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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

Commission file number 0-5423

DYCOM INDUSTRIES, INC.

Registrant’s telephone number, including area code: (561) 627-7171

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 the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

DYCOM INDUSTRIES, INC.

INDEX

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

DYCOM INDUSTRIES, INC. AND SUBSIDIARIES

See notes to condensed consolidated financial statements — unaudited.

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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES

See notes to condensed consolidated financial statements — unaudited.

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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES

See notes to condensed consolidated financial statements — unaudited.

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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
(Unaudited)

See notes to condensed consolidated financial statements — unaudited.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS—Unaudited

The accompanying condensed consolidated balance sheets of Dycom Industries, Inc. (“Dycom” or the “Company”) as of October 26, 2002 and July 27, 2002, and the related condensed consolidated statements of operations and cash flows for the three months ended October 26, 2002 and October 27, 2001 reflect all normal recurring adjustments which are, in the opinion of management, necessary for a fair presentation of such statements. The results of operations for the three months ended October 26, 2002 are not necessarily indicative of the results that may be expected for the entire year.

1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

PRINCIPLES OF CONSOLIDATION — The condensed consolidated financial statements are unaudited. These statements include Dycom Industries, Inc. and its subsidiaries, all of which are wholly owned.

In February 2002 the Company acquired Arguss Communications, Inc. (“Arguss”). This acquisition was accounted for using the purchase method of accounting; hence, the Company’s results include the results of this entity from its acquisition date.

The Company’s operations consist primarily of providing specialty-contracting services to the telecommunications and electrical utility industries. All material intercompany accounts and transactions have been eliminated.

USE OF ESTIMATES — The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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, and asset lives used in computing depreciation and amortization, including intangibles.

RECLASSIFICATIONS — Certain prior year amounts have been reclassified in order to conform to the current year presentation.

REVENUE RECOGNITION — The majority of the Company’s contracts are unit based. Revenue on unit based contracts is recognized as the unit is completed. Revenue on non-unit based contracts is recognized under 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” primarily relates to revenues for completed but unbilled units under unit based contracts, as well as unbilled revenues recognized under the percentage-of-completion method for non-unit based contracts. 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.

INVENTORIES — Inventories consist primarily of materials and supplies used in the Company’s business carried at the lower of cost (first-in, first out) or market (net realizable value). No obsolescence reserve has been recorded in the periods presented.

PROPERTY AND EQUIPMENT — Property and equipment are stated at cost and depreciated on a straight-line basis over their estimated useful lives. Useful lives range from: 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 and major improvements are capitalized. When 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 — In June 2001, FASB issued SFAS No. 142, “Goodwill and Other Intangibles Assets”, which supersedes APB Opinion No. 17, “Intangible Assets”. SFAS No. 142 establishes new standards for goodwill acquired in a business combination, eliminates amortization of goodwill and instead sets forth methods to periodically evaluate goodwill for impairment. The Company adopted SFAS No. 142 in the first quarter of 2002. In accordance with SFAS No. 142, the Company will conduct on at least an annual basis a review of its reporting units to determine whether their carrying value exceeds their fair market value. Should this be the case, a detailed analysis of the reporting unit’s assets and liabilities is performed to determine whether the goodwill is impaired. The Company performed a review of its reporting units as of July 29, 2001 and identified the following reporting units in which an impairment loss was recognized: Apex Digital, Inc., Globe Communications, Inc., Locating, Inc., Point to Point Communications, Inc., Tesinc, Inc., Nichols Construction, Inc., C-2 Utility Contractors, Inc. and Lamberts’ Cable Splicing Co. The valuations

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performed as part of the analysis employed a combination of present value techniques to measure fair value corroborated by comparisons to estimated market multiples. Third party specialists were engaged to assist in the valuations. As a result, the Company recorded a non-cash impairment charge of $99.0 million ($86.9 million after tax) as of the first quarter of fiscal 2002. The impairment charge was recorded as a cumulative effect of a change in accounting principles in our consolidated statement of operations for the three months ended October 27, 2001. Impairment losses subsequent to adoption are required to be reflected in operating income or loss in the consolidated statements of operations.

SFAS No. 142 requires the Company to conduct a valuation when an event occurs that would indicate that the goodwill of a reporting unit might be impaired. Because Adelphia Communications Corporation filed for bankruptcy protection in fiscal 2002 and was a significant customer of several reporting units, the Company conducted a review for goodwill impairment at those units. As a consequence the Company recorded an impairment charge of $45.1 million during the fourth quarter 2002.

SFAS No. 142 requires the Company to conduct an annual valuation of operating units to determine whether the carrying value of its assets exceeds their fair market value. This review resulted in an impairment charge at the Company’s Point to Point Communications, Inc. (“PTP”) reporting unit of $2.5 million during the fourth quarter 2002. This impairment was primarily the result of PTP’s loss of business associated with WorldCom Inc. (“WorldCom”).

The Company also recorded an impairment charge of $0.3 million in the fourth quarter 2002 related to the write-down of backlog included with other intangible assets.

Information regarding the Company’s other intangible assets is as follows:

Amortization expense was $148,971 and $18,082 for the three months ended October 26, 2002 and October 27, 2001, respectively. Estimated amortization expense for fiscal 2003 and each of the four succeeding fiscal years is as follows:

SELF-INSURED CLAIMS LIABILITY — The Company retains the risk, 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 $11,019,537 and $10,624,755 at October 26, 2002 and

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July 27, 2002, respectively. The determination of such claims and expenses and the appropriateness of the related liability is periodically reviewed and updated. Because the Company retains these risks, up to certain limits, a change in experience or actuarial assumptions that did not affect the rate of claims payments could nonetheless materially affect results of operations in a particular period.

CUSTOMER ADVANCES — Under the terms of certain contracts, the Company receives advances from customers that may be offset against its future billings. The Company has recorded these advances as liabilities and has not recognized any revenue for these advances.

INCOME TAXES — The Company files a consolidated federal income tax return. Deferred income taxes are provided for the temporary differences between the financial reporting basis and the tax basis of the its 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 number of common shares outstanding during the period plus all potentially dilutive common stock equivalents except in cases where the effect would be anti-dilutive, using the treasury stock method. See Note 2.

RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS — In November 2002, FASB Interpretation No. (“FIN”) 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others” was issued. This interpretation requires elaborating on the disclosures that must be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued. It also clarifies that a guarantor is required to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken in issuing the guarantee. The disclosure requirements of this Interpretation are effective for statements issued after December 15, 2002 and its recognition requirements are applicable for guarantees issued or modified after December 31, 2002. Management is in the process of evaluating the impact of implementing FIN 45 and is unable to estimate the effect, if any, on the Company’s financial statements.

In June 2002, SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities” was issued. This statement requires the recording of costs associated with exit or disposal activities at their fair values only once a liability exists. Under previous guidance, certain exit costs were accrued when management committed to an exit plan, which may have been before an actual liability arose. The provisions of this Statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early adoption encouraged. Management is in the process of evaluating the impact of implementing SFAS No. 144 and is unable to estimate the effect, if any, on the Company’s financial statements.

In August 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” This statement supersedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” and the accounting and reporting provisions of APB Opinion No. 30, “Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions.” SFAS No. 144 is effective for financial statements issued for fiscal years beginning after December 15, 2001. The adoption of SFAS 144 did not have a material impact on the Company’s financial statements.

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2. COMPUTATION OF PER SHARE EARNINGS

The following is a reconciliation of the numerators and denominators of the basic and diluted (loss) earnings per share computation as required by SFAS No. 128.

3. ACQUISITIONS

In February 2002, the Company acquired 100% of the outstanding capital stock of Arguss for 4,853,031 shares of its common stock for an aggregate purchase price of approximately $85.4 million before various transaction costs. Arguss provides infrastructure services to cable and telecommunication companies. This acquisition primarily expands the Company’s geographical presence within its existing customer base.

The Company recorded the acquisition of Arguss using the purchase method of accounting. Under SFAS No. 142, goodwill associated with this acquisition is no longer being amortized, but will be reviewed annually for impairment. The operating results of Arguss are included in the accompanying consolidated condensed financial statements from its date of purchase.

The following unaudited pro forma summaries presents the Company’s consolidated results of operations as if the foregoing acquisition had occurred on July 29, 2001:

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4. ACCOUNTS RECEIVABLE

Accounts receivable consist of the following:

For the periods indicated, the allowance for doubtful accounts changed as follows:

As of October 26, 2002 and July 27, 2002, the Company expected to collect all of its retainage balances within twelve months.

Accounts receivable, classified as non-current, consist of pre-petition trade receivables due from Adelphia of $40,376,746 and WorldCom of $2,054,287, net of an allowance for doubtful accounts of $20,899,474 with $20,550,694 charged to bad debt expense in the fourth quarter of fiscal 2002. Adelphia and WorldCom both filed for bankruptcy protection in the fourth quarter of fiscal year 2002.

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:

As stated in Note 1, the Company performs services under unit based and non-unit based contracts. The amounts presented above aggregate the effects of these types of contracts.

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6. PROPERTY AND EQUIPMENT

     The accompanying consolidated balance sheets include the following property and equipment:

Maintenance and repairs of property and equipment amounted to $2,695,599 and $2,438,283 for the three months ended October 26, 2002 and October 27, 2001, respectively.

7. OTHER ACCRUED LIABILITIES

Other accrued liabilities consist of the following:

8. NOTES PAYABLE

Notes payable are summarized as follows:

During fiscal 2002, the Company entered into a new three-year $200 million unsecured revolving credit agreement (the “Credit Agreement”) with a syndicate of banks that replaced the Company’s prior credit agreement. The Credit Agreement provides the Company with a commitment of $200 million for a three-year period including a $40 million limit for the issuance of letters of credit. As of October 26, 2002, the Company had $22.3 million of outstanding letters of credit issued under the Credit Agreement. The outstanding letters of credit are all issued to the Company’s insurance administrators as part of the Company’s self-insurance program. Under the most restrictive covenants of the Credit Agreement, as of October 26, 2002, the available borrowing capacity is approximately $103.1 million.

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The Credit Agreement requires that the Company maintain certain financial covenants and conditions including restricting its ability to encumber its assets or incur certain types of indebtedness, precluding the payment of cash dividends, and maintaining a leverage ratio of not greater than 2.25:1.00, as measured at the end of each fiscal quarter. At October 26, 2002, the Company was in compliance with all financial covenants and conditions under the Credit Agreement.

Loans under the Credit Agreement bear interest, at the Company’s option, at the bank’s prime interest rate or LIBOR plus a spread of 1.25%, 1.50%, or 2.00% based upon the Company’s current leverage ratio. Based upon the Company’s current leverage ratio, borrowings would be eligible for the 1.25% spread. The Company deferred approximately $1.1 million of fees related to the Credit Agreement, which are being amortized over its three year term. The Company is required to pay an annual non-utilization fee equal to 0.50% of the unused portion of the facilities. In addition, the Company pays an annual agent fee of $50,000.

9. 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. Certain of these leases contain renewal provision and generally require the Company to pay insurance, maintenance, and other operating expenses. The future minimum obligations under these leases are:

On September 10, 2001, as amended on November 9, 2001 and June 7, 2002, Williams Communications LLC (“Williams”) filed suit against one of the Company’s subsidiaries, Niels Fugal Sons Company (“NFS”), in the United States District Court of the Northern District of Oklahoma for claims that include breach of contract with respect to fiber-optic cable installation projects that NFS had constructed for Williams. Williams seeks an unspecified amount of damages, including compensatory, liquidated and punitive damages. The Company has answered and asserted affirmative defenses to their complaints and has filed a counterclaim for unpaid amounts of approximately $8 million due under the contract which is primarily recorded in retainage as of October 26, 2002. Trial is currently set for March 2003. Management believes the Company has meritorious defenses against these claims and intends to defend them vigorously. Management believes that this litigation will not materially affect the Company’s financial position or future operating results, although no assurance about the ultimate outcome of this or any other litigation can be provided.

In the normal course of business, certain of the Company’s subsidiaries have pending claims and legal proceedings. It is the opinion of the Company’s management, based on information available at this time, that none of the current claims or proceedings will have a material adverse effect on the Company’s consolidated financial statements.

In the normal course of business, the Company enters into employment agreements with certain members of its executive management. It is the opinion of the Company’s management, based on information available at this time, that these agreements will not have a material adverse effect on the Company’s consolidated financial statements.

10. CAPITAL STOCK

In June 2001, the Board of Directors approved a resolution authorizing management to repurchase up to $25.0 million of the Company’s issued and outstanding stock over an eighteen-month period expiring on December 4, 2002. Cumulatively through December 4, 2002, approximately 82,000 shares having an aggregate cost of approximately $1.2 million had been repurchased under this program and are included as authorized and unissued shares.

On February 21, 2002, the Company issued 4,853,031 shares of our common stock in connection with the acquisition of Arguss. These shares were registered under the Securities Act of 1933, as amended.

In connection with the consummation of the merger of Arguss, 1,017,165 options to purchase the Company’s common stock were issued to former Arguss employees in exchange for their existing Arguss stock options.

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On November 26, 2002, the shareholders approved the 2002 Directors Restricted Stock Plan wherein non-employee directors must elect to receive a minimum percentage of their annual fees in restricted shares of the Company’s common stock. The Company has reserved 100,000 shares of its common stock for issuance under the plan. The number of restricted shares of the Company’s common stock to be granted is based on the fair market value of a share of common stock on the date such fees are payable.

11. SEGMENT INFORMATION

The Company operates in one reportable segment as a specialty contractor. The Company provides engineering, placement and maintenance of aerial, underground, and buried fiber-optic, coaxial and copper cable systems owned by local and long distance communications carriers, and cable television multiple system operators. Additionally, 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 provides underground locating services to various utilities and provides construction and maintenance services to electrical utilities. Each of these services is provided by the Company’s various subsidiaries, which provide management with monthly financial statements. All of the Company’s subsidiaries have been aggregated into one reporting segment due to their similar customer bases, products and production methods, and distribution methods. The following table presents information regarding annual contract revenues by type of customer:

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

Overview

We are a leading provider of specialty contracting services, including engineering, construction, installation and maintenance services to telecommunications providers throughout the United States. We also provide underground locating services to various utilities and maintenance and construction services to electrical utilities. For the three months ended October 26, 2002, specialty contracting services related to the telecommunications industry, underground utility locating and construction and maintenance to electrical utilities contributed approximately 88.2%, 9.6% and 2.2%, respectively, to our total contract revenues.

In February 2002, we acquired all of the outstanding stock of Arguss Communications, Inc. (“Arguss”) for approximately 4.9 million shares of our common stock. The aggregate purchase price, which was accounted for under the purchase method of accounting, was approximately $85.4 million before various transaction costs. The results of operations of Arguss are included in our consolidated financial statements from the date of acquisition.

We provide a significant portion of our services pursuant to multi-year master service agreements. Under master service agreements, we generally agree to provide for a period of one or more years, generally on an exclusive basis, a customer’s specified service requirements within a given geographical area. Master service agreements generally provide that we 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). A customer may generally terminate these agreements for convenience with at least 90 days prior written notice. Master service agreements are usually awarded on a competitive bid basis but in some cases are extended by negotiation rather than re-bid. We are currently a party to approximately 60 master service agreements.

The remainder of our services are provided pursuant to contracts for particular jobs. Long-term contracts relate to specific projects with terms in excess of one year from the contract date. Short-term contracts are generally from three to four months in duration, depending upon the size of the project. A portion of our contracts include retainage provisions under which 5% to 10% of the contract invoicing is withheld subject to project completion and acceptance by the customer.

Contract revenues from multi-year master service agreements represented 44.8% and 40.8% of total contract revenues in the first quarter of fiscal 2003 and 2002, respectively, and contract revenues from long-term contracts, including multi-year master service agreements, represented 76.5% and 83.3% of total contract revenues, respectively.

We recognize revenue on unit based contracts as the unit is completed. Revenue on non-unit based contracts is recognized under 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.

We derive a significant amount of our revenue from telecommunications companies. Beginning in the latter part of 2000 and continuing throughout fiscal 2002, and into fiscal 2003, certain segments of the telecommunications industry suffered a severe downturn that has resulted in a number of our customers experiencing financial difficulties. Several of our customers have filed for bankruptcy protection, including Adelphia Communications Corporation (“Adelphia”) and WorldCom Inc. (“WorldCom”). At October 26, 2002, we had pre-petition outstanding receivables from Adelphia and WorldCom of approximately $40.3 million and $2.1 million, respectively.

The downturn in the telecommunications industry has adversely affected capital expenditures for infrastructure projects even among customers that are not experiencing financial difficulties. Capital expenditures by telecommunications customers during the remainder of calendar 2002 are expected to remain at low levels in comparison with prior years, and there can be no assurance that additional customers will not file for bankruptcy protection or otherwise experience severe financial difficulties in fiscal 2003. Additional bankruptcies of companies in the telecommunications sector or further decreases in our customer’s capital expenditures could reduce our cash flows and adversely impact our liquidity.

A significant portion of our revenue comes from several large customers. The following table reflects customers with at least 5% of our total contract revenue in either the quarter ending October 26, 2002 or October 27, 2001:

In August 2002, in accordance with our contractual rights, we notified DIRECTV of our intention to cease performing services for them on or before March 1, 2003.

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Cost of earned revenues includes all direct costs of providing services under our contracts. Cost of earned revenues includes all costs of construction personnel, subcontractor costs, all costs associated with operation of equipment (excluding depreciation), insurance and materials not supplied by the customer. Generally the customer provides the materials that are to be used for its job. Because we retain the risk for automobile and general liability, worker’s compensation, and employee group health claims subject to certain limits, a change in experience or actuarial assumptions that did not affect the rate of claims payments could nonetheless materially affect results of operations in a particular period.

General and administrative costs include all our costs at the holding company level, as well as subsidiary management personnel and administrative overhead. Our management personnel, including subsidiary management, perform substantially all sales and marketing functions as part of their management responsibilities and, accordingly, we have not incurred material selling expenses.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the related disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. On an ongoing basis, we evaluate these estimates, including those related to revenue recognition, bad debts, self-insured claims liability, income taxes, intangible assets, investments, contingencies and litigation. We base our estimates on current information, historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recognition of revenue that are not readily apparent from other sources. We cannot assure you that actual results will not differ from those estimates.

We have identified the accounting policies below as critical to the accounting for our business operations and the understanding of our results of operations. The impact of these policies on our operations is discussed throughout “Management’s Discussion and Analysis of Financial Condition and Results of Operations” where such policies affect our reported and expected financial results. Our key accounting estimates and policies are reviewed with our Audit Committee. For a further discussion of the application of these and other accounting policies, see Note 1 to the Notes to Condensed Consolidated Financial Statements.

Revenue Recognition. The majority of our contracts are unit based. Revenue on unit based contracts is recognized as the unit is completed. Revenue on non-unit based contracts is recognized under 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” primarily relates to revenues for completed but unbilled units under unit based contracts, as well as unbilled revenues recognized under the percentage-of-completion method for non-unit based contracts. 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.”

Estimation of the Allowance for Doubtful Accounts. We maintain an allowance for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. We record an increase in the allowance for doubtful accounts when it is probable that the receivable has been impaired at the date of the financial statements and the loss can be reasonably estimated. Any increase in the allowance account has a corresponding negative effect on our results of operations. Estimates of uncollectable amounts are reviewed each period, and changes are recorded in the period they become known. Management analyzes accounts receivable and historical bad debts, customer creditworthiness, current economic trends and considers changes in customer payment terms and other factors when evaluating the adequacy of the allowance for doubtful accounts. Should any of these factors change, the estimate made by management may also change, which could affect the level of our future provision for doubtful accounts.

Self-Insured Claims Liability. We retain the risk of loss, up to certain limits, for automobile, general liability and workers’ compensation claims. A liability for unpaid claims and the associated claim expenses, including incurred but unreported losses, is actuarially determined and reflected in the consolidated financial statements as an accrued liability. Factors affecting the determination of amounts to be accrued for automobile, general liability and workers’ compensation claims include, but are not limited to, cost, frequency, or payment patterns resulting from new types of claims, the hazard level of our operations, tort reform or other legislative changes, unfavorable jury decisions, court interpretations, changes in the medical conditions of claimants and economic factors such as inflation.

In addition, we retain the risk, up to certain limits, under a self-insured employee health plan. We periodically review the paid claims history of our employee health plan and analyze our accrued liability for claims, including claims incurred but not yet paid. Factors affecting the determination of amounts to be accrued under the employee health plan include, but are not limited to, frequency of use, changes in medical costs, unfavorable jury decisions, legislative changes, changes in the medical conditions of claimants, court interpretations and economic factors such as inflation.

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For losses occurring during fiscal years 2002 and 2003, we retain the risk on a per occurrence basis for automobile liability to $500,000, for general liability to $250,000, and for worker’s compensation, in states where we are allowed to retain risk, to $500,000. For fiscal year 2002, we had aggregate stop loss coverage for the above exposures at the stated retentions of approximately $20 million and $17.4 million for fiscal year 2003. In addition, we have umbrella liability coverage to a policy limit for each year of $75 million. Within the umbrella coverage, we have retained the risk of loss between $2.0 and $5.0 million, on a per occurrence basis, with an aggregate stop loss for this layer of $10.0 million for each of fiscal year 2002 and 2003.

The method of calculating the estimated accrued liability for automobile, general liability workers’s compensation and employee group health claims is subject to inherent uncertainty. If actual results are less favorable than what we use to calculate the accrued liability, we would have to record expenses in excess of what we have already accrued.

Valuation of Intangible Assets and Investments. We have adopted SFAS No. 142, “Goodwill and Other Intangible Assets.” In accordance with that statement, we conduct, on at least an annual basis, a review of our reporting units to determine whether their carrying value exceeds their fair market value. Should this be the case, the value of our goodwill may be impaired and written down. The valuations employ a combination of present value techniques to measure fair value corroborated by comparisons to estimated market multiples. When necessary, we engage third party specialists to assist us with our valuations. Impairment losses are reflected in operating income or loss in the consolidated statements of operations.

Accounting for Income Taxes. We account for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities. Developing our provision for income taxes requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. We have not recorded any valuation allowances as of October 26, 2002 because management believes that future taxable income will, more likely than not, be sufficient to realize the benefits of those assets as the temporary differences in basis reverse over time. Our judgments and tax strategies are subject to audit by various taxing authorities. While the Company believes it has provided adequately for its income tax liabilities in its consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on our consolidated financial condition and results of operations.

Contingencies and Litigation. We are currently involved in certain legal proceedings. We estimate the range of liability related to pending litigation where the amount and range of loss can be estimated. Where there is a range of loss, we record the minimum estimated liability related to those claims. As additional information becomes available, we assess the potential liability related to our pending litigation and revise our estimates. Revisions of our estimates of the potential liability could materially impact our results of operations. If the final outcome of such litigation and contingencies differs adversely from that currently expected, it would result in a charge to earnings when determined.

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Results of Operations

The following table sets forth, as a percentage of contract revenues earned, certain items in our condensed consolidated statements of operations for the periods indicated: