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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, 1997
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 33410
PALM BEACH GARDENS, FLORIDA
(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
Common Stock, Name of each exchange on which registered
par value $.33 1/3 per share New York Stock Exchange
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. [ ]
The aggregate market value of the voting 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 September 26, 1997 was $213,408,461.
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 SEPTEMBER 26, 1997
Common Stock, $.33 1/3 10,870,252
The registrant's proxy statement for the Annual Meeting of Shareholders to
be held on November 24, 1997 (the "Definitive Proxy Statement") to be filed with
the Commission pursuant to Regulation 14A is incorporated by reference into Part
III of this Form 10-K.
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PART I
ITEM 1. BUSINESS
OVERVIEW
Dycom is a leading provider of engineering, construction and maintenance
services to telecommunications providers that operate 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. Dycom also performs underground utility locating and
electric utility contracting services. For the fiscal year ended July 31, 1997,
telecommunications services contributed approximately 87% of contract revenues,
underground utility locating services contributed 6%, and electric utility
contracting services contributed 7%.
Through its nine active wholly-owned 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., The Southern New
England Telephone Company, GTE Corporation, U.S. West Communications, Inc., and
Florida Power & Light Company. Approximately 40% of the Company's revenues come
from multi-year master service agreements with large telecommunications
providers and electric utilities.
In July 1997, Dycom acquired Communications Construction Group, Inc.
("CCG"), a Pennsylvania-based provider of construction services to cable
television multiple system operators (the "CCG Acquisition"). CCG generated
revenues of $67.7 million in its fiscal year 1997. This transaction diversified
Dycom's telephone company customer base to include a broader mix of work for
cable television multiple system operators. The acquisition also created a
greater geographic presence for Dycom in the Mid-Atlantic, Midwest and Northeast
regions of the United States.
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 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.
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. 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 also 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,
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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. The Company is currently a party to
30 underground utility locating contracts. 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, 1995, 1996 and 1997, 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,
--------------------
1995 1996 1997
---- ---- ----
Telecommunications services................................. 86% 87% 87%
Underground utility locating services....................... 8 7 6
Electrical construction and maintenance services............ 6 6 7
--- --- ---
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., Sprint Corporation, Ameritech Corporation, GTE Corporation, The Southern
New England Telephone Company, Citizen Utilities and Cincinnati Bell Telephone.
Dycom 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., Falcon Cable
Media, Time Warner, Inc. and MediaOne, Inc. Dycom also provides it services to
long distance carriers such as MCI Telecommunications Corporation and AT&T
Corporation, as well as to competitive access providers such as MFS
Communications Company, Inc. and Brooks Fiber Corporation. Premise wiring
services have been provided to, among others, Lucent Technologies, Inc., Duke
University, International Business Machines Corporation, and several state
governments. The Company also provides construction and maintenance support to
Lee County Electrical Cooperative, Florida Power & Light Company, and Florida
Power Corporation.
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The Company's customer base is highly concentrated, with its top three
customers in fiscal years 1995, 1996 and 1997 accounting in the aggregate for
approximately 66.8%, 72.8% and 64.0%, respectively, of the Company's total
revenues. During fiscal 1997, approximately 34.3% of the Company's total
revenues were derived from BellSouth Telecommunications, Inc., 23.3% from
Comcast Cable Communications, Inc. and 6.4% from GTE Corporation. The Company
believes that a substantial portion of its total 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 and results of operations.
A significant amount of the Company's business is performed under master
service agreements. These agreements with telecommunications providers are
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's backlog at July 31, 1997 was $314.4 million. As of July 31,
1997, the Company expected to complete approximately 66% of this backlog within
the next fiscal year. Due to the nature of its contractual commitments, in many
instances the Company's customers do not commit to the volume of services to be
purchased under the contract, but rather commit the Company to perform these
services if requested by the customer and commit to obtain these services from
the Company if they are not performed internally. Many of the contracts are
multi-year agreements, and the Company includes the full amount of services
projected to be performed over the life of the contract. The Company includes
all services projected to be performed over the life of the contract in its
backlog due to 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 management's estimates of such estimates at any point in time are
accurate.
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 risk
manager, 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 for automobile liability up to $1.0 million, for general liability
up to $1.0 million, and for workers' compensation, in states where the Company
elects to do so, up to $1.0 million per occurrence and $2.0 million in the
aggregate. The Company has umbrella coverage up to a policy limit of $30.0
million.
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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 Operation" and Note 1 of 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 that 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
competitive factors on a whole.
EMPLOYEES
As of July 31, 1997, the Company employed 2,864 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.
None of the Company's employees are represented by a labor union. CCG is
currently a party to two collective bargaining agreements with local bargaining
units in Philadelphia, Pennsylvania, and New York, New York, although none of
its current employees are subject to the agreements. 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 master services agreements 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.
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ITEM 2. PROPERTIES
The Company leases its executive office located in Palm Beach Gardens,
Florida. The Company's subsidiaries operate from owned and leased administrative
offices, district field offices, equipment yards and shop facilities, and
temporary storage locations. The Company owns properties 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, Bridgeport and Wallingford, Connecticut,
Knoxville, Tennessee, and Greensboro, North Carolina. The Company also leases
and owns other smaller properties as necessary to enable it to effectively
perform its operations 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 the periods through August 31, 1995.
See Note 15 to the accompanying financial statements.
In the normal course of business, certain subsidiaries of the Company have
pending and unasserted claims. Although the ultimate resolution and liability of
these claims cannot be determined, management believes the final disposition of
these claims will not have a material adverse impact on the Company's
consolidated financial statements.
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.
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 1996 FISCAL 1997
------------------ ------------------
HIGH LOW HIGH LOW
------- ------- ------- -------
First Quarter............................................. $ 8 $ 6 3/8 $14 3/8 $11 1/2
Second Quarter............................................ 7 1/8 5 12 1/4 9 1/4
Third Quarter............................................. 9 1/4 5 7/8 12 1/4 10
Fourth Quarter............................................ 13 1/8 8 7/8 18 1/8 9 7/8
As of September 26, 1997, there were approximately 660 record holders of
the Company's $.33 1/3 par value common stock. The common stock traded at a high
of $23 1/8 and a low of $16 9/16 during the period August 1, 1997 through
September 26, 1997.
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 facilities expressly
limit the payment of cash dividends to fifty percent (50%) of each fiscal year's
after-tax profits. The credit facilities' restrictions regarding the Company's
debt to equity, 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, 1993, 1994, 1995, 1996, and 1997. The
Company acquired CCG on July 29, 1997. The acquisition has been accounted for as
a pooling of interest and accordingly, the consolidated financial statements for
the periods presented include the accounts of CCG. This data should be read in
conjunction with the consolidated financial statements and related notes
included elsewhere in this report.
1993(1) 1994(1) 1995 1996(2) 1997(2)
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Revenues............................... $156,689 $152,647 $188,333 $195,260 $243,923
Income (loss) before income taxes...... (31,778) (6,710) 8,874 11,381 19,042
Net income (loss)...................... (31,013) (7,501) 5,141 7,664 11,219
Earnings (loss) per common and common
equivalent share(3):
Primary.............................. (2.93) (0.71) 0.49 0.71 1.02
Fully diluted........................ (2.93) (0.71) 0.49 0.70 1.02
Total assets........................... 65,890 59,542 62,218 66,195 88,162
Long-term obligations.................. 28,916 6,641(4) 21,344 17,490 15,430
Stockholders' equity................... 15,374 8,132 13,319 21,182 33,752
Cash dividends per share............... -- -- -- -- --
- ---------------
(1) The Company changed its method of accounting for income taxes as of the
beginning of fiscal 1993; the years prior to fiscal 1993 have not been
restated. The cumulative effect of the accounting change increased the net
loss by $2,286. The Company wrote-off $24,285 and $1,423 of intangible
assets in 1993 and 1994, respectively. In fiscal 1994, the Company recorded
a $1.7 million deferred tax asset valuation allowance.
(2) The results of operations for fiscal 1996 and 1997 include a $1.1 million
and $0.3 million reduction in the deferred tax valuation allowance.
(3) The options to purchase common stock had an insignificant or anti-dilutive
effect on the per share amounts. See Note 1 to the consolidated financial
statements regarding the per share data.
(4) 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.
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. In
addition, contract revenues earned are derived from underground utility locating
services and from maintenance and construction services provided to the electric
utility industry. 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, principally in
the Southeast, Northeast, Midwest and Mid-Atlantic 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
gain on sale of surplus equipment and interest income.
In July 1997, Dycom completed the CCG Acquisition in a transaction
accounted for as a pooling of interest. CCG's revenues for fiscal 1997 were
approximately $67.7 million. CCG provides engineering, construction, and
maintenance services for cable television multiple system operators. Its
principal customer is Comcast Cable Communications, Inc., which accounted for
81.0% of CCG's revenues and 23.3% of Dycom's
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contract revenues in fiscal 1997. 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.
Dycom provides services to its customers pursuant to master service
agreements and 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. 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 on the
percentage of completion basis. Dycom is currently party to 15 master service
agreements, which accounted for approximately 40% of fiscal 1997 revenues.
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, which are generally from three to four months in
duration from the contract date, depending upon the size of the project. These
contracts may be either bid or negotiated.
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, 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 1991, (ii) write-offs of intangible
assets, including goodwill, of $24.3 million and $1.4 million in 1993 and 1994,
respectively, incurred in connection with four acquisitions, which contributed
to 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. See Selected Financial Data. All
of these matters were concluded in or before the 1995 fiscal year. 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.
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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,
------------------------
1995 1996 1997
------ ------ ------
Revenues:
Contract revenues earned.................................. 100.0% 100.0% 100.0%
Other, net................................................ 0.7 0.6 0.4
------ ------ ------
Total revenues.................................... 100.7 100.6 100.4
------ ------ ------
Expenses:
Cost of earned revenue, excluding depreciation............ 82.0 80.3 79.2
General and administrative................................ 10.2 10.6 9.8
Depreciation and amortization............................. 3.8 3.9 3.6
------ ------ ------
Total expenses.................................... 96.0 94.8 92.6
------ ------ ------
Income before income taxes.................................. 4.7 5.8 7.8
Provision for income taxes.................................. 2.0 1.9 3.2
------ ------ ------
Net income.................................................. 2.7% 3.9% 4.6%
====== ====== ======
YEAR ENDED JULY 31, 1997 COMPARED TO YEAR ENDED JULY 31, 1996
Revenues. Contract revenues increased $48.9 million or 25.2% to $243.0
million in fiscal 1997 from $194.1 million in fiscal 1996. Of this increase,
$40.7 million was attributable to the telecommunications services group, $6.1
million was attributable to the electric services group and $2.1 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 $210.4 million of contract revenues from the
telecommunications services group as compared to $169.7 million in fiscal 1996.
The increase in the Company's telecommunications services group reflects an
increased volume of projects and activity in fiscal 1997 associated with the
cable television services group, which increased by $19.4 million to $70.6
million in fiscal 1997 from $51.2 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 services agreements. Contract revenues from
master services agreements, however, continue to be a significant source of the
Company's revenues, representing approximately 40% of total contract revenues in
fiscal 1997 as compared to 47.2% in fiscal 1996. The Company recognized contract
revenues of $16.8 million from electric utilities services in fiscal 1997 as
compared to $10.7 million in fiscal 1996, an increase of 57.0%. The Company
recognized contract revenues of $15.8 million from underground utility locating
services in fiscal 1997 as compared to $13.7 million in fiscal 1996, an increase
of 15.2%.
Cost of Earned Revenues. Cost of earned revenues increased $36.6 million
to $192.4 million in fiscal 1997 from $155.8 million in fiscal 1996, but
decreased slightly as a percentage of contract revenues to 79.2% from 80.3%.
Direct labor, subcontract 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 $3.3 million to $23.8 million in fiscal 1997 from $20.5 million in
fiscal 1996, but decreased as a percentage of contract revenues to 9.8% from
10.6%. The increase in general and administrative expenses was primarily
attributable to a $2.1 million increase in administrative salaries, bonuses,
employee benefits and payroll taxes and an increase of $300,000 in the provision
for doubtful accounts. The Company also incurred professional and related
expenses associated with the CCG Acquisition of $400,000 in fiscal 1997.
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Depreciation and Amortization. Depreciation and amortization expense
increased $1.1 million to $8.7 million in fiscal 1997 from $7.6 million in
fiscal 1996, but decreased as a percentage of contract revenues to 3.6% from
3.9%. 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 $7.8 million in fiscal
1997 as compared to $3.7 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 41.1% in
fiscal 1997 as compared to 32.7% in fiscal 1996. The effective tax rate differs
from the statutory tax rate due to state income taxes, the amortization of
intangible assets that do not provide a tax benefit, other non-deductible
expenses for tax purposes and, in fiscal 1996, the reduction in a valuation
allowance relative to certain deferred tax assets.
Net Income. Net income increased to $11.2 million in fiscal 1997 from $7.7
million in fiscal 1996, a 46.9% increase.
YEAR ENDED JULY 31, 1996 COMPARED TO YEAR ENDED JULY 31, 1995
Revenues. Contract revenues increased $7.1 million or 3.8% to $194.1
million in fiscal 1996 from $187.0 million in fiscal 1995. For fiscal 1996, the
telecommunications services group contract revenues increased by $8.8 million,
which was offset by declines in contract revenues from the utility locating
services and the electrical services groups of $1.1 million and $600,000,
respectively. During fiscal 1996, the Company recognized $169.7 million of
contract revenues from the telecommunications services group as compared to
$160.9 million in fiscal 1995. The telecommunications services group experienced
an increased volume of projects and activity in fiscal 1996 associated with the
design and installation of broadband networks, telephony engineering and design
services and premise wiring services, which was partially offset by a decline in
contract revenues from services performed under master service agreements.
Contract revenues from master service agreements represented 47.2% of contract
revenues in fiscal 1996 as compared to 52.1% in fiscal 1995. The Company
recognized contract revenues from electrical services of $10.7 million in fiscal
1996 as compared to $11.3 million in fiscal 1995, a decrease of 5.3%, as a
result of lower volume from bid contracts, partially offset by improved volume
and pricing under certain existing contracts. The Company recognized contract
revenues from underground utility locating services of $13.7 million in fiscal
1996 as compared to $14.8 million in fiscal 1995, a decrease of 7.4%, as a
result of the loss of a certain underground utility locating contract during the
competitive bid process, partially offset by the realization of certain new
underground utility locating business.
Cost of Earned Revenues. Cost of earned revenues increased $2.5 million to
$155.8 million in fiscal 1996 from $153.3 million in fiscal 1995, but decreased
as a percentage of contract revenues to 80.3% from 82.0%. Direct labor,
subcontract 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 on projects. Additionally, insurance costs
increased by approximately $900,000 as a result of more claims arising in fiscal
1996.
General and Administrative Expenses. General and administrative expenses
increased $1.5 million to $20.5 million in fiscal 1996 from $19.0 million in
fiscal 1995, and increased as a percentage of contract revenues to 10.6% from
10.2%. The increase in general and administrative expenses was primarily
attributable to a $1.1 million increase in administrative salaries, wages and
related payroll taxes and an increase of $300,000 in professional expenses.
Depreciation and Amortization. Depreciation and amortization expense
increased $459,000 to $7.6 million in fiscal 1996 from $7.2 million in fiscal
1995, and increased slightly as a percentage of contract revenues to 3.9% from
3.8%. The increase reflected the depreciation of additional capital expenditures
incurred in the ordinary course of business.
Income Taxes. The provision for income taxes was $3.7 million in fiscal
1996, as well as in fiscal 1995. 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 32.7% in
fiscal 1996 as compared to 42.1% in
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fiscal 1995. The effective tax rate differed from the statutory tax rate due to
state income taxes, the amortization of intangible assets that do not provide a
tax benefit, other non-deductible expenses for tax purposes and, in fiscal 1996,
the reduction in a valuation allowance relative to certain deferred tax assets.
Net Income. Net Income increased to $7.7 million in fiscal 1996 from $5.1
million in fiscal 1995, a 49.1% 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 and by bank borrowings. 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 1997, net cash provided by operating activities was $9.8 million
compared to $13.8 million for 1996 and $12.3 million for 1995. The decrease in
1997 was due primarily to an increase in accounts receivable.
For 1997, net cash used in investing activities for capital expenditures
was $12.1 million, compared to $10.7 million in 1996 and $8.7 million in 1995.
For 1997, these expenditures were for the normal replacement of equipment and
the buyout of certain operating leases on terms favorable to the Company. For
1996, these expenditures were for normal equipment replacement and for expansion
in the underground utility locating group's geographic market. In addition to
equipment purchases, the Company obtained approximately $3.3 million of
equipment in 1997, $3.0 million of equipment in 1996, and $4.4 million of
equipment in 1995 under noncancellable operating leases.
On April 28, 1997, the Company signed a new $35 million credit agreement
arranged by a group of banks led by Dresdner Bank Lateinamerika AG. The Company
utilized $10.2 million of the new facilities to satisfy its then outstanding
long-term debt, $4.2 million to finance its increased working capital
requirements, and $800,000 for capital equipment expenditures. The new credit
agreement, in total, provides for a (i) $10.0 million revolving working capital
facility, (ii) $10.0 million standby letter of credit facility, (iii) $9.0
million five-year term loan, and (iv) $6.0 million revolving equipment
acquisition facility. The new credit agreement increased the level of available
financing by $11.2 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 new credit agreement requires the Company to maintain certain financial
covenants and conditions such as not more than a 3.0:1 debt-to-equity ratio, 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 $4.0 million in the first year, increasing thereafter in
$750,000 increments, as well as placing restrictions on encumbrances of assets
and creation of additional indebtedness. The new credit agreement also limits
the payment of cash dividends to 50% of the fiscal net after tax profits. At
July 31, 1997, the Company was in compliance with all covenants and conditions
under the credit facility.
The revolving working capital facility is available for a one-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%. As of July 31, 1997, the Company had
borrowed $4.2 million against the revolving working capital facility to meet
current working capital requirements, leaving an available borrowing capacity of
$5.8 million. At July 31, 1997, the interest rate on the outstanding balance was
at LIBOR plus 1.50% (7.56%).
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, 1997). The term loan
principal and interest is payable in quarterly installments through April, 2002.
The Company used $9.0 million of the facility to refinance the indebtedness
under the previous revolving credit facility. During fiscal 1997, the Company
repaid $500,000 on this facility.
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The revolving equipment acquisition facility is available for a one-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 acquisition term loans is payable in
monthly installments through January 2001. As of July 31, 1997, the Company had
borrowed $1.2 million to refinance the indebtedness under the previous equipment
acquisition term loans and an additional $0.8 million to finance the acquisition
of new equipment. The Company repaid $100,000 and has remaining available
borrowing capacity of $4.1 million under this facility. At July 31, 1997, the
interest rate on the outstanding equipment acquisition term loans was at LIBOR
plus 1.75% (7.81%).
The standby letter of credit facility is available for a one-year period.
At July 31, 1997, the Company had $9.2 million in outstanding standby letters of
credit issued as security to the Company's insurance administrators, as part of
its self-insurance program leaving $0.8 million of available borrowing capacity.
CCG maintains a $6.6 million working capital bank credit facility. The
interest rate on this credit facility is at the bank's prime rate plus 0.75% and
is collateralized by 75% of the eligible trade accounts receivable and
inventories. During 1997, certain financial covenants were breached and the bank
waived such violations. At July 31, 1997, CCG was in compliance with the bank
credit facility covenants and conditions. At July 31, 1997, the outstanding
principal balance was $5.9 million. This credit facility was an existing
arrangement made prior to the CCG Acquisition.
Net days of contract revenues in trade accounts receivable, including
retainage, was 52 days at July 31, 1997, compared to 41 days at July 31, 1996
and 48 days at July 31, 1995.
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 new 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.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In February 1997, the FASB issued SFAS No. 128 "Earnings per Share" which
changes the method of calculating earnings per share and is effective for fiscal
years ending after December 15, 1997. SFAS No. 128 requires the presentation of
"basic" earnings per share and "diluted" earnings per share on the face of the
income statement. Basic earnings per share is computed by dividing the net
income available to common shareholders by the weighted average shares of
outstanding common stock. The calculation of diluted earnings per share is
similar to basic earnings per share except the denominator includes dilutive
common stock equivalents such as stock options and warrants. The Company will
adopt SFAS No. 128 in fiscal 1998 as early adoption is not permitted. The
calculation of earnings per share under SFAS No. 128 is not expected to be
materially different than the current disclosure of earnings per share.
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 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
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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 performance. This statement is effective for financial statements for
periods beginning after December 15, 1997.
Management is currently evaluating the requirements of SFAS No. 130 and No.
131, respectively.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Registrant's consolidated financial statements and related notes and
independent auditors' reports follow on subsequent pages of this report.
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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JULY 31, 1996 AND 1997
1996 1997
----------- -----------
ASSETS
CURRENT ASSETS:
Cash and equivalents........................................ $ 3,927,736 $ 6,645,972
Accounts receivable, net.................................... 21,747,268 34,353,367
Costs and estimated earnings in excess of billings.......... 7,519,284 10,479,974
Deferred tax assets, net.................................... 1,261,065 2,168,763
Other current assets........................................ 1,291,249 1,550,545
----------- -----------
Total current assets.............................. 35,746,602 55,198,621
----------- -----------
PROPERTY AND EQUIPMENT, net................................. 24,514,470 27,543,238
----------- -----------
OTHER ASSETS:
Intangible assets, net...................................... 4,839,447 4,684,358
Deferred tax assets......................................... 704,887 424,205
Other....................................................... 389,947 311,473
----------- -----------
Total other assets................................ 5,934,281 5,420,036
----------- -----------
TOTAL............................................. $66,195,353 $88,161,895
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable............................................ $ 5,567,512 $10,281,615
Notes payable............................................... 7,257,867 13,080,316
Billings in excess of costs and estimated earnings.......... 38,714 470,940
Accrued self-insured claims................................. 3,064,229 2,011,622
Income taxes payable........................................ 1,099,178 1,230,376
Other accrued liabilities................................... 10,496,020 11,904,304
----------- -----------
Total current liabilities......................... 27,523,520 38,979,173
NOTES PAYABLE............................................... 10,427,837 9,012,066
ACCRUED SELF-INSURED CLAIMS................................. 7,062,150 6,418,400
----------- -----------
Total liabilities................................. $45,013,507 $54,409,639
=========== ===========
COMMITMENTS AND CONTINGENCIES, Note 15
STOCKHOLDERS' EQUITY:
Common stock, par value $.33 1/3 per share: 50,000,000
shares authorized; 10,654,734 and 10,867,877 issued and
outstanding, respectively................................. $ 3,551,578 $ 3,622,625
Additional paid-in capital.................................. 24,582,832 25,421,701
Retained earnings (deficit)................................. (6,952,564) 4,707,930
----------- -----------
Total stockholders' equity........................ 21,181,846 33,752,256
----------- -----------
TOTAL............................................. $66,195,353 $88,161,895
=========== ===========
See notes to consolidated financial statements.
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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED JULY 31, 1995, 1996, AND 1997
1995 1996 1997
------------ ------------ ------------
REVENUES:
Contract revenues earned............................. $186,956,976 $194,053,617 $242,957,932
Other, net........................................... 1,376,398 1,206,624 965,549
------------ ------------ ------------
Total...................................... 188,333,374 195,260,241 243,923,481
------------ ------------ ------------
EXPENSES:
Cost of earned revenues excluding depreciation....... 153,284,320 155,769,390 192,412,439
General and administrative........................... 19,009,530 20,485,022 23,779,913
Depreciation and amortization........................ 7,165,252 7,624,395 8,689,611
------------ ------------ ------------
Total...................................... 179,459,102 183,878,807 224,881,963
------------ ------------ ------------
INCOME BEFORE INCOME TAXES........................... 8,874,272 11,381,434 19,041,518
------------ ------------ ------------
PROVISION (BENEFIT) FOR INCOME TAXES
Current............................................ 3,732,893 5,297,772 8,018,951
Deferred........................................... (1,580,196) (196,241)
------------ ------------ ------------
Total...................................... 3,732,893 3,717,576 7,822,710
------------ ------------ ------------
NET INCOME........................................... $ 5,141,379 $ 7,663,858 $ 11,218,808
============ ============ ============
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Primary............................................ $ 0.49 $ 0.71 $ 1.02
============ ============ ============
Fully diluted...................................... $ 0.49 $ 0.70 $ 1.02
============ ============ ============
SHARES USED IN COMPUTING EARNINGS PER COMMON AND
COMMON EQUIVALENT SHARE:
Primary............................................ 10,588,766 10,859,819 10,948,689
============ ============ ============
Fully diluted...................................... 10,588,766 10,928,284 10,994,500
============ ============ ============
See notes to consolidated financial statements.
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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED JULY 31, 1995, 1996, AND 1997
COMMON STOCK ADDITIONAL RETAINED
----------------------- PAID-IN EARNINGS
SHARES AMOUNT CAPITAL (DEFICIT)
---------- ---------- ----------- ------------
Balances at July 31, 1994, as previously
reported................................... 8,528,990 $2,842,997 $24,253,309 $(20,387,411)
Acquisition accounted for as pooling of
interests.................................. 2,053,242 684,414 109,563 629,610
---------- ---------- ----------- ------------
Balances at July 31, 1994.................... 10,582,232 3,527,411 24,362,872 (19,757,801)
Stock options exercised...................... 15,000 5,000 40,000
Net income................................... 5,141,379
---------- ---------- ----------- ------------
Balances at July 31, 1995.................... 10,597,232 3,532,411 24,402,872 (14,616,422)
Stock options exercised...................... 57,502 19,167 179,960
Net income................................... 7,663,858
---------- ---------- ----------- ------------
Balances at July 31, 1996.................... 10,654,734 3,551,578 24,582,832 (6,952,564)
Stock options exercised...................... 213,143 71,047 706,300
Income tax benefit from stock options
exercised.................................. 132,569
Adjustment for change in fiscal year of
pooled company............................. 441,686
Net income................................... 11,218,808
---------- ---------- ----------- ------------
Balances at July 31, 1997.................... 10,867,877 $3,622,625 $25,421,701 $ 4,707,930
========== ========== =========== ============
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, 1995, 1996, AND 1997
1995 1996 1997
----------- ------------ ------------
Increase (Decrease) in Cash and Equivalents from:
OPERATING ACTIVITIES:
Net income............................................ $ 5,141,379 $ 7,663,858 $ 11,218,808
Adjustments to reconcile net cash provided by
operating activities:
Depreciation and amortization....................... 7,165,252 7,624,395 8,689,611
Gain on disposal of assets.......................... (840,637) (763,104) (667,377)
Deferred income taxes............................... (1,580,196) (196,241)
Changes in assets and liabilities:
Accounts receivable, net............................ (1,900,640) 2,842,893 (10,861,852)
Unbilled revenues, net.............................. (1,300,412) (2,286,096) (2,429,995)
Other current assets................................ (18,790) 205,641 (785,024)
Other assets........................................ 123,780 49,570 93,350
Accounts payable.................................... 2,042,901 (2,767,120) 3,782,196
Accrued self-insured claims and other liabilities... 1,623,897 2,703,422 323,789
Accrued income taxes................................ 250,189 85,227 636,427
----------- ------------ ------------
Net cash inflow from operating activities............. 12,286,919 13,778,490 9,803,692
----------- ------------ ------------
INVESTING ACTIVITIES:
Capital expenditures................................ (8,704,641) (10,684,195) (12,063,723)
Proceeds from sale of assets........................ 2,569,307 2,195,774 1,685,069
----------- ------------ ------------
Net cash outflow from investing activities............ (6,135,334) (8,488,421) (10,378,654)
----------- ------------ ------------
FINANCING ACTIVITIES:
Borrowings on notes payable and bank
lines-of-credit.................................. 1,504,982 1,690,917 17,321,661
Principal payments on notes payable and bank
lines-of-credit.................................. (5,944,358) (7,671,189) (14,646,255)
Exercise of stock options........................... 45,000 199,127 777,347
----------- ------------ ------------
Net cash inflow (outflow) from financing activities... (4,394,376) (5,781,145) 3,452,753
----------- ------------ ------------
Net cash outflow related to change in fiscal year of
pooled company...................................... (159,555)
----------- ------------ ------------
NET CASH INFLOW (OUTFLOW) FROM ALL ACTIVITIES......... 1,757,209 (491,076) 2,718,236
CASH AND EQUIVALENTS AT BEGINNING OF YEAR............. 2,661,603 4,418,812 3,927,736
----------- ------------ ------------
CASH AND EQUIVALENTS AT END OF YEAR................... $ 4,418,812 $ 3,927,736 $ 6,645,972
=========== ============ ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW AND NONCASH
INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for:
Interest............................................ $ 2,493,381 $ 2,023,159 $ 1,798,093
Income taxes........................................ 3,411,785 5,364,539 8,158,759
Property and equipment acquired and financed with:
Capital lease obligations........................... $ 360,242 $ 135,341 $ 601,024
Income tax benefit from stock options exercised....... $ 132,569
See notes to consolidated financial statements.
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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 merged with and into the Company through an exchange of
common stock. The merger was accounted for as a pooling of interests.
Accordingly, the Company's consolidated financial statements include the results
of CCG for all periods presented. See Note 2.
The Company's operations consist primarily of telecommunication and
electric utility services contracting. All material intercompany accounts and
transactions have been eliminated.
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 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. As some of these contracts
extend over one or more years, revisions in cost and profit estimates during the
course of the work are reflected in the accounting period as the facts that
require the revision become known. At the time a loss on a contract becomes
known, the entire amount of the estimated ultimate loss is accrued. 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.
"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 in
excess of daily requirements which are invested in overnight repurchase
agreements, certificates of deposits, 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. The carrying amount reported in the balance sheet for cash and
equivalents approximates its fair value.
PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost, reduced
in certain cases by valuation reserves. 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 -- 3-10 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 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 the straight-line method 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.
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DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Amortization expense was $155,088 for each of the fiscal years ended July
31, 1995, 1996, and 1997, respectively. The intangible assets are net of
accumulated amortization of $996,270 and $1,151,358 at July 31, 1996 and 1997,
respectively.
LONG-LIVED ASSETS -- In March 1995, the Financial Accounting Standards
Board ("FASB") issued the Statement of Financial Accounting Standards ("SFAS")
No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of". SFAS No. 121 requires that the long-lived assets and
certain identifiable intangibles be reviewed for impairment whenever events and
circumstances indicate that the carrying amount of an asset may not be
recoverable. The Company adopted the provisions of SFAS No. 121 effective August
1, 1996 and has determined that no impairment loss need be recognized.
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 $4,458,000 and $4,429,000 at July 31, 1996 and 1997,
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, file a
consolidated federal income tax return. CCG will be included in the Company's
consolidated federal income tax return commencing in fiscal year 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 and common equivalent share are
computed using the weighted average shares of common stock outstanding plus the
common stock equivalents arising from the effect of dilutive stock options,
using the treasury stock method. See Note 12.
CHANGE IN ACCOUNTING PRINCIPLE -- In October 1995, the FASB issued 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 12.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS -- In February 1997, the FASB
issued SFAS No. 128 "Earnings per Share" which changes the method of calculating
earnings per share and is effective for fiscal years ending after December 15,
1997. SFAS No. 128 requires the presentation of "basic" earnings per share and
"diluted" earnings per share on the face of the income statement. Basic earnings
per share is computed by dividing the net income available to common
shareholders by the weighted average shares of outstanding common stock. The
calculation of diluted earnings per share is similar to basic earnings per share
except the denominator includes dilutive common stock equivalents such as stock
options and warrants. The Company will adopt SFAS No. 128 in fiscal 1998 as
early adoption is not permitted. The calculation of earnings per share under
SFAS No. 128 is not expected to be materially different than the
18
20
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
current calculation of earnings per share. The pro forma basic earnings per
share and diluted earnings per share calculated in accordance with SFAS 128 for
the years ended July 31, are as follows:
1995 1996 1997
----- ----- -----
Pro forma basic earnings per share.......................... $0.49 $0.72 $1.04
Pro forma diluted earnings per share........................ $0.49 $0.71 $1.02
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 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 performance. This statement is effective for financial statements for
periods beginning after December 15, 1997.
Management is currently evaluating the requirements of SFAS No.130 and No.
131, respectively.
2. ACQUISITION
On July 29, 1997, the Company consummated the Communications Construction
Group, Inc.("CCG") acquisition by merger. 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.
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 years ending July 31, 1995, 1996, and 1997 combines the
statements of operations of CCG for its fiscal years ending May 31, 1995, 1996,
and 1997, respectively. The Company's consolidated balance sheet at July 31,
1996 includes the CCG balance sheet as of May 31, 1996. 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.
19
21
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The combined and separate company results of Dycom and CCG for the fiscal
years ended July 31 and May 31, 1995, 1996, and 1997 are as follows:
DYCOM CCG
JULY 31, MAY 31, COMBINED
------------ ----------- ------------
Fiscal year 1995:
Total revenues.............................. $145,283,116 $43,050,258 $188,333,374
Net income.................................. $ 4,433,204 $ 708,175 $ 5,141,379
Fiscal year 1996:
Total revenues.............................. $145,135,380 $50,124,861 $195,260,241
Net income.................................. $ 6,390,144 $ 1,273,714 $ 7,663,858
Fiscal year 1997:
Total revenues.............................. $176,204,581 $67,718,900 $243,923,481
Net income.................................. $ 8,268,502 $ 2,950,306 $ 11,218,808
The direct transaction costs resulting from the merger were $0.4 million.
These costs, which include filing fees with regulatory agencies, legal,
accounting and other professional costs, were charged to the combined operations
for the fiscal year ended July 31, 1997.
3. ACCOUNTS RECEIVABLE
Accounts receivable at July 31 consist of the following:
1996 1997
----------- -----------
Contract billings........................................... $20,393,361 $32,586,289
Retainage................................................... 1,432,545 1,885,656
Other receivables........................................... 527,405 896,015
----------- -----------
Total............................................. 22,353,311 35,367,960
Less allowance for doubtful accounts........................ 606,043 1,014,593
----------- -----------
Accounts receivable, net.................................... $21,747,268 $34,353,367
=========== ===========
4. 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:
1996 1997
----------- -----------
Costs incurred on contracts in progress..................... $24,553,658 $16,894,451
Estimated earnings thereon.................................. 436,154 3,222,120
----------- -----------
24,989,812 20,116,571
Less billings to date....................................... 17,509,242 10,107,537
----------- -----------
$ 7,480,570 $10,009,034
=========== ===========
Included in the accompanying consolidated balance sheets
under the captions:
Costs and estimated earnings in excess of billings........ $ 7,519,284 $10,479,974
Billings in excess of costs and estimated earnings........ (38,714) (470,940)
----------- -----------
$ 7,480,570 $10,009,034
=========== ===========
20
22
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. PROPERTY AND EQUIPMENT
The accompanying consolidated balance sheets include the following property
and equipment:
1996 1997
----------- -----------
Land........................................................ $ 1,711,464 $ 1,942,247
Buildings................................................... 2,236,322 2,346,993
Leasehold improvements...................................... 1,078,939 1,356,861
Vehicles.................................................... 28,385,347 32,232,343
Equipment and machinery..................................... 22,534,900 23,674,176
Furniture and fixtures...................................... 3,738,944 5,011,660
----------- -----------
Total............................................. 59,685,916 66,564,280
Less accumulated depreciation and amortization.............. 35,171,446 39,021,042
----------- -----------
Property and equipment, net................................. $24,514,470 $27,543,238
=========== ===========
During fiscal 1996 and 1997, certain subsidiaries of the Company entered
into lease arrangements accounted for as capitalized leases. The carrying value
of capital leases at July 31, 1996 and 1997 was $372,170 and $838,137,
respectively, net of accumulated amortization of $874,937 and $881,336,
respectively. Capital leases are included as a component of equipment and
machinery.
Maintenance and repairs of property and equipment amounted to $6,142,484,
$6,280,575, and $6,116,397 for the fiscal years ended July 31, 1995, 1996, and
1997, respectively.
6. OTHER ACCRUED LIABILITIES
Other accrued liabilities at July 31 consist of the following:
1996 1997
----------- -----------
Accrued payroll and related taxes........................... $ 2,618,266 $ 3,281,376
Accrued employee benefit costs.............................. 2,385,969 3,406,400
Accrued construction costs.................................. 2,178,785 2,033,371
Accrued other liabilities................................... 3,313,000 3,183,157
----------- -----------
Other accrued liabilities................................... $10,496,020 $11,904,304
=========== ===========
7. NOTES PAYABLE
Notes payable at July 31 are summarized by type of borrowing as follows:
1996 1997
----------- -----------
Bank Credit Agreements
Revolving credit facilities............................... $12,985,119 $10,113,484
Term-loan................................................. 2,162,812 8,550,000
Equipment term-loans...................................... 704,168 1,907,216
Capital lease obligations................................... 344,445 722,927
Equipment loans............................................. 852,083 798,755
Other....................................................... 637,077
----------- -----------
Total............................................. 17,685,704 22,092,382
Less current portion........................................ 7,257,867 13,080,316
----------- -----------
Notes payable -- non-current................................ $10,427,837 $ 9,012,066
=========== ===========
21
23
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On April 28, 1997 the Company signed a new $35.0 million credit agreement
with a group of banks. The new credit facility provides for (i) a five-year
term-loan in the principal amount of $9.0 million used to refinance the
Company's previously existing bank credit facility, (ii) a $6.0 million
revolving equipment facility used to refinance existing equipment term-loans and
to provide financing for Company's future equipment requirements, (iii) a $10.0
million revolving credit facility used for financing working capital, and (iv) a
$10.0 million standby letter of credit facility issued as security to the
Company's insurance administrators as part of its self-insurance program. The
revolving credit facility, the revolving equipment facility and the standby
letter of credit facility are available for a one-year period.
The outstanding principal under the term-loan bears interest at the prime
interest rate minus 0.50% (8.00% at July 31, 1997). Principal and interest is
payable in quarterly installments through April 2002. The loans outstanding
under the revolving credit facility and the revolving equipment facility bear
interest, at the option of the Company, at the prime interest rate minus 1.0% or
LIBOR plus 1.50% and at the prime interest minus 0.75% or LIBOR plus 1.75%,
respectively. At July 31, 1997, the interest rates on the outstanding revolving
credit facility and revolving equipment facility loans were at the LIBOR options
or 7.56% and 7.81%, respectively. At July 31, 1997, the outstanding amounts
under the term-loan and the revolving credit facility were $8.6 million and $4.2
million, respectively.
The advances under the revolving equipment 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 January
2001. During the quarter ended April 30, 1997, the Company borrowed $1.2 million
to refinance the then existing equipment term-loans and an additional $0.8
million for current equipment requirements. At July 31, 1997, the outstanding
amount owed under the revolving equipment facility was $1.9 million.
At July 31, 1997, the Company had outstanding $9.2 million in standby
letters of credit issued to the Company's insurance administrators as part of
its self-insurance program.
The new bank credit arrangement 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 1997. The
credit facility is secured by the Company's assets. At July 31, 1997, the
Company was in compliance with all the financial covenants and conditions.
The Company's newly acquired subsidiary, CCG, maintains a $6.6 million
revolving bank credit facility. The interest rate on this facility is at the
bank's prime interest rate plus 0.75% and is 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. In
addition, the former shareholders of CCG are personal guarantors of this
facility. The facility contains certain financial conditions and covenants
including limitation on the amount of capital expenditures and the creation of
additional indebtedness. During 1997, certain financial covenants were breached
and the bank waived such violations. At July 31, 1997, CCG was in compliance
with the bank credit facility covenants and conditions. The outstanding
principal balance was $5.9 million at July 31, 1997. This facility was an
existing arrangement made by CCG prior to the acquisition by Dycom.
In addition to the borrowings under the bank credit agreement, certain
subsidiaries have outstanding obligations under capital leases and other
equipment financing arrangements. These obligations are payable in monthly
installments expiring at various dates through December 2001.
The estimated aggregate annual principal repayments for notes payable and
capital lease obligations in the next five years are $13,080,316 in 1998,
$2,869,834 in 1999, $2,592,735 in 2000, $2,160,155 in 2001, and $1,389,342 in
2002.
22
24
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Interest costs incurred on notes payable, all of which is expensed, for the
years ended July 31, 1995, 1996, and 1997 were $2,348,574, $1,916,389, and
$1,899,570, 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.
8. INCOME TAXES
The components of the provision (benefit) for income taxes are:
1995 1996 1997
---------- ---------- ----------
Current:
Federal.......................................... $3,027,160 $4,265,617 $6,248,234
State............................................ 705,733 1,032,155 1,770,717
---------- ---------- ----------
3,732,893 5,297,772 8,018,951
---------- ---------- ----------
Deferred:
Federal.......................................... (74,145) (522,169) 191,765
State............................................ (134,700)
Valuation allowance.............................. 74,145 (1,058,027) (253,306)
---------- ---------- ----------
(1,580,196) (196,241)
---------- ---------- ----------
Total tax provision...................... $3,732,893 $3,717,576 $7,822,710
========== ========== ==========
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. The
change in the deferred tax assets and liabilities of CCG for the two-months
ended July 31, 1997 is included in the Company's retained earnings as the
adjustment for the change in fiscal year of pooled company. The deferred tax
assets and liabilities at July 31 are comprised of the following:
1996 1997
---------- ----------
Deferred tax assets:
Self-insurance, warranty, and other non-deductible
reserves............................................... $4,008,715 $3,943,356
Allowance for doubtful accounts........................... 172,340 346,993
Small tools............................................... 348,067
---------- ----------
4,181,055 4,638,416
Valuation allowance....................................... (728,491) (475,185)
---------- ----------
$3,452,564 $4,163,231
========== ==========
Deferred tax liabilities:
Property and equipment.................................... $1,275,314 $1,357,721
Unamortized acquisition costs............................. 211,298 212,542
---------- ----------
$1,486,612 $1,570,263
========== ==========
Net deferred tax assets..................................... $1,965,952 $2,592,968
========== ==========
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. In fiscal
1996 and 1997, the Company reduced the valuation allowance by $1.1 million and
$0.3 million, respectively. 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. Management's estimate and conclusion is based
23
25
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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:
1995 1996 1997
---------- ----------- ----------
Statutory rate applied to pre-tax income.......... $3,017,252 $ 3,869,688 $6,664,531
State taxes, net of federal tax benefit........... 465,784 681,836 1,059,178
Amortization and write-off of intangible assets,
with no tax benefit............................. 52,730 52,730 52,730
Tax effect of non-deductible items................ 169,161 139,101 374,564
Valuation allowance............................... 74,145 (1,058,027) (253,306)
Other items, net.................................. (46,179) 32,248 (74,987)
---------- ----------- ----------
Total tax provision..................... $3,732,893 $ 3,717,576 $7,822,710
========== =========== ==========
The Internal Revenue Service (the "IRS")has examined and closed the
Company's consolidated federal income tax returns for all years through fiscal
1990. 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 to open tax years. The IRS has examined and closed the income tax
returns for years through 1994 for CCG.
On August 5, 1997, The Taxpayer Relief Act of 1997 (the "Act") was signed
into law. The Act will not have a material effect on the Company's consolidated
financial statements.
9. REVENUES -- OTHER
The components of other revenues are as follows:
1995 1996 1997
---------- ---------- --------
Interest income..................................... $ 266,392 $ 264,551 $190,181
Gain on sale of fixed assets........................ 840,637 763,104 667,377
Miscellaneous income................................ 269,369 178,969 107,991
---------- ---------- --------
Total other revenues, net........................... $1,376,398 $1,206,624 $965,549
========== ========== ========
10. 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 officers of the Company have change of control agreements with
Dycom, which provide extraordinary 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
24
26
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
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.
At July 31, 1997, the Company has authorized 1,000,000 shares of preferred
stock, par value $1.00, of which no shares are issued and outstanding.
11. EMPLOYEE BENEFIT PLAN
The Company sponsors 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.
The Company's contributions to the plans are discretionary. The Company's
discretionary contributions were $60,039, $100,000 and $230,000 in fiscal years
1995, 1996, and 1997, respectively.
12. 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 Plan provides for the granting of options
to key employees until it expires in 2001. Options are granted at the fair
market value on the date of grant and are exercisable over a period of up to
five years. Since the Plan's adoption, certain of the options granted have
lapsed as a result of employees terminating their employment with the Company.
At July 31, 1995, 1996, and 1997, options available for grant under the 1991
Plan were 403,419 shares, 427,353 shares, and 384,118 shares, respectively.
On August 25, 1997, the Company granted to key employees under the 1991
Plan options to purchase an aggregate of 192,059 shares of common stock. The
options were granted at $18.25, the fair market value on the date of grant.
The Company's previous Incentive Stock Option Plan (the "1981 Plan")
expired on December 31, 1991. No further grants will be made under the 1981
Plan, and all outstanding options expired during the first quarter of fiscal
1996.
In addition to the stock option plans discussed above, the Company has
agreements outside of the plans 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.
25
27
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table summarizes the stock option transactions under the 1991
Plan, the 1981 Plan, and the Directors Plan for the three years ended July 31,
1995, 1996, and 1997:
WEIGHTED
AVERAGE
NUMBER OF EXERCISE
SHARES PRICE
--------- --------
Options outstanding at July 31, 1994........................ 504,498 $ 4.78
Granted................................................... 161,300 $ 5.09
Terminated................................................ (106,625) $ 7.73
Exercised................................................. (15,000) $ 3.00
-------- ------
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
-------- ------
Exercisable options at
July 31, 1995............................................. 138,069 $ 4.92
July 31, 1996............................................. 190,817 $ 3.78
July 31, 1997............................................. 69,933 $ 5.21
-------- ------
The range of exercise prices for options outstanding at July 31, 1997 was
$2.75 to $13.50. 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.
The following summarizes information about options outstanding at July 31,
1997:
OUTSTANDING OPTIONS
----------------------------------
WEIGHTED WEIGHTED
AVERAGE AVERAGE
NUMBER OF CONTRACTUAL EXERCISE
SHARES LIFE PRICE
--------- ----------- --------
Range of exercise prices
$ 2.00 to $ 4.00...................................... 107,357 5.3 3.44
$ 6.00 to $ 8.00...................................... 64,000 3.0 6.75
$12.00 to $14.00...................................... 94,880 4.1 13.50
------- --- ------
266,237 4.5 $10.32
======= === ======
EXERCISABLE OPTIONS
------------------------
WEIGHTED
EXERCISABLE AVERAGE
AS OF EXERCISE
JULY 31, 1997 PRICE
------------- --------
Range of exercise prices
$2.00 to $4.00............................................ 44,683 $3.58
$6.00 to $8.00............................................ 25,250 $6.75
------ -----
69,933 $5.21
====== =====
26
28
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These options will expire if not exercised at specific dates ranging from
November 1997 to August 2001. The prices for the options exercised during the
three years ended July 31, 1997 ranged from $2.75 to $6.75.
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
has been estimated at the date of grant using the Black-Scholes option-pricing
model with the following assumptions: expected stock volatility of 58.97%,
risk-free interest rate of 6.57%, expected lives of 4 years, and no dividend
yield, due to the Company's recent history of not paying cash dividends. The
Company did not grant stock options in fiscal 1996.
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 was $6.98 per share.
The pro forma disclosures amortize to expense the estimated compensation
costs for its stock options granted subsequent to July 31, 1995 over the options
vesting period. The Company's fiscal 1997 pro forma net earnings and earnings
per share are reflected below:
1996 1997
---------- -----------
Pro forma net income........................................ $7,663,858 $11,092,254
Pro forma earnings per share:
Primary................................................... $ 0.71 $ 1.01
Fully diluted............................................. $ 0.70 $ 1.01
13. RELATED PARTY TRANSACTIONS
The Company's newly acquired subsidiary leases administrative offices from
a partnership of which certain officers of the subsidiary are the general
partners. The total expense under these arrangements for the years ended July
31, 1995, 1996, and 1997 was $79,200, $112,200 and $115,200, respectively. The
future minimum lease commitments under these arrangements are $163,200 in 1998,
$163,200 in 1999, $163,200 in 2000, $67,200 in 2001, and $24,000 thereafter.
In addition, two of the Company's subsidiaries lease land, office
buildings, shop facilities, and other equipment from two of these subsidiaries'
former owners, one of which is a former Director of the Company. The total
expense under these arrangements when such individuals were considered related
parties for the fiscal year ended July 31, 1995 was $404,767. The total expenses
in fiscal 1996 and 1997 and the related future minimum lease commitments are
disclosed in Note 15.
14. MAJOR CUSTOMERS AND CONCENTRATION OF CREDIT RISK
The operating subsidiaries obtain contracts from both public and private
concerns. For the years ended July 31, 1995, 1996, and 1997, approximately 44%,
44%, and 34%, respectively, of the contract revenues were from BellSouth
Telecommunications, Inc. ("BellSouth") and 15%, 21%, and 23%, respectively, of
the contract revenues were from Comcast Communications, Inc. ("Comcast").
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of trade accounts receivable.
BellSouth and Comcast represent a significant portion of the Company's customer
base. At July 31, 1996, the total outstanding trade receivables from BellSouth
and Comcast were $4.8 million or 22% and $6.9 million or 32%, respectively, of
the Company's outstanding trade receivables. As of July 31, 1997, the total
outstanding trade receivables from BellSouth and Comcast were $4.5 million or
13% and $11.5 million or 33% of the outstanding trade receivables.
27
29
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
15. 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 1995, 1996, and 1997, 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. Total expense incurred under
operating lease agreements, excluding the transactions with related parties (see
Note 13), for the years ended July 31, 1995, 1996, and 1997, was $3,358,108,
$5,018,744, and $6,561,022, respectively. The future minimum obligations under
these leases are $3,826,759 in 1998; $1,673,498 in 1999; $550,516 in 2000;
$95,870 in 2001, and $323,860 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, the asserted amounts due from CCG for sales
taxes and interest for the periods through August 31, 1995, aggregated
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. Although the ultimate resolution and liability of
these claims cannot be determined, management believes the final disposition of
these claims will not have a material adverse impact on the Company's
consolidated financial statements.
16. LITIGATION SETTLEMENT
During fiscal year 1995, a final settlement was reached in the complaint
filed in March 1993 by BellSouth against Star Construction, Inc. ("Star"), a
subsidiary of the Company. The settlement provided for the payment of $750,000
to BellSouth by Star. The settlement monies were paid in two installments of
$375,000 each during the quarters ended January 31, 1995 and April 30, 1995,
respectively. The Company previously recorded a liability of $1.2 million for
this claim and as such, credited operations for the excess liability at the time
the claim was settled.
17. QUARTERLY FINANCIAL DATA (UNAUDITED)
In the opinion of management, the following unaudited quarterly data for
the years ended July 31, 1996 and 1997 reflect all adjustments necessary for a
statement of operations. All such adjustments are of a normal recurring nature
other than as discussed below. The Company acquired CCG on July 29, 1997. The
acquisition was accounted for as a pooling of interests and accordingly, the
unaudited quarterly financial statements for the periods presented include the
accounts of CCG. Earnings per common and common equivalent share calculation for
each quarter is based on the weighted average shares of common stock outstanding
plus the effect of dilutive stock options. The sum of the quarters earnings per
common and common equivalent share may not necessarily be equal to the full year
earnings per common and common equivalent share amounts.
28
30
DYCOM INDUSTRIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
IN WHOLE DOLLARS, EXCEPT PER SHARE AMOUNTS
-----------------------------------------------------
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER
----------- ----------- ----------- -----------
1996:
Revenues:
Dycom..................................... $37,605,583 $32,648,532 $35,390,645 $39,307,689
CCG....................................... 13,248,340 12,641,609 9,824,440 14,593,403
----------- ----------- ----------- -----------
$50,853,923 $45,290,141 $45,215,085 $53,901,092
=========== =========== =========== ===========
Income Before Income Taxes:
Dycom..................................... $ 1,715,485 $ 1,603,524 $ 2,965,713 $ 2,834,998
CCG....................................... 1,003,486 179,311 (459,847) 1,538,764
----------- ----------- ----------- -----------
$ 2,718,971 $ 1,782,835 $ 2,505,866 $ 4,373,762
=========== =========== =========== ===========
Net Income:
Dycom..................................... $ 968,638 $ 984,232 $ 1,704,150 $ 2,733,124
CCG....................................... 553,486 129,311 (259,847) 850,764
----------- ----------- ----------- -----------
$ 1,522,124 $ 1,113,543 $ 1,444,303 $ 3,583,888
=========== =========== =========== ===========
Earnings per Common and Common Equivalent
Share:
Primary................................... 0.14 0.11 0.14 0.33
Fully Diluted............................. 0.14 0.11 0.14 0.33
1997:
Revenues:
Dycom..................................... $40,367,225 $40,012,074 $48,186,014 $47,639,268
CCG....................................... 16,047,187 17,263,237 14,995,292 19,413,184
----------- ----------- ----------- -----------
$56,414,412 $57,275,311 $63,181,306 $67,052,452
=========== =========== =========== ===========
Income Before Income Taxes:
Dycom..................................... $ 2,888,362 $ 2,446,288 $ 4,019,975 $ 4,434,187
CCG....................................... 1,092,878 1,129,119 680,403 2,350,306
----------- ----------- ----------- -----------
$ 3,981,240 $ 3,575,407 $ 4,700,378 $ 6,784,493
=========== =========== =========== ===========
Net Income:
Dycom..................................... $ 1,661,619 $ 1,641,478 $ 2,413,033 $ 2,552,372
CCG....................................... 574,422 672,688 405,340 1,297,856
----------- ----------- ----------- -----------
$ 2,236,041 $ 2,314,166 $ 2,818,373 $ 3,850,228
=========== =========== =========== ===========
Earnings per Common and Common Equivalent
Share:
Primary................................... $ 0.20 $ 0.21 $ 0.26 $ 0.35
Fully Diluted............................. $ 0.20 $ 0.21 $ 0.26 $ 0.35
The fiscal 1996 and 1997 fourth quarter results of operations include a
$1.1 million and a $0.3 million reduction in the deferred tax asset valuation
allowance.
29
31
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, 1997 and 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
each of the three years in the period ended July 31, 1997. 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 2 to the consolidated financial
statements. We did not audit the balance sheet of Communications Construction
Group, Inc. as of May 31, 1996 or the statements of operations, stockholders'
equity, and cash flows of Communications Construction Group, Inc. for the years
ended May 31, 1997, 1996 and 1995, which statements reflect total assets of
$14,121,468 as of May 31, 1996, and total revenues of $67,717,326, $50,121,009
and $43,047,102 for the years ended May 31, 1997, 1996 and 1995, respectively.
Those financial statements were audited by other auditors whose reports have
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 reports of such other auditors. As described in Note 2 to the
consolidated financial statements, subsequent to the issuance of the reports 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 reports of the other auditors provide a
reasonable basis for our opinion.
In our opinion, based on our audits and the reports 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, 1997 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended July 31,
1997 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Certified Public Accountants
West Palm Beach, Florida
September 26, 1997
30
32
INDEPENDENT AUDITOR'S 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.
/s/ NOWALK & ASSOCIATES
--------------------------------------
Nowalk & Associates
Cranbury, New Jersey
July 23, 1997
31
33
INDEPENDENT AUDITOR'S 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, 1996 and
1995, 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, 1996
and 1995, and the consolidated results of its operations and its cash flows for
the years then ended in conformity with generally accepted accounting
principles.
/s/ NOWALK & ASSOCIATES
--------------------------------------
Norwalk & Associates
Cranbury, New Jersey
August 29, 1996
As to Notes 5 and 6, January 3, 1997
32
34
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
There have been no disagreements with accountants on accounting and
financial disclosure within the meaning of Item 304 of Regulation S-K.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning directors and nominees of the Registrant is hereby
incorporated by reference from the Company's definitive proxy statement to be
filed with the Commission pursuant to Regulation 14A.
The following table sets forth certain information concerning the executive
officers of the Company, all of whom serve at the pleasure of the Board of
Directors.
EXECUTIVE
OFFICER
NAME AGE OFFICE SINCE
- ---- --- ------ ---------
Thomas R. Pledger................................ 59 Chairman and Chief Executive 1/4/84
Officer
Steven E. Nielsen................................ 34 President and Chief Operating 2/26/96
Officer
Douglas J. Betlach............................... 45 Vice President, Chief 10/6/93
Financial Officer and
Treasurer
Darline M. Richter............................... 36 Vice President and Controller 2/9/93
Patricia B. Frazier.............................. 62 Secretary 1/4/84
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation is hereby incorporated by
reference from the Company's definitive proxy statement to be filed with the
Commission pursuant to Regulation 14A.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning the ownership of certain of the Registrant's
beneficial owners and management is hereby incorporated by reference from the
Company's definitive proxy statement to be filed with the Commission pursuant to
Regulation 14A.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
hereby incorporated by reference from the Company's definitive proxy statement
to be filed with the Commission pursuant to Regulation 14A.
33
35
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as a part of this report:
PAGE
-----
1. Consolidated financial statements:
Consolidated balance sheets at July 31, 1996 and 1997..... 13
Consolidated statements of operations for the years ended
July 31, 1995, 1996, and 1997.......................... 14
Consolidated statements of stockholders' equity for the
years ended July 31, 1995, 1996, and 1997.............. 15
Consolidated statements of cash flows for the years ended
July 31, 1995, 1996, and 1997.......................... 16
Notes to consolidated financial statements.................. 17-29
Independent auditors' reports............................... 30-32
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.
Exhibits furnished pursuant to the requirements of Form
3. 10-K:
See Exhibit Index on page 36.
(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, 1997.
34
36
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.
By: /s/ THOMAS R. PLEDGER
------------------------------------
Thomas R. Pledger
Chairman and Chief Executive Officer
Date: September 30, 1997
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 30, 1997
- --------------------------------------------------- Financial Officer, and
Douglas J. Betlach Principal Accounting Officer
/s/ STEVEN NIELSEN President, Chief Operating September 30, 1997
- --------------------------------------------------- Officer, and Director
Steven Nielsen
/s/ THOMAS R. PLEDGER Director September 30, 1997
- ---------------------------------------------------
Thomas R. Pledger
/s/ LOUIS W. ADAMS, JR. Director September 30, 1997
- ---------------------------------------------------
Louis W. Adams, Jr.
/s/ WALTER L. REVELL Director September 30, 1997
- ---------------------------------------------------
Walter L. Revell
/s/ RONALD L. ROSEMAN Director September 30, 1997
- ---------------------------------------------------
Ronald L. Roseman
/s/ RONALD P. YOUNKIN Director September 30, 1997
- ---------------------------------------------------
Ronald P. Younkin
35
37
EXHIBIT INDEX
NUMBER DESCRIPTION
- ------ -----------
(3)(i) -- Articles of Incorporation of the Company, as amended
(3)(ii) -- Bylaws of the Company, as amended
(11) -- Statement re computation of per share earnings
(21) -- Subsidiaries of the Company
(23)(i) -- Independent Auditors' Consent
(23)(ii) -- Independent Auditors' Consent
(27)(i) -- Financial Data Schedules for fiscal years ended July 31,
1995, 1996 and 1997
(27)(ii) -- Financial Data Schedules for fiscal quarters ended October
31, 1996, January 31, 1997 and April 30, 1997
(27)(iii) -- Financial Data Schedules for fiscal quarters ended October
31, 1995, January 31, 1996 and April 30, 1996
(99) -- Credit Facility Agreement, Security Agreement and Guaranty
Agreement dated April 28, 1997 between Dycom Industries,
Inc. and Dresdner Lateinamerika Aktiengesellschaft; Bank
Leumi Trust Company of New York and Republic National Bank
of Miami, N.A.
36