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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2002
Commission File Number 001-08106
MASTEC, INC.
(Exact name of registrant as specified in its charter)
Florida 65-0829355
State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
3155 N.W. 77th Avenue, Miami, FL 33122-1205 (305) 599-1800
(Address of principal executive offices) (Registrant's telephone number,
including area code)
Securities registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class which registered
Common Stock, $.10 Par Value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Exchange Act: None
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 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 ____.
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. _X_
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act. Yes _X_ No ____.
The aggregate market value of the registrant's outstanding common stock
held by non-affiliates of the registrant computed by reference to the price
at which the common stock was last sold as of the last business day of
the registrant's most recently completed second fiscal quarter was
$194,105,323 (based on a closing price of $7.36 per share for the
registrant's common stock on the New York Stock Exchange on June 28, 2002).
There were 48,035,674 shares of common stock outstanding as of March 21,
2003.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant's Proxy Statement relating to the 2003
Annual Meeting of Shareholders to be held on May 30, 2003 are incorporated
by reference in Part III of this Annual Report on Form 10-K.
TABLE OF CONTENTS
PART I ................................................................. 3
ITEM 1. BUSINESS.................................................. 3
ITEM 2. PROPERTIES................................................ 11
ITEM 3. LEGAL PROCEEDINGS......................................... 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....... 12
ITEM 4(A). EXECUTIVE OFFICERS..................................... 12
PART II................................................................. 12
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS....................................... 12
ITEM 6. SELECTED FINANCIAL DATA................................... 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS....................... 14
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK...................................................... 25
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............... 25
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE....................... 51
PART III................................................................ 51
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........ 51
ITEM 11. EXECUTIVE COMPENSATION.................................... 51
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS................ 51
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............ 51
ITEM 14. CONTROLS AND PROCEDURES................................... 51
PART IV................................................................. 52
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON
FORM 8-K.................................................. 52
SIGNATURES.............................................................. 54
POWER OF ATTORNEY....................................................... 54
SECTION 302 CERTIFICATIONS.............................................. 55
PART I
ITEM 1. BUSINESS
Cautionary Statement Regarding Forward-Looking Statements
Except for historical information, the matters discussed below may
contain forward-looking statements, such as statements regarding our future
growth and profitability, growth strategy and anticipated trends in the
industries and economies in which we operate. These forward-looking
statements are based on our current expectations and are subject to a number
of risks, uncertainties and assumptions, including that our revenue or profit
may differ from that projected, that we may be further impacted by slowdowns
in our clients' businesses or deterioration in our clients' financial
condition, that our reserves may be inadequate or our equity investments may
be impaired, that the outcome of pending litigation may be adverse to us and
that we may experience increased costs associated with realigning our
business or may be unsuccessful in those efforts. Should one or more of
these risks or uncertainties materialize, or should the underlying
assumptions prove incorrect, actual results may differ significantly from
results expressed or implied in any forward-looking statements made by us.
These and other risks are detailed in this annual report and in other
documents filed by us with the Securities and Exchange Commission. We do
not undertake any obligation to revise these forward-looking statements to
reflect future events or circumstances.
General
We are a leading end-to-end infrastructure service provider offering
services in telecommunications, broadband, intelligent traffic systems, and
energy markets to a broad range of clients in North America and Brazil.
We design, build, install, maintain and upgrade external networks and
other facilities for our clients. We are one of the few national, multi-
disciplinary infrastructure providers that furnishes a comprehensive
solution to our clients' infrastructure needs ranging from basic installation
and construction to sophisticated engineering, design and integration. Our
diverse and long-standing client base, experienced management and integrated
value added service offering provide a stable base of repeat business and
enable us to quickly and efficiently meet client demands.
Our strategy is to use these competitive strengths to increase market
share in the fragmented network infrastructure industry by expanding
relationships across multiple service offerings with long-time clients and
selected new clients who have both financial liquidity and end-user customers.
We target predictable recurring maintenance and upgrade work under exclusive,
multiple year master service and other agreements. We are also focused on
leveraging our administrative base and achieving other cost savings and
efficiencies through better utilization of our equipment, facilities and
personnel and through economies of scale.
In the third quarter of 2002, we initiated an organizational efficiency
plan designed to improve gross margins and reduce general and administrative
costs. The majority of the expenses associated with this plan were incurred
in the fourth quarter of 2002. There can be no assurance that we will be
able to effect the plan or that the plan will result in the expected benefits.
Clients
Our more than 200 clients include some of the largest and most prominent
companies in the communications, broadband, intelligent traffic services, and
energy fields, including:
- - incumbent local exchange carriers - government agencies such as state,
- - cable television operators departments of transportation,
- - long distance carriers municipalities and the Department
- - satellite TV service providers of Defense
- public and private energy companies
- financial institutions
Services and Markets
We design, build, install, maintain, upgrade and monitor the physical
facilities used to provide end-to-end voice, video and data service from the
provider's central office, switching center or cable television head-end to
the ultimate consumer's home or business. We provide similar services to
electrical and other utility providers. We provide these services both
externally on public or private rights-of-ways or in our clients' premises.
Our services include:
- - comprehensive project management, coordination, consulting and
administration,
- - designing conduit networks and fiber rings,
- - placing and splicing fiber optic, coaxial and copper cable; excavating
trenches in which to place the cable; and furnishing and placing related
structures such as poles, anchors, conduits, manholes, cabinets and
closures,
- - overhead and underground installation and maintenance of electrical and
other utilities' transmission and distribution networks, substation
construction and maintenance,
- - placing drop lines from our clients' main distribution terminals to their
customer's home or business,
- - installing set-top boxes, satellite dishes and other connection devices
in homes and businesses,
- - erecting wireless communication towers, constructing related structures
and installing associated equipment,
- - designing and installing intelligent traffic networks,
- - engineering, furnishing and installing integrated voice, video and data
networks inside client premises,
- - systems integration, which includes selecting, configuring and installing
software, hardware and other computing and communications equipment and
cabling to provide an integrated computing and communications system,
- - procuring materials,
- - providing acceptance testing and as-built documentation, and
- - maintaining, upgrading, removing and replacing these systems.
Backlog
At December 31, 2002 and 2001, we had a backlog in our domestic
operations of approximately $1.2 billion and $1.4 billion, respectively.
Our backlog consists of the uncompleted portion of services we are to perform
under project-specific contracts as well as estimated work on master service
agreements. We expect to complete most of our project-specific backlog as of
December 31, 2002 during the next 18 months. Our backlog also includes
certain master service agreements that contain 3 to 5 year terms.
Sales and Marketing
We market our services individually and in combination to provide the
most efficient and effective solution to meet our clients' demands, which
increasingly require resources from multiple disciplines. Through our unified
"MasTec"(R) brand and an integrated organizational structure designed to
permit rapid deployment of labor, equipment and materials, we are able
quickly and efficiently to allocate resources to meet client needs.
We have developed a marketing plan emphasizing the "MasTec"(R) registered
service mark and an integrated service offering to position ourselves as a
seamless, end-to-end nationwide infrastructure services solution, providing
services ranging from basic installation to sophisticated engineering,
design and integration. We believe our long-standing relationships with our
clients and reputation for reliability and efficiency facilitate our repeat
business. Our marketing efforts are principally carried out by the
management of our service offerings, most of whom have many years' experience
in the industries they serve, both at the service provider level and in some
cases with the clients we serve. Our service offering leadership markets to
existing and potential clients to negotiate new contracts or to be placed on
lists of vendors invited to submit proposals for master service agreements
and individual projects. Our executive management supplements their efforts
at the national level. We also market through salespeople and our corporate
marketing department.
Safety and Insurance/Risk Management
Performance of our services requires the use of equipment and exposure
to conditions that can be dangerous. Although we are committed to a policy
of operating safely and prudently, we have been and will continue to be
subject to claims by team members, customers and third parties for property
damage and personal injuries resulting from the performance of our services.
We perform on-site services using team members who have completed our
applicable safety and training programs. Our policies require that team
members complete the prescribed training and service program for which they
work in addition to those required by applicable law.
We are committed to ensuring that our team members perform their work
safely and strive to instill safe work habits in all of our team members. We
evaluate our team members not only on the basis of the efficiency and quality
of their work but also on their safety records and the safety records of the
team members they supervise. We also hold regular training sessions and
seminars with our team members devoted to safe work practices. We have
established a company-wide safety committee to share best practices and to
monitor and improve compliance with safety regulations.
The primary claims we face in our operations are workers' compensation,
automobile liability and various general liabilities. We maintain insurance
policies with respect to these risks, but these policies are subject to
deductibles for workers' compensation, automobile liability and general
liability up to $1.0 million per claim. We have umbrella coverage up to a
policy limit of $50.0 million and no stop loss coverage for the 2002-2003
policy period. An independent third party actuarially determines any
liabilities for unpaid claims and associated expenses, including incurred but
not reported losses, and we reflect those liabilities on our balance sheet as
an accrued liability. We continually review these claims and expenses and
the appropriateness of the accrued liability.
Suppliers and Materials
Our clients supply the majority of the raw materials and supplies
necessary to carry out our contracted work. We obtain materials and supplies
for our own account from independent third-party providers and do not
manufacture any significant amount of materials or supplies for resale. We
are not dependent on any one supplier for any materials or supplies that
we obtain for our own account. We have not experienced any significant
difficulty in obtaining an adequate supply of materials and supplies.
We use independent contractors to perform portions of our services and
to manage work flow. These independent contractors typically are sole
proprietorships or small business entities. Independent contractors
typically provide their own employees, vehicles, tools and insurance
coverage. We are not dependent on any single independent contractor. Our
contracts with our subcontractors typically contain provisions limiting our
obligation to pay the subcontractor if our client has not paid us. These
payment limitation provisions may not be available to us in certain cases.
Competition
There is no dominant provider in the network infrastructure services
industry. The industry is highly fragmented and we compete with other
companies in most of the markets in which we operate ranging from small
independent firms servicing local markets to larger firms servicing regional
and national markets. We also face competition from existing or prospective
clients who employ in-house personnel to perform some of the same types of
services we provide. Historically, there have been relatively few
significant barriers to entry into the markets in which we operate and, as a
result, any organization that had adequate financial resources and access to
technical expertise may become one of our competitors. We are, however, one
of the few providers with a nationwide comprehensive services offering.
We believe our clients consider a number of factors in choosing a
service provider, including technical expertise and experience, financial
and operational resources, nationwide presence, industry reputation and
dependability. A significant portion of our revenue is currently derived
from unit price agreements and price historically has often been the
principal factor in determining whether the services provider is awarded the
work on smaller, less complex projects. Smaller competitors are sometimes
able to win bids for these projects based on price alone due to their lower
costs and financial return requirements. We believe our size, nationwide
presence, integrated value added service offering, financial strength,
bonding capacity and reputation provide a competitive advantage in obtaining
larger, more complex infrastructure projects and gaining market share in the
fragmented infrastructure services industry. There can be no assurance,
however, that our competitors will not develop the expertise, experience
and resources to provide services that are superior in both price and
quality to our services or that we will be able to maintain or enhance our
competitive position.
Regulation
Our operations are subject to various federal, state and local laws,
including:
- contractor licensing requirements,
- building and electrical codes,
- permitting and inspection requirements, and
- regulations related to labor relations, worker safety,
and environmental protection.
We believe we have all material licenses and permits required to
conduct our operations and that we are in substantial compliance with all
applicable regulatory requirements.
Employees
As of December 31, 2002, we had approximately 7,100 team members in
North American operations and approximately 2,930 in Brazil. The total number
of our team members is down from December 31, 2001 by approximately 500.
Approximately 300 of our team members are represented by labor unions,
principally the Communication Workers of America or the International
Brotherhood of Electrical Workers. We believe that our employee relations
are good.
Recruiting. Our primary hiring sources for our team members include
promotion from within, team member referrals, print and Internet advertising
and direct recruiting. We attract and retain team members by offering
technical training opportunities, bonus opportunities, stock ownership,
competitive salaries, and a comprehensive benefits package. Our "MasTec"(R)
brand and integrated service offering also has created a unified corporate
culture that we believe helps attract and retain team members. Team members
are exposed to numerous technologies being deployed by our clients which
serves as a recruitment tool. We attract talent from numerous sources
including higher learning institutions, colleges, and industry.
Training and Career Development. We believe that our continuous focus
on training and career development helps us to retain our team members.
Team members participate in on-going educational programs, many of which are
internally developed, to enhance their technical and management skills
through classroom and field training. Manufacturers of telecommunications
equipment also sponsor training programs covering the installation and
maintenance of their equipment, which our team members regularly attend. We
also provide opportunities for promotion and mobility within our integrated
service organization that we believe helps retain our team members.
Available Information
A copy of this Annual Report on Form 10-K, as well as our Quarterly
Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to these
reports, are available free of charge on the Internet at our website,
www.mastec.com, as soon as reasonably practicable after we electronically
file these reports with, or furnish these reports to, the Securities and
Exchange Commission. The reference to our website address does not
constitute incorporation by reference of the information contained on the
website and should not be considered part of this report.
Alternatively, you may access these reports at the Securities and
Exchange Commission's Internet website, www.sec.gov.
Other
We are organized as a Florida corporation. Our predecessor company was
formed in 1969, and we have operated as "MasTec" since 1994.
Risk Factors
This report includes forward-looking statements that are necessarily
subject to various risks and uncertainties. These statements are based on
current expectations and assumptions which management believes are
reasonable and on information currently available to management. Actual
results could differ materially from those contemplated by the forward-
looking statements. Although MasTec is not able to predict all the factors
that may affect future results, some of the factors, many of which have
been disclosed previously, that could cause future results to differ
materially from those expressed or implied by forward-looking statements or
from historical results include the following:
The industries we serve are subject to consolidation and rapid technological
and regulatory change.
We derive and anticipate that we will continue to derive a substantial
portion of our revenue from customers in the telecommunications industry.
The telecommunications industry is subject to rapid changes in technology
and governmental regulation. Changes in technology may reduce the demand
for the services we provide. New or developing technologies could displace
the wireline systems used for the transmission of voice, video and data,
and improvements in existing technology may allow telecommunications
providers to significantly improve their networks without physically
upgrading them. Additionally, the telecommunications industry has been
characterized by a high level of consolidation that may result in the loss
of one or more customers. The energy and broadband industries have also
entered into a phase of deregulation and consolidation similar to the
telecommunications industry, which could lead to the same uncertainties as
in the telecommunications industry.
Economic slowdown or increased international political instability may have
an adverse effect on our business and results of operations.
If the economy remains slow, our customers may not outsource projects
to us. Additionally, the recent international political instability,
demonstrated by enhanced security measures, terrorist threats, the war in
Iraq, and increasing tension in the Middle East and Korea, may have an
adverse effect on our business. Items that could impact our business include:
- demand for our services,
- cost of fuel,
- availability of financing,
- delay or cancellation of new projects,
- potential bankruptcies,
- availability of insurance at reasonable rates, and
- additional security precautions.
If the economic slowdown or international political instability
continues or increases, our business, results of operations and the market
price of our common stock could be adversely affected.
The volume of work we receive is dependent on our customers' financial
resources and ability to obtain capital.
The volume of work awarded under contracts with certain of our
telecommunications and energy customers is subject to periodic
appropriations or rate increase approvals during each contract's term. If a
customer fails to receive sufficient appropriations or rate increase
approvals, that customer could reduce the volume of work that it awards to
us or delay its payments to us. In addition, financing conditions for the
telecommunications and energy industries could adversely affect our
customers and their ability or willingness to fund capital expenditures
in the future. We currently derive a significant portion of our revenue
from our master service contracts and master service-like agreements. Under
these contracts, our customers have no obligations to undertake any
infrastructure projects or other work with us. A significant decline in the
work our customers assign us could materially and adversely affect our
results of operations by decreasing the amount of revenue we receive.
Our industry is highly competitive.
The industries in which we operate are highly competitive. Additionally,
many of our customers provide the same type of services we provide which
means we face competition from our customers as well as third parties. There
are relatively few significant barriers to entry into certain of the markets
in which we operate, and as a result, any organization that has adequate
financial resources and access to technical expertise may become one of our
competitors. We cannot be certain that our existing customers will continue
to outsource services in the future. Our competitors may be able to offer
similar services at a lower cost.
Some of our contracts may be canceled on short notice.
Many of our customers may cancel our long-term contracts with them on
short notice, typically 90 to 180 days, even if we are not in default under
the contract. Therefore, these contracts do not give us the assurances that
long-term contracts typically provide. Many of our contracts, including
our master service contracts, are opened to public bid at the expiration of
their terms and price is often an important factor in the award of such
agreements. We cannot assure you that we will be the successful bidder on
our existing contracts that come up for bid. We also provide a significant
portion of our services on a non-recurring, project by project basis. We
could experience a material adverse effect on our results of operations and
financial condition if:
- our customers cancel a significant number of contracts,
- we fail to win a significant number of our existing contracts upon
re-bid, or
- we complete the required work under a significant number of our
non-recurring projects and cannot replace them with similar projects.
Our business is seasonal, exposing us to variable quarterly results.
The budgetary years of many of our external network services customers
end in December. As a result of the end of their budgetary years, our
telecommunications customers, and particularly our incumbent local exchange
customers, typically reduce their expenditures and work order requests
towards the end of the year. The onset of winter also affects our ability
to render external network services in certain regions of the United States.
As a result, we experience reduced revenue in the first and fourth quarters
of each year.
We may be unable to attract and retain qualified managers and employees.
Our business is labor intensive, and many of our operations experience
a high rate of employee turnover. At times of low unemployment rates in the
United States it will be more difficult for us to find qualified personnel
at low cost in some areas where we operate. Additionally, our business is
managed by a small number of key executive and operational officers. As we
offer new services and pursue new customer markets, we will need to increase
our executive and support personnel. We cannot assure you that we will be
able to hire and retain the sufficient skilled labor force necessary to
operate efficiently and to support our growth strategy or that our labor
expenses will not increase as a result of a shortage in the supply of
skilled personnel. Labor shortages or increased labor costs or the loss of
key personnel could have a material adverse effect on our financial
condition and our operations.
Continued efforts to streamline our business operations could significantly
strain our operational infrastructure, financial resources and, if
unsuccessful, our ability to meet the requirements under the Sarbanes-Oxley
Act of 2002.
To manage our business effectively, we will need to continuously:
- Improve our information and financial reporting systems. We are
converting our accounting systems to a fully integrated ERP
software system.
- Restructure our business model. During 2002, we engaged outside
consultants to assist us in a project that contemplates significant
reductions in our cost structure, including reductions in leased
facilities and equipment, underutilized fleet, insurance premiums,
personnel and other costs. Results of operations will be adversely
affected if we are unsuccessful in implementing the plan.
- Enhance our operational and financial systems and controls. We
continue to take action to assure compliance with the internal
controls, disclosure controls and other governance requirements of
the Sarbanes-Oxley Act of 2002.
Additionally, if we are unable to expand and improve our operational
infrastructure and financial and control systems, our business and
results of operations may be adversely affected and we may experience
continued reductions in profitability.
We are effectively self-insured against many potential liabilities.
Although we maintain insurance policies with respect to automobile,
general liability, workers' compensation and employee group health claims,
those policies are generally subject to high deductibles, and we are
effectively self-insured for all claims up to the amount of the applicable
deductible. We actuarially determine any liabilities for unpaid claims and
associated expenses, including incurred but not reported losses, and reflect
those liabilities in our balance sheet as an accrued liability. We
periodically review the status of such claims and expenses and the
extent of the accrued liability. Because of increases in claims (primarily
workers compensation claims), a weak economy, projected significant increases
in medical costs and wages, lost compensation, and reductions in coverage,
insurance carriers may be unwilling to provide the current levels of coverage
without a significant increase in collateral requirements to cover our
deductible obligations. The increased collateral requirements may be in the
form of additional letters of credit because most surety firms are no longer
providing surety bonds due to overall weakness in the insurance and surety
markets. If our insurance claims or costs are higher than our estimates, it
will reduce our profitability.
Our credit facility and senior notes impose restrictions on us.
We have a credit facility with a group of financial institutions and
have outstanding 7 3/4% Senior Subordinated Notes due 2008. The terms of our
indebtedness contain customary events of default and covenants that prohibit
us from taking certain actions without satisfying certain financial tests or
obtaining the consent of the lenders. The prohibited actions include, among
other things:
- making investments in excess of specified amounts,
- incurring additional indebtedness in excess of a specified amount,
- paying dividends in excess of a specified amount,
- making capital expenditures in excess of a specified amount,
- creating certain liens,
- prepaying our other indebtedness, including the senior notes,
- engaging in mergers or combinations and
- engaging in transactions that would result in a "change of control."
Events that are beyond our control may affect our ability to comply
with these provisions. If we breach any of these covenants, we could be in
default under the credit facility or under the indenture relating to the
senior notes. A default could accelerate the indebtedness and restrict our
liquidity. In addition, these covenants may significantly restrict our
ability to respond to changing business and economic conditions or to secure
additional financing, if needed, and may prevent us from engaging in
transactions that might otherwise be considered beneficial to us.
If we violate one or more of these covenants in the future, and we are
unable to cure or obtain waivers from our lenders or amend or otherwise
restructure the credit facility, we could be in default under the facility
which would entitle the lenders to accelerate the repayment of amounts
outstanding and terminate the facility, and we may be required to sell
assets for less than their carrying value to repay any amounts outstanding
under this facility. We also may be required to seek alternative sources
of liquidity if our cash flows from operations are insufficient to fund our
operations. As a result of these covenants, our ability to respond to
changing business and economic conditions and to secure additional
financing, if needed, may be restricted significantly, and we may be
prevented from engaging in transactions that might otherwise be considered
beneficial. Further, to the extent additional financing is needed, there
can be no assurance that such financing would be available at all or on
favorable terms.
We may be unable to obtain sufficient bonding capacity to support certain
of service offerings.
Some of our contracts within certain service offerings require
performance and payment bonds. Bonding capacity in the infrastructure
industry has become increasingly difficult to obtain, and bonding companies
are denying or restricting coverage to certain contractors. We are
currently negotiating our bonding agreements with existing carriers and
seeking additional carriers. There can be no assurance that we will be
able to maintain a sufficient level of bonding capacity in the future,
which could adversely impact our ability to seek work from certain clients.
We are controlled by a small number of our existing shareholders.
Jorge Mas, our Chairman, and other members of his family beneficially
own approximately 49.6% of the outstanding shares of our common stock.
Accordingly, they remain in a position to effectively:
- control the vote of most matters submitted to our shareholders,
including any merger, consolidation or sale of all or substantially
all of our assets,
- elect all of the members of our Board of Directors,
- prevent or cause a change in our control and
- decide whether we will issue additional common stock or other
securities or declare dividends.
The Mas family's ability to exercise significant control over us may
discourage, delay or prevent a takeover attempt that you might consider in
your best interest and that might result in you receiving a premium for your
common stock.
Our Articles of Incorporation and Florida law contain anti-takeover
provisions that may make it more difficult to effect a change in our control.
Our articles of incorporation and bylaws and certain provisions of the
Florida Business Corporation Act may make it difficult in some respects to
effect a change in our control and replace our incumbent directors and
management.
We have a "classified" or "staggered" Board of Directors and our Board
of Directors has the authority to fix the rights and preferences of, and to
issue our preferred stock, and to take other actions that may have the effect
of delaying or preventing a change of our control without the action of our
shareholders.
New York Stock Exchange Listing.
All stock exchanges have certain minimum initial and continuing listing
requirements for companies. These exchange requirements include, among other
items, certain average minimum stock prices, shareholders' equity, financial
performance and compliance with other non-financial rules and regulations.
The materialization of any risks included in this section, any financial
problem or a significant decline in the price of our common stock for an
extended period of time could cause us to be out of compliance with
continuing listing requirements of the stock exchange. In such a case, we
must in a timely manner remedy the compliance problem or successfully list
on another exchange or over the counter market, or our securities could become
less liquid and decrease in value.
Our foreign operations are subject to political and economic instability and
foreign currency fluctuations.
We derived approximately 5.0% of our revenue during the year ended
December 31, 2002 from our operations in Brazil, which are subject to the
risks of political, economic or social instability, including:
- the possibility of expropriation,
- confiscatory taxation,
- recessions,
- hyper-inflation,
- other adverse governmental or regulatory developments or
- limitations on the repatriation of investment income, capital stock
and other assets.
We also conduct business in foreign currencies that are subject to
fluctuations in their exchange rates relative to the U.S. dollar. We monitor
our currency exchange risk but we do not currently hedge against that risk.
We cannot assure you that currency exchange fluctuations or other political,
economic or social factors will not adversely affect our financial condition
or results of operations.
ITEM 2. PROPERTIES
Our corporate headquarters is located in a 60,000 square foot building
owned by us in Miami, Florida. Our principal operations are conducted from
approximately 175 service facilities, none of which we believe is material
to our operations because most of our services are performed on the clients'
premises or on public rights of way. In addition, we believe that equally
suitable alternative locations are available in all areas where we currently
conduct business. We are attempting to sell our corporate headquarters and
move into a smaller location in or around Miami, Florida.
We also own a substantial amount of machinery and equipment, which at
December 31, 2002 had a gross value of $253.0 million (see Note 5 to Notes
to Consolidated Financial Statements). This machinery and equipment includes
vans, trucks, tractors, trailers, bucket trucks, backhoes, bulldozers,
directional boring machines, digger derricks, cranes and testing equipment.
We obtain our equipment from various third-party vendors, none of which
we depend upon, and have not experienced any difficulties in obtaining
desired equipment.
ITEM 3. LEGAL PROCEEDINGS
In November of 1997, we filed two suits against Miami-Dade County
seeking unpaid amounts due under several contracts between us and the
county for road repair, paving, sidewalk construction and road stripping.
Miami-Dade County filed counterclaims seeking recovery of amounts paid by
the county to us for work that was alledgedly not actually performed by
one of the Company's subcontractors. Following a mediation that occurred
in December of 2002, we settled all claims arising out of the litigation
and paid Miami-Dade County the amount of $2.25 million in February, 2003.
Following the settlement, the litigation has been dismissed.
The labor union representing the workers of Sistemas e Instalaciones de
Telecomunicacion S.A. ("Sintel"), a former MasTec subsidiary, has instigated
an investigative action with a Spanish federal court that commenced in July
2001 alleging that five former members of the board of directors of Sintel,
including Jorge Mas, the Chairman of the Board of MasTec, and his brother
Juan Carlos Mas, approved a series of allegedly unlawful transactions that
led to the bankruptcy of Sintel. We are also named as a potentially liable
party. The union alleges Sintel and its creditors were damaged in the
approximate amount of 13 billion pesetas ($81.9 million at December 31, 2002
exchange rates). As discussed in prior filings, the Spanish judge has taken
no action to enforce a bond order pending since July 2001 for the amount of
alleged damages. A Spanish judge has met with certain of our executives,
but neither we nor our executives have been served in the action.
On January 9, 2002, Harry Schipper, a MasTec shareholder, filed a
shareholder derivative lawsuit in the U.S. District Court for the Southern
District of Florida against us as nominal defendant and against certain
current and former members of the Board of Directors and senior management,
including Jorge Mas, our Chairman of the Board, and Austin J. Shanfelter,
our President and Chief Executive Officer. The lawsuit alleges
mismanagement, misrepresentation and breach of fiduciary duty as a result
of a series of allegedly fraudulent and criminal transactions, including
both the matters described above, the severance we paid our former chief
executive officer, and our investment in and financing of a client that
subsequently filed for bankruptcy protection, as well as certain other
matters. The lawsuit seeks damages and injunctive relief against the
individual defendants on MasTec's behalf. The Board of Directors has
formed a special committee, as contemplated by Florida law, to investigate
the allegations of the complaint and to determine whether it is in the best
interests of MasTec to pursue the lawsuit. The lawsuit has been
administratively dismissed without prejudice by agreement of the parties
to permit the committee to complete its investigation. On July 16, 2002,
Mr. Schipper made a supplemental demand on our Board of Directors by letter
to investigate allegations that (a) we reported greater revenue in an
unspecified amount on certain contracts than permitted under the contract
terms and (b) we recognized between $3 to $5 million in income for certain
projects on the books of two separate subsidiaries. These additional
allegations have also been referred to the special committee for
investigation.
We believe we have meritorious defenses to the actions described above.
We are also a party to other pending legal proceedings arising in the normal
course of business. While complete assurance cannot be given as to the
outcome of any legal claims, we believe that any financial impact would not
be material to our results of operations, financial position or cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4(A). EXECUTIVE OFFICERS
The following is a list of the names and ages of our executive officers
as of March 21, 2003, indicating all positions and offices they hold with us.
Our executive officers hold office for the term of their respective
employment contract and if they do not have an employment contract, one year
or until their successors are elected by our Board of Directors.
Name Age Position
----------------------------------------------------------------------------
Austin J. Shanfelter 45 President and Chief Executive Officer
Jose R. Mas 31 Executive Vice President-Business Development
Eric J. Tveter 44 Executive Vice President and Chief Operating Officer
Donald P. Weinstein 38 Executive Vice President and Chief Financial Officer
Austin J. Shanfelter has been our Chief Executive Officer and President
since August 2001. From February until August 2001, Mr. Shanfelter was our
Chief Operating Officer. Prior to being named Chief Operating Officer, he
served as President of one of our service offerings from January 1997.
Mr. Shanfelter has been in the infrastructure industry since 1981.
Mr. Shanfelter has been a member of the Board of Directors of the Power and
Communications Contractors Association (PCCA), an industry trade group,
since 1993. He is also the Chairman of the Cable Television Contractors
Council of the PCCA. Mr. Shanfelter is also a member of the Society of
Cable Television Engineers since 1982 and the National Cable Television
Association since 1991.
Jose R. Mas has been our Executive Vice President-Business Development
since September 2001. Mr. Mas has served in a number of capacities at the
operating level with us since 1991, most recently as President of one of our
service offerings from May 1999 to August 2001. Mr. Mas is the brother of
Jorge Mas, who is MasTec's Chairman of the Board.
Eric J. Tveter has been our Executive Vice President and Chief
Operating Officer since August 2002. Prior to joining MasTec, Mr. Tveter
was an executive with Comcast Corporation, Time Warner Communications,
Cablevision Systems Corporation's Lightpath business unit, and Metromedia
International Group, Inc., where he held various key roles in the
industries served by MasTec, most recently as President of Cablevision
Lightpath, Inc.
Donald P. Weinstein has been our Executive Vice President and Chief
Financial Officer since January 2002. From November 1999 to April 2001,
Mr. Weinstein was Senior Vice President and Chief Financial Officer of AGL
Resources, Inc., a publicly traded energy services holding company, as well
as President of the company's telecommunications subsidiary, AGL Networks.
From August 1989 to November 1999, Mr. Weinstein was employed by Citizens
Communications Co., a telecommunications and utility company, the last two
years as Vice President - Planning and Development.
Other than indicated above for Jose R. Mas, there are no family
relationships among the directors and executive officers.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
Market Information. Our common stock currently is listed on the New
York Stock Exchange under the symbol "MTZ." The following table sets forth,
for the quarters indicated, the high and low sale prices of the common
stock, as reported by the New York Stock Exchange.
Year Ended December 31,
---------------------------------------------
2001 2002
High Low High Low
---------------------------------------------
First Quarter $ 24.75 $ 12.26 $ 8.30 $ 5.25
Second Quarter $ 19.45 $ 11.40 $ 9.13 $ 6.80
Third Quarter $ 15.42 $ 4.30 $ 7.65 $ 2.40
Fourth Quarter $ 6.95 $ 3.98 $ 4.30 $ 2.03
Year Ended December 31,
Holders. As of March 21, 2003, there were 2,152 shareholders of record
of the common stock.
Dividends. We have not declared cash dividends since our inception and
we do not anticipate paying any cash dividends, but intend instead to retain
any future earnings for reinvestment in our business. On February 28, 1997
and June 19, 2000, we effected three-for-two splits of our outstanding
shares of common stock by paying each of our shareholders a stock dividend
of one share of common stock for every two shares of common stock held by
the shareholder on the record date for each split. We paid cash in lieu of
fractional shares resulting from the stock splits based on the last sale
price as reported on the New York Stock Exchange on the record date. All
references in this Annual Report to shares of common stock or share prices
have been adjusted to give retroactive effect to the stock splits.
Any future determination as to the payment of dividends will be made at
the discretion of our Board of Directors and will depend upon our operating
results, financial condition, capital requirements, general business
conditions and such other factors as the Board of Directors deem relevant.
In addition, certain credit agreements to which we are a party restrict us
from paying cash dividends or making other distributions on the common stock
except in certain circumstances. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations-Liquidity and Capital
Resources."
ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data, which
are derived from our audited consolidated financial statements. The
operating data for 1998 includes the results of our Spanish operations, 87%
of which we sold effective December 31, 1998. You should read the following
selected financial data together with our consolidated financial statements
and their notes as well as "Management's Discussion and Analysis of
Financial Condition and Results of Operations." Historical results are not
necessarily indicative of results to be expected in the future.
Year Ended December 31,
-------------------------------------------------------
1998 (1) 1999 2000 2001 2002
-------------------------------------------------------
(dollars in thousands, except per share amounts)
Statement of Operations Data:
Revenue $1,048,922 $1,059,022 $1,330,296 $1,222,580 $ 838,055
Costs of revenue, excluding
depreciation(1) 803,112 803,799 1,017,878 988,198 745,178
Depreciation 32,288 46,447 52,413 51,707 35,063
Amortization 11,025 9,701 11,042 10,810 883
General and administrative
expenses (1)(5) 140,472 91,898 98,521 290,040 117,395
Goodwill impairment - - - - 79,710
Interest expense 29,580 26,673 18,283 20,426 19,237
Interest income 9,093 9,398 4,973 5,775 1,069
Other expense, net
(1)(2)(3)(4)(5) 38,920 10,092 25,756 14,618 10,129
--------- ---------- ---------- ---------- ---------
Income (losses) before
(provision) benefit for
income taxes, equity in
earnings (losses) of
unconsolidated companies
and minority interest 2,618 79,810 111,376 (147,444) (168,471)
(Provision) benefit for
income taxes (1) (12,550) (33,266) (45,877) 54,858 65,473
Equity in earnings (losses)
of unconsolidated companies
and minority interest (3,983) (1,818) (352) 232 (137)
--------- ---------- ---------- ---------- ---------
Income (loss) before
cumulative effect of change
in accounting principle (13,915) 44,726 65,147 (92,354) (103,135)
Cumulative effect of change
in accounting principle - - - - (25,671)
--------- ---------- ---------- ---------- ---------
Net income (loss) $ (13,915) $ 44,726 $ 65,147 $ (92,354)$(128,806)
========= ========== ========== ========== =========
Basic weighted average common
shares outstanding (6) 41,234 41,714 46,390 47,790 47,922
Basic earnings (loss) per
share before cumulative
change in accounting
principle $ (0.34) $ 1.07 $ 1.40 $ (1.93)$ (2.15)
Cumulative effect of change
in accounting principle - - - - (0.54)
--------- ---------- ---------- ---------- ---------
Basic earnings (loss) per
share $ (0.34) $ 1.07 $ 1.40 $ (1.93)$ (2.69)
========= ========== ========== ========== =========
Diluted weighted average common
shares outstanding (6) 41,234 42,624 48,374 47,790 47,922
Diluted earnings (loss) per
share before cumulative change
In accounting principle $ (0.34) $ 1.05 $ 1.35 $ (1.93) (2.15)
Cumulative effect of change
in accounting principle - - - - (0.54)
--------- ---------- ---------- ---------- ---------
Diluted earnings (loss) per
share $ (0.34) $ 1.05 $ 1.35 $ (1.93) $ (2.69)
========= ========== ========== ========== =========
December 31,
-------------------------------------------------
Balance Sheet Data: 1998 (2) 1999 2000 2001 2002
-------------------------------------------------
(in thousands)
Working capital $ 197,587 $ 169,619 $ 242,437 $ 248,062 $ 144,777
Property and equipment, net 137,382 153,527 159,673 151,774 118,475
Total assets 732,221 728,409 956,345 851,372 623,792
Total debt 321,832 279,658 209,483 269,749 198,642
Total shareholders' equity 204,273 256,833 500,328 406,803 273,748
(1) Included in 1998 are severance charges relating to our Spanish
operations of $13.4 million, of which $1.9 million is reflected in
costs of revenue and $11.5 million in general and administrative
expenses, and a loss of $9.2 million related to the sale of our Spanish
subsidiary. Our effective tax rate for the year ended December 31,
1998 was mainly affected by a tax liability of approximately $7.8
million resulting from the sale of 87% of our Spanish subsidiary, the
non-deductibility of the amortization of intangibles and the non-
deductibility of other expenses. Because of the sale, the balance sheet
data as of December 31, 1998 does not include the financial position of
our Spanish operations.
(2) Included in 1998 is a charge for payments to operational management of
$33.8 million.
(3) Included in 1999 is a write-down of $10.2 million related to non-core
international assets.
(4) Included in 2000 is a net write-down and other charges of $26.3 million
related primarily to non-core assets.
(5) Included in 2001 and 2002, respectively, in other expense are charges to
reduce the carrying amount of certain assets held for sale and in use,
and non-core assets, totaling $16.5 million and $12.8 million. Included
in selling general and administrative expense are reserves for bad debt
totaling $182.2 million in 2001 related to clients who filed for
bankruptcy protection and severance charges totaling $11.5 million in
2001 and $0.2 million in 2002.
(6) Amounts have been adjusted to reflect the three-for-two stock splits
effected on February 28, 1997 and June 19, 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
General
We design, build, install, maintain, upgrade and monitor internal and
external networks and other facilities for our clients, ranging from basic
installation and construction to sophisticated engineering, design and
integration. Our diverse and long-standing client base, experienced
management and integrated value added service offering provide a stable
base of repeat business and enable us to quickly and efficiently meet client
demands.
Our primary types of contracts with our clients include:
- master service agreements for all specified design, installation and
maintenance services within a defined geographic territory for a
multi-year term,
- design and installation contracts for specific projects, and
- turnkey agreements for comprehensive design, engineering,
procurement, installation and maintenance services.
The majority of our contracts provide that we will furnish a specified
unit of service for a price per unit. We recognize revenue as the related
work is performed. A portion of our work during 2002 was performed under
percentage-of-completion contracts. Under this method, revenue is recognized
on a cost-to-cost method based on the estimated percentage of total cost
incurred to date in proportion to total estimated cost to complete the
contract. We anticipate that percentage-of-completion contracts will
constitute a smaller percentage of our total contracts in 2003 as compared
to prior years. We also recognize revenue for monitoring services and
project management services ratably over the term of the agreement. Clients
are billed with varying frequency-weekly, monthly or upon attaining specific
milestones.
We perform a significant portion of our services under master service
agreements, which typically are exclusive service agreements to provide all
of the client's network requirements up to a specified dollar amount per job
within defined geographic areas. These contracts are generally for up to five
years but are typically subject to termination at any time upon 90 to 180
days prior notice. Each master service agreement consists of hundreds of
individual projects generally valued at less than $100,000 each. These
master service agreements are frequently awarded on a competitive bid basis,
although clients are often willing to negotiate contract extensions beyond
their original terms without re-bidding. Master service agreements are
invoiced on a unit basis as work is completed. In addition, we have a
significant number of long-term maintenance and upgrade contracts with our
broadband clients that are similar to master service agreements except they
typically are not exclusive. Taken together, our master service agreements
and master service-like agreements constitute a majority of our contracts by
prior years volume.
We derive a significant amount of our revenue from telecommunications
clients. During the latter part of 2001 and all of 2002, certain segments
of the telecommunications and broadband industries suffered a severe
downturn that resulted in a number of our clients filing for bankruptcy
protection or experiencing financial difficulties. The downturn adversely
affected capital expenditures for infrastructure projects, even among
clients that did not experience financial difficulties. Capital
expenditures by telecommunications and broadband clients in 2002 remained
at low levels in comparison with prior years, and there can be no assurance
that additional clients will not file for bankruptcy protection or otherwise
experience financial difficulties in 2003. Although we refocused our
business on long-time, stable telecommunications, broadband, governmental
and other clients, there can be no assurance that these clients will
continue to fund capital expenditures for infrastructure projects at current
levels or that we will be able to increase our market share with these
stronger clients. Additional bankruptcies or further decreases in our
client's capital expenditures could reduce our cash flows and adversely
impact our liquidity.
Direct costs included in costs of revenue are:
- operations payroll and benefits,
- fuel,
- subcontractor costs,
- equipment rental,
- materials not provided by our clients, and
- insurance.
Our clients generally supply materials such as cable, conduit and
telephone equipment.
General and administrative expenses include all costs of our management
personnel, severance payments, reserves for bad debts, rent, utilities,
travel and business development efforts and back office administration such
as financial services, insurance administration, professional costs and
clerical and administrative overhead.
Contracts often include retainage provisions under which 5% to 10% of
the contract price is withheld from us until the work has been completed and
accepted by the client. We typically agree to indemnify our clients against
adverse claims and warrant the workmanship of our services for specified
time periods, usually one year.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of
operations is based upon our consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
the United States. The preparation of these financial statements requires us
to make estimates and judgments that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to revenue recognition, allowance for doubtful
accounts, intangible assets, reserves and accruals, impairment of assets,
income taxes, insurance reserves and litigation and contingencies. We base
our estimates on historical experience and on various other assumptions that
are believed to be reasonable under the circumstances, the results of which
form the basis of making judgments about the carrying values of assets and
liabilities, that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or
conditions.
We believe the following critical accounting policies involve our more
significant judgments and estimates used in the preparation of our
consolidated financial statements.
Revenue Recognition
Revenue and related costs for short-term construction projects (i.e.,
generally projects with a duration of less than one month) are recognized as
the services are rendered, generally using units of output. We recognize
revenue and related costs as work progresses on long-term, fixed price
contracts using the percentage-of-completion method, which relies on
estimates of total expected contract revenue and costs. We follow this
method since reasonably dependable estimates of the revenue and costs
applicable to various stages of a contract can be made. Recognized revenue
is subject to revisions as the contract progresses to completion. Revisions
in estimates are charged to income in the period in which the facts that
give rise to the revision become known. If we do not accurately estimate
revenue and costs, the profitability of such contracts can be affected
adversely. At the time a loss on a contract becomes known, the entire
amount of the estimated ultimate loss is accrued.
Allowance for Doubtful Accounts
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our clients to make required payments.
Management analyzes historical bad debt experience, client concentrations,
client credit-worthiness, analysis of client financial condition and credit
reports, the availability of mechanic's and other liens, the existence of
payment bonds and other sources of payment, and current economic trends when
evaluating the adequacy of the allowance for doubtful accounts. We review
the adequacy of reserves on a monthly basis. If our estimates of the
collectability of accounts receivable are incorrect, adjustments to the
allowance for doubtful accounts may be required, which could reduce our
profitability.
Depreciation
We depreciate our property and equipment over estimated useful lives
using the straight-line method. We periodically review changes in technology
and industry conditions, asset retirement activity and salvage to determine
adjustments to estimated remaining useful lives and depreciation rates.
Effective November 30, 2002, we have implemented the results of a review
of the estimated service lives of our in use property and equipment. Useful
lives were adjusted to reflect the extended use of much of our equipment.
In addition, the adjustments make the estimated useful lives for similar
equipment consistent among all operating units.
Valuation of Long-Lived Assets
We review long-lived assets, consisting primarily of property and
equipment and intangible assets with finite lives, for impairment in
accordance with Statement of Financial Accounting Standards No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS No.
144). In analyzing potential impairment, we use projections of future cash
flows from the assets. These projections are based on our views of growth
rates for the related business and anticipated future economic conditions and
the appropriate discount rates relative to risk and estimates of residual
values. We believe that our estimates are consistent with assumptions that
marketplace participants would use in their estimates of fair value. If
changes in growth rates, future economic conditions or discount rates and
estimates of terminal values were to occur, long-lived assets may become
impaired. In 2002, we recognized impairment losses related to long-lived
assets no longer in use and held for sale and certain assets in use.
Valuation of Intangible Assets and Investments
We have adopted SFAS No. 142, "Goodwill and Other Intangible Assets."
In accordance with that statement, we conduct, on at least an annual basis,
a review of our reporting units to determine whether their carrying value
exceeds fair market value. Should this be the case, the value of our
goodwill may be impaired and written down. The valuations employ a
combination of present value techniques to measure fair value corroborated
by comparisons to estimated market multiples. When necessary, we engage
third party specialists to assist us with our valuations. Impairment losses
are reflected in operating income or loss in the consolidated statements
of operations.
Effective January 1, 2002, we adopted SFAS No. 142 resulting in a
write-down of our goodwill, net of tax, in the amount of $25.7 million,
which is reflected in our consolidated financial statements as a
cumulative effect due to a change in accounting principle as discussed in
Note 2 to the Consolidated Financial Statements. Impairment losses
subsequent to adoption totalling $79.7 million ($51.9 million, net of tax)
are reflected in operating income or loss on the consolidated statement
of operations.
Insurance Reserves
We maintain insurance policies subject to a $1.0 million deductible per
claim for certain auto, property and casualty and worker's compensation
claims. We are required to post letters of credit to secure our obligation
to reimburse the insurance carrier for amounts that could potentially be
advanced by the carrier that are not covered by insurance. Our estimated
liability for claims and the associated expenses is reflected in other
current and non-current liabilities. The determination of such claims and
expenses and the appropriateness of the related liability is reviewed and
updated semi-annually. If we do not accurately estimate the losses
resulting from these claims, we may experience losses in excess of our
estimated liability, which may reduce our profitability. We also may be
required to post additional collateral with the insurance carrier, which
may affect our liquidity.
Income Tax Liability
We record income taxes using the liability method of accounting for
deferred income taxes. Under this method, deferred tax assets and
liabilities are recognized for the expected future tax consequence of
temporary differences between the financial statement and income tax bases
of our assets and liabilities. We estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating our
tax exposure together with assessing temporary differences resulting from
differing treatment of items, such as deferred revenue, for tax and
accounting purposes. These differences result in deferred tax assets and
liabilities, which are included within our consolidated balance sheet. While
the Company has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation
allowance, in the event that we determine that we will not be able to realize
all or part of the net deferred tax asset in the future, an adjustment to
the deferred tax asset would be charged to income in the period such
determination is made.
Restructuring Charges
During the second quarter of 2002, we initiated a study to determine
the proper balance of downsizing and cost cutting in relation to our
ability to respond to current and future work opportunities in each of our
service offerings. The review not only evaluated our current operations,
but also the growth and opportunity potential of each service offering as
well as the consolidation of back-office processes. As a result of this
review, we implemented a restructuring program which included four
categories to accomplish:
* Elimination of service offerings that no longer fit into our core
business strategy. This process includes reducing or eliminating
service offerings that do not fit our long-term business plan.
* Reduce or eliminate services that do not produce adequate revenue or
margins to support the level of profitability, return on investment or
investments in capital resources. This includes exiting contracts
that do not meet the minimum rate on return requirements and
aggressively seeking to improve margins and reduce costs.
* Analyze businesses that provide adequate profit contributions but still
need margin improvements which includes aggressive cost reductions and
efficiencies.
* Review new business opportunities in similar business lines that can
utilize our existing human and physical resources.
The elements of the restructuring program included involuntary
terminations of employees in affected service offerings and the
consolidation of facilities. The plan resulted in a pre-tax charge of
operations of $3.7 million. The involuntary terminations impacted both the
salaried and hourly employee groups. The total employees impacted was
approximately 1025. As of December 31, 2002, all employees have been
terminated and a balance of $0.6 million severance and benefit costs remains
to be paid. We also closed approximately 25 facilties during 2002 as part
of the program and anticipate further office closures in 2003. As of
December 31, 2002, we have remaining obligations under existing lease
agreements for closed facilities of approximately $2.1 million.
In addition to the costs noted above, we paid a consulting firm
approximately $4.6 million to assist us in preparing the plan, all of which
was expensed in 2002 as the plan was complete as of December 31,
2002. We also recognized valuation allowances and impairment losses related
to property and equipment of $12.8 million in connection with the
restructuring plan (see Note 6).
The following is a reconciliation of the restructuring accruals as of
December 31, 2002 (in thousands):
Severance costs (1) $ 1,075
Lease cancellation costs (2) 2,585
-------
3,660
Cash payments (925)
-------
Accrued costs at December 31, 2002 $ 2,735
=======
(1) Severance costs of $0.9 million are reflected in costs of revenue
and $0.2 million is reflected in general and administrative.
(2) Lease cancellation costs are reflected in costs of revenue.
Results of Operations
The following tables state for the periods indicated our consolidated
operations in dollar and percentage of revenue terms for 2000, 2001 and
2002 (dollars in thousands):
Year Ended December 31,
2000 2001 2002
-------------------------------------------
Revenue $1,330,296 $1,222,580 $ 838,055
Costs of revenue, excluding
depreciation 1,017,878 988,198 745,178
Depreciation 52,413 51,707 35,063
Amortization 11,042 10,810 883
General and administrative expenses 98,521 290,040 117,395
Godwill impairment - - 79,710
Interest expense, net of
interest income 13,310 14,651 18,168
Other expense, net 25,756 14,618 10,129
---------- ---------- ----------
Income (loss) before (provision)
benefit for income taxes
and minority interest 111,376 (147,444) (168,471)
(Provision) benefit for income taxes (45,877) 54,858 65,473
Minority interest (352) 232 (137)
---------- ---------- ----------
Net income (loss) before cumulative
effect of change in
accounting principle 65,147 (92,354) (103,135)
Cumulative effect of change in
accounting principle - - (25,671)
---------- ---------- ----------
Net income (loss) $ 65,147 $ (92,354) $ (128,806)
========== ========== ==========
Year Ended December 31,
2000 2001 2002
------ ------ ------
Revenue 100.0% 100.0% 100.0%
Costs of revenue 76.5 80.8 88.9
Depreciation 4.0 4.2 4.2
Amortization 0.8 0.9 0.1
General and administrative expenses 7.4 23.7 14.0
Goodwill impairment - - 9.5
Interest expense, net of
interest income 1.0 1.2 2.2
Other expense, net 1.9 1.3 1.2
----- ----- -----
Income (loss) before (provision)
benefit for income taxes,
and minority interest 8.4 (12.1) (20.1)
(Provision) benefit for income
taxes (3.4) 4.4 7.8
Minority interest (0.1) 0.1 -
----- ----- -----
Net income (loss) before cumulative
effect of change in
accounting principle 4.9 (7.6) (12.3)
Cumulative effect of change in
accounting principle - - (3.1)
----- ----- -----
Net income (loss) 4.9% (7.6)% (15.4)%
===== ===== =====
Year ended December 31, 2002, compared to year ended December 31, 2001
Our revenue was $838.1 million for the year ended December 31, 2002,
compared to $1,222.6 million for the same period in 2001, representing a
decrease of $384.5 million or 31.5%. This decrease was due primarily to a
continued reduction in capital expenditures by incumbent communications and
broadband clients and our decision to reduce services to certain Competitive
Local Exchange Carriers (CLEC) due to adverse financial condition
experienced by many such carriers. In addition, our fourth quarter 2002
revenues were negatively impacted by weather conditions. By industry
category, revenues in our Broadband construction operations declined by
$106.0 million, which was partially offset by increasing residential
installation revenues which reflected a $22.5 million increase. Our Energy
division reflected a $26.0 million or 15.0% decline in year over year revenues,
which was partially the result of exiting certain unprofitable contracts as
well as negative industry trends that resulted in reduced capital expenditures
by our customers. Our revenues from government contracts experienced a slight
(2.3%) decline in 2002, primarily as a result of poor weather conditions
in the southwestern, midatlantic, and southeastern United States. Inside
plant and wireless revenues reflected dramatic declines as we began to
significantly reduce these services. During the fourth quarter of 2002,
we implemented plans to exit certain unprofitable divisions and locations.
Revenue from these locations aggregated $77.8 million during 2002.
Our costs of revenue were $745.2 million or 88.9% of revenue for the
year ended December 31, 2002, compared to $988.2 million or 80.8% of
revenue for the same period in 2001. In 2002, margins were adversely
affected by under-utilization of personnel and equipment and demobilization
and redeployment costs as we adjusted to reduced capital spending by our
client base. In addition, our margins were negatively affected by
additional reserves for insurance and litigation, restructuring charges and
demobilization costs incurred to exit certain contracts and locations.
During the fourth quarter of 2002, we implemented plans to exit certain
locations or businesses which incurred costs of revenue aggregating $85.9
million in 2002.
Depreciation was $35.1 million or 4.2% of revenue for the year ended
December 31, 2002, compared to $51.7 million or 4.2% of revenue for the same
period in 2001. The decrease in the amount of depreciation expense in 2002
was due primarily to reduction of fixed assets resulting from disposals of
excess equipment.
Amortization expense decreased to $0.9 million for the year ended
December 31, 2002, compared to $10.8 million for the same period in 2001.
Goodwill is no longer amortized in accordance with SFAS No. 142 (see Note 2
to the Consolidated Financial Statements), which was implemented January 1,
2002. The remaining amortization expense relates to non-competition
agreements.
General and administrative expenses were $117.4 million or 14.0% of
revenue for the year ended December 31, 2002, compared to $290.0 million or
23.7% of revenue for the same period in 2001. Included in general and
administrative expenses in 2002 and 2001 are provisions for bad debts of
$15.4 million and $185.5 million, respectively. We incurred severance
charges totaling $0.2 million in 2002 in connection with our restructuring
plan, and $11.5 million in 2001 primarily related to our former president
and chief executive officer. Excluding these provisions and charges, general
and administrative expenses were $101.8 million or 12.1% of revenue for the
year ended December 31, 2002 and $93.0 million or 7.6% of revenue for the
year ended December 31, 2001, an increase of $8.8 million from the prior
year. General and administrative expenses as a percentage of revenue in
2002 was affected by an overall decline in revenues experienced during the
year without a similar reduction of expenses as well as additional costs
incurred in connection with our restructuring plan. We are currently
implementing additional measures to streamline our cost structure,
including exiting certain divisions and locations and activities that
added approximately $17.1 million to our overall general and
administrative expenses in 2002.
Interest expense, net of interest income, was $18.2 million or 2.2% of
revenue for the year ended December 31, 2002, compared to $14.7 million or
1.3% of revenue for the same period in 2001. We had no outstanding draws on
our credit facility as of December 31, 2002. Although we continue to incur
interest expense from our long term debt and periodic credit line borrowing
to meet working capital needs and support various letters of credit, we have
reduced interest expense by $1.2 million during the year. This reduction
was partially offset by a $4.7 million reduction in interest income from
notes receivable.
Other expense was $10.1 million or 1.2% of revenue for the year ended
December 31, 2002, compared to $14.6 million of other expense or 1.3% of
revenue for the same period in 2001. In 2002, a $5.0 million gain on
disposal of certain non-core assets, investments and excess equipment was
offset by a $13.2 million valuation allowance to reduce the carrying value
of certain assets held for sale, long lived assets in use and investments.
In 2001, we recorded an impairment charge of $6.5 million related to our
equity investment in a client and a $10.0 million write-down of non-core
international assets
For the year ended December 31, 2002, our effective tax rate was
approximately 37.9%, compared to 37.2% in 2001. The increase in effective
rate was due to the nondeductibility of certain expenses which reduced the
overall tax benefit in 2002 due to a proportionate increase in our loss
for 2002 relative to 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
Our revenue was $1.2 billion for the year ended December 31, 2001,
compared to $1.3 billion for the same period in 2000, representing a
decrease of $107.7 million or 8.1% primarily due to a reduction in capital
expenditures by telecommunications clients and a downturn in the economy
generally.
Our costs of revenue were $988.2 million or 80.8% of revenue for the
year ended December 31, 2001, compared to $1.0 billion or 76.5% of revenue
for the same period in 2000. In 2001, margins were impacted by under-
utilization of personnel, leased equipment and other properties; losses
related to our internal network service offerings; and demobilization and
redeployment costs, all related to reduced capital spending by
telecommunication carriers.
Depreciation was $51.7 million or 4.2% of revenue for the year ended
December 31, 2001, compared to $52.4 million or 4.0% of revenue for the
same period in 2000. The decrease in the amount of depreciation expense
in 2001 was due primarily to reduced capital expenditures.
Amortization was $10.8 million or 0.9% of revenue for the year ended
December 31, 2001, compared to $11.0 million or 0.8% of revenue for the same
period in 2000. Beginning January 1, 2002, goodwill was no longer
amortized as a result of the adoption of SFAS 142.
General and administrative expenses were $290.0 million or 23.7% of
revenue for the year ended December 31, 2001, compared to $98.5 million or
7.4% of revenue for the same period in 2000. Included in general and
administrative expenses in 2001 is a reserve for bad debt of $182.2 million
related to receivables from clients that have filed for bankruptcy
protection or are experiencing financial difficulties and a charge of
$11.5 million primarily related to severance for our former president and
chief executive officer. Excluding these charges and reserves, general and
administrative expenses were $96.3 million or 7.9% of revenue, a reduction
of $2.2 million from the prior year.
Interest expense, net of interest income, was $14.7 million or 1.2% of
revenue for the year ended December 31, 2001, compared to $13.3 million or
1.0% of revenue for the same period in 2000. The increase in net interest
expense of $1.4 million was due primarily to higher debt balances in 2001.
Other expense was $14.6 million or 1.3% of revenue for the year ended
December 31, 2001, compared to $25.8 million or 1.9% of revenue for the same
period in 2000. In 2001, we recorded an impairment charge of $6.5 million
related to our equity investment in a client and a $10 million write-down of
non-core international assets. In 2000, we recognized a net charge of $26.3
million primarily related to write-downs of non-core international assets.
For the year ended December 31, 2001, our effective tax rate was
approximately 37.2%, compared to 41.2% in 2000. The decline in effective
rate was due to the nondeductibility of certain expenses which reduced the
overall tax benefit in 2001 proportionately more than increased the tax
provision in 2000 due to the greater amount of the loss in 2001 compared to
the amount of income in 2000.
Financial Condition, Liquidity and Capital Resources
We derive a significant amount of our revenue from communications
providers. During the last two years, the communications industry suffered
a severe downturn that resulted in a number of our clients filing for
bankruptcy protection or experiencing financial difficulties. The downturn
adversely affected capital expenditures for infrastructure projects even
among clients that did not experience financial difficulties. Capital
expenditures by telecommunications and other clients in 2003 are expected
to remain at low levels in comparison with prior years, and there can be no
assurance that additional clients will not file for bankruptcy protection or
otherwise experience financial difficulties in 2003. Although we have
refocused our business on established, stable communications, energy,
government entities and other clients, there can be no assurance that these
clients will continue to fund capital expenditures for infrastructure
projects at current levels or that we will be able to increase our market
share with these stronger clients. Further decreases in our client's
capital expenditures could reduce our cash flows and adversely impact our
liquidity.
Our primary liquidity needs are for working capital, capital
expenditures, letters of credit and debt service. Our primary sources of
liquidity are cash flows from operations, borrowings under revolving lines of
credit, tax refunds and sale of property and assets. During the fourth
quarter of 2002, we recorded certain restructuring charges aggregating $8.2
million, including consulting fees, of which $6.3 million remains outstanding
as of December 31, 2002. We anticipate payment of approximately $5.2 million
during 2003 and $1.1 million in 2004.
Net cash provided by operating activities was $57 million for the year
ended December 31, 2002, compared to $54.8 million in 2001. The net cash
provided by operating activities in 2002, in part resulted from collection
of receivables, changes in other working capital components, and receipt of
a $53.4 million income tax refund resulting from losses incurred in 2001.
Proceeds from the income tax refund were used to repay all borrowings under
our credit facility at the time of receipt.
We have a credit facility for U.S. operations that provides for
borrowings up to an aggregate of $125.0 million, based on a percentage of
eligible accounts receivable and unbilled receivables as well as a fixed
amount of equipment that decreases quarterly. Although the credit facility
provides for borrowings of up to $125.0 million, the amount that can be
borrowed at any given time is based upon a formula that takes into account,
among other things, our eligible billed and unbilled accounts receivable,
which can result in borrowing availability of less than the full amount of
the facility. As of December 31, 2002, availability under the credit
facility totaled $39 million net of outstanding standby letters of credit
aggregating $47 million. Substantially all of the outstanding letters of
credit are all issued to the Company's insurance providers as part of the
Company's insurance program. We had no outstanding draws under the credit
facility as of December 31, 2002. Amounts outstanding under the revolving
credit facility mature on January 22, 2007. The credit facility is
collateralized by a first priority security interest in substantially all
of our U.S. assets and a pledge of the stock of certain of our operating
subsidiaries. Interest under the facility accrues at rates based, at our
option, on the agent bank's base rate plus a margin of between 0.50% and
1.50% or its LIBOR rate (as defined in the credit facility) plus a margin of
between 2.0% and 3.0% each depending on certain financial thresholds. The
credit facility includes an unused facility fee of 0.50%, which may be
adjusted to as low as 0.375% or as high as 0.625% depending on the
achievement of certain financial thresholds.
The credit facility, as amended in March 2003, contains customary
events of default (including cross-default) provisions and covenants related
to our North American operations that prohibit, among other things, making
investments and acquisitions in excess of a specified amount, incurring
additional indebtedness in excess of a specified amount, paying cash
dividends, making other distributions in excess of a specified amount, making
capital expenditures in excess of a specified amount, creating liens,
prepaying other indebtedness, including our 7.75% senior subordinated notes,
and engaging in certain mergers or combinations without the prior written
consent of the lenders. In addition, deterioration in the quality of our
billed and unbilled receivables will reduce availability under our credit
facility.
The credit facility, as amended in March 2003, contains certain
financial covenants that require us to maintain:
(a) tangible net worth
(i) on or after March 31, 2002 and on or prior to December 31,
2002 of $180.0 million plus an amount equal to 50% of net
income from North American operations with certain adjustments
for non-recurring charge amounts for the period from September
30, 2002 through December 31, 2002 and
(ii) any time after December 31, 2002 the greater of our tangible
net worth from North American operations and $167.0 million
less $10.0 million, plus an amount equal to 50% of net income
from North American operations from January 1, 2003 through
the date of determination, and
(b) a minimum fixed charge coverage ratio (all as defined in the
credit facility) of at least:
for calendar year, 2002, of at least 2.0:1 for the successive
periods of three, four, five, six, seven, eight, nine, ten, eleven
and twelve consecutive calendar months beginning January 1, 2002
and for calendar year 2003 of at least:
(i) 1.10:1 for the successive periods of three, four and five
consecutive calendar months beginning January 1, 2003;
(ii) 1.25:1 for the successive periods of six, seven and eight
consecutive calendar months beginning January 1, 2003;
(iii) 1.50:1 for the successive periods of nine, ten and eleven
consecutive calendar months beginning on January 1, 2003;
(iv) 1.75:1 for the period of 12 consecutive calendar months
ending on December 31, 2003 and
(v) 2.0:1 for the period of 12 consecutive months ending on or
after January 31, 2004.
As of December 31, 2002, we were in compliance with all of the
covenants under the credit facility, as amended in March 2003. During
2002, we amended the credit facility to provide a sub-facility for the
issuance of letters of credit to secure our potential obligations under
casualty insurance programs, to exclude a portion of the cost of
implementing our new management information system, and to modify certain
financial covenants. Failure to achieve certain results could cause us not
to meet these covenants in the future.
We have $200.0 million, 7.75% senior subordinated notes due in
February 2008, with interest due semi-annually, of which $196.0 million,
net of discount, is outstanding at December 31, 2002. The notes also
contain default (including cross-default) provisions and covenants
restricting many of the same transactions as under our credit facility.
During the year ended December 31, 2002, we paid approximately $17.3
million related to contingent consideration from earlier acquisitions that
was reflected as a reduction in other current liabilities. During the
year ended December 31, 2002, we invested $11.6 million in our fleet to
replace or upgrade equipment and $7.4 million in technology enhancements
including approximately $1.2 million of which was financed. Also, we
received proceeds of approximately $14.3 million on the sale of assets
and disposal of assets held for sale and investments. During year ended
December 31, 2002, our financing activities primarily consisted of the
repayment of all borrowings under our credit facility using the proceeds
from the $53.4 million income tax refund received, sales of assets and cash
generated from operations.
The following table sets forth our contractual commitments as of
December 31, 2002 (in thousands) and the payment obligations:
2007 &
Contractual Obligations Total 2003 2004 2005 2006 Thereafter
- -------------------------------------------------------------------------------
Senior subordinated notes (1) $195,860 $ - $ - $ - $ - $195,860
Notes payable for equipment(1) 1,955 380 1,575 - - -
Other revolving debt(1) 827 827 - - - -
Obligations related to
acquisitions (2) 4,919 4,919 - - - -
Capital leases (3) 2,291 974 703 566 48 -
Severance 571 414 157
Operating leases 31,266 13,660 9,142 4,791 2,035 1,638
-------- ------- ------- ------- ------ --------
Total $237,689 $21,174 $11,577 $ 5,357 $2,083 $197,498
======== ======= ======= ======= ====== ========
(1) See Note 6 to the Notes to Consolidated Financial Statements.
(2) Primarily related to contingent consideration for acquisitions.
(3) Included in other liabilities in Consolidated Balance Sheets.
Total
Amounts 2007 &
Other Commitments Committed 2003 2004 2005 2006 Thereafter
- -----------------------------------------------------------------------------
Standby letters of credit $46,704 $46,704 $ - $ - $ - $ -
Executive life insurance 22,856 1,624 1,624 1,624 1,124 16,860
------- ------- ------ ------ ------ -------
Total $69,560 $48,328 $1,624 $1,624 $1,124 $16,860
======= ======= ====== ====== ====== =======
Seasonality
Our North American operations are historically seasonally slower in the
first and fourth quarters of the year. This seasonality is primarily the
result of client budgetary constraints and preferences and the effect of
winter weather on external network activities. Some of our clients,
particularly the incumbent local exchange carriers, tend to complete
budgeted capital expenditures before the end of the year and defer
additional expenditures until the following budget year. Revenue in local
currency from our Brazilian operations is not expected to fluctuate
seasonally.
Impact of Inflation
The primary inflationary factor affecting our operations is increased
labor costs. We have not experienced significant increases in labor costs
to date. Our Brazilian operations may be exposed to risks associated with
high inflation.
Recently Issued Accounting Pronouncements
In 2001, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 requires
that goodwill be assessed at least annually for impairment by applying a
fair-value based test. Goodwill will no longer be amortized over its
estimated useful life. In addition, acquired intangible assets are required
to be recognized and amortized over their useful lives if the benefit of the
asset is based on contractual or legal rights. Effective January 1, 2002,
we implemented SFAS No. 142, which resulted in a write-down of our goodwill,
net of tax, in the amount of $25.7 million and is reflected in our
consolidated financial statements as a cumulative effect due to a change in
accounting principle. Subsequent to adoption, a $79.7 million impairment
charge was recognized in the fourth quarter of 2002 in the accompanying
consolidated statement of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets. This statement supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of
and establishes a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by
sale. We adopted SFAS No. 144 effective January 1, 2002. The adoption of
this statement had a material effect on the Company's operating results as
of December 31, 2002, as we recorded valuation allowances and impairment
charges against certain assets held for sale and in use, which aggregated
$12.8 million.
In May 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 rescinds the automatic treatment of
gains or losses from extinguishment of debt as extraordinary unless they
meet the criteria for extraordinary items as outlined in APB Opinion No.
30, Reporting the Results of Operations, Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions. SFAS No. 145 also requires sale-
leaseback accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions and makes various
technical corrections to existing pronouncements. The provisions of SFAS
No. 145 related to the rescission of FASB Statement 4 are effective for
fiscal years beginning after May 15, 2002, with early adoption encouraged.
All other provisions of SFAS No. 145 are effective for transactions
occurring after May 15, 2002, with early adoption encouraged. We do not
anticipate that adoption of SFAS No. 145 will have a material effect on
our earnings or financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires the
recording of costs associated with exit or disposal activities at their fair
values only once a liability exists. Under previous guidance, certain exit
costs were accrued when management committed to an exit plan, which may have
been before an actual liability arose. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December
31, 2002, with early application encouraged. We do not anticipate that
adoption of SFAS No. 146 will have a material effect on our earnings or
financial position.
In December 2002, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure an Amendment of FASB Statement No.
123 ("SFAS 148") which is effective for years ending after December 15, 2002.
SFAS 148 amends Statement of Accounting Standards No. 123, "Acconting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based
method of accounting for stock-based employee compensation. It also amends
the disclosure provisions of SFAS 123 to require prominent disclosure about
the effects on reported net earnings of an entity's accounting policy
decisions with respect to stock-based compensation. Finally, SFAS 148
amends APB Opinion No. 28, "Interim Financial Reporting," to require
disclosure about those effects in interim financial information. We will
continue to apply APB Opinon No. 25, "Accounting for Stock Issued to
Employees" and related interpretations in accounting for stock-based
compensation plans, which continues to be allowed under SFAS 123, as
amended by SFAS 148. In addition, we have made the required disclosure
provisions required by SFAS 148 in Notes 1 and 9 of the Notes to the
Consolidated Financial Statements and will include the additional required
disclosures in all future interim financial statements.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See Notes 12 and 13 of Notes to Consolidated Financial Statements
for disclosures about market risk.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants..........................26
Report of Independent Certified Public Accountants..........................27
Consolidated Statements of Operations for the Three Years Ended
December 31, 2002.........................................................28
Consolidated Balance Sheets as of December 31, 2001 and 2002................29
Consolidated Statements of Changes in Shareholders' Equity for the
Three Years Ended December 31, 2002.......................................30
Consolidated Statements of Cash Flows for the Three Years Ended
December 31, 2002.........................................................31
Notes to Consolidated Financial Statements..................................33
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of MasTec, Inc.:
We have audited the accompanying consolidated balance sheet of MasTec, Inc.
as of December 31, 2002 and the related consolidated statement of operations,
shareholders' equity, and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of MasTec,
Inc. at December 31, 2002 and the consolidated results of their operations
and their cash flows for year then ended, in conformity with accounting
principles generally accepted in the United States.
As discussed in Note 2 to the Financial Statements in 2002, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and
Other Intangible Assets.
/s/ Ernst & Young LLP
Miami, Florida
March 10, 2003
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Shareholders of MasTec, Inc.:
In our opinion, the accompanying consolidated balance sheet and the
related consolidated statements of operations, changes in shareholders'
equity and cash flows present fairly, in all material respects, the
financial position of MasTec, Inc. and its subsidiaries at December 31,
2001, and the results of their operations and their cash flows for each
of the two years in the period ended December 31, 2001 in conformity with
accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
Miami, Florida
February 18, 2002
MASTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
Year Ended December 31,
2000 2001 2002
---------- ---------- ----------
Revenue $1,330,296 $1,222,580 $ 838,055
Costs of revenue, excluding
depreciation 1,017,878 988,198 745,178
Depreciation 52,413 51,707 35,063
Amortization 11,042 10,810 883
General and administrative expenses 98,521 290,040 117,395
Goodwill impairment - - 79,710
Interest expense 18,283 20,426 19,237
Interest income 4,973 5,775 1,069
Other expense, net 25,756 14,618 10,129
---------- ---------- ----------
Income (loss) before (provision)
benefit for income taxes and
minority interest 111,376 (147,444) (168,471)
(Provision) benefit for income taxes (45,877) 54,858 65,473
Minority interest (352) 232 (137)
---------- ---------- ----------
Net income (loss) before cumulative
change in accounting principle 65,147 (92,354) (103,135)
Cumulative change in accounting
principle - - (25,671)
---------- ---------- ----------
Net income (loss) $ 65,147 $ (92,354) $ (128,806)
========== ========== ==========
Basic weighted average common
shares outstanding 46,390 47,790 47,922
Basic earnings (loss) per share
before cumulative change
in accounting principles $ 1.40 $ (1.93) (2.15)
Cumulative change in accounting
principle - - (0.54)
---------- ---------- ----------
Basic earnings (loss) per share $ 1.40 $ (1.93) $ (2.69)
========== ========== ==========
Diluted weighted average common
shares outstanding 48,374 47,790 47,922
Diluted earnings (loss) per share
before cumulative change in
accounting principles $ 1.35 $ (1.93) $ (2.15)
Cumulative change in accounting
principle - - (0.54)
---------- ---------- ----------
Diluted earnings (loss) per share $ 1.35 $ (1.93) $ (2.69)
========== ========== ==========
The accompanying notes are an integral part of these consolidated financial
statements.
MASTEC, INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
December 31
-----------------------
2001 2002
---------- ---------
Assets
Current assets:
Cash and cash equivalents. . . . . . . . . . $ 48,478 $ 8,730
Accounts receivable, unbilled revenue and
retainage, net. . . . . . . . . . . . . . . 251,715 185,235
Inventories. . . . . . . . . . . . . . . . . 25,697 23,736
Income tax refund receivable . . . . . . . . 44,904 24,598
Prepaid expenses and other current assets. . 23,078 32,873
--------- ---------
Total current assets . . . . . . . . . . . 393,872 275,172
Property and equipment, net. . . . . . . . . . 151,774 118,475
Goodwill . . . . . . . . . . . . . . . . . . . 264,826 150,984
Deferred taxes . . . . . . . . . . . . . . . . - 40,271
Other assets . . . . . . . . . . . . . . . . . 40,900 38,890
--------- ---------
Total assets . . . . . . . . . . . . . . . $ 851,372 $ 623,792
========= =========
Liabilities and Shareholders' Equity
Current liabilities:
Current maturities of debt . . . . . . . . $ 1,892 $ 1,207
Accounts payable . . . . . . . . . . . . . 75,508 63,492
Other current liabilities. . . . . . . . . 68,410 65,696
--------- ---------
Total current liabilities. . . . . . . . 145,810 130,395
--------- ---------
Other liabilities. . . . . . . . . . . . . . 30,902 22,214
--------- ---------
Long-term debt . . . . . . . . . . . . . . . 267,857 197,435
--------- ---------
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value; authorized
shares - 5,000,000; issued and outstanding
shares - none. . . . . . . . . . . . . . - -
Common stock $0.10 par value; authorized
shares - 100,000,000; issued and outstanding
shares - 47,905,000 in 2001 and
48,006,000 in 2002 . . . . . . . . . . . 4,791 4,801
Capital surplus. . . . . . . . . . . . . . 348,022 348,319
Retained earnings (deficit). . . . . . . . 73,996 (54,810)
Foreign currency translation adjustments . (20,006) (24,562)
--------- ---------
Total shareholders' equity . . . . . . . 406,803 273,748
--------- ---------
Total liabilities and shareholders' equity $ 851,372 $ 623,792
========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(In thousands)
Foreign Accumulated
Common Stock Currency Other
-------------- Capital Retained Translation Comprehensive
Shares Amount Surplus Earnings Adjustments Total Income
------ ------ -------- -------- ----------- -------- -----------
Balance December 31, 1999 42,350 $4,235 $167,387 $101,203 $(15,992) $256,833 $ 85,211
Net income - - - 65,147 - 65,147 65,147
Foreign currency translation
adjustment - - - - (899) (899) (899)
Stock issued, primarily for
acquisitions and stock
options exercised 5,352 535 173,804 - - 174,339 -
Tax benefit resulting from
stock option plan - - 4,908 - - 4,908 -
------ ------ -------- -------- -------- -------- --------
Balance December 31, 2000 47,702 $4,770 $346,099 $166,350 $(16,891) $500,328 $149,459
Net loss - - - (92,354) - (92,354) (92,354)
Foreign currency translation
adjustment - - - - (3,115) (3,115) (3,115)
Stock issued, primarily for
acquisitions and stock
options exercised 203 21 1,923 - - 1,944 -
------ ------ -------- -------- -------- -------- --------
Balance December 31, 2001 47,905 $4,791 $348,022 $ 73,996 $(20,006) $406,803 $ 53,990
Net loss - - - (128,806) - (128,806) (128,806)
Foreign currency translation
adjustment - - - - (4,556) (4,556) (4,556)
Stock issued, primarily for stock
options exercised 101 10 297 - - 307 -
------ ------ -------- -------- -------- -------- --------
Balance December 31, 2002 48,006 $4,801 $348,319 $( 54,810) $(24,562) $273,748 $(79,372)
====== ====== ======== ======== ======== ======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Year Ended December 31,
------------------------------
2000 2001 2002
-------- -------- ---------
Cash flows from operating activities:
Net income (loss). . . . . . . . . . . . . $ 65,147 $(92,354) $(128,806)
Adjustments to reconcile net income
(loss) to net cash (used in) provided
by operating activities:
Depreciation and amortization. . . . . . 63,455 62,517 35,946
Minority interest. . . . . . . . . . . . 352 (232) 137
Gain on disposal of assets and investments (450) (863) (5,520)
Bad debt expense . . . . . . . . . . . . - 182,200 15,418
Write-down of assets . . . . . . . . . . 23,024 16,500 20,375
Cumulative change in accounting
principle, net . . . . . . . . . . . . - - 25,671
Goodwill impairment. . . . . . . . . . . - - 79,710
Deferred income tax provision (benefit). 981 719 (41,783)
Changes in assets and liabilities net
of effect of acquisitions:
Accounts receivable, unbilled revenue
and retainage, net . . . . . . . . . (109,470) (17,121) 41,709
Inventories. . . . . . . . . . . . . . (4,347) (5,807) (3,031)
Income tax refunds . . . . . . . . . . - (44,904) 53,414
Other assets, current and non-current
portion. . . . . . . . . . . . . . . (56,665) (525) (35,701)
Accounts payable . . . . . . . . . . . (1,433) (3,701) (11,768)
Other liabilities, current and non-
current portion. . . . . . . . . . . 7,535 (41,617) 11,201
-------- -------- ---------
Net cash (used in) provided by operating
activities . . . . . . . . . . . . . . . . (11,871) 54,812 56,972
-------- -------- ---------
Cash flows from investing activities:
Capital expenditures . . . . . . . . . . . (52,638) (43,915) (18,965)
Cash paid for acquisitions and contingent
consideration, net of cash acquired. . . (55,303) (30,313) (17,269)
Investments in unconsolidated companies
and distribution to joint venture
partner. . . . . . . . . . . . . . . . . (4,900) (11,450) -
Investment in life insurance policies. . . - - (1,840)
Repayment of notes receivable. . . . . . . 1,100 - -
Net proceeds from sale of assets and
investments. . . . . . . . . . . . . . . 54,065 2,336 14,280
-------- -------- ---------
Net cash used in investing activities. . . . (57,676) (83,342) (23,794)
-------- -------- ---------
Cash flows provided by (used in) financing
activities:
Proceeds (repayments) from revolving
credit facilities, net . . . . . . . . . (71,538) 58,645 (71,107)
Proceeds from issuance of common stock . . 133,695 1,146 307
-------- -------- ---------
Net cash provided by (used in) financing
activities . . . . . . . . . . . . . . . . 62,157 59,791 (70,800)
-------- -------- ---------
Net (decrease) increase in cash and cash
equivalents. . . . . . . . . . . . . . . . (7,390) 31,261 (37,622)
Net effect of translation on cash. . . . . . (1,788) (1,240) (2,126)
Cash and cash equivalents--beginning
of period. . . . . . . . . . . . . . . . . 27,635 18,457 48,478
-------- -------- ---------
Cash and cash equivalents--end of period . . $ 18,457 $ 48,478 $ 8,730
======== ======== =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest . . . . . . . . . . . . . . . . . $ 18,042 $ 20,115 $ 19,576
======== ======== =========
Income taxes . . . . . . . . . . . . . . . $ 44,618 $ 10,016 $ 1,555
======== ======== =========
(continued)
The accompanying notes are an integral part of these consolidated financial
statements.
MASTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS-(Continued)
During the year ended December 31, 2000, we completed certain
acquisitions which have been accounted for as purchases. The fair value of
the net assets acquired excluding goodwill totaled $16.2 million and was
comprised primarily of $26.9 million of accounts receivable, $9.4 million of
property and equipment, $1.1 million of other assets and $5.8 million in
cash, offset by $27.0 million of assumed liabilities. The excess of the
purchase price over the net assets acquired was $73.4 million and was
allocated to goodwill. The total purchase price of $89.6 million was paid
by issuing $36.5 million of common stock (0.6 million shares) and notes and
$53.1 million in cash. We also issued 207,171 shares of common stock with a
value of $15.8 million related to the payment of contingent consideration
from earlier acquisitions. Of the $15.8 million, $0.2 million was recorded
as a reduction of other current liabilities and $15.6 million as additional
goodwill. Additionally, $8.0 million of contingent consideration was paid
in cash and was recorded as goodwill.
During the year ended December 31, 2001, we completed certain
acquisitions which have been accounted for as purchases. The fair value of
the net assets excluding goodwill acquired totaled $2.6 million and was
comprised primarily of $3.0 million of accounts receivable, $2.0 million of
property and equipment, $0.5 million of other assets and $0.2 million in
cash, offset by $3.1 million of assumed liabilities. The excess of the
purchase price over the fair value of net assets acquired was $2.7 million
and was allocated to goodwill. The total purchase price of $5.3 million is
comprised of $4.0 million in cash and the balance in seller financing. We
also paid approximately $25.9 million related to contingent consideration
from earlier acquisitions of which $0.6 million was reflected as additional
goodwill and $25.3 million reflected as a reduction in other current
liabilities.
During the year ended December 31, 2002, we paid approximately $17.3
million related to contingent consideration from earlier acquisitions that
was reflected as a reduction in other current liabilities.
The accompanying notes are an integral part of these consolidated financial
statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Note 1 - Nature of the Business and Summary of Significant Accounting Policies
We are a leading end-to-end communication, broadband and energy
infrastructure service provider for a broad range of clients in North America
and Brazil. We design, build, install, maintain, upgrade and monitor internal
and external networks and other facilities for our clients. We are one of
the few national, multi-disciplinary infrastructure providers that furnishes
a comprehensive solution to our clients' infrastructure needs ranging from
basic installation and construction to sophisticated engineering, design and
integration. Our diverse and long-standing client base, experienced management
and integrated value added service offering provide a stable base of repeat
business and enable us to quickly and efficiently meet client demands.
A summary of the significant accounting policies followed in the
preparation of the accompanying consolidated financial statements is
presented below:
Management estimates. The preparation of financial statements in
conformity with accounting principles generally accepted in the United States
requires us to make estimates and assumptions that affect the reported
amounts of assets, liabilities, revenue and expenses, and related disclosure
of contingent assets and liabilities. The more significant estimates relate
to our revenue recognition, allowance for doubtful accounts, intangible
assets, accrued insurance, income taxes, litigation and contingencies. We
base our estimates on historical experience and on various other assumptions
that we believe to be reasonable under the circumstances, the results of
which form the basis for our judgments about our results and the carrying
values of our assets and liabilities. Actual results and values may differ
from these estimates.
Principles of consolidation. The consolidated financial statements
include MasTec, Inc. and its subsidiaries. Other parties' interests in
consolidated entities are reported as minority interests. All material
intercompany accounts and transactions have been eliminated.
Reclassifications. Certain prior year amounts have been reclassified
to conform to the 2002 presentation.
Comprehensive income (loss). As reflected in the consolidated statements
of changes in shareholders' equity, comprehensive income is a measure of net
income and all other changes in equity that result from transactions other
than with shareholders. Comprehensive loss consists of net loss and foreign
currency translation adjustments. Our comprehensive income (losses) for the
years ended December 31, 2000, 2001 and 2002 were $64.2 million, $(95.5)
million and $(133.4) million, respectively.
Foreign currency. We operate in Brazil, which is subject to greater
political, monetary, economic and regulatory risks than our domestic
operations. Assets and liabilities of foreign subsidiaries and equity with a
functional currency other than U.S. dollars are translated into U.S. dollars
at exchange rates in effect at the end of the reporting period. Foreign
entity revenue and expenses are translated into U.S. dollars at the average
rates that prevailed during the period. The resulting net translation gains
and losses are reported as foreign currency translation adjustments in
shareholders' equity as a component of other accumulated comprehensive
income. Exchange gains and losses on transactions and equity investments
denominated in a currency other than their functional currency are included
in results of operations as incurred.
Revenue recognition. Revenue and related costs for short-term
construction projects (i.e., generally projects with a duration of less than
one month) are recognized as the services are rendered, generally using units
of output. Revenue generated by certain long-term construction contracts are
accounted for by the percentage of completion method under which income is
recognized based on the ratio of estimated cost incurred to total estimated
contract cost. We follow this method since reasonably dependable estimates of
the revenue and costs applicable to various stages of a contract can be made.
Recognized revenue and profits are subject to revisions as the contract
progresses to completion. Revisions in profit estimates are charged to income
in the period in which the facts that give rise to the revision become known.
We also provide management, coordination, consulting and administration
services for network infrastructure projects. Compensation for such services
is recognized ratably over the term of the service agreement. At the time a
loss on a contract becomes known, the entire amount of the estimated ultimate
loss is accrued.
Billings in excess of costs and estimated earnings on uncompleted
contracts are classified as current liabilities. Any costs in excess of
billings are classified as current assets. Work in process on contracts is
based on work performed but not billed to clients as per individual contract
terms.
Allowance for doubtful accounts. We maintain allowances for doubtful
accounts for estimated losses resulting from the inability of our clients to
make required payments. Management analyzes historical bad debt experience,
client concentrations, client credit-worthiness, the availability of
mechanic's and other liens, the existence of payment bonds and other sources
of payment, and current economic trends when evaluating the adequacy of the
allowance for doubtful accounts.
Earnings per share. Basic earnings per common share is computed by
dividing income available to common shareholders by the weighted average
number of common shares outstanding. Diluted earnings per common share
include the dilutive effect of stock options using the treasury stock
method. The difference between the weighted average common shares outstanding
used to calculate basic and diluted earnings per share relates to stock
options assumed exercised under the treasury method of accounting of
approximately 1,984,000 for the year ended December 31, 2000. Included in
the diluted earnings per share computation are approximately 167,000 shares
for the year ended December 31, 2000 to be issued in connection with an
acquisition of a network service provider. Potentially dilutive shares for
the year ended December 31, 2001 and 2002 totaling 199,000 and 74,000 shares,
respectively, were not included in the diluted per share calculation because
their effect would be anti-dilutive. Accordingly, for the years ended
December 31, 2001 and 2002, diluted net loss per common share is the
same as basic net loss per common share.
Cash and cash equivalents. We consider all short-term investments with
maturities of three months or less when purchased to be cash equivalents.
At December 31, 2001 and 2002, we had cash and cash equivalents denominated
in Brazilian reals that translate to approximately $4.0 million and $1.5
million, respectively.
Inventories. Inventories (consisting principally of materials and
supplies) are carried at the lower of first-in, first-out cost or market.
During 2002, the Company recorded an obsolescence reserve of $5.2 million
in "Costs of revenue" in the consolidated statement of operations.
Property and equipment. Property and equipment are recorded at cost.
Depreciation is computed using the straight-line method over the estimated
useful lives of the respective assets. Leasehold improvements are
depreciated over the shorter of the term of the lease or the estimated
useful lives of the improvements. Expenditures for repairs and maintenance
are charged to expense as incurred. Expenditures for betterments and major
improvements are capitalized and depreciated over the remaining useful life
of the asset. The carrying amounts of assets sold or retired and related
accumulated depreciation are eliminated in the year of disposal and the
resulting gains and losses are included in other income or expense.
Deferred Financing Costs. Deferred financing costs related to the
Company's revolving credit facility and the senior subordinated notes whose
short and long-term portions are included in other current and non-current
assets in the consolidated balance sheets are amortized over the related
terms of the debt using the effective interest method. The net deferred
financing costs were $3.1 million and $6.2 million at December 31, 2001 and
2002, respectively.
Software Capitalization. The Company capitalizes certain costs incurred
in connection with developing or obtaining internal use software in
accordance with American Institute of Certified Public Accountants Statement
of Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. These capitalized software costs are included
in "Property and equipment, net" in the consolidated balance sheets and are
being amortized ratably over a period not to exceed seven years.
Intangibles and other long lived assets. Intangibles, long-lived assets
and goodwill are recorded at estimated fair value. Intangibles are amortized
on a straight-line basis over periods of up to 5 years. We assess the
impairment of identifiable intangibles, long-lived assets and goodwill
whenever events or changes in circumstances indicate that the carrying value
may not be recoverable.
In July 2001, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 142, Goodwill and
Other Intangible Assets. SFAS No. 142 requires that goodwill be assessed
at least annually for impairment by applying a fair-value based test.
Goodwill is no longer amortized over its estimated useful life. In addition,
acquired intangible assets are required to be recognized and amortized over
their useful lives if the benefit of the asset is based on contractual or
legal rights. Effective January 1, 2002, we adopted SFAS No. 142 resulting
in a write-down of our goodwill, net of tax, in the amount of $25.7 million,
which is reflected in our consolidated financial statements as a cumulative
effect due to a change in accounting principle as discussed in Note 2.
Impairment losses subsequent to adoption are performed during the fourth
quarter of each year starting in the fourth quarter of 2002 and are
reflected in operating income or loss in the consolidated statement of
operations. During the fourth quarter of 2002, we recorded an additional
impairment charge of $79.7 million which is reflected in operating losses
in the consolidated statement of operations for the year ended December 31,
2002.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS No. 144 addresses
financial accounting and reporting for the impairment or disposal of long-
lived assets. This statement supersedes SFAS No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of,
and establishes a single accounting model, based on the framework
established in SFAS No. 121, for long-lived assets to be disposed of by sale.
The Company reviews its long-lived assets, including property and
equipment that are held and used in its operations for impairment whenever
events or changes in circumstances indicate that the carrying amount of the
asset may not be recoverable, as required by FAS 144. If such an event or
change in circumstances is present, the Company will estimate the
undiscounted future cash flows, less the future outflows necessary to obtain
those inflows, excpected to result from the use of the asset and its eventual
disposition. If the sum of the undiscounted future cash flows is less than
the carrying amount of the related assets, the Comany will recognize an
impairment loss or review its depreciation policies as may be appropriate.
The Company records impairment losses resulting from such abandonment in
operating income. Assets to be disposed of are reclassified as assets held
for sale at the lower of their carrying amount or fair value less costs to
sell. Write-downs to fair value less costs to sell are reported above the
operating income line as other expense. We adopted SFAS No. 144 effective
January 1, 2002. See Note 5 for discussion of impairment losses recognized
in 2002.
Accrued insurance. The Company is insured for worker's compensation,
employers' liability, auto liability, and general liability claims subject
to a $1.0 million deductible per claim. 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 accurate. Because the Company retains those
risks, up to certain limits, a change in experience or actuarial assumptions
that did not affect the rate of claims payments could nonetheless materially
affect results of operations in a particular period.
Income taxes. We record income taxes using the liability method of
accounting for deferred income taxes. Under this method, deferred tax assets
and liabilities are recognized for the expected future tax consequence of
temporary differences between the financial statement and income tax bases of
our assets and liabilities. We estimate our income taxes in each of the
jurisdictions in which we operate. This process involves estimating our tax
exposure together with assessing temporary differences resulting from differing
treatment of items, such as deferred revenue, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are
included in our balance sheet. While we have considered future taxable income
and ongoing prudent and feasible tax planning strategies in assessing the need
for a valuation allowance, in the event that we determine that we will not be
able to realize all or part of the net deferred tax asset in the future, an
adjustment to the deferred tax asset would be charged to income in the period
such determination is made.
Stock Based Compensation. The Company accounts for its stock-based
award plans in accordance with Accounting Principle Board ("APB") Opinion
No. 25, Accounting for Stock Issued to Employees, and related interpretations,
under which compensation expense is recorded to the extent that the current
market price of the underlying stock exceeds the exercise price. Note 9
provides the assumptions used to calculate the pro forma net income (loss)
and pro forma earnings (loss) per share disclosures as if the stock-based
awards had been accounted for using the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 123, Accounting for Stock-Based
Compensation. The required pro forma disclosures are as follows: (in
thousands, except per share data)
2000 2001 2002
-------- ---------- ----------
Net income (loss)
As reported $ 65,147 $ (92,354) $(128,806)
Pro forma $ 41,707 $(106,944) $(134,196)
Net income (loss)
Basic:
As reported $ 1.40 $ (1.93) $ (2.69)
Pro forma $ 0.90 $ (2.24) $ (2.80)
Net income (loss)
Diluted:
As reported $ 1.35 $ (1.93) $ (2.69)
Pro forma $ 0.86 $ (2.24) $ (2.80)
Fair value of financial instruments. We estimate the fair market value
of financial instruments through the use of public market prices, quotes from
financial institutions and other available information. Judgment is required
in interpreting data to develop estimates of market value and, accordingly,
amounts are not necessarily indicative of the amounts that we could realize
in a current market exchange. Our short-term financial instruments, including
cash and cash equivalents, accounts and notes receivable, accounts payable
and other liabilities, consist primarily of instruments without extended
maturities, the fair value of which, based on management's estimates, equaled
their carrying values. At December 31, 2001 and 2002, the fair value of
senior subordinated notes was $163.7 million and $170.5 million, respectively,
based on quoted market values. We use letters of credit to back certain
insurance policies. The letters of credit reflect fair value as a condition
of their underlying purpose and are subject to fees competitively determined
in the marketplace.
New pronouncements. In May 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 rescinds the automatic
treatment of gains or losses from extinguishment of debt as extraordinary
unless they meet the criteria for extraordinary items as outlined in APB
Opinion No. 30, Reporting the Results of Operations, Reporting the Effects
of Disposal of a Segment of a Business, and Extraordinary, Unusual and
Infrequently Occurring Events and Transactions. SFAS No. 145 also requires
sale-leaseback accounting for certain lease modifications that have economic
effects that are similar to sale-leaseback transactions and makes various
technical corrections to existing pronouncements. The provisions of SFAS
No. 145 related to the rescission of FASB Statement 4 are effective for
fiscal years beginning after May 15, 2002, with early adoption encouraged.
All other provisions of SFAS No. 145 are effective for transactions occurring
after May 15, 2002, with early adoption encouraged. We do not anticipate
that adoption of SFAS No. 145 will have a material effect on our results of
operations or financial position.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. This statement requires the
recording of costs associated with exit or disposal activities at their fair
values only once a liability exists. Under previous guidance, certain exit
costs were accrued when management committed to an exit plan, which may have
been before an actual liability arose. The provisions of SFAS No. 146 are
effective for exit or disposal activities that are initiated after December
31, 2002, with early adoption encouraged. We do not anticipate that adoption
of SFAS No. 146 will have a material effect on our results of operations or
financial position.
In December 2002, the Financial Accounting Standards Board issued
Statement of Accounting Standards No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure an Amendment of FASB Statement No.
123 ("SFAS 148") which is effective for years ending after December 15,
2002. SFAS 148 amends Statement of Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123"), to provide
alternative methods of transition for an entity that voluntarily changes to
the fair value based method of accounting for stock-based employee
compensation. It also amends the disclosure provisions of SFAS 123 to
require prominent disclosure about the effects on reported net earnings of
an entity's accounting policy decisions with respect to stock-based
compensation. Finally, SFAS 148 amends APB Opinion No. 28, "Interim
Financial Reporting," to require disclosure about those effects in
interim financial information. We will continue to apply APB Opinon
No. 25, "Accounting for Stock Issued to Employees" and related
interpretations in accounting for stock-based compensation plans, which
continues to be allowed under SFAS 123, as amended by SFAS 148. In
addition, we have made the required prominent disclosure with respect to
stock-based compensation in Note 9 of the Notes to the Consolidated
Financial Statements and will include the additional required disclosures
in all future interim financial statements.
Note 2 - Goodwill and Other Intangible Assets
As discussed in Note 1, in January 2002 we adopted SFAS No. 142, which
requires companies to stop amortizing goodwill and certain intangible assets
with an indefinite useful life. Instead, SFAS No. 142 requires that goodwill
and intangible assets deemed to have an indefinite useful life be reviewed
for impairment upon adoption of SFAS No. 142 and annually thereafter.
Under SFAS No. 142, goodwill impairment is deemed to exist if the net
book value of a reporting unit exceeds its estimated fair value as
determined using a discounted cash flow methodology applied to the particular
unit. This methodology differs from MasTec's previous policy, in accordance
with accounting standards existing at that time, of using undiscounted cash
flows on an enterprise-wide basis to determine recoverability. Upon adoption
of SFAS No. 142 in the first quarter of 2002, we recorded a one-time,
non-cash charge of approximately $25.7 million net of $13.8 million tax
benefit to reduce the carrying value of our goodwill. This charge is
reflected as a cumulative effect of an accounting change in the accompanying
consolidated statement of operations. The SFAS No. 142 goodwill impairment
recorded in the first quarter is associated with goodwill resulting from the
acquisition of various inside plant infrastructure businesses and is based
on discounting our projected future cash flows for these companies. During
2001, our inside plant infrastructure businesses experienced losses due to a
decrease in demand for services from telecommunications equipment
manufacturers, competitive local exchange carriers and corporate clients.
Based on that trend, our earnings forecasts were revised, resulting in an
impairment of the goodwill associated with our acquisitions of businesses
that provide these services.
During the fourth quarter of 2002, we performed an annual review of
goodwill for impairment. The review resulted in a goodwill impairment
charge of approximately $79.7 million ($51.9 million, net of tax) and is
based, in part, on an overall decline in the market value of our stock and
market values of other companies that serve our industry. Impairment
adjustments recognized after adoption are required to be recognized as
operating expenses and have been presented under "Goodwill impairment" on
the accompanying consolidated statements of operations. The primary factors
contributing to the impairment charge was the overall deterioration of the
business climate during 2002, the continued depression in the Company's
stock price, and the expected termination of various operations as a result
of our restructuring plan (see Note 7).
A summary of changes in the Company's goodwill for the year ended
December 31, 2002 is as follows (in thousands):
Note 2 - Goodwill and Other Intangible Assets (cont'd)
Balance as of January 1, 2002 $ 264,826
Transitional impairment (39,512)
Annual evaluation (79,710)
Other reclassifications 5,380
---------
Balance as of December 31, 2002 $ 150,984
=========
The following table sets forth our results for the years ended December
31, 2000 and 2001, which are presented on a basis comparable to the 2002
results, adjusted to exclude amortization expense related to goodwill:
Year ended December 31,
---------------------------------
2000 2001 2002
--------- -------- ---------
Income (loss) before cumulative effect of
accounting change, as reported $ 65,147 $(92,354) $(103,135)
Adjustments:
Goodwill amortization, net of tax 6,857 6,234 -
--------- -------- ---------
Income (loss) before cumulative effect of
accounting change, as adjusted $ 72,004 $(86,120) $(103,135)
========= ======== =========
Net income (loss), as reported $ 65,147 $(92,354) $(128,806)
Adjustments:
Goodwill amortization, net of tax 6,857 6,234 -
--------- -------- ---------
Net income (loss), as adjusted $ 72,004 $(86,120) $(128,806)
========= ======== =========
Basic earnings per share:
Net income (loss), as reported $ 1.40 $ (1.93) $ (2.69)
Adjustments:
Goodwill amortization, net of tax 0.15 0.13 -
--------- -------- ---------
Net income (loss), as adjusted $ 1.55 $ (1.80) $ (2.69)
========= ======== =========
Diluted earnings per share:
Net income (loss), as reported $ 1.35 $ (1.93) $ (2.69)
Adjustments:
Goodwill amortization, net of tax 0.14 0.13 -
--------- -------- ---------
Net income (loss), as adjusted $ 1.49 $ (1.80) $ (2.69)
========= ======== =========
Note 3 - Other Assets and Liabilities
Other non-current assets consists of the following as of December 31,
2001 and 2002 (in thousands):
2001 2002
------- -------
Long-term receivables, including retainage $12,236 $11,311
Non-core investments 10,132 12,122
Real estate held for sale 5,473 1,683
Deferred finance costs, net 2,616 4,834
Cash surrender value of insurance policies 1,774 3,402
Non-compete agreement, net 1,323 810
Other 7,346 4,728
------- -------
Total $40,900 $38,890
======= =======
Other current and non-current liabilities consists of the following as
of December 31, 2001 and 2002 (in thousands):
Current liabilities 2001 2002
- ----------------------------------- -------- --------
Obligations related to prior acquisitions $ 21,246 $ 4,919
Accrued compensation 20,727 21,302
Accrued insurance 10,448 11,354
Accrued severance 7,250 571
Accrued interest 6,819 6,480
Other 1,920 21,070
-------- --------
Total $ 68,410 $ 65,696
======== ========
Non-current liabilities 2001 2002
- ----------------------------------- -------- --------
Accrued insurance $ 15,626 $ 18,521
Net deferred tax liability 10,011 -
Minority interest 2,170 1,797
Other 3,095 1,896
-------- --------
Total $ 30,902 $ 22,214
======== ========
Note 4 - Accounts Receivable
Accounts receivable, classified as current, consist of the following
(in millions):
2001 2002
------- -------
Contract billings $ 207.5 $ 157.7
Retainage 18.2 15.3
Unbilled revenue 46.0 38.0
------- -------
Total 271.7 211.0
Less Allowance for doubtful accounts 20.0 25.8
------- -------
Accounts receivable, net $ 251.7 $ 185.2
======= =======
Retainage, which has been billed but is not due until completion of
performance and acceptance by clients, is expected to be collected within
one year. Any retainage expected to be collected beyond a year is recorded
in long-term other assets.
For the Twelve Months Ended
($ amounts in millions)
---------------------------------------
December 31, December 31, December 31,
2000 2001 2002
----------- ----------- -----------
Allowance for doubtful accounts at
beginning of year $ 9.7 $ 11.0 $ 20.0
Additions charged to bad debt expense 6.6 185.5 15.4
Amounts charged against the allowance,
net of recoveries and reclasses (5.3) (176.5) (9.6)
----------- ----------- -----------
Allowance for doubtful accounts at
end of year $ 11.0 $ 20.0 $ 25.8
=========== =========== ===========
Note 5 - Property and Equipment
Property and equipment is comprised of the following as of December 31,
2001 and 2002 (in thousands):
Estimated
Useful Lives
2001 2002 (In Years)
--------- --------- ----------
Land $ 6,892 $ 6,451
Buildings and leasehold improvements 12,953 12,321 5 - 40
Machinery and equipment 290,606 253,135 2 - 15
Office furniture and equipment 29,544 39,726 3 - 5
--------- ---------
339,995 311,633
Less-accumulated depreciation (188,221) (193,158)
--------- ---------
$ 151,774 $ 118,475
========= =========
Management reviews 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. The effect
of any impairment would be to expense the difference between the fair value
of such asset and its carrying value.
A review of the carrying value of property and equipment was conducted
during the fourth quarter of 2002 in accordance with SFAS No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets. This review was
conducted in connection with the Company's plan of exiting businesses that
did not have adequate revenue or margins to support the desired level of
profitability and consideration of changes in the business environment which
caused change in the extent and manner in which these assets were being used
(see Note 7).
An impairment loss of $12.8 million, including $3.1 million relating to
assets held and used, has been recognized and is presented as "Other expense"
on the accompanying Consolidated Statement of Operations for property and
equipment whose carrying value was not recoverable (carrying value exceeded
undiscounted cash flows expected to result from the use and eventual
disposition of the assets) and exceeded its fair market value. Fair market
value was determined by independent valuations.
As a result of the review, included in property and equipment on the
accompanying Consolidated Balance Sheet is property and equipment that is
held and used, the carrying amount of which is $3.0 million. These assets
held and used are expected to be disposed of by selling them to third
parties within the next 12 months.
Note 6 - Debt
Debt is comprised of the following at December 31, 2001 and 2002
(in thousands):
2001 2002
--------- --------
Revolving credit facility at LIBOR plus 2.25% or 4.18%
for 2001; and base rate plus 1.0 or 5.25% for base
rate loans and Libor + 2.50% for Libor loans for 2002 $ 70,000 $ -
Notes payable for equipment, at interest rates from
7.5% to 8.5% due in installments through the year 2004 2,397 1,955
Other revolving debt 1,520 827
7.75% senior subordinated notes due February 2008 195,832 195,860
--------- --------
Total debt 269,749 198,642
Less current maturities (1,892) (1,207)
--------- --------
Long-term debt $ 267,857 $197,435
========= ========
Revolving Credit Facility
We have a credit facility for U.S. operations that provides for
borrowings up to an aggregate of $125.0 million, based on a percentage of
eligible accounts receivable and unbilled receivables as well as a fixed
amount of equipment that decreases quarterly. Although the credit facility
provides for borrowings of up to $125.0 million, the amount that can be
borrowed at any given time is based upon a formula that takes into account,
among other things, our eligible billed and unbilled accounts receivable,
which can result in borrowing availability of less than the full amount of
the facility. As of December 31, 2002, availability under the credit
facility totaled $39 million net of outstanding standby letters of credit
aggregating $47 million. Substantially all of the outstanding letters of
credit are all issued to the Company's insurance providers as part of the
Company's insurance program. We had no outstanding draws under the credit
facility as of December 31, 2002. Amounts outstanding under the revolving
credit facility mature on January 22, 2007. The credit facility is
collateralized by a first priority security interest in substantially all
of our U.S. assets and a pledge of the stock of certain of our operating
subsidiaries. Interest under the facility accrues at rates based, at our
option, on the agent bank's base rate plus a margin of between 0.50% and
1.50% or its LIBOR rate (as defined in the credit facility) plus a margin
of between 2.0% and 3.0% each depending on certain financial thresholds.
The facility includes an unused facility fee of 0.50%, which may be
adjusted to as low as 0.375% or as high as 0.625% depending on the
achievement of certain financial thresholds.
The credit facility, as amended in March 2003, contains customary events
of default (including cross-default) provisions and covenants related to our
North American operations that prohibit, among other things, making
investments and acquisitions in excess of a specified amount, incurring
additional indebtedness in excess of a specified amount, paying cash
dividends, making other distributions in excess of a specified amount, making
capital expenditures in excess of a specified amount, creating liens,
prepaying other indebtedness, including our 7.75% senior subordinated notes,
and engaging in certain mergers or combinations without the prior written
consent of the lenders. In addition, deterioration in the quality of our
billed and unbilled receivables will reduce availability under our credit
facility.
The credit facility, as amended in March 2003, contains certain
financial covenants that require us to maintain:
(a) tangible net worth
(i.) on or after March 31, 2002 and on or prior to December 31,
2002 of $180.0 million plus an amount equal to 50% of net
income from North American operations with certain adjustments
for non-recurring charge amounts for the period from September
30, 2002 through December 31, 2002 and
(ii.) any time after December 31, 2002 the greater of our tangible
net worth from North American operations and $167.0 million
less $10.0 million, plus an amount equal to 50% of net income
from North American operations from January 1, 2003 through
the date of determination, and
(b) a minimum fixed charge coverage ratio (all as defined in the credit
facility) of at least:
(i.) for calendar year, 2002, of at least 2.0:1 for the successive
periods of three, four, five, six, seven, eight, nine, ten,
eleven and twelve consecutive calendar months beginning
January 1, 2002 and for calendar year 2003 of at least:
(ii.) 1.10:1 for the successive periods of three, four and five
consecutive calendar months beginning January 1, 2003;
(iii.) 1.25:1 for the successive periods of six, seven and eight
consecutive calendar months beginning January 1, 2003;
(iv.) 1.50:1 for the successive periods of nine, ten and eleven
consecutive calendar months beginning on January 1, 2003;
(v.) 1.75:1 for the period of 12 consecutive calendar months
ending on December 31, 2003 and
(vi.) 2.0:1 for the period of 12 consecutive months ending on or
after January 31, 2004.
As of December 31, 2002 we were in compliance with all of the covenants
under the credit facility, as amended in March 2003. During 2002, we
amended the credit facility to provide a sub-facility for the issuance of
letters of credit to secure our potential obligations under casualty
insurance programs, to exclude a portion of the cost of implementing our new
management information system, and to modify certain financial covenants.
Failure to achieve certain results could cause us not to meet these covenants
in the future.
Our variable rate credit facility exposes us to interest rate risk.
However, we believe that changes in interest rates should not materially
affect our financial position, results of operations or cash flows since at
December 31, 2002 we had no borrowings under our credit facility.
Senior Subordinated Notes
We have $200.0 million, 7.75% senior subordinated notes due in
February 2008, with interest due semi-annually, of which $195.9 million,
net of discount, is outstanding as of December 31, 2002. The notes also
contain default (including cross-default) provisions and covenants
restricting many of the same transactions as under our credit facility.
We had no holdings of derivative financial or commodity instruments at
December 31, 2002.
The maturities of long-term debt obligations (excluding capital leases)
as of December 31, 2002, are as follows (in thousands):
2003. . . . . . . . . . . . . $ 1,207
2004. . . . . . . . . . . . . 1,575
2005. . . . . . . . . . . . . -
2006. . . . . . . . . . . . . -
2007. . . . . . . . . . . . . -
Thereafter. . . . . . . . . . 195,860
---------
Total $ 198,642
=========
Note 7 - Restructuring Charges
During the second quarter of 2002, we initiated a study to determine the
proper balance of downsizing and cost cutting in relation to our ability to
respond to current and future work opportunities in each of our service
offerings. The review not only evaluated our current operations, but also
the growth and opportunity potential of each service offering as well as the
consolidation of back-office processes. As a result of this review, we
implemented a restructuring program which included four categories to
accomplish:
* Elimination of service offerings that no longer fit into our core
business strategy. This process includes reducing or eliminating
service offerings that do not fit our long-term business plan.
* Reduce or eliminate services that do not produce adequate revenue or
margins to support the level of profitability, return on investment or
investments in capital resources. This includes exiting contracts
that do not meet the minimum rate on return requirements and
aggressively seeking to improve margins and reduce costs.
* Analyze businesses that provide adequate profit contributions but still
need margin improvements which includes aggressive cost reductions and
efficiencies.
* Review new business opportunities in similar business lines that can
utilize our existing human and physical resources.
The elements of the restructuring program included involuntary
terminations of employees in affected service offerings and the
consolidation of facilities. The plan resulted in a pre-tax charge of
operations of $3.7 million. The involuntary terminations impacted both the
salaried and hourly employee groups. The total employees impacted was
approximately 1025. As of December 31, 2002, all employees have been
terminated and a balance of $0.6 million severance and benefit costs remains
to be paid. We also closed approximately 25 facilties during 2002 as part
of the program and anticipate further office closures in 2003. As of
December 31, 2002, we have remaining obligations under existing lease
agreements for closed facilities of approximately $2.1 million.
In addition to the costs noted above, we paid a consulting firm
approximately $4.6 million to assist us in preparing the plan, all of which
was expensed in 2002 as the plan was complete as of December 31,
2002. We also recognized valuation allowances and impairment losses related
to property and equipment of $12.8 million in connection with the
restructuring plan (see Note 6).
The following is a reconciliation of the restructuring accruals as of
December 31, 2002 (in thousands):
Severance costs (1) $ 1,075
Lease cancellation costs (2) 2,585
-------
3,660
Cash payments (925)
-------
Accrued costs at December 31, 2002 $ 2,735
=======
(1) Severance costs of $0.9 million are reflected in costs of revenue
and $0.2 million is reflected in generaland administrative.
(2) Lease cancellation costs are reflected in costs of revenue.
Note 8 - Lease Commitments
We have operating lease agreements for our premises and equipment that
expire on various dates. The operating lease agreements are subject to
escalation. Rent expense for the years ended December 31, 2000, 2001
and 2002 was approximately $14.4 million, $19.0 million and $18.5 million,
respectively.
Minimum future lease commitments under non-cancelable operating leases
in effect at December 31, 2002 were as follows (in thousands):
2003 $ 13,660
2004 9,142
2005 4,791
2006 2,035
2007 1,404
Thereafter 234
--------
Total minimum lease payments $ 31,266
Note 9 -- Retirement and Stock Option Plans
We have a 401(k) plan covering all eligible employees. Subject to
certain dollar limits, eligible employees may contribute up to 15% of their
pre-tax annual compensation to the plan. We currently match company common
stock 50% of the employee contributions up to 2% of their gross salary and
may make discretionary contributions in amounts determined by the Board of
Directors. Our matching contributions in the form of Company Common
Stock charged to earnings were approximately $2,077,000, $1,997,000 and
$806,000 for the years ended December 31, 2000, 2001 and 2002, respectively.
The Company has granted options to purchase its common stock to
employees and directors of the Company and its affiliates under various
stock option plans at no less than the fair market value of the underlying
stock on the date of grant. These options are granted for a term not
exceeding ten years and are forfeited in the event the employee or director
terminates his or her employment or relationship with the Company or one of
its affiliates. All option plans contain anti-dilutive provisions that
require the adjustment of the number of shares of the Company common stock
represented by each option for any stock splits or dividends.
We have three stock option plans in effect as of December 31, 2002: the
1994 Employee Stock Incentive Plan (the "1994 Plan"), the 1994 Stock Option
Plan for Non-Employee Directors (the "Directors' Plan") and the 1999 Non-
Qualified Employee Stock Option Plan (the "Non-Qualified Plan"). Typically,
options under these plans are granted at fair market value at the date of
grant, vest between three to five years after grant and terminate no later
than 10 years from the date of grant.
Under these plans there were a total of 2,028,798, 1,118,253 and
815,855 options available for grant at December 31, 2000, 2001 and 2002,
respectively. The 1994 Plan and the Directors Plan expire in 2004. In
addition, there are 286,450 options outstanding under individual option
agreements with varying vesting schedules at exercise prices ranging from
$2.56 to $17.67 with terms up to 10 years. We also have a 1997 non-
qualified employee stock purchase plan under which eligible employees may
purchase common stock of the company through payroll deductions or in a
lump sum at a 15% discount from fair market value.
The following is a summary of all stock option transactions:
Weighted Weighted Average
Stock Average Exercise Fair Value of
Options Price Options Granted
--------- -------------- ---------------
Outstanding December 31, 1999 5,855,940 $ 16.81
Granted 711,820 32.28 $20.39
Exercised (584,794) 10.98
Canceled (151,604) 20.44
--------- ------
Outstanding December 31, 2000 5,831,362 19.07
Granted 1,341,794 10.88 $ 7.79
Exercised (7,693) 11.26
Canceled (440,076) 23.15
--------- ------
Outstanding December 31, 2001 6,725,387 17.18
Granted 933,500 5.41 $ 3.84
Exercised - -
Canceled (622,275) 22.50
--------- ------
Outstanding December 31, 2002 7,036,612 $ 15.32
========= ======
The following tables summarize information about stock options outstanding:
As of December 31, 2002
- ---------------------------------------------------------------------------
Stock Options Outstanding Options Exercisable
------------------------------- -------------------
Weighted
Average Weighted Weighted
Range of Number of Remaining Average Number of Average
Exercise Stock Contractual Exercise Stock Exercise
Prices Options Life Price Options Price
- -------------- --------- -------- -------- --------- --------
$ 2.56 - 3.34 195,000 5.37 $ 3.16 45,000 $ 2.56
3.42 - 6.14 1,116,966 5.14 5.30 579,175 5.30
6.19 - 14.98 2,834,777 5.05 12.51 2,175,201 12.96
15.02 - 21.25 1,866,191 6.52 19.27 1,750,254 19.45
25.58 - 36.88 993,178 4.21 28.67 753,958 28.40
39.91 - 45.08 30,500 4.36 43.64 20,335 43.64
--------- -------- -------- --------- --------
$ 2.56 - 45.08 7,036,612 5.34 $15.32 5,323,923 $16.48
========= ======== ======== ========= ========
As of December 31, 2000 we had 2,982,238 of options which were
exercisable at a weighted average exercise price of $14.86. As of December
31, 2001 we had 4,276,377 which were exercisable at a weighted average
exercise price of $16.90.
We have elected to follow Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations in
accounting for our employees' stock options. Pursuant to APB No. 25, no
compensation cost has been recognized.
We have reflected below the 2000, 2001 and 2002 earnings and the
proforma earnings as if compensation expense relative to the fair value of
the options granted had been recorded under the provisions of SFAS No. 123
"Accounting for Stock- Based Compensation." The fair value of each option
grant was estimated using the Black-Scholes option-pricing model with the
following assumptions used for grants in 2000, 2001 and 2002, respectively:
a five, five and seven year expected life; volatility factors of 60%, 79%
and 74%; risk-free interest rates of 5.75%, 3.50% and 3.0%; and no dividend
payments.
2000 2001 2002
-------- --------- ---------
Net income (loss) (in thousands):
As reported $ 65,147 $ (92,354) $(128,806)
======== ========= =========
Pro forma $ 41,707 $(106,944) $(134,196)
======== ========= =========
Basic earnings (loss) per share:
As reported $ 1.40 $ (1.93) $ (2.69)
Pro forma $ 0.90 $ (2.24) $ (2.80)
Diluted earnings (loss) per share:
As reported $ 1.35 $ (1.93) $ (2.69)
Pro forma $ 0.86 $ (2.24) $ (2.80)
Note 10 - Income Taxes
The provision (benefit) for income taxes before cumulative change in
accounting principle consists of the following (in thousands):
2000 2001 2002
-------- -------- ---------
Current:
Federal $ 36,669 $(46,068) $ (22,220)
Foreign 354 220 498
State and local 7,873 (9,729) (1,968)
-------- -------- ---------
44,896 (55,577) (23,690)
-------- -------- ---------
Deferred:
Federal 727 508 (32,731)
Foreign - - (444)
State and local 254 211 (8,608)
-------- -------- ---------
981 719 (41,783)
-------- -------- ---------
Provision (benefit) for
income taxes $ 45,877 $(54,858) $ (65,473)
======== ======== =========
The tax effects of significant items comprising our net deferred tax
(liability) asset as of December 31, 2001 and 2002 are as follows (in
thousands):
2001 2002
------- -------
Current:
Deferred tax assets
Non-compete $ 6,211 $ 4,681
Bad debts 6,710 7,429
Accrued self insurance 7,484 9,947
Operating loss and tax credit carry forward 974 34,159
Other 2,674 3,592
Goodwill - 18,873
-------- -------
Subtotal 24,053 78,681
Deferred tax liabilities:
Accounts receivable retainage 10,187 9,317
Property and equipment 15,946 8,270
Basis differences in acquired assets 2,027 1,979
Other 5,904 11,415
-------- -------
Total deferred tax liabilities 34,064 30,981
-------- -------
Net deferred tax (liability) asset $(10,011) $47,700
======== =======
At December 31, 2002, the Company has approximately $65.0 million of net
operating loss carry forwards for US federal income tax purposes that expire
in 2022. Additionally, the Company has net operating loss carryforwards
for U.S. state and local purposes that expire from 2005 to 2022.
In assessing the ability to realize the deferred tax assets, management
considers whether it is more likely than not that some portion or all of the
deferred tax assets will not be realized. The ultimate realization of deferred
tax assets is dependent upon the generation of future taxable income during the
periods in which these temporary differences become deductible. Management
considers the projected future taxable income and prudent and feasable tax
planning strategies in making this assessment. Accordingly, no valuation
allowance is recorded at December 31, 2002.
A reconciliation of U.S. statutory federal income tax expense on the
earnings from continuing operations is as follows:
2000 2001 2002
----- ----- ------
U.S. statutory federal rate
applied to pretax income 35% (35)% (35)%
State and local income taxes 5 (4) (5)
Amortization and impairment 1 1 2
Non-deductible expenses 1 1 -
Other (1) - -
----- ----- ------
Provision (benefit) for income taxes 41% (37)% (38)%
===== ===== ======
The IRS is currently auditing the year ended December 31, 1999 and
certain other years as a result of net operating losses carried back in
2001. We believe that the ultimate disposition of this matter will not
have a material adverse effect on our consolidated financial statements.
Note 11 - Operations by Geographic Areas and Segments
We operate in one reportable segment as a specialty contractor. We
design, build, install, maintain and upgrade aerial, underground, and buried
fiber-optic, coaxial and copper cable systems owned by local and long
distance communications carriers and cable television multiple system
operators. Additionally, we provide similar services related to the
installation of integrated voice, data and video local and wide area
networks within office buildings and similar structures and also provide
construction and maintenance services to electrical and other utilities.
All of our operating units have been aggregated into one reporting segment
due to their similar customer bases, products and production and distribution
methods. We also operate in Brazil through an 87.5% joint venture that we
consolidate net of a 12.5% minority interest after tax. Our Brazilian
operations perform similar services and for the years ended December 31,
2000, 2001 and 2002 had revenue of $55.3 million, $57.9 million and $41.8
million, respectively. Total assets for Brazil aggregated $33.9 million
and $35.3 million as of December 31, 2001 and December 31, 2002, respectively.
Note 12 - Commitments and Contingencies
In November of 1997, the Company filed two suits against Miami-Dade
County seeking unpaid amounts due under several contracts between the Company
and the county for road repair, paving, sidewalk construction and road
stripping. Miami-Dade County filed counterclaims seeking recovery of amounts
paid by the county to the Company for work that was not actually performed by
one of the Company's subcontractors. Following a mediation that occurred in
December of 2002, the Company and Miami-Dade County settled all claims arising
out of the litigation with the Company making payment to Miami-Dade County in
the amount of $2.25 million in February 2003. Following the settlement, the
litigation has been dismissed.
The labor union representing the workers of Sistemas e Instalaciones de
Telecomunicacion S.A. ("Sintel"), a former MasTec subsidiary, has instigated
an investigative action with a Spanish federal court that commenced in July
2001 alleging that five former members of the board of directors of Sintel,
including Jorge Mas, the Chairman of the Board of MasTec, and his brother
Juan Carlos Mas, approved a series of allegedly unlawful transactions that
led to the bankruptcy of Sintel. We are also named as a potentially liable
party. The union alleges Sintel and its creditors were damaged in the
approximate amount of 13 billion pesetas ($81.9 million at December 31, 2002
exchange rates). As discussed in prior filings, the Spanish judge has taken
no action to enforce a bond order pending since July 2001 for the amount of
alleged damages. A Spanish judge has met with certain of our executives,
but neither we nor our executives have been served in the action.
On January 9, 2002, Harry Schipper, a MasTec shareholder, filed a
shareholder derivative lawsuit in the U.S. District Court for the Southern
District of Florida against us as nominal defendant and against certain
current and former members of the Board of Directors and senior management,
including Jorge Mas, our Chairman of the Board, and Austin J. Shanfelter,
our President and Chief Executive Officer. The lawsuit alleges mismanagement,
misrepresentation and breach of fiduciary duty as a result of a series of
allegedly fraudulent and criminal transactions, including both the matters
described above, the severance we paid our former chief executive officer,
and our investment in and financing of a client that subsequently filed for
bankruptcy protection, as well as certain other matters. The lawsuit seeks
damages and injunctive relief against the individual defendants on MasTec's
behalf. The Board of Directors has formed a special committee, as
contemplated by Florida law, to investigate the allegations of the complaint
and to determine whether it is in the best interests of MasTec to pursue the
lawsuit. The lawsuit has been administratively dismissed without prejudice
by agreement of the parties to permit the committee to complete its
investigation. On July 16, 2002, Mr. Schipper made a supplemental demand on
our Board of Directors by letter to investigate allegations that (a) we
reported greater revenue in an unspecified amount on certain contracts than
permitted under the contract terms and (b) we recognized between $3-$5
million in income for certain projects on the books of two separate
subsidiaries. These additional allegations have also been referred to the
special committee for investigation.
We believe we have meritorious defenses to the actions described above.
We are also a party to other pending legal proceedings arising in the normal
course of business. While complete assurance cannot be given as to the
outcome of any legal claims, we believe that any financial impact would not
be material to our results of operations, financial position or cash flows.
We have commitments to pay life insurance premiums on policies on the
life of our chairman of the board and our chief executive officer totalling
$22.9 million over the next nineteen years, obligations related to
acquisitions of $4.9 million, capital leases totaling $2.3 million,
operating lease commitments of $31.3 million and revolving debt of $0.1
million.
Our operations in Brazil are subject to the risks of political,
currency, economic or social instability, including the possiblity of
expropriation, confiscatory taxation, hyper-inflation or other adverse
regulatory or legislative developments, or limitations on the repatriation
of investment income, capital and other assets. We cannot predict whether
any of these factors will occur in the future or the extent to which such
factors would have a material adverse effect on our Brazilian operations.
In certain circumstances, the Company is required to provide
performance bonds in connection with its contractual commitments.
Note 13 - Concentrations of Risk
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, collectibility
of receivables, acquisition integration and financing, significant
fluctuations in quarterly results, contracts, management of growth,
dependence on key personnel, availability to qualified employees,
competition, recoverability of goodwill, and potential exposures to
environmental liabilities.
We have more than 200 clients throughout the United States, Canada and
Brazil, which include some of the largest and most prominent companies in the
communications, broadband and energy fields, as well as government agencies
such as departments of transportation. Our clients include incumbent local
exchange carriers, broadband and satellite operators, public and private
energy providers, long distance carriers, financial institutions and
wireless service providers. We grant credit, generally without collateral
to our customers. Consequently, we are subject to potential credit risk
related to changes in business and economic factors. However, we generally
are entitled to payment for work performed and have certain lien rights on
that work and concentrations of credit risk are limited due to the diversity
of the customer lease. We believe our billing and collection policies are
adequate to minimize potential credit risk. No customer accounted for more
than 10% of revenues during the years ended December 31, 2000, 2001 and 2002.
We maintain allowances for doubtful accounts for estimated losses
resulting from the inability of our clients to make required payments.
Management analyzes historical bad debt experience, client concentrations,
client credit-worthiness, the availability of mechanic's and other liens, the
existence of payment bonds and other sources of payment, and current economic
trends when evaluating the adequacy of the allowance for doubtful accounts.
If our judgments regarding the collectability of our accounts receivables
were incorrect, adjustments to the allowance may be required, which would
reduce our profitability. Prior to 2001, the allowance for doubtful
accounts had averaged approximately $3.0 to $6.0 million annually, as we
had not incurred significant bad debts or experienced significant client
bankruptcies. However, during 2001 and 2002, we recorded bad debt
provisions of $15.4 million and $185.5 million, respectively, primarily due
to the unprecedented number of clients that filed for bankruptcy protection
during the year 2001 and general economic climate of 2002. As of December
31, 2002, we had remaining receivables from clients undergoing bankruptcy
reorganization totaling $10.6 million net of $7.0 million in specific
reserves. Based on the analytical process described above, management
believes that we will recover the net amounts recorded. We maintain an
allowance for doubtful accounts of $25.8 million as of December 31, 2002 for
both specific customers and as a general reserve. There can be no assurance
that we will collect the amounts reflected on our books for these clients
as well as other clients. Should additional clients file for bankruptcy or
experience difficulties, or should anticipated recoveries in existing
bankruptcies and other workout situations fail to materialize, we could
experience reduced cash flows and losses in excess of the current allowance.
Note 14 - Other Expense, Net
For the year ended December 31, 2000 other expense, net is comprised
primarily of a $26.3 million write-down of certain non-core international
assets resulting from management's review of the carrying value of such
assets.
For the year ended December 31, 2001 other expense, net is comprised
primarily of an impairment charge of $6.5 million related to our equity
investment in a client and a $10.0 million write-down of non-core
international assets.
For the year ended December 31, 2002 other expense, net is comprised
primarily of the net of a $5.0 million gain on disposal of certain non-core
assets, investments and excess equipment and a $13.2 million valuation
allowance against assets held for sale and investments.
Note 15 - Quarterly Information (Unaudited)
The following table presents unaudited quarterly operating results for
the two years ended December 31, 2001 and 2002. We believe that all
necessary adjustments have been included in the amounts stated below to
present fairly the quarterly results when read in conjunction with the
Consolidated Financial Statements and Notes thereto for the years ended
December 31, 2001 and 2002.
2001 2002
Quarter Ended Quarter Ended
-------------------------------------- ---------------------------------------
Mar 31 Jun 30 Sep 30 Dec 31 Mar 31 Jun 30 Sep 30 Dec 31
-------- -------- -------- -------- -------- -------- -------- ---------
(in thousands, except per share data)
Revenue $337,212 $330,220 $302,243 $252,905 $203,782 $213,041 $231,758 $ 189,474
Net income (loss)
before cumulative
effect of accounting
charge $ 3,297 $ (2,162) $(75,241) $(18,247) $ 1,235 $ 1,798 $ 2,363 $(108,531)
Net income (loss) $ 3,297 $ (2,162) $(75,241) $(18,247) $(24,436) $ 1,798 $ 2,363 $(108,531)
Basic earnings (loss)
per share before
cumulative effect of
accounting charge $ 0.07 $ (0.05) $ (1.57) $ (0.38) $ 0.03 $ 0.04 $ 0.05 $ (2.26)
Diluted earnings
(loss) per share
before cumulative
effect of
accounting charge $ 0.07 $ (0.05) $ (1.57) $ (0.38) $ 0.03 $ 0.04 $ 0.05 $ (2.26)
Basic earnings (loss)
per share $ 0.07 $ (0.05) $ (1.57) $ (0.38) $ (0.51) $ 0.04 $ 0.05 $ (2.26)
Diluted earnings
(loss) per share $ 0.07 $ (0.05) $ (1.57) $ (0.38) $ (0.51) $ 0.04 $ 0.05 $ (2.26)
In the first quarter of 2001, we recorded a reserve of $13.1 million,
net of tax or $0.27 per share primarily due to clients filing for bankruptcy
protection.
In the second quarter of 2001, we recorded a reserve of $9.6 million,
net of tax or $0.20 per share primarily due to clients filing for bankruptcy
protection.
In the third quarter of 2001, we recorded charges of $81.0 million, net
of tax or $1.70 per share due to reserves relating to receivables, a write-
down of non-core international assets and severance expense.
In the fourth quarter of 2001, we recorded charges of $23.8 million,
net of tax or $0.50 per share due to reserves relating to receivables.
Note 15 - Quarterly Information (Unaudited) (cont'd)
In the first quarter of 2002, we recorded an impairment charge of $25.7
million, net of tax or $(0.54) per share resulting from the initial
implementation of FAS 142. The charge was recorded as a change in accounting
principle.
In the fourth quarter of 2002, we recorded charges of $15.4 million,
reflecting additions to reserves relating to receivables, $18.4 million in
valuation allowances and impairment losses related to certain assets held
for sale and in use, investments, and inventory and $8.2 million, including
consulting, related to restructuring. We also recorded a $79.7 million
impairment charge relating to goodwill pursuant to FAS 142. These reserves
and charges aggregated $121.7 million, ($76.8 million net of tax) or $1.60
per share.
The accompanying notes are an integral part of these consolidated financial
statements.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 26, 2002, we filed a Current Report on Form 8-K (as amended on
June 11, 2002) reporting that on April 19, 2002, the audit committee of the
board of directors dismissed PricewaterhouseCoopers LLP and engaged Ernst &
Young LLP as our independent auditors for the 2002 calendar year. The Form
8-K reported that there were no disagreements between us and
PricewaterhouseCoopers involving any matter of accounting principles or
practices, financial statement disclosure or auditing scope or procedure.
The Form 8-K stated that the audit committee adopted a policy to review
the independent auditor selection on a periodic basis.
PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding our executive officers is included in this Annual
Report under the caption "Executive Officers." Information regarding our
directors and nominees for directors and compliance with Section 16(a) of
the Exchange Act will be contained under the captions "Election of
Directors" and "Section 16(a) Beneficial Ownership Reporting Compliance" in
our proxy statement relating to the 2003 Annual Meeting of Shareholders to
be filed with the Securities and Exchange Commission on or before April 30,
2003 (the "Proxy Statement"), and is incorporated in this Annual Report by
reference.
ITEM 11. EXECUTIVE COMPENSATION
Information regarding compensation of our executive officers will be
contained under the captions "Executive Compensation," "Compensation of
Directors" and "Stock Performance Graph" in the Proxy Statement and is
incorporated in this Annual Report by reference, except the Compensation
Committee Report contained in the Proxy Statement, which is not incorporated
in this Annual Report by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information regarding the ownership of our common stock and equity
compensation plans will be contained under the captions "Securities
Authorized for Issuance Under Equity Compensation Plans" and "Security
Ownership of Certain Beneficial Owners and Management" in the Proxy
Statement and is incorporated in this Annual Report by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information regarding certain relationships and related transactions
will be contained under the caption "Certain Relationships and Related
Transactions" in the Proxy Statement and is incorporated in this Annual
Report by reference.
ITEM 14. CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures. Our chief
executive officer and chief financial officer are responsible for
establishing and maintaining "disclosure controls and procedures"
(as defined in the Securities Exchange Act of 1934 Rules 13a-14(c)
and 15d-14(c)) for MasTec. Our disclosure controls and
procedures include "internal controls," as that term is used in
Section 302 of the Sarbanes-Oxley Act of 2002 and described in the
Securities and Exchange Commission's Release No. 34-46427 (August
29, 2002). MasTec's chief executive officer and chief financial
officer, after evaluating the effectiveness of its disclosure
controls and procedures as of a date within 90 days of the filing
date of this Form 10-K, have concluded that its disclosure
controls and procedures were effective in timely alerting them to
material information relating to MasTec (including its
consolidated subsidiaries) required to be included in its periodic
SEC filings. MasTec has undertaken software upgrades at its
numerous back office locations to improve the timeliness of
disclosure.
(b) Changes in internal controls. There were no significant changes
in MasTec's internal controls or in other factors that could
significantly affect those internal controls subsequent to the date
of the evaluation. As a result, no corrective actions were taken.
However, as mentioned above, MasTec is attempting to streamline
its back office operations to enhance its information, financial
and operational systems, which should improve its internal controls.
PART IV
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) 1. Financial Statements - The financial statements and the report
of our Certified Public Accountants are listed on page 26
through 53.
2. Financial Statements Schedules - The financial statement
schedule information required by Item 14(a)(2) is included as
part of "Note 4 - Accounts Receivable" of the Notes to
Consolidated Financial Statements.
3. Exhibits including those incorporated by reference:
Exhibit
No. Description
- ------- ---------------------------------------------------------------
3.1 Articles of Incorporation, filed as Appendix B to our definitive
Proxy Statement for our 1998 Annual Meeting of Stockholders dated
April 14, 1998 and filed with the Securities and Exchange Commission
on April 14, 1998, and incorporated by reference herein.
3.2 Amended and Restated Bylaws as of April 16, 2002, filed as Exhibit
3.1 to our Form 10-Q for the quarter ended June 30, 2002 and filed
with the Commission on August 14, 2002, and incorporated by reference
herein.
4.1 7.75% Senior Subordinated Notes Due 2008 Indenture dated as of
February 4, 1998, filed as Exhibit 4.2 to our Registration Statement
on Form S-4 (file no. 333-46361) and incorporated by reference herein.
10.1 1994 Stock Incentive Plan filed as an Appendix to our definitive
Proxy Statement for our 1993 Annual and Special Meeting of
Stockholders, dated February 10, 1994 and filed with the Commission
on February 11, 1994 and incorporated by reference herein.
10.2 1994 Stock Option Plan for Non-employee Directors filed as an A
ppendix to our definitive Proxy Statement for our 1993 Annual and
Special Meeting of Stockholders, dated February 10, 1994 and filed
with the Commission on February 11, 1994 and incorporated by
reference herein.
10.3 Stock Option Agreement dated March 11, 1994 between MasTec and
Arthur B. Laffer, filed as Exhibit 10.6 to our Form 10-K for the
year ended December 31, 1995 and incorporated by reference herein.
10.4* 1999 Non-Qualified Employee Stock Option Plan, as amended
October 4, 1999.
10.5 Revolving Credit and Security Agreement dated as of January 22, 2002
between MasTec, certain of its subsidiaries, and Fleet Financial
Corporation as agent filed as Exhibit 10.2 to our Form 10-K for the
year ended December 31, 2001, and filed with the Commission on March
28, 2002 and incorporated by reference herein.
10.6 Assumption and Amendment Agreement to Revolving Credit and Security
Agreement dated February 7, 2002 filed as Exhibit 10.3 to our Form
10-K for the year ended December 31, 2001, and filed with the
Commission on March 28, 2002 and incorporated by reference herein.
10.7* Amendment No. 2 to the Revolving Credit and Security Agreement dated
as of October 25, 2002 between MasTec, Inc., certain of its
subsidiaries, and Fleet Financial Corporation as agent.
10.8* Amendment No. 3 and Consent to the Revolving Credit and Security
Agreement dated as of November 1, 2002 between MasTec, Inc., certain
of its subsidiaries, and Fleet Financial Corporation as agent.
10.9* Amendment No. 4 to the Revolving Credit and Security Agreement dated
as of March 6, 2003 between MasTec, Inc., certain of its subsidiaries,
and Fleet Financial Corporation as agent.
10.10* Amendment to Employment Agreement dated as of January 1, 2002,
between MasTec, Inc. and Carmen Sabater.
10.11 Terms and Conditions of Employment dated as of January 1, 2002
between MasTec, Inc. and Donald P. Weinstein, filed as Exhibit 10.1
to our Form 10-Q for the quarter ended March 31, 2002, and filed
with the Commission on May 15, 2002 and incorporated by reference
herein.
10.12 Employment Agreement dated July 15, 2002, between MasTec, Inc. and
Eric J. Tveter, filed as Exhibit 10.2 to our Form 10-Q for the
quarter ended September 30, 2002, and filed with the Commission on
November 14, 2002 and incorporated by reference herein.
10.13 Employment Agreement dated September 27, 2002, between MasTec, Inc.
and Austin J. Shanfelter, filed as Exhibit 10.1 to our Form 10-Q for
the quarter ended September 20, 2002, and filed with the
Commission on November 14, 2002 and incorporated by reference herein.
10.14* Severance Agreement with Jose Sariego dated as of December 31, 2002.
10.15* Split-Dollar Agreement effective August 27, 2002 between MasTec, Inc.
and Jorge Mas.
10.16* Split-Dollar Agreement effective September 13, 2002 between MasTec,
Inc. and Jorge Mas.
10.17* First Amendment to the Split-Dollar Agreement dated September 13,
2002 between MasTec, Inc. and Jorge Mas.
10.18* Split-Dollar Agreement effective September 13, 2002 between MasTec,
Inc. and Austin J. Shanfelter.
21.1* Subsidiaries of MasTec.
23.1* Consent of Independent Certified Public Accountants (Ernst &
Young LLP).
23.2* Consent of Independent Certified Public Accountants
(PricewaterhouseCoopers LLP).
24.1* Powers of Attorney (included on signature page).
- --------------------------------
* Exhibits filed with the Securities and Exchange Commission with this
Annual Report on Form 10-K.
The registrant agrees to provide these exhibits supplementally upon
request.
(b) Reports on Form 8-K:
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Miami, State of Florida, on April 7, 2003.
MASTEC, INC.
/s/ DONALD P. WEINSTEIN
------------------------
Donald P. Weinstein
Executive Vice President -
Chief Financial Officer
(Principal Financial and
Accounting Officer)
POWER OF ATTORNEY
The undersigned directors and officers of MasTec, Inc. hereby
constitute and appoint Donald Weinstein and Ivette Ruiz with full power to
act without the other and with full power of substitution and
resubstitution, our true and lawful attorneys-in-fact with full power to
execute in our name and behalf in the capacities indicated below this
Annual Report on Form 10-K and any and all amendments thereto and to file
the same, with all exhibits thereto and other documents in connection
therewith, with the Securities and Exchange Commission and hereby ratify
and confirm all that such attorneys-in-fact, or any of them, or their
substitutes shall lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of
the Registrant and in the capacities indicated on April 7, 2003.
/s/ JORGE MAS /s/ JOSEPH P. KENNEDY II
- -------------------------------- --------------------------------
Jorge Mas, Chairman of the Board Joseph P. Kennedy II, Director
/s/ AUSTIN J. SHANFELTER /s/ WILLIAM N. SHIEBLER
- -------------------------------- --------------------------------
Austin J. Shanfelter, President William N. Shiebler, Director
and Chief Executive Officer
(Principal Executive Officer)
/s/ JOSE MAS /s/ JOSE S. SORZANO
- -------------------------------- --------------------------------
Jose Mas, Director Jose S. Sorzano, Director
/s/ ARTHUR B. LAFFER /s/ JULIA L. JOHNSON
- -------------------------------- --------------------------------
Arthur B. Laffer, Director Julia L. Johnson, Director
/s/ JOHN VAN HEUVELEN
- --------------------------------
John Van Heuvelen, Director
SECTION 302 CERTIFICATION
I, Austin J. Shanfelter, certify that:
1. I have reviewed this annual report on Form 10-K of MasTec, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 7, 2003
/s/ Austin Shanfelter
-------------------------------
Austin J. Shanfelter, President and
Chief Executive Officer
SECTION 302 CERTIFICATION
I, Donald P. Weinstein, certify that:
1. I have reviewed this annual report on Form 10-K of MasTec, Inc.;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this annual report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this annual report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officers and I have indicated in
this annual report whether there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: April 7, 2003
/s/ Donald P. Weinstein
---------------------------
Donald P. Weinstein, Executive
Vice President and
Chief Financial Officer