodic Report by Chief Financial Officer
(filed herewith)

(b) Reports on Form 8-K.

(1) Quanta filed a Form 8-K on May 22, 2002 in which it reported that it
reached an agreement for Aquila to terminate its proxy contest for control of
Quanta's board of directors.

22

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant, Quanta Services, Inc., has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

QUANTA SERVICES, INC.

By: /s/ DERRICK A. JENSEN
-------------------------------------
Derrick A. Jensen
Vice President, Controller and
Chief Accounting Officer

Dated: August 14, 2002

23

INDEX TO EXHIBITS