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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE FISCAL YEAR ENDED JULY 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-5423
DYCOM INDUSTRIES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Florida 59-1277135
(State of incorporation) (I.R.S. Employer Identification No.)
4440 PGA Boulevard, Suite 600
Palm Beach Gardens, Florida 33410
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (561) 627-7171
Securities registered pursuant to Section 12(b) of the Act:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
- ----------------------------------------------------- -----------------------------------------------------
Common Stock, New York Stock Exchange
par value $.33 1/3 per share
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
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]
The aggregate market value of the common stock, par value $.33 1/3 per
share, held by non-affiliates of the registrant, computed by reference to the
closing price of such stock on August 24, 1998 was $440,341,785.
Indicate the number of shares outstanding of each of the registrant's
classes of common stock, as of the latest practicable date.
CLASS OUTSTANDING AS OF AUGUST 24, 1998
- ----------------------------------------------------- -----------------------------------------------------
Common Stock, $.33 1/3 14,723,456
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PART I
ITEM 1. BUSINESS
OVERVIEW
Dycom is a leading provider of engineering, construction and maintenance
services to telecommunications providers throughout the United States. The
Company's comprehensive range of telecommunications infrastructure services
include the engineering, placement and maintenance of aerial, underground, and
buried fiber-optic, coaxial and copper cable systems owned by local and long
distance communications carriers, competitive local exchange carriers, and cable
television multiple system operators. Additionally, the Company provides 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
performs underground utility locating and electric utility contracting services.
For the fiscal year ended July 31, 1998, telecommunications services contributed
approximately 90% of the Company's total contract revenues, underground utility
locating services and electric utility contracting services each contributed
approximately 5%.
Through its eleven wholly-owned and independently operated subsidiaries,
Dycom has established relationships with many leading local exchange carriers,
long distance providers, competitive access providers, cable television multiple
system operators and electric utilities. Such key customers include BellSouth
Telecommunications, Inc., Comcast Cable Communications, Inc., GTE Corporation,
MediaOne, Inc., Sprint Corporation, Time Warner, Inc., U.S. West Communications,
Inc. and Florida Power and Light Company. During fiscal 1998, approximately 72%
of the Company's total contract revenues came from multi-year master service
agreements and other long-term agreements with large telecommunications
providers and electric utilities.
RECENT ACQUISITIONS
In July 1997, Dycom acquired Communications Construction Group, Inc.
("CCG"), a Pennsylvania-based provider of construction services to cable
television multiple system operators. In April 1998, the Company acquired Cable
Com Inc. ("CCI"), a Georgia-based firm that provides construction services to
cable television multiple system operators, and Installation Technicians, Inc.
("ITI"), a Missouri-based firm that provides construction and engineering
services to local and long distance telephone companies. Each of these
acquisitions was accounted for as a pooling of interests. See Note 3 of the
Notes to Consolidated Financial Statements. These transactions have diversified
Dycom's telephone company customer base to include a broader mix of work for
cable television multiple system operators. The acquisition of CCG also created
a greater geographic presence for Dycom in the Mid-Atlantic, Midwest and
Northeast regions of the United States, while the acquisitions of CCI and ITI
have further expanded the Company's operations in the Midwest, Upper Midwest,
Rocky Mountain and West Coast regions of the United States.
In connection with the acquisitions of CCG, CCI and ITI, the Company
entered into five year employment contracts with certain executive officers of
each of the acquired companies.
SERVICES
Telecommunications Services
Engineering. Dycom provides outside plant engineers and drafters to local
exchange carriers and competitive access providers. The Company designs aerial,
buried and underground fiber optic and copper cable systems from the telephone
central office to the ultimate consumer's home or business. Engineering services
for local exchange carriers include the design of service area concept boxes,
terminals, buried and aerial drops, transmission and central office equipment
design and the proper administration of feeder and distribution cable pairs. For
competitive access providers, Dycom designs building entrance laterals, fiber
rings and conduit systems. The Company obtains rights of way and permits in
support of engineering activities, and provides construction management and
inspection personnel in conjunction with engineering services or on a stand
alone basis. For cable television multiple system operators, Dycom performs make
ready studies, strand mapping, field walk out, computer-aided radio frequency
design and drafting, and fiber cable routing and design.
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Construction and Maintenance. The services provided by the Company include
the placing and splicing of cable, excavation of trenches in which to place the
cable, placement of related structures such as poles, anchors, conduits,
manholes, cabinets and closures, placement of drop lines from the main
distribution lines to the customer's home or business, and maintenance and
removal of these facilities. In addition, the Company installs and maintains
transmission and central office equipment. The Company has the capacity to
directionally bore the placement of cables, a highly specialized and
increasingly necessary method of placing buried cable networks in congested
urban and suburban markets where trenching is highly impractical.
Premise Wiring. The Company provides premise wiring services to a variety
of large corporations and certain governmental agencies. These services, unlike
the engineering, construction and maintenance services provided under various
master service agreements and to cable television multiple system operators, are
limited to the installation, repair and maintenance of telecommunications
infrastructure within improved structures. Projects include the placement and
removal of various types of cable within buildings and individual offices. These
services generally include the development of communication networks within a
company or government agency related primarily to the establishment and
maintenance of computer operations, telephone systems, Internet access and
communications monitoring systems established for purposes of monitoring
environmental controls or security procedures.
Underground Utility Locating Services
The Company is a provider of underground utility locating services,
primarily to telecommunications providers. Under a variety of state laws,
excavators are required to locate underground utilities prior to excavating.
Utilities located include telephone, cable television, power and gas. Recently,
excavators performing telecommunications network upgrades and expansions have
generated significant growth in requests for underground utility locating, and
the Company expects this trend to continue. These services are offered
throughout the United States.
Electrical Construction and Maintenance Services
The Company performs electrical construction and maintenance services for
electric companies. This construction is performed primarily as a stand alone
service, although at times it is performed in conjunction with services for
telecommunications providers. These services include installing and maintaining
electrical transmission and distribution lines, setting utility poles and
stringing electrical lines, principally above ground. The work performed often
involves high voltage splicing and, on occasion, the installation of underground
high voltage distribution systems. The Company also provides the repair and
replacement of lines which are damaged or destroyed as a result of weather
conditions.
REVENUES BY SERVICE GROUP
For the fiscal years ended July 31, 1996, 1997 and 1998, the percentages of
the Company's total contract revenues earned were derived from
telecommunications services, underground utility locating services and
electrical construction and maintenance services as set forth below.
YEAR ENDED JULY 31,
--------------------
1996 1997 1998
---- ---- ----
Telecommunications services................................. 90% 90% 90%
Underground utility locating services....................... 6 5 5
Electrical construction and maintenance services............ 4 5 5
--- --- ---
Total............................................. 100% 100% 100%
=== === ===
CUSTOMER RELATIONSHIPS
Dycom's current customers include local exchange carriers such as BellSouth
Telecommunications, Inc., SBC Communications, Inc., U.S. West Communications,
Inc., Ameritech Corporation, GTE Corporation, The Southern New England Telephone
Company, Citizen Utilities and Cincinnati Bell Telephone. Dycom
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also currently provides telecommunications engineering, construction and
maintenance services to a number of cable television multiple system operators
including Comcast Cable Communications, Inc., Cablevision, Inc.,
Tele-Communications, Inc., Falcon Cable Media, Time Warner, Inc. and MediaOne,
Inc. Dycom also provides its services to long distance carriers such as MCI
Telecommunications Corporation, Sprint Corporation and AT&T Corporation, as well
as to competitive access providers such as MFS Communications Company, Inc.
Premise wiring services have been provided to, among others, Lucent
Technologies, Inc., Duke University, International Business Machines
Corporation, and several state and local governments. The Company also provides
construction and maintenance support to Lee County Electrical Cooperative,
Florida Power & Light Company, and Florida Power Corporation.
While the Company's customer base has broadened in recent years, the
Company's customer base remains highly concentrated, with its top five customers
in fiscal years 1996, 1997 and 1998 accounting in the aggregate for
approximately 68%, 63% and 65%, respectively, of the Company's total contract
revenues. During fiscal 1998, approximately 24% of the Company's total contract
revenues were derived from Comcast Cable Communications, Inc., 22% from
BellSouth Telecommunications, Inc. and 7% from GTE Corporation. The Company
believes that a substantial portion of its contract revenues and operating
income will continue to be derived from a concentrated group of customers. The
loss of any of such customers could have a material adverse effect on the
Company's business, financial condition, results of operations and cash flows.
A significant amount of the Company's business is performed under master
service agreements. These agreements with telecommunications providers are
generally exclusive requirement contracts, with certain exceptions, including
the customer's option to perform the services with its own regularly employed
personnel. The agreements are typically three to five years in duration,
although the terms typically permit the customer to terminate the agreement upon
90 days prior written notice. Each agreement contemplates hundreds of individual
construction and maintenance projects valued generally at less than $10,000
each. Other jobs are bid by the Company on a nonrecurring basis.
Although historically master service agreements have been awarded through a
competitive bidding process, recent trends have been toward securing or
extending such contracts on negotiated terms. With the rapid expansion of the
telecommunications market and the immediate need for upgrading existing, as well
as constructing new, telecommunications infrastructure, the Company believes
that more master service agreements will be awarded on the basis of negotiated
terms as opposed to the competitive bidding process.
Sales and marketing efforts of the Company are the responsibility of the
management of Dycom and its operating subsidiaries.
BACKLOG
The Company views its backlog to be comprised of the uncompleted portion of
services to be performed under job-specific contracts and the estimated value of
future services that the Company expects to provide under long-term requirements
contracts. The Company's backlog at July 31, 1998 was $467.7 million. The
Company expects to complete approximately 60% of this backlog within the next
fiscal year. Due to the nature of its contractual commitments, in many instances
the Company's customers are not committed to the specific volumes of services to
be purchased under a contract, but rather the Company is committed to perform
these services if requested by the customer. However, the customer is obligated
to obtain these services from the Company if they are not performed by the
customer internally. Many of the contracts are multi-year agreements, and the
Company includes in its backlog the full amount of services projected to be
performed over the term of the contract based on its historical relationships
with its customers and experience in procurements of this nature. Historically,
the Company has not experienced a material variance between the amount of
services it expects to perform under a contract and the amount actually
performed for a specified period. There can be no assurance, however, as to the
customer's requirements during a particular period or that such estimates at any
point in time are accurate.
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SAFETY AND RISK MANAGEMENT
The Company is committed to ensuring that its employees perform their work
in the safest possible manner. The Company regularly communicates with its
employees to promote safety and to instill safe work habits. Dycom's safety
director, a holding company employee, reviews all accidents and claims
throughout the operating subsidiaries, examines trends and implements changes in
procedures or communications to address any safety issues.
The primary claims rising in the Company's business are workers'
compensation and other personal injuries, various general liabilities, and
vehicle liability (personal injury and property damage). The Company is
self-insured on a per occurrence basis for automobile liability up to $250,000,
for general liability up to $250,000, and for workers' compensation, in states
where the Company elects to do so, up to $500,000. The Company has an aggregate
stop loss coverage for all claims arising in a given year of $10.5 million
adjusted for certain exposures in addition to umbrella liability coverage up to
a policy limit of $50.0 million.
The Company carefully monitors claims and participates actively in claims
estimates and adjustments. The estimated costs of self-insured claims, which
include estimates for incurred but not reported claims, are accrued as
liabilities on the Company's balance sheet. Due to changes in the Company's loss
experience in recent years, insurance accruals have varied from year to year and
have had an effect on operating margins. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and Note 1 of the
Notes to Consolidated Financial Statements.
COMPETITION
The telecommunications engineering, construction and maintenance services
industry in which the Company operates is highly competitive, requiring
substantial resources and skilled and experienced personnel. The Company
competes with other independent contractors in most of the markets in which it
operates, several of which are large domestic companies, some of which may have
greater financial, technical and marketing resources than the Company. In
addition, there are relatively few, if any, barriers to entry into the markets
in which the Company operates and, as a result, any organization that has
adequate financial resources and access to technical expertise may become a
competitor to the Company. A significant portion of the Company's revenues are
currently derived from master service agreements and price is often an important
factor in the award of such agreements. Accordingly, the Company could be outbid
by its competitors in an effort to procure such business. There can be no
assurance that the Company's competitors will not develop the expertise,
experience and resources to provide services that are equal or superior in both
price and quality to the Company's services, or that the Company will be able to
maintain or enhance its competitive position. The Company may also face
competition from the in-house service organizations of its existing or
prospective customers, including telecommunications providers, which employ
personnel who perform some of the same types of services as those provided by
the Company. Although a significant portion of these services is currently
outsourced, there can be no assurance that existing or prospective customers of
the Company will continue to outsource telecommunications engineering,
construction and maintenance services in the future.
The Company believes that the principal competitive factors in the market
for telecommunications engineering, construction and maintenance services
include technical expertise, reputation, price, quality of service, availability
of skilled technical personnel, geographic presence, breadth of service
offerings, adherence to industry standards and financial stability. The Company
believes that it competes favorably with its competitors on the basis of these
factors.
EMPLOYEES
As of July 31, 1998, the Company employed 3,834 persons. The number of
employees of the Company and its subsidiaries varies according to the work in
progress. As a matter of course, the Company maintains a nucleus of technical
and managerial personnel from which it draws to supervise all projects.
Additional employees are added as needed to complete specific projects.
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None of the Company's employees are represented by a labor union. CCG is
currently a party to a collective bargaining agreement with a local bargaining
unit in Philadelphia, Pennsylvania, and approximately 20 of its current
employees are subject to such agreement. The Company has never experienced a
work stoppage or strike. The Company believes that its employee relations are
good.
MATERIALS
In many cases, the Company's customers supply most or all of the materials
required for a particular contract and the Company provides the personnel, tools
and equipment to perform the installation services. However, with respect to
certain of its contracts the Company may supply part or all of the materials
required. In these instances, the Company is not dependent upon any one source
for the products which it customarily utilizes to complete the job. The Company
is not presently experiencing, nor does it anticipate experiencing, any
difficulties in procuring an adequate supply of materials.
ITEM 2. PROPERTIES
The Company leases its executive offices in Palm Beach Gardens, Florida.
The Company's subsidiaries operate from owned or leased administrative offices,
district field offices, equipment yards, shop facilities, and temporary storage
locations. The Company owns facilities in Phoenix, Arizona; Durham, North
Carolina; Pinellas Park, Florida; and West Palm Beach, Florida. The Company also
leases, subject to long-term noncancelable leases, facilities in West Chester,
Pennsylvania; Kimberling City, Missouri; Lithonia, Georgia; Knoxville,
Tennessee; and Greensboro, North Carolina. The Company also leases and owns
other smaller properties as necessary to enable it to effectively perform its
obligations under master service agreements and other specific contracts. The
Company believes that its facilities are adequate for its current operations.
ITEM 3. LEGAL PROCEEDINGS
In September 1995, the State of New York commenced a sales and use tax
audit of CCG for the years 1989 through 1995. As a result of the audit, certain
additional taxes were paid by CCG in fiscal 1996. The State of New York has
claimed additional amounts due from CCG for sales taxes and interest for the
periods through August 31, 1995. See Note 17 of the Notes to Consolidated
Financial Statements.
In the normal course of business, certain subsidiaries of the Company have
pending and unasserted claims. It is the opinion of the Company's management,
based on information available at this time, that these claims will not have a
material adverse impact on the Company's consolidated financial condition,
results of operations and cash flows.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of the year covered by this report, no matters
were submitted to a vote of the Company's security holders whether through the
solicitation of proxies or otherwise.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York Stock Exchange
("NYSE") under the symbol "DY". The following table sets forth the range of the
high and low closing sales prices for each quarter within the last two fiscal
years as reported on the NYSE.
FISCAL 1997 FISCAL 1998
----------- -----------
HIGH LOW HIGH LOW
---- --- ---- ---
First Quarter............................................... $14 3/8 $11 1/2 $27 7/16 $16 9/16
Second Quarter.............................................. 12 1/4 9 1/4 26 7/16 19 3/16
Third Quarter............................................... 12 1/4 10 29 23
Fourth Quarter.............................................. 18 1/8 9 7/8 37 1/8 25 1/4
As of August 24, 1998, there were 618 record holders of the Company's
$.33 1/3 par value common stock. The common stock closed at a high of $35 3/16
and a low of $30 5/8 during the period August 1, 1998 through August 24, 1998.
The Company currently intends to retain future earnings, and since 1982, no
cash dividends have been paid by the Company. The Board of Directors will
determine any future change in dividend policies based on financial conditions,
profitability, cash flow, capital requirements, and business outlook, as well as
other factors relevant at the time. The Company's credit agreement expressly
limits the payment of cash dividends to fifty percent (50%) of each fiscal
year's after-tax profits. The credit agreement's restrictions regarding the
Company's debt-to-net worth, quick and current ratios also affect the Company's
ability to pay dividends.
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ITEM 6. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data of the
Company for the years ended July 31, 1994, 1995, 1996, 1997, and 1998. The
Company acquired CCG in July, 1997 and acquired CCI and ITI in April, 1998.
These acquisitions have been accounted for as pooling of interests and
accordingly, the consolidated financial statements for the periods presented
include the accounts of CCG, CCI, and ITI. This data should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this report.
1994(1) 1995 1996(2) 1997(2) 1998(2)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Operating Data:
Total revenues......................... $189,195 $255,045 $247,295 $312,419 $371,363
Income (loss) before income taxes...... (5,415) 15,153 14,055 23,770 36,081
Net income (loss)...................... (6,537) 11,352 9,922 15,814 23,036
Per Common Share (4):
Basic.................................. $ (0.53) $ 0.92 $ 0.80 $ 1.26 $ 1.63
Diluted................................ $ (0.53) $ 0.92 $ 0.78 $ 1.24 $ 1.61
Pro Forma Earnings (5):
Income (loss) before income taxes...... $ (5,415) $ 15,153 $ 14,055 $ 23,770 $ 36,081
Pro forma provision for income taxes... 1,481 6,343 4,860 9,841 14,420
Pro forma net income (loss)............ (6,896) 8,810 9,195 13,929 21,661
Pro Forma Per Common Share (4):
Basic.................................. $ (0.56) $ 0.71 $ 0.74 $ 1.11 $ 1.53
Diluted................................ $ (0.56) $ 0.71 $ 0.73 $ 1.09 $ 1.51
Balance Sheet Data (at end of period):
Total assets........................... 75,708 81,759 82,483 112,512 166,318
Long-term obligations (3).............. 15,870 29,002 23,778 20,651 30,957
Stockholders' equity................... 12,510 19,871 27,785 42,427 98,379
Cash dividends per share............... -- -- -- -- --
- ---------------
(1) The Company wrote-off $1.4 million of intangible assets and recorded a $1.7
million deferred tax asset valuation allowance.
(2) The results of operations for fiscal 1996, 1997 and 1998 include a $1.1
million, $0.3 million and $0.4 million reduction in the deferred tax
valuation allowance, respectively.
(3) The outstanding borrowings under the bank credit agreement were classified
as a current liability at July 31, 1994 due to the likelihood of covenant
violations within the following twelve months. But for the reclassification,
the long-term obligations at July 31, 1994 would have been $25,515.
(4) Basic and diluted earnings per common share have replaced primary and fully
diluted earnings per common share, respectively, in accordance with
Statement of Financial Accounting Standards No. 128, "Earnings per Share".
See Note 2 of the Notes to Consolidated Financial Statements.
(5) The provision for income taxes has been adjusted to reflect a pro forma tax
provision for pooled companies which were previously "S Corporations". See
Note 1 of the Notes to Consolidated Financial Statements.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
Dycom derives most of its contract revenues earned from engineering,
construction and maintenance services to the telecommunications industry.
Additionally, the Company provides 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 performs underground utility locating
and electric utility contracting services.
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The Company currently performs work for more than 25 local exchange carriers,
cable television multiple system operators, long distance carriers, competitive
access providers, and electric utilities throughout the United States. The
Company expects that future growth in contract revenues earned will be generated
from (i) increasing the volume of services to existing customers; (ii) expanding
the scope of services to existing customers; (iii) broadening its customer base;
and (iv) geographically expanding its service area. Growth is expected to result
from internal sources as well as through acquisitions. Other revenues include
interest income and gain on sale of surplus equipment.
In July 1997, Dycom completed the acquisition of CCG and in April 1998,
Dycom completed the acquisitions of CCI and ITI. See Note 3 of the Notes to
Consolidated Financial Statements. Each of these transactions was accounted for
as a pooling of interests. Dycom's financial statements and all financial and
operating data derived therefrom have been combined for all periods presented
herein to include the financial condition and results of operations of CCG, CCI
and ITI. CCG and CCI provide construction services to cable television multiple
system operators, and ITI provides construction and engineering services to
local and long distance telephone companies.
Dycom provides services to its customers pursuant to multi-year master
service agreements and long- and short-term contracts for particular projects.
Under master service agreements, Dycom agrees to provide, for a period of
several years, all specified service requirements to its customer within a given
geographical territory. Under the terms of such agreements, the customer can
typically terminate the agreement with 90 days prior written notice. The
customer, with certain exceptions, agrees to purchase such requirements from
Dycom. Materials to be used in these jobs are generally provided by the
customer. Master service agreements generally provide that Dycom will furnish a
specified unit of service for a specified unit price (e.g., fiber optic cable
will be installed underground for a specified rate of dollars per foot). The
Company recognizes revenue under master service agreements as the related work
is performed. Dycom is currently a party to 32 master service agreements, which
may be either bid or negotiated. Master service agreements are typically bid
initially and may be extended by negotiation. The remainder of Dycom's services
are provided pursuant to contracts for particular jobs. Long-term contracts
relating to specific projects have terms in excess of one year from the contract
date. Short-term contracts are generally from three to four months in duration
from the contract date, depending upon the size of the project. Contract
revenues from multi-year master service agreements and other long-term
agreements represented 72% of total contract revenues in fiscal 1998, of which
contract revenues from multi-year master service agreements represented 49% of
total contract revenues.
Cost of earned revenues includes all direct costs of providing services
under the Company's contracts, other than depreciation on fixed assets owned by
the Company or utilized by the Company under capital leases, which are included
in depreciation and amortization expense. Cost of earned revenues includes all
costs of construction personnel, subcontractor costs, all costs associated with
operation of equipment, excluding depreciation, materials not supplied by the
customer and insurance. Because the Company is primarily self-insured for
automobile and general liability, workers' compensation, and employee group
health claims, a change in experience or actuarial assumptions that did not
affect the rate of claims payments could nonetheless materially adversely affect
results of operations in a particular period. General and administrative costs
include all costs of holding company and subsidiary management personnel, rent,
utilities, travel and centralized costs such as insurance administration,
interest on debt, professional costs and certain clerical and administrative
overhead. The Company's management personnel, including subsidiary management,
undertake all sales and marketing functions as part of their management
responsibilities and, accordingly, the Company does not incur material selling
expenses.
Dycom, founded in 1969, witnessed significant growth during the 1980's as
the result of increasing competitive growth in the long distance telephone
market and the needs of the long distance carriers to replace their copper
cabling with fiber optic cable. Through 1990, Dycom acquired nine operating
subsidiaries. As long distance carriers completed most of their long haul lines
in the late 1980's, the Company shifted its focus to the local exchange carrier
market. During the early 1990's, Dycom's results of operations were materially
adversely affected by a number of internal developments, including (i)
adjustments taken to insurance reserves in fiscal 1991, (ii) write-offs of
intangible assets, including goodwill, of $24.3 million and $1.4 million in
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fiscal 1993 and fiscal 1994, respectively, incurred in connection with four
acquisitions, which contributed to substantial net losses in those years, and
(iii) significant costs and distraction of management attention associated with
a range of litigation and a governmental investigation, including shareholder
litigation and protracted litigation with a former officer involved in a
takeover effort. All of these matters were concluded in or before fiscal 1995.
Management of the Company does not believe that any of the events or
circumstances it faced in the early 1990's are indicative of the manner in which
the Company currently operates or the Company's future prospects.
RESULTS OF OPERATIONS
The following table sets forth, as a percentage of contract revenues
earned, certain items in the Company's statement of operations for the periods
indicated:
YEAR ENDED JULY 31,
---------------------
1996 1997 1998
----- ----- -----
Revenues:
Contract revenues earned............................... 100.0% 100.0% 100.0%
Other, net............................................. 0.6 0.4 0.7
----- ----- -----
Total revenues.................................... 100.6 100.4 100.7
----- ----- -----
Expenses:
Cost of earned revenue, excluding depreciation......... 80.7 79.0 77.3
General and administrative............................. 9.9 9.9 10.0
Depreciation and amortization.......................... 4.3 3.8 3.6
----- ----- -----
Total expenses.................................... 94.9 92.7 90.9
----- ----- -----
Income before income taxes................................ 5.7 7.7 9.8
Provision for income taxes................................ 1.7 2.6 3.6
----- ----- -----
Net income................................................ 4.0 5.1 6.2
Pro forma adjustment to income tax provision.............. 0.3 0.6 0.3
----- ----- -----
Pro forma net income...................................... 3.7% 4.5% 5.9%
===== ===== =====
Year Ended July 31, 1998 Compared to Year Ended July 31, 1997
Revenues. Contract revenues increased $57.5 million, or 18.5%, to $368.7
million in fiscal 1998 from $311.2 million in fiscal 1997. Of this increase,
$51.8 million was attributable to the telecommunications services group, $2.8
million was attributable to the electric construction and maintenance services
group and $2.9 million was attributable to the underground utility locating
services group, reflecting an increased overall market demand for the Company's
services. During fiscal 1998, the Company recognized $330.6 million of contract
revenues from the telecommunications services group as compared to $278.8
million in fiscal 1997. The increase in the Company's telecommunications
services group contract revenues reflects an increased volume of projects and
activity in fiscal 1998 associated with cable television services, which
increased by $36.9 million to $153.5 million in fiscal 1998 from $116.6 million
in fiscal 1997. Contract revenues in the telecommunications services group also
increased for services performed in the design and installation of broadband
networks, telephone engineering services, telephony splicing services, premise
wiring services, and revenues from services performed under master service
agreements. The Company recognized contract revenues of $20.2 million from the
electric construction and maintenance services group in fiscal 1998 as compared
to $17.4 million in fiscal 1997, an increase of 16.1%. The Company recognized
contract revenues of $17.9 million from underground utility locating services in
fiscal 1998 as compared to $15.0 million in fiscal 1997, an increase of 19.3%.
Contract revenues from multi-year master service agreements and other
long-term agreements represented 72% of total contract revenues in fiscal 1998
as compared to 68% in fiscal 1997, of which contract revenues from multi-year
master service agreements represented 49% of total contract revenues in fiscal
1998 as compared to 51% in fiscal 1997.
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Cost of Earned Revenues. Cost of earned revenues increased $39.0 million
to $285.0 million in fiscal 1998 from $246.0 million in fiscal 1997, but
decreased as a percentage of contract revenues to 77.3% from 79.0%. Direct
materials, equipment costs, and other direct costs declined slightly as a
percentage of contract revenues as a result of improved productivity and the
utilization of more modern equipment.
General and Administrative Expenses. General and administrative expenses
increased $5.9 million to $36.7 million in fiscal 1998 from $30.8 million in
fiscal 1997, and increased slightly as a percentage of contract revenues to
10.0% from 9.9%. The increase in general and administrative expenses was
primarily attributable to a $2.4 million increase in administrative salaries,
bonuses, employee benefits and payroll taxes and an increase of $1.2 million in
the provision for doubtful accounts. Acquisition and merger related expenses
charged to general and administrative expenses were $0.6 million and $0.4
million in fiscal 1998 and 1997, respectively.
Depreciation and Amortization. Depreciation and amortization expense
increased $1.7 million to $13.5 million in fiscal 1998 from $11.8 million in
fiscal 1997, but decreased as a percentage of contract revenues to 3.6% from
3.8%. The increase in amount reflects the depreciation of additional capital
expenditures incurred in the ordinary course of business.
Income Taxes. The provision for income taxes was $13.0 million in fiscal
1998 as compared to $8.0 million in fiscal 1997. The provision for income taxes
for 1998 reflects a reduction of $0.4 million in a valuation allowance relative
to certain deferred tax assets. The Company's effective tax rate was 36.2% in
fiscal 1998 as compared to 33.5% in fiscal 1997. The effective tax rate differs
from the statutory tax rate due to state income taxes, income of Subchapter S
Corporations (CCI and ITI) being taxed to their stockholders, the amortization
of intangible assets that do not provide a tax benefit, other non-deductible
expenses for tax purposes and the reduction in a valuation allowance relative to
certain deferred tax assets. As of the date of the merger, CCI and ITI
recognized a combined deferred tax liability of $0.6 million which was included
in the results of operations for the quarter ended April 30, 1998.
The pro forma provision for income taxes was $14.4 million in fiscal 1998
as compared to $9.8 million in fiscal 1997. The pro forma effective tax rate was
40.0% in fiscal 1998 and 41.4% in fiscal 1997.
Net Income. Net income increased to $23.0 million in fiscal 1998 from
$15.8 million in fiscal 1997, a 45.7% increase. Pro forma net income increased
to $21.7 million in fiscal 1998 from $13.9 million in fiscal 1997, a 55.5%
increase.
Year Ended July 31, 1997 Compared to Year Ended July 31, 1996
Revenues. Contract revenues increased $65.3 million, or 26.6%, to $311.2
million in fiscal 1997 from $245.9 million in fiscal 1996. Of this increase,
$57.3 million was attributable to the telecommunications services group, $6.7
million was attributable to the electric construction and maintenance services
group and $1.3 million was attributable to the underground utility locating
services group, reflecting an increased overall market demand for the Company's
services. During fiscal 1997, the Company recognized $278.8 million of contract
revenues from the telecommunications services group as compared to $221.5
million in fiscal 1996. The increase in the Company's telecommunications
services group contract revenues reflects an increased volume of projects and
activity in fiscal 1997 associated with cable television services, which
increased by $32.4 million to $116.6 million in fiscal 1997 from $84.2 million
in fiscal 1996, the design and installation of broadband networks, telephone
engineering services and premise wiring services, partially offset by a slight
decline in contract revenues from services performed under master service
agreements. The Company recognized contract revenues of $17.4 million from
electric construction and maintenance services in fiscal 1997 as compared to
$10.7 million in fiscal 1996, an increase of 62.6%. The Company recognized
contract revenues of $15.0 million from underground utility locating services in
fiscal 1997 as compared to $13.7 million in fiscal 1996, an increase of 9.5%.
Contract revenues from multi-year master service agreements and other
long-term agreements represented 68% of total contract revenues in fiscal 1997
as compared to 77% in fiscal 1996, of which contract
10
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revenues from master service agreements represented 51% of total contract
revenues in fiscal 1997 as compared to 56% in fiscal 1996.
Cost of Earned Revenues. Cost of earned revenues increased $47.6 million
to $246.0 million in fiscal 1997 from $198.4 million in fiscal 1996, but
decreased as a percentage of contract revenues to 79.0% from 80.7%. Direct
labor, equipment and materials costs declined slightly as a percentage of
contract revenues as a result of improved productivity in the labor force and
the utilization of more modern equipment. Additionally, insurance costs declined
by approximately $1.6 million as a result of fewer claims arising in fiscal
1997.
General and Administrative Expenses. General and administrative expenses
increased $6.4 million to $30.8 million in fiscal 1997 from $24.4 million in
fiscal 1996 and remained unchanged at 9.9% of contract revenues. The increase in
general and administrative expenses was primarily attributable to a $4.1 million
increase in administrative salaries, bonuses, employee benefits and payroll
taxes and a $0.4 million increase in the provision for doubtful accounts. The
Company also incurred professional and related expenses associated with the
acquisition of CCG of $0.4 million in fiscal 1997.
Depreciation and Amortization. Depreciation and amortization expense
increased $1.4 million to $11.8 million in fiscal 1997 from $10.4 million in
fiscal 1996, but decreased as a percentage of contract revenues to 3.8% from
4.3%. The increase in amount reflects the depreciation of additional capital
expenditures incurred in the ordinary course of business.
Income Taxes. The provision for income taxes was $8.0 million in fiscal
1997 as compared to $4.1 million in fiscal 1996. The provision for income taxes
for 1996 reflects a reduction of $1.1 million in a valuation allowance relative
to certain deferred tax assets. The Company's effective tax rate was 33.5% in
fiscal 1997 as compared to 29.4% in fiscal 1996. The effective tax rate differs
from the statutory tax rate due to state income taxes, income of Subchapter S
Corporations (CCI and ITI) being taxed to their stockholders, the amortization
of intangible assets that do not provide a tax benefit, other non-deductible
expenses for tax purposes and the reduction in a valuation allowance relative to
certain deferred tax assets.
The pro forma provision for income taxes was $9.8 million in fiscal 1997 as
compared to $4.9 million in fiscal 1996. The pro forma effective tax rate was
41.4% in fiscal 1997 and 34.6% in fiscal 1996.
Net Income. Net income increased to $15.8 million in fiscal 1997 from $9.9
million in fiscal 1996, a 59.4% increase. Pro forma net income increased to
$13.9 million in fiscal 1997 from $9.2 million in fiscal 1996, a 51.5% increase.
LIQUIDITY AND CAPITAL RESOURCES
The Company's needs for capital are attributable primarily to its needs for
equipment to support its contractual commitments to customers and its needs for
working capital sufficient for general corporate purposes. Capital expenditures
have been financed by operating and capital leases, bank borrowings and internal
cash flows. To the extent that the Company seeks to grow by acquisitions that
involve consideration other than Company stock, the Company's capital
requirements may increase, although the Company is not currently subject to any
commitments or obligations with respect to any acquisitions. The Company's
sources of cash have historically been from operating activities, bank
borrowings and from proceeds arising from the sale of idle and surplus equipment
and real property.
For fiscal 1998, net cash provided by operating activities was $30.6
million compared to $12.8 million for fiscal 1997 and $19.5 million for fiscal
1996. The increase in fiscal 1998 was due primarily to an increase in net income
and other non-cash expenses. The increase was also attributable to funds
advanced by a customer for materials and start-up expenses related to certain
long-term construction contracts. The amounts advanced at July 31, 1998 were
$9.4 million.
For fiscal 1998, net cash used in investing activities for capital
expenditures was $21.5 million, compared to $16.1 million in fiscal 1997 and
$13.5 million in fiscal 1996. For fiscal 1998 and fiscal 1997, these capital
expenditures were for the normal replacement of equipment and the buy out of
certain operating leases on terms favorable to the Company. For fiscal 1996,
these capital expenditures were for normal equipment
11
13
replacement and for additional equipment purchases made by the underground
utility locating group to service new geographic areas. In addition to equipment
purchases, the Company obtained approximately $2.2 million of equipment in
fiscal 1998, $3.3 million of equipment in fiscal 1997, and $3.0 million of
equipment in fiscal 1996 under noncancellable operating leases.
On April 29, 1998, the Company signed an $85.0 million amended credit
agreement arranged by a group of banks led by Dresdner Bank Lateinamerika AG.
The amended credit agreement provides for (i) a $30.0 million revolving working
capital facility; (ii) a $15.0 million standby letter of credit facility; (iii)
a $15.0 million five-year term loan; and (iv) a $25.0 million revolving
equipment acquisition and small business purchase facility. The amended credit
agreement increased the level of available financing by $50.0 million over the
limits set in the Company's previous credit facility. The Company sought this
increased borrowing to facilitate its ability to meet its working capital needs
in order to sustain its current level of internal growth.
The amended credit agreement requires the Company to maintain certain
financial covenants and conditions, such as a debt-to-net worth ratio of not
more than 2.25:1, a current ratio of not less than 1.4:1, a quick ratio of not
less than 0.75:1, and net profit levels of at least $6.0 million in the first
year and for each subsequent fiscal year, and also places restrictions on
encumbrances of assets and creation of additional indebtedness. The amended
credit agreement also limits the payment of cash dividends to 50% of each fiscal
year's after-tax profits. At July 31, 1998, the Company was in compliance with
all covenants and conditions under the amended credit agreement.
The revolving working capital facility is available for a two-year period
and bears interest, at the option of the Company, at the bank's prime interest
rate minus 1.00% or LIBOR plus 1.50%. In October 1997, the Company borrowed $4.9
million under this facility to pay off a subsidiary's previously existing credit
facility. On November 28, 1997, the Company repaid the outstanding balance of
this facility with proceeds from the public offering of its common stock. As of
July 31, 1998, there was no outstanding balance on this facility, resulting in
an available borrowing capacity of $30.0 million.
The term loan facility has a five-year maturity and bears interest at the
bank's prime interest rate minus 0.50% (8.00% at July 31, 1998). Principal
amounts due under the term loan are payable in quarterly installments of
$750,000, plus accrued interest, through April 2003. In May 1998, the
outstanding principal under the term loan was increased by $7.8 million in
accordance with the terms of the amended bank credit agreement. The amount
outstanding on the term loan facility was $14.3 million at July 31, 1998.
The revolving equipment acquisition and small business purchase facility is
available for a two-year period and bears interest, at the option of the
Company, at the bank's prime interest rate minus 0.75% or LIBOR plus 1.75%.
Advances against this facility are converted into term loans with maturities not
to exceed 48 months. The outstanding principal on the equipment term loans is
payable in monthly installments through February 2001. In October 1997, the
Company borrowed $1.0 million to buy out existing operating leases and $1.7
million to refinance equipment under a subsidiary's previously existing credit
facility. During fiscal 1998, the Company repaid $1.3 million of borrowings
under this facility and as of July 31, 1998 had remaining available borrowing
capacity of $21.7 million. At July 31, 1998, the interest rates on the
outstanding equipment term loans were at the LIBOR option ranging from 7.53% to
7.81%.
The standby letter of credit facility is available for a two-year period.
At July 31, 1998, the Company had $11.6 million in outstanding standby letters
of credit issued as security to the Company's insurance administrators as part
of its self-insurance program, leaving $3.4 million of available borrowing
capacity. The interest rate for all borrowings made pursuant to the facility
will be the prime rate plus 1.00%.
All obligations under the amended credit agreement are unconditionally
guaranteed by the Company's subsidiaries and secured by security interests in
certain property and assets of the Company and its subsidiaries.
The Company's recently acquired subsidiaries, CCI and ITI, had credit
facilities entered into prior to their acquisition by Dycom. CCI had a $5.2
million revolving credit facility for funding working capital and a $2.0 million
term note incurred to purchase equipment. The interest rate on the revolving
credit facility was at the bank's prime interest rate and the interest rate on
the term loan was at 8.75%. ITI had a $2.0 million
12
14
revolving credit facility for funding working capital and a $0.5 million
multiple advance term facility for equipment acquisitions. The interest rates on
the revolving credit facility and the multiple advance term facility were at the
bank's prime interest rate. The obligations were secured by substantially all of
CCI's and ITI's assets. The facilities contained restrictions, which among other
things, required the maintenance of certain financial ratios and covenants and
restricted the payment of cash dividends. During the fourth quarter of fiscal
1998, the Company paid off the outstanding balances of $8.1 million under these
facilities with existing cash balances and subsequently terminated such
facilities.
The Company concluded the public offering of an aggregate of 3,105,000
shares of its common stock in November, 1997, including 1,126,622 shares sold by
certain selling stockholders of the Company, at a public offering price of
$20.00 per share. The Company received aggregate net proceeds of $37.0 million,
net of the underwriting discount and offering expenses payable by the Company.
The Company invested the net proceeds, after paying off $9.1 million of its
outstanding indebtedness, in various short-term instruments having a maturity of
three months or less.
The Company foresees its capital resources together with existing cash
balances to be sufficient to meet its financial obligations, including the
scheduled debt payments under the amended credit agreement and operating lease
commitments, and to support the Company's normal replacement of equipment at its
current level of business for at least the next twelve months. The Company's
future operating results and cash flows may be affected by a number of factors
including the Company's success in bidding on future contracts and the Company's
continued ability to effectively manage controllable costs.
SPECIAL NOTE CONCERNING FORWARD LOOKING STATEMENTS
This Annual Report on Form 10-K, including the Notes to the Consolidated
Financial Statements and this Management's Discussion and Analysis of Financial
Condition and Results of Operations, contains forward looking statements. The
words "believe", "expect", "anticipate", "intends", "forecast", "project", and
similar expressions identify forward looking statements. Such statements may
include, but may not be limited to, the anticipated outcome of contingent
events, including litigation, projections of revenues, income or loss, capital
expenditures, plans for future operations, growth and acquisitions, financial
needs or plans and the availability of financing, and plans relating to services
of the Company, as well as assumptions relating to the foregoing. Such forward
looking statements are within the meaning of that term in Section 27A of the
Securities Act of 1933, as amended, and Section 21E of the Securities Exchange
Act of 1934, as amended.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130 "Reporting
Comprehensive Income" which establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general-purpose financial statements. This statement requires
that an enterprise classify items of other comprehensive income by their nature
in a financial statement and display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of a statement of financial position. This
statement is effective for fiscal years beginning after December 15, 1997.
In June 1997, the FASB issued SFAS No. 131, "Disclosure about Segments of
an Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes the standards for related disclosures about
products and services, geographic areas, and major customers. This statement
requires that a public business enterprise report financial and descriptive
information about its reportable operating segments. The financial information
is required to be reported on the basis that it is used internally for
evaluating segment performance and deciding how to allocate resources to
segments. Operating segments are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision maker in deciding how to allocate resources and in
assessing
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performance. This statement is effective for financial statements for periods
beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
About Pension and Other Postretirement Benefits" which revises certain
disclosures about pension and other postretirement benefit plans. This statement
does not change the measurement and recognition methods for pensions or
postretirement benefits costs reported in financial statements. This statement
is effective for fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes standards for the
accounting and reporting of derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for financial statements for periods beginning after December 15,
1999.
Management is currently evaluating the requirements and related disclosures
of SFAS No. 130, 131, 132, and 133.
YEAR 2000 COMPLIANCE
The Company has reviewed its computer systems to identify those areas that
could be adversely affected by Year 2000 software failures. The Company has
converted approximately 85% of its information systems to be Year 2000
compliant. The Company has incurred approximately $1.0 million through July 31,
1998 and approximately $0.5 million will be incurred in fiscal 1999 to complete
the information system conversions. Although the Company expects that any
additional expenditures that may be required in connection with the Year 2000
conversions will not be material, there can be no assurance in this regard. The
Company believes that certain of its customers, particularly local exchange and
long distance carriers and cable multiple system operators, may be impacted by
the Year 2000 problem, which could in turn affect the Company. Currently, the
Company cannot predict the effect of the Year 2000 problem on entities with
which it transacts business and there can be no assurance it will not have a
material adverse effect on the Company's business, financial condition, results
of operations or cash flows. The Company will be formulating a contingency plan
to address the possible effects of any of its customers experiencing Year 2000
problems.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company considered the provision of Financial Reporting Release No. 48
"Disclosure of Accounting Policies for Derivative Financial Instruments and
Derivative Commodity Instruments, and Disclosure of Quantitative and Qualitative
Information about Market Risk Inherent in Derivative Financial Instruments,
Other Financial Instruments and Derivative Commodity Instruments". The Company
had no holdings of derivative financial or commodity instruments at July 31,
1998. A review of the Company's other financial instruments and risk exposures
at that date revealed that the Company had exposure to interest rate risk. At
July 31, 1998, the Company performed sensitivity analyses to assess the
potential effect of this risk and concluded that near-term changes in interest
rates should not materially adversely affect the Company's financial position,
results of operations or cash flows.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's consolidated financial statements and related notes and
independent auditors' report follow on subsequent pages of this report.
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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1997 AND 1998
1997 1998
------------ ------------
ASSETS:
CURRENT ASSETS:
Cash and equivalents........................................ $ 5,276,112 $ 35,927,307
Accounts receivable, net.................................... 49,526,678 62,142,808
Costs and estimated earnings in excess of billings.......... 11,398,621 14,382,620
Deferred tax assets, net.................................... 2,168,763 2,726,348
Other current assets........................................ 1,966,538 3,014,199
------------ ------------
Total current assets.............................. 70,336,712 118,193,282
------------ ------------
PROPERTY AND EQUIPMENT, net................................. 36,336,212 42,865,197
------------ ------------
OTHER ASSETS:
Intangible assets, net...................................... 4,684,358 4,529,270
Deferred tax assets......................................... 424,205
Other....................................................... 730,394 730,342
------------ ------------
Total other assets................................ 5,838,957 5,259,612
------------ ------------
TOTAL............................................. $112,511,881 $166,318,091
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 14,724,340 $ 12,182,699
Notes payable............................................... 17,719,780 4,727,782
Billings in excess of costs and estimated earnings.......... 470,940
Accrued self-insurance claims............................... 2,011,622 2,440,303
Income taxes payable........................................ 1,228,648 2,812,144
Other accrued liabilities................................... 13,278,712 14,819,181
------------ ------------
Total current liabilities......................... 49,434,042 36,982,109
NOTES PAYABLE............................................... 13,588,022 13,407,990
ACCRUED SELF-INSURED CLAIMS................................. 6,418,400 7,454,849
OTHER LIABILITIES........................................... 644,625 10,094,195
------------ ------------
Total liabilities................................. 70,085,089 67,939,143
------------ ------------
COMMITMENTS AND CONTINGENCIES, Note 17
STOCKHOLDERS' EQUITY:
Preferred stock, par value $1.00 per share:
1,000,000 shares authorized; no shares issued and
outstanding
Common stock, par value $.33 1/3 per share:
50,000,000 shares authorized; 12,667,877 and 14,722,731
issued and outstanding, respectively...................... 4,222,625 4,907,577
Additional paid-in capital.................................. 25,670,666 62,496,252
Retained earnings........................................... 12,533,501 30,975,119
------------ ------------
Total stockholders' equity........................ 42,426,792 98,378,948
------------ ------------
TOTAL............................................. $112,511,881 $166,318,091
============ ============
See notes to consolidated financial statements.
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17
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1996, 1997, AND 1998
1996 1997 1998
------------ ------------ ------------
REVENUES:
Contract revenues earned............................. $245,937,063 $311,238,108 $368,713,563
Other, net........................................... 1,357,932 1,181,332 2,649,229
------------ ------------ ------------
Total...................................... 247,294,995 312,419,440 371,362,792
------------ ------------ ------------
EXPENSES:
Cost of earned revenues excluding depreciation....... 198,437,641 246,025,594 285,038,220
General and administrative........................... 24,368,552 30,808,780 36,746,614
Depreciation and amortization........................ 10,433,989 11,814,577 13,496,694
------------ ------------ ------------
Total...................................... 233,240,182 288,648,951 335,281,528
------------ ------------ ------------
INCOME BEFORE INCOME TAXES........................... 14,054,813 23,770,489 36,081,264
------------ ------------ ------------
PROVISION (BENEFIT) FOR INCOME TAXES:
Current............................................ 5,712,682 8,153,092 13,179,024
Deferred........................................... (1,580,196) (196,241) (133,380)
------------ ------------ ------------
Total...................................... 4,132,486 7,956,851 13,045,644
------------ ------------ ------------
NET INCOME........................................... $ 9,922,327 $ 15,813,638 $ 23,035,620
============ ============ ============
EARNINGS PER COMMON SHARE:
Basic.............................................. $ 0.80 $ 1.26 $ 1.63
============ ============ ============
Diluted............................................ $ 0.78 $ 1.24 $ 1.61
============ ============ ============
PRO FORMA NET INCOME AND EARNINGS
PER COMMON SHARE DATA:
Income before income taxes......................... $ 14,054,813 $ 23,770,489 $ 36,081,264
Pro forma provision for income taxes............... 4,859,762 9,841,081 14,419,904
------------ ------------ ------------
PRO FORMA NET INCOME................................. $ 9,195,051 $ 13,929,408 $ 21,661,360
============ ============ ============
PRO FORMA EARNINGS PER COMMON SHARE:
Basic.............................................. $ 0.74 $ 1.11 $ 1.53
============ ============ ============
Diluted............................................ $ 0.73 $ 1.09 $ 1.51
============ ============ ============
SHARES USED IN COMPUTING EARNINGS PER COMMON SHARE
AND PRO FORMA EARNINGS PER COMMON SHARE:
Basic.............................................. 12,416,376 12,575,991 14,114,683
============ ============ ============
Diluted............................................ 12,659,819 12,748,689 14,321,756
============ ============ ============
See notes to consolidated financial statements.
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18
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1996, 1997, AND 1998
COMMON STOCK ADDITIONAL RETAINED
----------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
---------- ---------- ----------- -----------
Balance, at July 31, 1995, as restated for
poolings.................................... 12,397,232 $4,132,411 $24,651,837 $(8,913,500)
Stock options exercised....................... 57,502 19,167 179,960
Pooled companies distributions................ (2,207,368)
Net income.................................... 9,922,327
---------- ---------- ----------- -----------
Balances at July 31, 1996..................... 12,454,734 4,151,578 24,831,797 (1,198,541)
Stock options exercised....................... 213,143 71,047 706,300
Income tax benefit from stock options
exercised................................... 132,569
Pooled companies distributions................ (2,523,282)
Adjustment for change in fiscal year of pooled
company (CCG)............................... 441,686
Net income.................................... 15,813,638
---------- ---------- ----------- -----------
Balances at July 31, 1997..................... 12,667,877 4,222,625 25,670,666 12,533,501
Stock options exercised....................... 76,476 25,493 331,944
Stock offering proceeds....................... 1,978,378 659,459 36,299,159
Income tax benefit from stock options
exercised................................... 194,483
Pooled companies distributions................ (4,594,002)
Net income.................................... 23,035,620
---------- ---------- ----------- -----------
Balances at July 31, 1998..................... 14,722,731 $4,907,577 $62,496,252 $30,975,119
========== ========== =========== ===========
See notes to consolidated financial statements.
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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JULY 31, 1996, 1997, AND 1998
1996 1997 1998
------------ ----------- -----------
Increase (Decrease) in Cash and Equivalents from:
OPERATING ACTIVITIES:
Net Income............................................. $ 9,922,327 $15,813,638 $23,035,620
Adjustments to reconcile net cash provided by operating
activities:
Depreciation and amortization................... 10,433,989 11,814,577 13,496,694
(Gain) on disposal of assets.................... (736,131) (601,645) (375,772)
Deferred income taxes........................... (1,580,196) (196,241) (133,380)
Changes in assets and liabilities:
Accounts receivable, net........................ 4,180,056 (18,537,042) (12,616,130)
Unbilled revenues, net.......................... (2,444,425) (2,873,149) (3,454,939)
Other current assets............................ (103,336) (773,980) (1,047,609)
Other assets.................................... (90,524) (135,882)
Accounts payable................................ (2,856,845) 6,080,835 (2,541,641)
Accrued self-insured claims and other
liabilities.................................. 2,713,096 1,632,232 12,455,169
Accrued income taxes............................ 99,067 626,228 1,777,979
------------ ----------- -----------
Net cash inflow from operating activities.............. 19,537,078 12,849,571 30,595,991
------------ ----------- -----------
INVESTING ACTIVITIES:
Capital expenditures.............................. (13,459,174) (16,086,823) (21,492,673)
Proceeds from sale of assets...................... 2,847,275 2,289,348 1,997,854
------------ ----------- -----------
Net cash outflow from investing activities............. (10,611,899) (13,797,475) (19,494,819)
------------ ----------- -----------
FINANCING ACTIVITIES:
Borrowings on notes payable and bank
lines-of-credit................................. 6,371,140 22,976,488 18,346,301
Principal payments on notes payable and bank
lines-of-credit................................. (13,590,079) (17,907,051) (31,518,331)
Exercise of stock options......................... 199,127 777,347 357,437
Pooled companies distributions.................... (2,207,368) (2,523,282) (4,594,002)
Proceeds from stock offering...................... 36,958,618
------------ ----------- -----------
Net cash inflow (outflow) from financing activities.... (9,227,180) 3,323,502 19,550,023
------------ ----------- -----------
Net cash outflow related to change in fiscal year of
pooled company....................................... (159,555)
------------ ----------- -----------
NET CASH INFLOW (OUTFLOW) FROM
ALL ACTIVITIES.................................... (302,001) 2,216,043 30,651,195
CASH AND EQUIVALENTS AT BEGINNING
OF YEAR........................................... 3,362,070 3,060,069 5,276,112
------------ ----------- -----------
CASH AND EQUIVALENTS AT END
OF YEAR........................................... $ 3,060,069 $ 5,276,112 $35,927,307
============ =========== ===========
18
20
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS -- (CONTINUED)
FOR THE YEARS ENDED JULY 31, 1996, 1997, AND 1998
1996 1997 1998
---------- ---------- -----------
SUPPLEMENTAL DISCLOSURE OF CASH
FLOW AND NONCASH INVESTING AND
FINANCING ACTIVITIES:
Cash paid during the period for:
Interest............................................. $2,659,228 $2,535,600 $ 2,185,802
Income taxes......................................... $5,765,829 $8,303,108 $11,480,800
Property and equipment acquired and financed with:
Capital lease obligations............................... $ 135,341 $ 601,024
Income tax benefit from stock options exercised........... $ 132,569 $ 194,483
See notes to consolidated financial statements.
19
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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. -- The consolidated financial statements
include Dycom Industries, Inc. ("Dycom" or the "Company") and its subsidiaries,
all of which are wholly owned. On July 29, 1997, Communications Construction
Group, Inc. ("CCG") was acquired by the Company through an exchange of common
stock. On April 6, 1998, Cable Com Inc. ("CCI") and Installation Technicians,
Inc. ("ITI") were acquired by the Company through an exchange of common stock.
These acquisitions were accounted for as poolings of interests. Accordingly, the
Company's consolidated financial statements include the results of CCG, CCI and
ITI for all periods presented. See Note 3.
The Company's operations consist primarily of telecommunications,
underground utility locating and electrical construction and maintenance
services contracting. All material intercompany accounts and transactions have
been eliminated.
Pro Forma Adjustments -- Prior to the acquisition by Dycom, CCI and ITI
elected under Subchapter S of the Internal Revenue Code to have the stockholders
recognize their proportionate share of CCI's and ITI's taxable income on their
personal tax return in lieu of paying corporate income tax. The pro forma net
income and earnings per common share reflected on the Statements of Operations
reflects a provision for current and deferred income taxes for all periods
presented as if the corporations were included in Dycom's federal and state
income tax returns. At April 6, 1998, the consummation date of the merger, CCI
and ITI recorded deferred taxes on the temporary differences between the
financial reporting basis and the tax basis of their assets and liabilities. The
deferred tax (asset) liability recorded by CCI and ITI was $616,358 and
$(11,035), respectively.
Use of Estimates -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates and such differences may be material to the financial statements.
Estimates are used in the Company's revenue recognition of work-in-process,
allowance for doubtful accounts, self-insured claims liability, deferred tax
asset valuation allowance, depreciation and amortization, and in the estimated
lives of assets, including intangibles.
Revenue -- Income on short-term unit contracts is recognized as the related
work is completed. Work-in-process on unit contracts is based on management's
estimate of work performed but not billed. Income on long-term contracts is
recognized on the percentage-of-completion method based primarily on the ratio
of contract costs incurred to date to total estimated contract costs. At the
time a loss on a contract becomes known, the entire amount of the estimated
ultimate loss is accrued.
"Costs and estimated earnings in excess of billings" represents the excess
of contract revenues recognized under the percentage-of-completion method of
accounting for long-term contracts and work-in-process on unit contracts over
billings to date. For those contracts in which billings exceed contract revenues
recognized to date, such excesses are included in the caption "billings in
excess of costs and estimated earnings".
Cash and Equivalents -- Cash and equivalents include cash balances on
deposit in banks, overnight repurchase agreements, certificates of deposit,
commercial paper, and various other financial instruments having an original
maturity of three months or less. For purposes of the consolidated statements of
cash flows, the Company considers these amounts to be cash equivalents.
Property and Equipment -- Property and equipment is stated at cost.
Depreciation and amortization is computed over the estimated useful life of the
assets utilizing the straight-line method. The estimated useful service lives of
the assets are: buildings -- 20-31 years; leasehold improvements -- the term of
the respective lease or the estimated useful life of the improvements, whichever
is shorter; vehicles -- 3-7 years; equipment and machinery -- 2-10 years; and
furniture and fixtures -- 3-10 years. Maintenance and repairs are expensed as
incurred; expenditures that enhance the value of the property or extend its
useful life are capitalized. When
20
22
assets are sold or retired, the cost and related accumulated depreciation are
removed from the accounts and the resulting gain or loss is included in income.
Intangible Assets -- The excess of the purchase price over the fair market
value of the tangible net assets of acquired businesses (goodwill) is amortized
on a straight-line basis over 40 years. The appropriateness of the carrying
value of goodwill is reviewed periodically by the Company at the subsidiary
level. An impairment loss is recognized when the projected future cash flows is
less than the carrying value of goodwill. No impairment loss has been recognized
in the periods presented.
Amortization expense was $155,088 for each of the fiscal years ended July
31, 1996, 1997, and 1998. The intangible assets are net of accumulated
amortization of $1,151,358 and $1,306,446 at July 31, 1997 and 1998,
respectively.
Self-Insured Claims Liability -- The Company is primarily self-insured, up
to certain limits, for automobile and general liability, workers' compensation,
and employee group health claims. A liability for unpaid claims and the
associated claim expenses, including incurred but not reported losses, is
actuarially determined and reflected in the consolidated financial statements as
an accrued liability. The self-insured claims liability includes incurred but
not reported losses of $4,429,000 and $5,120,000 at July 31, 1997 and 1998,
respectively. The determination of such claims and expenses and the
appropriateness of the related liability is continually reviewed and updated.
Income Taxes -- The Company and its subsidiaries, except for CCG, CCI and
ITI, file a consolidated federal income tax return. CCG was included in the
Company's consolidated federal income tax return effective July 29, 1997 and CCI
and ITI will be included effective April 6, 1998. Deferred income taxes are
provided for the temporary differences between the financial reporting basis and
the tax basis of the Company's assets and liabilities.
Per Share Data -- Earnings per common share-basic is computed using the
weighted average common shares outstanding during the period. Earnings per
common share-diluted is computed using the weighted average common shares
outstanding during the period and the dilutive effect of common stock options,
using the treasury stock method. See Notes 2 and 14.
Stock Option Plans -- In October 1995, the Financial Accounting Standards
Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No.
123 "Accounting for Stock Based Compensation" which was effective for the
Company beginning August 1, 1996. SFAS No. 123 requires expanded disclosures of
stock based compensation arrangements with employees and encourages, but does
not require, compensation cost to be measured based on the fair value of the
equity instrument awarded. Under SFAS No. 123, companies are permitted, however,
to continue to apply Accounting Principle Board ("APB") Opinion No. 25, which
recognizes compensation cost based on the intrinsic value of the equity
instrument awarded. The Company will continue to apply APB Opinion No. 25 to its
stock based compensation awards to employees and will disclose in the annual
financial statements the required pro forma effect on net income and earnings
per share. See Note 14.
Recently Issued Accounting Pronouncements -- In June 1997, the FASB issued
SFAS No. 130 "Reporting Comprehensive Income" which establishes standards for
reporting and display of comprehensive income and its components (revenues,
expenses, gains and losses) in a full set of general-purpose financial
statements. This statement requires that an enterprise classify items of other
comprehensive income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from retained
earnings and additional paid-in capital in the equity section of a statement of
financial position. This statement is effective for fiscal years beginning after
December 15, 1997.
In June 1997, the FASB issued SFAS No. 131 "Disclosure about Segments of an
Enterprise and Related Information" which establishes standards for public
business enterprises to report information about operating segments in annual
financial statements and requires those enterprises to report selected
information about operating segments in annual financial reports issued to
shareholders. It also establishes the standards for related disclosures about
products and services, geographic areas, and major customers. This statement
requires that a public business enterprise report financial and descriptive
information about its reportable
21
23
operating segments. The financial information is required to be reported on the
basis that it is used internally for evaluating segment performance and deciding
how to allocate resources to segments. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. This statement is effective for
financial statements for periods beginning after December 15, 1997.
In February 1998, the FASB issued SFAS No. 132 "Employers' Disclosures
about Pension and Other Postretirement Benefits" which revises certain
disclosures about pension and other postretirement benefit plans. This statement
does not change the measurement and recognition methods for pension or
postretirement benefit costs reported in financial statements. This statement is
effective for fiscal years beginning after December 15, 1997.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which establishes standards for the
accounting and reporting of derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that an entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. This statement is
effective for financial statements for periods beginning after December 15,
1999.
Management is currently evaluating the requirements and related disclosures
of SFAS No. 130, 131, 132, and 133.
2. ACCOUNTING CHANGE
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share" which
changes the method of calculating earnings per share and was effective for the
Company in the quarter ended January 31, 1998. All periods presented have been
restated in accordance with the provisions of SFAS No. 128.
The following is a reconciliation of the numerators and denominators of the
basic and diluted earnings per share computation as required by SFAS No. 128.
1996 1997 1998
---------- ----------- -----------
Net income available to common stockholders
(numerator)............................................ $9,922,327 $15,813,638 $23,035,620
========== =========== ===========
Weighted-average number of common shares (denominator)... 12,416,376 12,575,991 14,114,683
========== =========== ===========
Earnings per common share -- basic....................... $ 0.80 $ 1.26 $ 1.63
========== =========== ===========
Weighted-average number of common shares................. 12,416,376 12,575,991 14,114,683
Potential common stock arising from stock options........ 243,443 172,698 207,073
---------- ----------- -----------
Total shares (denominator)..................... 12,659,819 12,748,689 14,321,756
========== =========== ===========
Earnings per common share -- diluted..................... $ 0.78 $ 1.24 $ 1.61
========== =========== ===========
PRO FORMA EARNINGS PER SHARE DATA:
Pro forma net income available to common stockholders
(numerator)............................................ $9,195,051 $13,929,408 $21,661,360
========== =========== ===========
Pro forma earnings per common share -- basic............. $ 0.74 $ 1.11 $ 1.53
========== =========== ===========
Pro forma earnings per common share -- diluted........... $ 0.73 $ 1.09 $ 1.51
========== =========== ===========
3. ACQUISITIONS
On July 29, 1997, the Company consummated the CCG acquisition. The Company
issued 2,053,242 shares of common stock in exchange for all the outstanding
capital stock of CCG. Dycom has accounted for the acquisition as a pooling of
interests and, accordingly, the Company's historical financial statements
include the results of CCG for all periods presented.
22
24
Prior to the acquisition, CCG used a fiscal year ending May 31 and as of
July 31, 1997 adopted Dycom's fiscal year. The Company's consolidated statements
of operations for fiscal years ended July 31, 1996, and 1997 combines the
statements of operations of CCG for its fiscal years ended May 31, 1996, and
1997, respectively. The total revenue and net income of CCG for the two-month
period ended July 31, 1997 were $13.1 million and $0.4 million, respectively,
with the net income reflected as an adjustment to retained earnings as of July
31, 1997.
On April 6, 1998, the Company acquired CCI and ITI and issued 1.2 million
and 600,000 shares of common stock in exchange for all the outstanding capital
stock of CCI and ITI, respectively. Dycom has accounted for the acquisitions as
poolings of interests and, accordingly, the Company's historical financial
statements include the results of CCI and ITI for all periods presented.
Prior to the acquisitions, CCI and ITI used a fiscal calendar year
consisting of a 52/53 week time period and, as a result of the merger, have
adopted Dycom's fiscal year end of July 31. All periods presented reflect the
adoption of such fiscal year end as of the beginning of the period. The combined
and separate company results of Dycom, CCG, CCI and ITI for the fiscal years
ended July 31, 1996, 1997, and 1998 are presented below. The separate company
results of CCI and ITI for the quarter including the consummation date of the
mergers and the subsequent quarter, are included in the Dycom amounts.
1996 1997 1998
------------ ------------ ------------
Total revenues:
Dycom.............................................. $145,135,380 $176,204,581 $331,881,840
CCG................................................ 50,124,861 67,718,900
CCI................................................ 33,038,911 45,191,801 26,833,806
ITI................................................ 18,995,843 23,304,158 12,647,146
------------ ------------ ------------
Combined............................................. $247,294,995 $312,419,440 $371,362,792
============ ============ ============
Net income:
Dycom.............................................. $ 6,390,144 $ 8,268,502 $ 19,194,623
CCG................................................ 1,273,714 2,950,306
CCI................................................ 898,496 2,598,254 2,711,694
ITI................................................ 1,359,973 1,996,576 1,129,303
------------ ------------ ------------
Combined............................................. $ 9,922,327 $ 15,813,638 $ 23,035,620
============ ============ ============
The acquisition costs for the CCG merger were $0.4 million and $0.6 million
for the CCI and ITI mergers and were charged to the combined operations for the
fiscal year ended July 31, 1997 and July 31, 1998, respectively. These costs
include filing fees with regulatory agencies, legal, accounting and other
professional costs.
4. ACCOUNTS RECEIVABLE
Accounts receivable consist of the following:
1997 1998
----------- -----------
Contract billings........................................... $45,589,232 $58,888,421
Retainage................................................... 3,652,358 4,133,590
Other receivables........................................... 1,314,181 1,331,775
----------- -----------
Total............................................. 50,555,771 64,353,786
Less allowance for doubtful accounts........................ 1,029,093 2,210,978
----------- -----------
Accounts receivable, net.................................... $49,526,678 $62,142,808
=========== ===========
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5. COSTS AND ESTIMATED EARNINGS ON CONTRACTS IN PROGRESS
The accompanying consolidated balance sheets include costs and estimated
earnings on contracts in progress, net of progress billings as follows:
1997 1998
----------- -----------
Costs incurred on contracts in progress..................... $17,715,762 $15,056,642
Estimated earnings thereon.................................. 3,319,456 3,387,933
----------- -----------
21,035,218 18,444,575
Less billings to date....................................... 10,107,537 4,061,955
----------- -----------
$10,927,681 $14,382,620
=========== ===========
Included in the accompanying consolidated balance sheets
under the captions:
Costs and estimated earnings in excess of billings..... $11,398,621 $14,382,620
Billings in excess of costs and estimated earnings..... (470,940)
----------- -----------
$10,927,681 $14,382,620
=========== ===========
6. PROPERTY AND EQUIPMENT
The accompanying consolidated balance sheets include the following property
and equipment:
1997 1998
----------- -----------
Land........................................................ $ 1,942,247 $ 1,592,958
Buildings................................................... 2,346,993 2,497,103
Leasehold improvements...................................... 1,463,698 1,459,543
Vehicles.................................................... 41,522,848 52,287,135
Equipment and machinery..................................... 30,721,638 34,319,707
Furniture and fixtures...................................... 5,289,975 5,638,326
----------- -----------
Total............................................. 83,287,399 97,794,772
Less accumulated depreciation............................... 46,951,187 54,929,575
----------- -----------
Property and equipment, net................................. $36,336,212 $42,865,197
=========== ===========
Certain subsidiaries of the Company have entered into lease arrangements
accounted for as capitalized leases. The carrying value of capital leases at
July 31, 1997 and 1998 was $1,291,733 and $114,985, respectively, net of
accumulated depreciation of $985,636 and $82,813, respectively. Capital leases
are included as a component of vehicles and equipment and machinery.
Maintenance and repairs of property and equipment amounted to $6,825,017,
$6,843,444, and $7,728,971 for the fiscal years ended July 31, 1996, 1997, and
1998, respectively.
7. OTHER ACCRUED LIABILITIES
Other accrued liabilities consist of the following:
1997 1998
----------- -----------
Accrued payroll and related taxes........................... $ 3,909,405 $ 3,637,611
Accrued employee benefit costs.............................. 3,683,975 4,971,718
Accrued construction costs.................................. 2,033,371 2,728,568
Accrued other liabilities................................... 3,651,961 3,481,284
----------- -----------
Other accrued liabilities................................... $13,278,712 $14,819,181
=========== ===========
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8. NOTES PAYABLE
Notes payable are summarized by type of borrowing as follows:
1997 1998
----------- -----------
Bank credit agreements:
Revolving credit facilities............................... $15,053,484
Term loan................................................. 8,550,000 $14,250,000
Equipment term loans...................................... 4,559,937 3,339,218
Capital lease obligations................................... 1,086,967 60,931
Equipment loans............................................. 2,057,414 485,623
----------- -----------
Total............................................. 31,307,802 18,135,772
Less current portion........................................ 17,719,780 4,727,782
----------- -----------
Notes payable -- non-current................................ $13,588,022 $13,407,990
=========== ===========
On April 29, 1998, the Company signed an amendment to its current bank
credit agreement, increasing the total facility to $85.0 million. The amended
bank credit agreement provides for (i) a $30.0 million revolving working capital
facility; (ii) a $15.0 million standby letter of credit facility; (iii) a $25.0
million revolving equipment acquisition and small business purchase facility;
and (iv) a $15.0 million five-year term loan. The revolving working capital
facility, the standby letter of credit facility and the revolving equipment
facility are available for a two-year period.
The revolving working capital facility bears interest, at the option of the
Company, at the bank's prime interest rate minus 1.00% or LIBOR plus 1.50%. In
October 1997, the Company borrowed $4.9 million under this facility to pay off a
subsidiary's previously existing credit facility. On November 28, 1997, the
Company repaid the outstanding balance of this facility with proceeds from the
public offering of its common stock. As of July 31, 1998, there was no
outstanding balance on this facility, resulting in an available borrowing
capacity of $30.0 million.
The outstanding principal under the term loan bears interest at the bank's
prime interest rate minus 0.50% (8.00% at July 31, 1998). Principal and interest
is payable in quarterly installments through April 2003. The outstanding
principal under the term loan was increased to $15.0 million in accordance with
the terms of the amended bank credit agreement. The amount outstanding on the
term loan was $14.3 million at July 31, 1998.
The outstanding loans under the revolving equipment acquisition and small
business purchase facility bear interest, at the option of the Company, at the
bank's prime interest rate minus 0.75% or LIBOR plus 1.75%. At July 31, 1998,
the interest rates on the outstanding revolving equipment and small business
purchase facility were at the LIBOR option ranging from 7.53% to 7.81%. The
advances under the revolving equipment acquisition and small business purchase
facility are converted to term loans with maturities not to exceed 48 months.
The outstanding principal on the equipment term loans is payable in monthly
installments through February 2001. In October 1997, the Company borrowed $1.0
million to buy out existing operating leases and $1.7 million to refinance
equipment under a subsidiary's previously existing credit facility. During the
fiscal year ended July 31, 1998, the Company repaid $1.3 million under this
facility. The amount outstanding on the revolving equipment acquisition and
small business purchase facility was $3.3 million at July 31, 1998 resulting in
an available borrowing capacity of $21.7 million.
The Company had outstanding standby letters of credit issued to the
Company's insurance administrators as part of its self-insurance program of
$11.6 million at July 31, 1998.
The amended bank credit agreement contains restrictions which, among other
things, require maintenance of certain financial ratios and covenants, restricts
encumbrances of assets and creation of indebtedness, and limits the payment of
cash dividends. Cash dividends are limited to 50% of each fiscal year's
after-tax profits. No cash dividends have been paid during fiscal 1998. The
amended credit facility is secured by the
25
27
Company's assets and guaranteed by each of its subsidiaries. At July 31, 1998,
the Company was in compliance with all of the financial covenants and
conditions.
At July 31, 1997, CCG had a $6.6 million revolving bank credit facility of
which $5.9 million was outstanding. The interest rate on this facility was at
the bank's prime interest rate plus 0.75% and was collateralized by 75% of the
eligible trade accounts receivable, inventory, and certain real property owned
by a partnership, whose general partners are the former shareholders of CCG.
This facility was an existing arrangement made by CCG prior to the acquisition
by Dycom. In October 1997, the Company paid off the outstanding balance of $6.6
million and terminated the facility by borrowing $4.9 million against its
revolving working capital facility and $1.7 million against the revolving
equipment acquisition and small business purchase facility.
The Company's recently acquired subsidiaries, CCI and ITI, had credit
facilities entered into prior to the acquisition by Dycom. CCI had a $5.2
million revolving credit facility for funding working capital and a $2.0 million
term note incurred to purchase equipment. The interest rate on the revolving
credit facility was at the bank's prime interest rate and the interest rate on
the term loan was at 8.75%. ITI had a $2.0 million revolving credit facility for
funding working capital and a $0.5 million multiple advance term facility for
equipment acquisitions. The interest rates on the revolving credit facility and
the multiple advance term facility were at the bank's prime interest rate. The
obligations were secured by substantially all of CCI's and ITI's assets. The
facilities contained restrictions, which among other things, required the
maintenance of certain financial ratios and covenants and restricted the payment
of cash dividends. During the fourth quarter of fiscal 1998, the Company paid
off the outstanding balances of $8.1 million under these facilities with
existing cash balances and subsequently terminated such facilities.
In addition to the borrowings under the amended bank credit agreement,
certain subsidiaries have outstanding obligations under capital leases and other
equipment financing arrangements. During fiscal 1998, the Company repaid $2.6
million of outstanding balances on capital lease obligations and other equipment
term loans with existing cash balances. The remaining obligations are payable in
monthly installments expiring at various dates through September 2000.
The estimated aggregate annual principal repayments for notes payable and
capital lease obligations in the next five years are $4,727,782 in 1999,
$4,662,843 in 2000, $3,495,147 in 2001, $3,000,000 in 2002, and $2,250,000 in
2003.
Interest costs incurred on notes payable, all of which is expensed, for the
years ended July 31, 1996, 1997, and 1998 were $2,515,814, $2,619,191, and
$2,045,571, respectively. Such amounts are included in general and
administrative expenses in the accompanying consolidated statements of
operations.
The interest rates on notes payable under the bank credit agreement are at
current rates and, therefore, the carrying amount approximates fair value.
9. INCOME TAXES
The components of the provision (benefit) for income taxes are:
1996 1997 1998
---------- ---------- -----------
Current:
Federal................................................. $4,265,617 $6,248,234 $10,565,688
State................................................... 1,447,065 1,904,858 2,613,336
---------- ---------- -----------
5,712,682 8,153,092 13,179,024
---------- ---------- -----------
Deferred:
Federal................................................. (522,169) 191,765 737,355
State................................................... (134,700) (395,550)
Valuation allowance..................................... (1,058,027) (253,306) (475,185)
---------- ---------- -----------
(1,580,196) (196,241) (133,380)
---------- ---------- -----------
Total tax provision............................. $4,132,486 $7,956,851 $13,045,644
========== ========== ===========
26
28
The deferred tax provision (benefit) is the change in the deferred tax
assets and liabilities representing the tax consequences of changes in the
amount of temporary differences and changes in tax rates during the year. Prior
to the acquisition by Dycom, CCI and ITI elected under Subchapter S of the
Internal Revenue Code to have the stockholders recognize their proportionate
share of CCI's and ITI's taxable income on their personal income tax returns in
lieu of paying corporate income taxes. At April 6, 1998, the consummation date
of the acquisition, CCI and ITI recorded a deferred tax liability (asset) of
$616,358 and $(11,035), respectively, which was included in the third quarter
results of operations. The deferred tax assets and liabilities at July 31 are
comprised of the following:
1997 1998
---------- ----------
Deferred tax assets:
Self-insurance, warranty, and other non-deductible
reserves............................................... $3,943,356 $5,164,116
Allowance for doubtful accounts........................... 346,993 879,306
Small tools............................................... 348,067 380,153
---------- ----------
4,638,416 6,423,575
Valuation allowance....................................... (475,185)
---------- ----------
$4,163,231 $6,423,575
========== ==========
Deferred tax liabilities:
Property and equipment.................................... $1,357,721 $2,950,402
Unamortized acquisition costs............................. 212,542 248,612
Retainage................................................. 498,213
---------- ----------
$1,570,263 $3,697,227
========== ==========
Net deferred tax assets..................................... $2,592,968 $2,726,348
========== ==========
A valuation allowance is provided when it is more likely than not that some
portion of the Company's deferred tax assets will not be realized. The valuation
allowance recorded in the financial statements reduces deferred tax assets to an
amount that represents management's best estimate of the amount of deferred tax
assets that more likely than not will be realized. In fiscal 1997, the Company
reduced the valuation allowance by $0.3 million. In fiscal 1998, the Company
reversed the remaining $475,185 balance of the valuation allowance. The Company
believes that it is more likely than not that the deferred tax assets will be
realized based on the available evidence supporting the reversing deductible
temporary differences being offset by reversing taxable temporary differences
and the existence of sufficient taxable income within the current carryback
periods.
The difference between the total tax provision and the amount computed by
applying the statutory federal income tax rates to pre-tax income is as follows:
1996 1997 1998
---------- ---------- -----------
Statutory rate applied to pre-tax income.................. $4,919,185 $8,319,671 $12,628,442
State taxes, net of federal tax benefit................... 955,063 1,257,206 1,779,712
Amortization of intangible assets,
with no tax benefit..................................... 52,730 52,730 54,281
Tax effect of non-deductible items........................ 139,101 374,564 389,999
Valuation allowance....................................... (1,058,027) (253,306) (475,185)
Income from S Corporations (CCI and ITI).................. (907,814) (1,719,027) (1,827,023)
Deferred taxes of pooled companies........................ 605,323
Other items, net.......................................... 32,248 (74,987) (109,905)
---------- ---------- -----------
Total tax provision............................. $4,132,486 $7,956,851 $13,045,644
========== ========== ===========
The Internal Revenue Service (the "IRS") has examined and closed the
Company's consolidated federal income tax returns for all years through fiscal
1993. The Company has settled all assessments of additional taxes and believes
that it has made adequate provision for income taxes that may become payable
with respect
27
29
to open tax years. The IRS has examined and closed the income tax returns for
the years through fiscal 1994 for CCG. The IRS is currently auditing the 1995
and 1996 tax years of ITI.
10. REVENUES -- OTHER
The components of other revenues are as follows:
1996 1997 1998
---------- ---------- ----------
Interest income............................................ $ 271,398 $ 215,062 $1,597,987
Gain on sale of fixed assets............................... 736,131 601,645 375,772
Miscellaneous income....................................... 350,403 364,625 675,470
---------- ---------- ----------
Total other revenues............................. $1,357,932 $1,181,332 $2,649,229
========== ========== ==========
11. CAPITAL STOCK
On June 1, 1992, the Company approved a Shareholder Rights Plan. All
shareholders of record on June 15, 1992 were issued a Right for each outstanding
share of the Company's common stock. Each Right entitles the holder to purchase
one-half share of common stock for an exercise price of $18 subject to
adjustment. The Right is exercisable only when a triggering event occurs. The
triggering events, among others, are a person or group's (1) acquisition of 20%
or more of Dycom's common stock, (2) commencement of a tender offer which would
result in the person or group owning 20% or more of Dycom's common stock, or (3)
acquisition of at least 10% of Dycom's common stock and such acquisition is
determined to have effects adverse to the Company. The Company can redeem the
Rights at $0.01 per Right at any time prior to ten days after a triggering event
occurs.
Certain executive officers of the Company have change of control agreements
with the Company, which provide substantial compensation upon the change of
control of the Company. The payments pursuant to these agreements would be
triggered by any person's acquisition of more than 50% of the Company's
outstanding securities, the sale or transfer of substantially all of Dycom's
assets to someone other than a wholly-owned subsidiary of the Company, or a
change of control of the Board of Directors.
12. STOCK OFFERING
The Company concluded the public offering of 2,700,000 shares of its common
stock on November 4, 1997. The Company offered 1,573,378 shares and selling
shareholders offered 1,126,622 shares at an offering price of $20.00 per share.
The Company received $29,736,844 on November 10, 1997 which is net of an
underwriting discount of $1.10 per share. Additionally, the underwriters
exercised their option to purchase 405,000 shares to cover over-allotments. The
Company received $7,654,500 on November 25, 1997 as payment for the
over-allotments. The total offering proceeds, net of offering expenses of
$432,726, are included in stockholders' equity on the July 31, 1998 balance
sheet. On November 28, 1997, the Company repaid the outstanding balance of its
revolving working capital facility and will use the balance of the proceeds to
fund the Company's growth strategy, including acquisitions, working capital and
capital expenditures and for other general corporate purposes.
13. EMPLOYEE BENEFIT PLAN
The Company and certain of its subsidiaries sponsor defined contribution
plans that provide retirement benefits to all employees that elect to
participate. Under the plans, participating employees may defer up to 15% of
their base pre-tax compensation. Generally, the Company's contributions to the
plans are discretionary except for CCI which has a 25% company match up to the
first 5% of the employee's contributions. The Company's contributions were
$158,451, $287,179, and $398,529 in fiscal years 1996, 1997 and 1998,
respectively.
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30
14. STOCK OPTION PLANS
The Company has reserved 900,000 shares of common stock under its 1991
Incentive Stock Option Plan (the "1991 Plan") which was approved by the
shareholders on November 25, 1991. The 1991 Plan provides for the granting of
options to key employees until it expires in 2001. Options are granted at the
closing price on the date of grant and are exercisable over a period of up to
five years. Since the 1991 Plan's adoption, certain of the options granted have
lapsed as a result of employees terminating their employment with the Company.
At July 31, 1996, 1997, and 1998, options available for grant under the 1991
Plan were 427,353 shares, 384,118 shares, and 133,188 shares, respectively.
In fiscal 1998, the Company granted to key employees under the 1991 Plan,
options to purchase an aggregate of 258,980 shares of common stock. The options
were granted at prices ranging from $18.25 to $26.625, prices representing the
fair market value on the date of grant.
On August 24, 1998, the Company granted to key employees under the 1991
Plan options to purchase an aggregate of 141,288 shares of common stock. The
options were granted at $31 13/16, the fair market value on the date of grant.
In addition to the stock option plan discussed above, the Company has
agreements outside of the plan with the non-employee members of the Board of
Directors (the "Directors Plan"). On January 10, 1994, the Company granted to
the non-employee Directors, non-qualified options to purchase an aggregate of
60,000 shares of common stock. The options were granted at $3.875, the fair
market value on the date of grant, with vesting over a three-year period.
The following table summarizes the stock option transactions under the 1991
Plan and the Directors Plan for the three years ended July 31, 1996, 1997, and
1998:
NUMBER OF WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------- ----------------
Options outstanding at July 31, 1995........................ 544,173 $ 4.29
Terminated................................................ (50,526) $ 7.43
Exercised................................................. (57,502) $ 3.46
Options outstanding at July 31, 1996........................ 436,145 $ 4.54
Granted................................................... 100,000 $13.50
Terminated................................................ (56,765) $ 4.57
Exercised................................................. (213,143) $ 4.02
Options outstanding at July 31, 1997........................ 266,237 $10.32
Granted................................................... 258,980 $20.59
Terminated................................................ (8,050) $14.28
Exercised................................................. (76,476) $ 4.67
Options outstanding at July 31, 1998........................ 440,691 $15.74
Exercisable options at
July 31, 1996............................................. 190,817 $ 3.78
July 31, 1997............................................. 69,933 $ 5.21
July 31, 1998............................................. 87,191 $ 6.75
The range of exercise prices for options outstanding at July 31, 1998 was
$2.75 to $26.625. The range of exercise prices for options is wide due primarily
to the increasing price of the Company's stock over the period of the grants.
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31
The following summarizes information about options outstanding at July 31,
1998:
OUTSTANDING OPTIONS
----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE
SHARES LIFE PRICE
--------- ----------- --------
Range of exercise prices
$2.75 to $8.00............................................ 100,146 1.4 $ 5.16
$12.00 to $20.00.......................................... 266,845 3.8 $16.74
$20.00 to $26.625......................................... 73,700 4.7 $26.49
------- --- ------
440,691 3.4 $15.74
======= === ======
EXERCISABLE OPTIONS
------------------------
WEIGHTED
EXERCISABLE AVERAGE
AS OF EXERCISE
JULY 31, 1998 PRICE
------------- --------
Range of exercise prices
$2.75 to $8.00............................................ 70,086 $ 5.11
$12.00 to $26.625......................................... 17,105 $13.50
------ ------
87,191 $ 6.75
====== ======
These options will expire if not exercised at specific dates ranging from
November 1998 to April 2003. The prices for the options exercisable at July 31,
1998 ranged from $2.75 to $13.50.
As discussed in Note 1, the Company has adopted the disclosure-only
provisions of SFAS No. 123. The fair value of the options granted in fiscal 1997
and 1998 have been estimated at the date of grant using the Black-Scholes
option-pricing model with the following assumptions: expected stock volatility
of 58.97% in 1997 and 55.36% in 1998; risk-free interest rates of 6.57% in 1997
and 5.50% in 1998; expected lives of 4 years for 1997 and 1998, and no dividend
yield in both years, due to the Company's recent history of not paying cash
dividends.
The Black-Scholes option valuation model was developed for estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. Because option valuation models require the use of subjective
assumptions and changes in these assumptions can materially impact the fair
value of the options and the Company's options do not have the characteristics
of traded options, the option valuation models do not necessarily provide a
reliable measure of the fair value of its options. The estimated fair value of
stock options granted during fiscal 1997 and 1998 was $6.98 and $10.13 per
share, respectively.
30
32
The pro forma disclosures amortize to expense the estimated compensation
costs for its stock options granted subsequent to July 31, 1996 over the options
vesting period. The Company's fiscal 1996, 1997 and 1998 pro forma net earnings
and earnings per share are reflected below:
1996 1997 1998
---------- ----------- -----------
Net Income:
Pro forma net income reflecting stock option compensation
costs.................................................. $9,922,327 $15,687,084 $21,858,609
Pro forma earnings per share reflecting stock option
compensation costs:
Basic............................................... $ 0.80 $ 1.25 $ 1.55
Diluted............................................. $ 0.78 $ 1.23 $ 1.53
Net Income:
Reflecting pro forma tax expense related to S
corporations
Pro forma net income reflecting stock option
compensation costs................................ $9,195,051 $13,802,854 $20,484,349
Pro forma earnings per share reflecting stock option
compensation costs:
Basic.......................................... $ 0.74 $ 1.10 $ 1.45
Diluted........................................ $ 0.73 $ 1.08 $ 1.43
15. RELATED PARTY TRANSACTIONS
The Company's subsidiary, CCG, leases administrative offices from a
partnership of which certain officers of the subsidiary are the general partners
and the Company's newly acquired subsidiaries, CCI and ITI, lease administrative
offices from a corporation of which certain officers of the subsidiaries are
shareholders. ITI advanced the corporation $268,860 for leasehold improvements
to its administrative office building. The amount advanced was fully reimbursed
by July 31, 1998. The total expense under these arrangements for the years ended
July 31, 1996, 1997, and 1998 was $184,200, $242,310, and $304,010,
respectively. The future minimum lease commitments under these arrangements are
$299,760 in 1999, $299,760 in 2000, $203,760 in 2001 and $80,900 in 2002.
16. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The operating subsidiaries obtain contracts from both public and private
concerns. For the years ended July 31, 1996, 1997, and 1998, approximately 36%,
27%, and 22%, respectively, of the contract revenues were from BellSouth
Telecommunications, Inc. ("BellSouth"), 16%, 18%, and 24%, respectively, of the
contract revenues were from Comcast Cable Communications, Inc. ("Comcast"), and
6.4%, 6.3%, and 7.2%, respectively, of the contract revenues were from GTE
Corporation ("GTE").
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
BellSouth, Comcast, and GTE represent a significant portion of the Company's
customer base. As of July 31, 1997, the total outstanding trade receivables from
BellSouth, Comcast, and GTE were $5.7 million or 12%, $11.5 million or 23%, and
$2.2 million or 4%, respectively, of the outstanding trade receivables. At July
31, 1998, the total outstanding trade receivables from BellSouth, Comcast, and
GTE were $7.9 million or 13%, $16.9 million or 27%, and $2.3 million or 4%,
respectively, of the Company's outstanding trade receivables.
17. COMMITMENTS AND CONTINGENCIES
The Company and its subsidiaries have operating leases covering office
facilities, vehicles, and equipment which have noncancelable terms in excess of
one year. During fiscal 1996, 1997, and 1998, the Company entered into numerous
operating leases for vehicles and equipment. Certain of these leases contain
renewal provisions and generally require the Company to pay insurance,
maintenance, and other operating expenses.
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33
Total expense incurred under operating lease agreements, excluding the
transactions with related parties (see Note 15), for the years ended July 31,
1996, 1997, and 1998, was $5,305,237, $6,732,699, and $6,754,934, respectively.
The future minimum obligations under these leases are $4,599,287 in 1999;
$2,046,435 in 2000; $954,796 in 2001; $526,526 in 2002, $323,338 in 2003 and
$56,900 thereafter.
In September 1995, the State of New York commenced a sales and use tax
audit of CCG for the years 1989 through 1995. As a result of the audit, certain
additional taxes were paid by CCG in fiscal 1996. In addition, the State of New
York concluded that cable television service providers are subject to New York
State sales taxes for the construction of cable television distribution systems,
and by a Notice dated January 1997, asserted amounts due from CCG for sales
taxes and interest for the periods through August 31, 1995, aggregating
approximately $1.3 million. Any sales taxes asserted against the Company may be
offset by use taxes already paid by customers of the Company. The Company
intends to vigorously contest the assertion. The Company is unable to assess the
likelihood of any particular outcome at this time or to quantify the effect a
resolution of this matter may have on the Company's consolidated financial
statements.
In the normal course of business, certain subsidiaries of the Company have
pending and unasserted claims. It is the opinion of the Company's management,
based on the information available at this time, that these claims will not have
a material adverse impact on the Company's consolidated financial statements.
18. QUARTERLY FINANCIAL DATA (UNAUDITED)
The Company has historically experienced variability in revenues, income
before income taxes and net income on a quarterly basis. A significant amount of
this variability is due to the fact that the Company's business is subject to
seasonal fluctuations, with activity in its second and occasionally third fiscal
quarters (the quarters ended January 31 and April 30 in a given fiscal year)
being adversely affected by weather. In addition, budgetary spending patterns of
significant customers, which often run on a calendar year basis, have resulted
in greater volatility of second fiscal quarter results.
In the opinion of management, the following unaudited quarterly data for
the years ended July 31, 1997 and 1998 reflect all adjustments necessary for the
fair presentation of a statement of operations. All such adjustments are of a
normal recurring nature other than as discussed below. The Company acquired CCI
and ITI ("Pooled Companies") on April 6, 1998. The acquisitions were accounted
for as poolings of interests and accordingly, the unaudited quarterly financial
statements for the periods presented include the accounts of CCI and ITI. The
quarterly data for CCI and ITI for the quarter including the consummation date
of the mergers and the subsequent quarter are included in the Dycom data. The
earnings per common share calculation for each quarter is based on the weighted
average shares of common stock outstanding plus the dilutive effect of stock
options. The sum of the quarters earnings per common share may not necessarily
be equal to the full year earnings per common share amounts.
IN WHOLE DOLLARS, EXCEPT PER SHARE AMOUNTS
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ------------
1997
Revenues:
Dycom.................................... $56,414,412 $57,275,311 $63,181,306 $ 67,052,452
Pooled Companies......................... 15,816,874 14,502,399 17,628,078 20,548,608
----------- ----------- ----------- ------------
$72,231,286 $71,777,710 $80,809,384 $ 87,601,060
=========== =========== =========== ============
Income Before Income Taxes:
Dycom.................................... $ 3,981,240 $ 3,575,407 $ 4,700,378 $ 6,784,493
Pooled Companies......................... 1,141,040 393,687 1,373,172 1,821,072
----------- ----------- ----------- ------------
$ 5,122,280 $ 3,969,094 $ 6,073,550 $ 8,605,565
=========== =========== =========== ============
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34
IN WHOLE DOLLARS, EXCEPT PER SHARE AMOUNTS
------------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- ------------
Net Income:
Dycom.................................... $ 2,236,041 $ 2,314,166 $ 2,818,373 $ 3,850,228
Pooled Companies......................... 1,176,518 245,568 1,373,172 1,799,572
----------- ----------- ----------- ------------
$ 3,412,559 $ 2,559,734 $ 4,191,545 $ 5,649,800
=========== =========== =========== ============
Earnings per Common Share:
Basic.................................... $ 0.27 $ 0.20 $ 0.33 $ 0.45
Diluted.................................. $ 0.27 $ 0.20 $ 0.33 $ 0.44
Pro Forma Net Income:
Dycom.................................... $ 2,236,041 $ 2,314,166 $ 2,818,373 $ 3,850,228
Pooled Companies......................... 647,285 185,447 810,610 1,067,258
----------- ----------- ----------- ------------
$ 2,883,326 $ 2,499,613 $ 3,628,983 $ 4,917,486
=========== =========== =========== ============
Pro Forma Earnings per Common Share:
Basic.................................... $ 0.23 $ 0.20 $ 0.29 $ 0.39
Diluted.................................. $ 0.23 $ 0.20 $ 0.28 $ 0.38
1998
Revenues:
Dycom.................................... $70,793,691 $62,622,353 $96,872,826 $101,592,970
Pooled Companies......................... 20,638,774 18,842,178 -- --
----------- ----------- ----------- ------------
$91,432,465 $81,464,531 $96,872,826 $101,592,970
=========== =========== =========== ============
Income Before Income Taxes:
Dycom.................................... $ 6,165,432 $ 5,417,012 $ 8,807,157 $ 11,619,113
Pooled Companies......................... 2,222,087 1,850,463 -- --
----------- ----------- ----------- ------------
$ 8,387,519 $ 7,267,475 $ 8,807,157 $ 11,619,113
=========== =========== =========== ============
Net Income:
Dycom.................................... $ 3,515,950 $ 3,246,711 $ 5,343,005 $ 7,088,957
Pooled Companies......................... 2,222,087 1,618,910 -- --
----------- ----------- ----------- ------------
$ 5,738,037 $ 4,865,621 $ 5,343,005 $ 7,088,957
=========== =========== =========== ============
Earnings per Common Share:
Basic.................................... $ 0.45 $ 0.34 $ 0.36 $ 0.48
Diluted.................................. $ 0.45 $ 0.33 $ 0.36 $ 0.47
Pro Forma Net Income:
Dycom.................................... $ 3,515,950 $ 3,246,711 $ 5,432,241 $ 7,088,957
Pooled Companies......................... 1,298,383 1,079,118 -- --
----------- ----------- ----------- ------------
$ 4,814,333 $ 4,325,829 $ 5,432,241 $ 7,088,957
=========== =========== =========== ============
Pro Forma Earnings per Common Share:
Basic.................................... $ 0.38 $ 0.30 $ 0.37 $ 0.48
Diluted.................................. $ 0.37 $ 0.30 $ 0.36 $ 0.47
The 1997 fourth quarter results of operations include a $0.3 million
reduction in the deferred tax asset valuation allowance. The third and fourth
quarter 1998 results of operations include a reduction in the deferred tax asset
valuation allowance of $0.2 million and $0.2 million, respectively.
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35
INDEPENDENT AUDITORS' REPORT
Dycom Industries, Inc.:
We have audited the consolidated balance sheets of Dycom Industries, Inc.
and subsidiaries (the "Company") as of July 31, 1998 and 1997, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended July 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the financial statements based on our
audits. The consolidated financial statements give retroactive effect to the
merger of Communications Construction Group, Inc., which has been accounted for
as a pooling of interests as described in Note 3 to the consolidated financial
statements. We did not audit the statements of operations, stockholders' equity,
and cash flows of Communications Construction Group, Inc. for the years ended
May 31, 1997 and 1996, which statements reflect total revenues of $67,717,326
and $50,121,009 for the years ended May 31, 1997 and 1996, respectively. Those
financial statements were audited by other auditors whose report has been
furnished to us, and our opinion, insofar as it relates to the amounts included
for Communications Construction Group, Inc. for such periods, is based solely on
the report of such other auditors. As described in Note 3 to the consolidated
financial statements, subsequent to the issuance of the report of the other
auditors, Communications Construction Group, Inc. changed its fiscal year to
conform to the fiscal year of Dycom Industries, Inc. for the period ended July
31, 1997.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits and the report of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors,
the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Dycom Industries, Inc. and
subsidiaries as of July 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1998 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
West Palm Beach, Florida
August 31, 1998
34
36
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
Communications Construction Group, Inc.
We have audited the accompanying consolidated balance sheets of
Communications Construction Group, Inc. (the "Company") as of May 31, 1997 and
1996, and the related consolidated statements of operations, cash flows and
changes in stockholders' equity for the years 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above (not presented
separately herein) present fairly, in all material respects, the consolidated
financial position of Communications Construction Group, Inc. as of May 31, 1997
and 1996, and the consolidated results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
Nowalk & Associates
Cranbury, New Jersey
July 23, 1997
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37
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURES
There have been no changes in or disagreements with accountants on
accounting and financial disclosures within the meaning of Item 304 of
Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The table below sets forth the names and ages of the directors and
executive officers of the Company as well as the positions and offices held by
such persons. A summary of the background and experience of each of these
individuals is set forth after the table. Each director holds office for a three
year term and until his successor has been elected and qualified. A number of
executive officers have employment agreements while others serve at the
discretion of the Company's Board of Directors. There are no family
relationships among the directors or executive officers of the Company.
NAME AGE POSITION
---- --- --------
Thomas R. Pledger.......................... 60 Chairman of the Board of Directors and
Chief Executive Officer
Steven E. Nielsen.......................... 35 President, Chief Operating Officer and
Director
Louis W. Adams, Jr......................... 60 Director
Walter L. Revell........................... 63 Director
Ronald P. Younkin.......................... 56 Director
Douglas J. Betlach......................... 46 Vice President, Chief Financial Officer and
Treasurer
Darline M. Richter......................... 37 Vice President and Controller
Patricia B. Frazier........................ 63 Corporate Secretary
Thomas R. Pledger is Chairman of the Board of Directors and Chief Executive
Officer of Dycom. Mr. Pledger has been in the industry since 1960, and in 1968
became President of Burnup & Sims, Inc., which went public that year and was
acquired by MasTec, Inc. in 1994. Mr. Pledger left Burnup & Sims, Inc. in 1976.
Mr. Pledger's relationship with Dycom began in 1979 as a consultant. He became a
Director in 1981 and President and Chief Executive Officer in 1984. His current
employment contract as Chief Executive Officer with the Company expires November
30, 2000. He serves on the Board's Executive and Nominating Committees, as well
as on the Board of Directors for each of the Company's subsidiaries.
Steven E. Nielsen is President and Chief Operating Officer of Dycom. Mr.
Nielsen has held this position since August 1996 and has been with Dycom since
1993. As a member of Dycom's Board of Directors since 1996, he serves on the
Board's Executive Committee and on the Board of Directors of CCG, CCI and ITI.
He previously served as President of Ansco & Associates, Inc. and Fiber Cable,
Inc., two of Dycom's subsidiaries. His current employment contract as President
and Chief Operating Officer with the Company expires on March 10, 1999. Prior to
joining the Company, Mr. Nielsen was Division Manager/Regional Manager of
Henkels & McCoy, Inc., a gas, power and telephone utility contractor, from 1991
to 1993, and was employed in various positions with this company or a
predecessor since 1985.
Louis W. Adams, Jr. is a retired attorney and formerly a partner with the
law firm of Adams & Adams. Mr. Adams has been on the Board since 1969 and
currently serves on the Board's Audit and Compensation, Executive, Nominating
and Finance Committees. Mr. Adams is also a member of the Board of Directors of
each of the Company's subsidiaries, other than CCG, CCI and ITI.
Walter L. Revell has been a Director since 1993 and currently serves on the
Board's Audit and Compensation and Finance Committees. He has been Chairman and
Chief Executive Officer of H.J. Ross Associates, Inc. since 1991. The firm
provides consulting engineering, architectural and planning services. Mr. Revell
also serves on the Board of Directors of RISCORP, Inc., which provides managed
care workers'
36
38
compensation, St. Joe Corporation, a diversified corporation in sugar and real
estate, and Hotelecopy, Inc., an international fax mail service company.
Ronald P. Younkin is President of Greenlawn Mobile Home Sales, Inc., which
sells mobile homes and operates mobile home parks. Mr. Younkin has been a
Director of the Company since 1975. Mr. Younkin serves on the Board's Audit and
Compensation, Finance, and Nominating Committees.
Douglas J. Betlach is Vice President, Chief Financial Officer and Treasurer
and has been with Dycom since 1992. Prior to joining the Company, Mr. Betlach
served in various financial positions with Del Monte Processed Foods and RJR
Nabisco, Inc. from 1979 to 1991 and Price Waterhouse & Company from 1974 to
1979.
Darline M. Richter has been Vice President and Controller since 1996. She
has been employed by the Company since 1991 and previously was employed by
Deloitte & Touche LLP as a tax manager.
Patricia B. Frazier has been employed by Dycom since 1983. She has served
as Corporate Secretary since 1984. She previously served as Corporate Secretary
at Rubin Construction Company and Burnup & Sims, Inc.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all cash compensation paid or accrued by the
Company for services rendered to the Company and its subsidiaries in all
capacities during the fiscal years ended July 31, 1998, 1997, and 1996 to the
Company's Chief Executive Officer and two executive officers whose total cash
compensation exceeded $100,000.
SUMMARY COMPENSATION TABLE
LONG-TERM
COMPENSATION
AWARDS
ANNUAL COMPENSATION -------------
NAME AND FISCAL ------------------- STOCK OPTIONS ALL OTHER
PRINCIPAL POSITION YEAR SALARY BONUS # OF SHARES COMPENSATION(1)
- ------------------ ------ -------- -------- ------------- ---------------
Thomas R. Pledger........................ 1998 $416,000 $416,000 -0- $101,192
Chairman and CEO 1997 $416,000 $120,000 -0- $101,616
1996 $416,000 $ 0 -0- $ 99,895
Steven E. Nielsen........................ 1998 $259,000 $259,000 100,000 $ 3,415
President and COO 1997 $207,250 $208,000 33,000 $ 3,751
1996 $160,885 $208,000 -0- $ 2,001
Douglas J. Betlach....................... 1998 $124,789 $ 40,000 4,000 $ 1,736
Vice President, CFO and Treasurer 1997 $113,808 $ 25,000 3,500 $ 1,207
1996 $108,871 $ 17,000 -0- $ 1,518
- ---------------
(1) All other compensation for 1998 consists of: (i) an annual insurance premium
of $97,777 for a life insurance policy owned by Mr. Pledger, (ii) Company
contributions to the Dycom retirement savings plan (Thomas R. Pledger
$1,613; Steven E. Nielsen $1,613; and Douglas J. Betlach $591); and (iii)
Company paid premiums for group term life insurance and long-term disability
(Thomas R. Pledger $1,802; Steven E. Nielsen $1,802; and Douglas J. Betlach
$1,145).
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STOCK OPTION GRANTS IN FISCAL 1998
The following table shows the options granted to the named executive
officers of the Company during fiscal 1998 under the Company's 1991 Incentive
Stock Option Plan.
POTENTIAL REALIZABLE
VALUES AT
INDIVIDUAL GRANTS ASSUMED ANNUAL RATES
--------------------------------------------------- OF STOCK PRICE
% OF TOTAL APPRECIATION
OPTIONS OPTIONS EXERCISE FOR OPTION TERM
GRANTED GRANTED TO PRICE EXPIRATION ---------------------
NAME (# OF SHARES) EMPLOYEES ($/SHARE) DATE 5% 10%
- ---- ------------- ---------- --------- ---------- -------- ----------
Steven E. Nielsen......... 100,000 38.6% $ 18.25 8/25/2002 $504,214 $1,114,181
President and COO
Douglas J. Betlach........ 4,000 1.5% $ 18.25 8/25/2002 $ 20,169 $ 44,567
Vice President, CFO and
Treasurer
STOCK OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth information with respect to the named
executive officers, concerning the exercise of options during the last fiscal
year and unexercised options held as of the fiscal year ended July 31, 1998.
VALUE OF
UNEXERCISED
NUMBER OF SECURITIES IN-THE-MONEY OPTIONS
SHARES UNDERLYING UNEXERCISED AT JULY 31, 1998
ACQUIRED OPTIONS AT JULY 31, 1998 ($)(1)
ON EXERCISE VALUE --------------------------- ---------------------------
NAME (# OF SHARES) REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------- -------- ----------- ------------- ----------- -------------
Thomas R. Pledger............ -0- -0- 25,000 -0- $762,500 -0-
Chairman and CEO
Steven E. Nielsen............ 2,000 $37,528 23,250 130,550 $586,594 $2,292,581
President and COO
Douglas J. Betlach........... 3,750 $87,188 875 8,125 $ 18,266 $ 163,734
Vice President, CFO and
Treasurer
- ---------------
(1) The closing market value of the Company's common stock on July 31, 1998, as
reported by the New York Stock Exchange, Inc., was $34.375.
EMPLOYMENT AGREEMENTS
Mr. Pledger serves as Chief Executive Officer of the Company. In July 1995,
the Company extended Mr. Pledger's employment agreement for five years, expiring
November 30, 2000. Under the terms of the agreement, Mr. Pledger's minimum
annual base salary is $416,000. The agreement also provides that the Company is
obligated to pay Mr. Pledger a retirement benefit of $100,000 for each year of
employment he completes under his employment agreement. The Company transferred
two life insurance policies with face values of $500,000 and $3,300,000 to Mr.
Pledger and pays premiums of $97,777 per year on such policies in satisfaction
of this obligation.
Mr. Nielsen serves as President and Chief Operating Officer of the Company.
On March 11, 1997, Mr. Nielsen executed an employment agreement for a term of
two (2) years. Pursuant to this agreement, Mr. Nielsen receives a minimum annual
base salary of $208,000 and is eligible for an annual bonus as determined to be
appropriate by the Board of Directors.
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DIRECTOR COMPENSATION
Directors who are not employees of the Company receive $1,500 for each
directors' meeting attended; $750 for each committee meeting attended in
conjunction with a directors' meeting; $1,500 for each committee meeting
attended not in conjunction with a directors' meeting; $750 for telephone
conference meetings; and an annual retainer of $12,000.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information regarding each person
known to the Company to own beneficially more than five percent of the Common
Stock as of August 24, 1998. The Company understands that, except as otherwise
noted, each such person has sole voting and investment power with respect to
such shares.
NUMBER OF SHARES
AND NATURE PERCENT
OF BENEFICIAL OF
NAME AND ADDRESS OWNERSHIP CLASS
- ---------------- -------------------- -------
Mary Irene Younkin.......................................... 771,840(1) 5.2%
555 East Greenlawn Avenue
Columbus, OH 43223
- ---------------
(1) Mrs. Younkin disclaims beneficial ownership in the 161,597 shares owned by
her son, Ronald P. Younkin, a director of the Company, and the 12,661 shares
owned by Ronald P. Younkin's wife and children.
SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of Common Stock by each director, certain executive officers, and by
all directors and executive officers of the Company as a group as of August 24,
1998. The Company understands that, except as otherwise noted, each such person
has sole voting and investment power with respect to such shares.
NUMBER OF SHARES
AND NATURE
OF BENEFICIAL PERCENT
NAME OWNERSHIP OF CLASS(1)
- ---- -------------------- -----------
Directors:
Thomas R. Pledger........................................... 710,027(2),(3) 4.8 %
Ronald P. Younkin........................................... 161,597(4) 1.1 %
Steven E. Nielsen........................................... 63,700(3) *
Walter L. Revell............................................ 6,000 *
Louis W. Adams, Jr.......................................... 10,234 *
Other Named Executive Officers:
Douglas J. Betlach.......................................... 11,129(3) *
All officers and directors as a group of 8 persons.......... 967,046(3) 6.5 %
- ---------------
(1) Class includes outstanding shares and stock options exercisable within 60
days after August 24, 1998 held by executive officers.
(2) Excludes 12,252 shares owned by Thomas R. Pledger, Jr., Mr. Pledger's son,
as to which Mr. Pledger disclaims beneficial ownership.
(3) Includes shares that may be acquired within 60 days after August 24, 1998
upon exercise of stock options as follows: Mr. Pledger 25,000 shares; Mr.
Nielsen 56,500 shares; Mr. Betlach 2,750 shares; and all directors and
officers as a group 85,750 shares.
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(4) Excludes 12,661 shares owned by Mr. Younkin's wife and children, as to which
he disclaims beneficial ownership. Excludes 771,840 shares beneficially
owned by Mary Irene Younkin as to which Mr. Younkin disclaims beneficial
ownership. Mr. Younkin is the son of Mary Irene Younkin.
* Less than 1%.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Dycom, through its subsidiaries CCG, CCI and ITI leases administrative
offices from entities controlled by, or in part by, former shareholders of these
subsidiaries. Currently, CCG leases three properties from T&P Enterprises, a
Pennsylvania Limited Partnership, controlled by George H. Tamasi and Thomas J.
Polis, who are both officers and directors of CCG. Both CCI and ITI currently
lease their corporate offices from Kimberling Investments, Inc., a Missouri
Corporation, controlled in part by John J. Ekstrom and Gerald W. Hartman, who
are officers and directors of CCI and ITI, respectively. Additionally, ITI
advanced $268,860 for leasehold improvements to its administrative office
building and was fully reimbursed by Kimberling Investments, Inc. at July 31,
1998. During fiscal 1998, CCG, CCI and ITI incurred annual expenses of $163,200,
$47,760 and $93,050, respectively. In the Company's opinion, these rental rates
are considered to be within the prevailing market rates.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 10-K
(a) The following documents are filed as a part of this report:
PAGE
-----
1. Consolidated financial statements:
Consolidated balance sheets at July 31, 1997 and
1998.................................................. 15
Consolidated statements of operations for the years
ended July 31, 1996, 1997, and 1998................... 16
Consolidated statements of stockholders' equity for the
years ended July 31, 1996, 1997, and 1998............. 17
Consolidated statements of cash flows for the years
ended July 31, 1996, 1997, and 1998................... 18-19
Notes to consolidated financial statements............. 20-33
Independent auditors' reports.......................... 34-35
2. Financial statement schedules:
All schedules have been omitted because they are
inapplicable, not required, or the information is included
in the above referenced consolidated financial statements or
the notes thereto.
3. Exhibits furnished pursuant to the requirements of Form
10-K:
See Exhibit Index on page 42.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed on behalf of the Registrant during
the quarter ended July 31, 1998.
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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.
DYCOM INDUSTRIES, INC.
/s/ THOMAS R. PLEDGER September 4, 1998
- ---------------------------------------------------
By: Thomas R. Pledger Date
Chairman and Chief Executive Officer
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 and on the dates indicated.
NAME POSITION DATE
---- -------- ----
/s/ DOUGLAS J. BETLACH Vice President, Chief September 4, 1998
- --------------------------------------------------- Financial Officer, Treasurer
Douglas J. Betlach and Principal Accounting
Officer
/s/ STEVEN E. NIELSEN President, Chief Operating September 4, 1998
- --------------------------------------------------- Officer and Director
Steven E. Nielsen
/s/ THOMAS R. PLEDGER Director September 4, 1998
- ---------------------------------------------------
Thomas R. Pledger
/s/ LOUIS W. ADAMS, JR. Director September 4, 1998
- ---------------------------------------------------
Louis W. Adams, Jr.
/s/ WALTER L. REVELL Director September 4, 1998
- ---------------------------------------------------
Walter L. Revell
/s/ RONALD P. YOUNKIN Director September 4, 1998
- ---------------------------------------------------
Ronald P. Younkin
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EXHIBIT INDEX
NUMBER DESCRIPTION
------ -----------
(11) Statement re computation of per share earnings
All information required by Exhibit 11 is presented Note 2
of the Company's Consolidated Financial Statements in
accordance with the provision of SFAS No. 128.
(21) Subsidiaries of the Company
(23.1) Consent of Deloitte & Touche LLP
(23.2) Consent of Nowalk & Associates
(27)(i) Financial Data Schedules for fiscal years ended July 31,
1996, 1997, and 1998.
(27)(ii) Financial Data Schedules for fiscal quarters ended October
31, 1997, January 31, 1998 and April 30, 1998.
(27)(iii) Financial Data Schedules for fiscal quarters ended October
31, 1996, January 31, 1997 and April 30, 1997.
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