UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K/A
Amendment No.1
CURRENT REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of report (Date of earliest event reported): November 25, 2003
Dycom Industries, Inc.
(Exact name of Registrant as specified in its charter)
Florida
(State or other jurisdiction of incorporation)
0-5423 59-1277135
(Commission (I.R.S. Employer
File Number) Identification No.)
4440 PGA Boulevard, Suite 500, Palm Beach Gardens, Florida 33410
(Address of principal executive offices) (Zip Code)
(561) 627-7171
(Registrant's telephone number, including area code)
Exhibit Index on page 42
Item 2. Acquisition or Disposition of Assets
On November 25, 2003, pursuant to the terms of the Asset Purchase
Agreement, dated as of November 5, 2003, between Dycom Industries, Inc., a
Florida corporation ("Dycom") and First South Utility Construction, Inc., a
North Carolina corporation ("First South"), Dycom acquired substantially all of
the assets of First South and assumed certain liabilities associated with these
assets (the "Acquisition"), for approximately $50 million in cash and 175,840
shares of Dycom's common stock.
In conjunction with the acquisition, Dycom also paid approximately $9
million for excess working capital consisting primarily of accounts receivable
and unbilled revenue. Dycom deposited approximately $6.4 million of such amount
in escrow, to be returned to Dycom to the extent such amounts remain outstanding
on April 15, 2004. Dycom paid the purchase price from cash on hand.
The assets acquired by Dycom were used by First South in outside plant
construction, design and engineering services for telecommunication providers
and Dycom expects to continue to use the assets for substantially the same
business.
Item 7. Financial Statements and Exhibits
This Amended Current Report on Form 8-K is filed to provide the
financial information with respect to the Acquisition required by Item 7 of Form
8-K and to amend the language of sections (a) and (b) of Item 7 of the Form 8-K
filed on December 11, 2003.
(a) Financial Statements of Business Acquired
Audited financial statements of First South as of
December 28, 2002 and for the year ended December 28, 2002.
Unaudited financial statements of First South as of
September 27, 2003 and for the nine months ended September 27, 2003
and September 28, 2002.
(b) Pro forma Financial Information
Unaudited pro forma condensed combined balance sheet of
Dycom as of October 25, 2003, which gives effect to the acquisition of
assets and assumption of certain liabilities from First South as if it
had occurred on October 25, 2003.
2
Unaudited pro forma condensed combined statements of
operations of Dycom for the year ended July 26, 2003 and for the three
months ended October 25, 2003, which gives effect to the acquisition
of assets and assumption of certain liabilities from First South as if
it had occurred on July 28, 2002.
(c) Exhibits
Exhibit No. Description
------------- --------------
10.1 Asset Purchase Agreement, dated as of November
5, 2003, between Dycom Industries, Inc. and
First South Utility Construction, Inc.
23.1 Consent of Davenport, Marvin, Joyce & Co., L.L.P.
99.1 Press Release, dated November 25, 2003
(incorporated herein by reference to Exhibit
99.1 of the Current Report on Form 8-K filed by
Dycom on November 25, 2003, File No. 001-10613).
3
DYCOM INDUSTRIES, INC
UNAUDITED PRO FORMA CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma condensed combined financial
information presents the effect of the acquisition of First South by Dycom
accounted for as a purchase. The unaudited pro forma condensed combined balance
sheet presents the combined financial position of Dycom and First South as of
October 25, 2003 assuming that the acquisition had occurred as of that date.
Such pro forma information is based upon the historical consolidated balance
sheet data of Dycom as of October 25, 2003 and First South as of September 27,
2003. The unaudited pro forma condensed combined statements of operations for
the year ended July 26, 2003 and three-month period ended October 25, 2003 give
effect to the acquisition of First South by Dycom as if such acquisition had
occurred on July 28, 2002, the first day of Dycom's fiscal year 2003. Pro forma
operations for the year-end and three-month periods for Dycom consist of its
results of operations for the year ended July 26, 2003 and three months ended
October 25, 2003, respectively. Pro forma operations for the twelve-month and
three-month periods for First South consist of its results of operations for the
twelve months ended June 28, 2003 and three months ended September 27, 2003,
respectively. The use of different closing dates is based on each entity having
different fiscal year ends.
The unaudited pro forma condensed combined financial statements are
based on the estimates and assumptions set forth in the notes to such
statements. The pro forma adjustments are preliminary and have been made solely
for purposes of developing such pro forma statements. The unaudited pro forma
condensed combined financial statements are not necessarily an indication of the
results that would have been achieved had the transaction been consummated as of
the dates indicated or that may be achieved in the future.
4
DYCOM INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED JULY 26, 2003
----------------------------------
Dycom First South
Historical Historical
Fiscal Year Twelve Months
Ended Ended Pro Forma
July 26, June 28, Adjustments Pro Forma
2003 2003 (Note 2) Combined
----------------- ------------- -------------------- ----------------
REVENUES:
Contract revenues earned $618,182,653 $52,786,037 $670,968,690
----------------- ------------- -------------------- ----------------
EXPENSES:
Costs of earned revenue excluding depreciation 482,876,707 45,186,244 528,062,951
General and administrative 70,058,588 2,863,532 72,922,120
Depreciation and amortization 39,073,959 2,852,312 (2,852,312) a 41,110,844
2,036,885 b
Total ----------------- ------------- ---------------- ----------------
592,009,254 50,902,088 (815,427) 642,095,915
----------------- ------------- ----------------- ----------------
Interest, net 1,300,895 (1,550,889) 1,550,889 c 530,752
(770,143) d
Other income, net 2,981,164 (369,476) 2,611,688
INCOME (LOSS) BEFORE INCOME TAXES 30,455,458 (36,416) 1,596,173 32,015,215
----------------- ------------- ----------------- ----------------
PROVISION FOR INCOME TAXES 13,306,167 52,950 e 638,469 f 13,997,586
----------------- ------------- ----------------- ----------------
NET INCOME (LOSS) $17,149,291 $(89,366) $957,704 $18,017,629
================= ============= ================= ================
EARNINGS PER COMMON SHARE
Basic EPS per share $0.36 $0.37
================= ================
Diluted EPS per share $0.36 $0.37
================= ================
SHARES USED IN COMPUTING INCOME PER COMMON SHARE:
Basic: 47,880,673 48,056,513 g
================= ================
Diluted: 47,886,567 48,062,407 g
================= ================
5
DYCOM INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED OCTOBER 25, 2003
----------------------------------
Dycom First South
Historical Historical
Three Three Months
Months Ended Ended Pro Forma
October 25 September 27, Adjustments Pro Forma
2003 2003 (Note 2) Combined
----------------- ------------- --------------- ----------------
REVENUES:
Contract revenues earned $196,021,442 $15,482,042 $211,503,484
----------------- --------------- --------------- ----------------
EXPENSES:
Costs of earned revenue excluding depreciation 147,049,735 12,839,519 159,889,254
General and administrative 17,507,642 497,354 18,004,996
Depreciation and amortization 9,334,410 635,483 ($635,483) a 9,843,631
509,221 b
Total ----------------- --------------- --------------- ----------------
173,891,787 13,972,356 (126,262) 187,737,881
----------------- --------------- --------------- ----------------
Interest, net 318,251 (385,582) 385,582 c 184,307
(133,944) d
Other income, net 845,543 (31,581) 813,962
INCOME BEFORE INCOME TAXES 23,293,449 1,092,523 377,900 24,763,872
----------------- --------------- --------------- ----------------
PROVISION FOR INCOME TAXES 9,366,210 433,980 e 148,893 f 9,949,083
----------------- --------------- --------------- ----------------
NET INCOME $13,927,239 $658,543 $229,007 $14,814,789
================= =============== =============== ================
EARNINGS PER COMMON SHARE
Basic EPS per share $0.29 $0.31
================= ================
Diluted EPS per share $0.29 $0.30
================= ================
SHARES USED IN COMPUTING INCOME PER COMMON SHARE:
Basic: 48,028,895 48,204,735 g
================= ================
Diluted: 48,486,210 48,662,050 g
================= ================
6
DYCOM INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF OCTOBER 25, 2003
First South
Historical
Dycom Three Months Pro Forma
Historical Three Ended Adjustments Pro Forma
Three Months Ended September 27,
October 25, 2003 2003 (1) (Note 2) Combined
----------------- ------------- --------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and equivalents $149,794,385 $ ($60,364,327) a $89,430,058
Investments 238,363 (238,363) b
Acounts receivable, net 124,803,409 18,066,699 (9,320,526) c 133,549,582
Costs and estimated earnings in excess of
billings 37,319,061 5,771,898 43,090,959
Deferred tax assets, net 9,269,856 9,269,856
Inventories 3,068,041 1,229,380 4,297,421
Other current assets 10,562,491 252,097 10,814,588
----------------- ------------- --------------- ----------------
Total current assets 334,817,243 25,558,437 (69,923,216) 290,452,464
----------------- ------------- --------------- ----------------
PROPERTY AND EQUIPMENT, net 80,665,828 11,010,408 (708,517) d 88,177,034
(2,790,685) d
----------------- ------------- --------------- ----------------
Goodwill, net 106,615,836 3,509,807 (3,509,807) e 148,466,813
41,850,977 f
Intangible assets, net 664,998 214,063 (214,063) e 3,414,998
2,750,000 g
Accounts receivable 21,567,480 21,567,480
Deferred tax assets, net non-current 7,260,991 7,260,991
Other 7,340,333 47,784 (47,784) b 7,340,333
----------------- ------------- --------------- ----------------
Total other assets 143,449,638 3,771,654 40,829,323 188,050,615
----------------- ------------- --------------- ----------------
TOTAL $558,932,709 $40,340,499 ($32,593,095) $566,680,113
================= ============= =============== ================
(1) Certain amounts have been reclassified in order to conform to Dycom's
financial statement presentation.
7
DYCOM INDUSTRIES, INC.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF OCTOBER 25, 2003 (continued)
First South
Dycom Historical Pro Forma
Historical September 27, Adjustments Pro Forma
October 25, 2003 2003 (1) (Note 2) Combined
----------------- ------------- --------------- ----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $26,359,139 $4,870,028 ($2,759,000) h $28,470,167
Notes payable 8,886 9,746,423 (9,746,423) b 8,886
Billings in excess of costs and estimated
earnings 720,876 720,876
Accrued self-insured claims 11,259,228 500,000 (500,000) b 11,259,228
Income taxes payable 8,266,683 8,266,683
Other accrued liabilities 32,082,695 1,452,087 33,534,782
----------------- ------------- --------------- -----------------
Total current liabilities 78,697,507 16,568,538 (13,005,423) 82,260,622
----------------- ------------- --------------- ----------------
NOTES PAYABLE 18,355 9,646,129 (9,646,129) b 18,355
ACCRUED SELF-INSURED CLAIMS 13,633,951 13,633,951
OTHER LIABILITIES 1,116,156 1,116,156
----------------- ------------- --------------- ----------------
Total Liabilities 93,465,969 26,214,667 (22,651,552) 97,029,084
----------------- ------------- --------------- ----------------
STOCKHOLDERS' EQUITY
Common stock 16,024,416 200,000 (200,000) i 16,083,029
58,613 j
Additional paid-in capital 337,565,116 7,772,095 (7,772,095) i 341,690,792
4,125,676 j
Retained earnings 111,877,208 6,153,737 (6,153,737) i 111,877,208
----------------- ------------- --------------- ----------------
Total stockholders' equity 465,466,740 14,125,832 (9,941,543) 469,651,029
----------------- ------------- --------------- ----------------
TOTAL $558,932,709 $40,340,499 ($32,593,095) $566,680,113
================= ============= =============== ================
(1) Certain amounts have been reclassified in order to conform to Dycom's
financial statement presentation.
8
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
On November 5, 2003, Dycom entered into an Asset Purchase Agreement
with First South Utility Construction, Inc. wherein substantially all of the
assets of First South were acquired and certain liabilities associated with
these assets were assumed. The acquisition of First South is to be accounted for
under the purchase method of accounting. Accordingly, the purchase price will be
allocated to the tangible and intangible assets acquired and the liabilities
assumed on the basis of their respective fair values on the acquisition date.
The purchase price of the First South acquisition was approximately $64.5
million, including the value of the 175,840 Dycom shares issued as part of the
purchase. The fair value of the Dycom shares used in determining the purchase
price was $23.80, based on the average closing market price of Dycom's shares
for the five trading days ended on November 10, 2003. Estimated direct
transaction costs of Dycom consist primarily of fees for attorneys, accountants,
and SEC filing fees.
The purchase price is derived as follows:
(in thousands)
Cash paid (including $9 million for excess working capital) $ 59,964
Transaction costs 400
Dycom common stock issued 4,184
-----------------
$ 64,548
=================
The purchase price is allocated as follows:
ASSETS (in thousands)
Accounts Receivable $ 8,746
Costs and estimated earnings in excess of billings 5,772
Inventories 1,229
Other current assets 252
Property and equipment 7,511
Goodwill 41,851
Trade name 650
Intangibles 2,100
Total assets ------------------
68,111
LIABILITIES
Accounts payable 2,111
Other accrued liabilities 1,452
Total liabilities ------------------
3,563
9
Net assets acquired ------------------
$ 64,548
==================
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
The above purchase price allocation is based on Dycom management's best
estimate of the fair values of the acquired assets and assumed liabilities.
However, this allocation is preliminary. The final determination of the
allocation of purchase price will be determined based on the fair value of
assets acquired and the fair value of liabilities assumed as of the acquisition
date. The purchase price allocation will remain preliminary until Dycom is able
to (a) complete a valuation of property, plant and equipment acquired and (b)
evaluate the fair value of other assets, including intangibles and liabilities
acquired. The final determination of the purchase price is expected to be
completed by the end of Dycom's fiscal year ending July 31, 2004. Although Dycom
does not believe that the actual amounts allocated to assets and liabilities
will differ materially from the preliminary allocation presented in the
unaudited pro forma condensed combined financial statements there can be no
assurances that such actual amounts will not be materially different.
2. PRO FORMA ADJUSTMENTS
UNAUDITED PRO FORMA CONDENSED COMBINED STATEMENTS OF OPERATIONS
The following adjustments are reflected in the pro forma condensed
combined statements of operations to reflect the estimated impact of the merger
on the historical combined results of Dycom and First South.
(a) To remove historical depreciation and amortization.
(b) To record depreciation and amortization expense of acquired property,
plant and equipment and the identifiable intangibles based on the
allocated purchase price. The reduction of depreciation expense is
primarily due to the write-down of property, plant and equipment to
its fair market value. The expected useful lives of these assets
valued at fair market value depreciate/amortize on a straight-line
basis as follows:
Estimated Useful Annual Expense Quarterly
Life/years Expense
Buildings 25 $25,365 $6,341
Equipment and machinery/vehicles 3-5 1,634,853 408,713
----------------- ------------------
1,660,218 415,054
----------------- ------------------
Tradename 5 130,000 32,500
Covenant not to compete 5 160,000 40,000
Contracts 15 86,667 21,667
----------------- ------------------
376,667 94,167
----------------- ------------------
----------------- ------------------
Total pro forma depreciation and amortization $2,036,885 $509,221
================= ==================
10
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
(c) To eliminate interest expense related to First South's debt as none of
these liabilities were assumed by Dycom.
(d) To reflect reduced interest income from lower cash balances as a
result of cash used by Dycom to fund the acquisition. If interest
rates were to increase or decrease by 1/8%, pro forma income before
taxes would change by approximately $76,000 for the year ended July
26, 2003 and $19,000 for the three months ended October 25, 2003.
(e) To record income tax expense for First South. Prior to the acquisition
by Dycom, First South elected under Subchapter S of the Internal
Revenue Code to have the stockholders recognize their proportionate
share of First South's taxable income on their personal tax returns in
lieu of paying corporate income taxes. As a result of such election,
First South did not record any provision for federal income taxes.
(f) To record tax expense related to pro forma adjustments using Dycom's
statutory rate of 40.0% for the twelve months ended July 26, 2003 and
39.4% for the three months ended October 25, 2003.
(g) Reflects an additional 175,840 Dycom shares issued as part of the
purchase of First South.
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
The following adjustments in the unaudited pro forma condensed combined
balance sheet reflect the estimated impact of events that are directly
attributable to Dycom's acquisition of certain assets and assumption of
liabilities related to those assets of First South.
(a) To record estimated cash portion of the purchase price.
(b) To eliminate assets not purchased and liabilities not assumed by
Dycom.
(c) To adjust for certain Accounts Receivable not purchased by Dycom:
Related party accounts receivable $7,689,208
Miscellaneous receivables 61,170
Selected customer 1,570,148
----------------
$9,320,526
================
(d) To record fair market value of property, plant and equipment acquired,
as below:
11
NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS (Continued)
Historical net book value of property $11,010,408
Eliminate net book of property not purchased (708,517)
------------
Net book value of property acquired 10,301,891
Estimated fair market value of property acquired 7,511,206
------------
$(2,790,685)
============
The expected useful lives of these assets valued at fair market value
depreciated on a straight-line basis is as follows:
Number of Years
----------------------
Buildings 25
Vehicles 3-5
Equipment and machinery 3-5
(e) To eliminate First South's goodwill and intangibles.
(f) To record $41.9 million as goodwill representing the excess of the
amount paid over the fair market value of the assets acquired,
including the identifiable intangible assets and the liabilities
assumed.
(g) To record identifiable intangibles arising from the transaction. These
assets are amortized on a straight-line basis over their useful lives
and consist of the following:
Estimated Useful Life
---------------------
Tradename $650,000 5 years
Covenant not to compete 800,000 5 years
Contracts 1,300,000 15 years
-------------------
$2,750,000
===================
(h) To adjust for certain Accounts Payable not purchased by Dycom
described as follows:
Related Party Account Payable $1,559,000
Miscellaneous Payables 1,200,000
------------------
$2,759,000
==================
(i) To eliminate First South's common stock, additional paid-in capital
and retained earnings.
(j) To record the issuance of Dycom's common stock as part of the purchase
price.
12
INDEX TO FIRST SOUTH UTILITY CONSTRUCTION, INC.
HISTORICAL FINANCIAL STATEMENTS
Independent Auditors' Report 14
Balance Sheet as of December 28, 2002 15
Statements of Income and Retained Earnings for the year ended
December 28, 2002 17
Statement of Comprehensive Income for the year ended December 28, 2002 18
Statement of Changes in Stockholders' Equity and Accumulated Other
Comprehensive Loss for the year ended December 28, 2002 19
Statement of Cash Flows for the year ended December 28, 2002 20
Notes to Financial Statements for the year ended December 28, 2002 22
Unaudited Balance Sheet as of September 27, 2003 30
Unaudited Statements of Operations for the nine months ended
September 27, 2003 and September 28, 2002 31
Unaudited Statements of Cash Flows for the nine months ended
September 27, 2003 and September 28, 2002 32
Notes to Unaudited Financial Statements 34
13
[Logo of Davenport, Marvin, Joyce & Co., L.L.P.]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
First South Utility Construction, Inc.
We have audited the accompanying balance sheet of First South Utility
Construction, Inc. (an S corporation), as of December 28, 2002, and the related
statements of income and retained earnings, comprehensive income, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of First South Utility
Construction, Inc., as of December 28, 2002, and the results of its operations
and its cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States of America.
Davenport, Marvin, Joyce & Co., L.L.P.
Certified Public Accountants
Greensboro, North Carolina
February 14, 2003
14
FIRST SOUTH UTILITY CONSTRUCTION, INC.
BALANCE SHEET
December 28, 2002
ASSETS
Current Assets
Cash $ 624,698
Investments 536,226
Accounts receivable:
Trade, net of allowance for bad debt of $1,250,000 14,001,122
Related party 5,061,858
Officer receivable 7,404,264
Employees and other 73,408
Notes receivable 1,669
Inventory 1,088,177
Costs and estimated earnings in excess of bilings on uncompleted contracts 229,523
Prepaid expenses 20,790
Cash surrender value of life insurance, net of policy loans of $630,623 850,000
----------------------
Total Current Assets 29,891,735
----------------------
Fixed Assets
Vehicles 10,027,427
General equipment 11,761,176
Land 273,399
Building 545,040
Leasehold improvements 169,435
Office equipment 1,964,108
Capitalized professional fees 79,505
Land improvements 45,295
----------------------
24,865,385
Less - accumulated depreciation (12,313,865)
----------------------
Total Fixed Assets 12,551,520
----------------------
Other Assets
Deferred charges, net of amortization of $3,000,000 125,000
Goodwill, net of amortization of $917,975 3,509,807
Refundable deposits 112,922
----------------------
Total Other Assets 3,747,729
----------------------
Total Assets $ 46,190,984
======================
The accompanying notes are an integral part of these financial statements.
15
LIABILITIES
Current Liabilities
Accounts payable $ 6,712,551
Accrued wages, payroll taxes and withholdings 432,859
Accrued profit sharing expense -
Accounts payable - officers and employees -
Other accrued expenses 843,636
Short-term debt 148,399
Current maturities of long-term debt 135,692
-----------------------
Total Current Liabilities 8,273,137
Long-Term Liabilities
Long-term debt 25,241,498
-----------------------
Total Liabilities 33,514,635
-----------------------
STOCKHOLDERS' EQUITY
Common Stock
No par value, 100,000 shares authorized, 20,000 shares issued and outstanding 200,000
Paid-In Capital 7,772,095
Retained Earnings 4,465,891
Accumulated Other Comprehensive Income 238,363
-----------------------
Total Stockholders' Equity 12,676,349
-----------------------
Total Liabilities and Stockholders' Equity $ 46,190,984
=======================
16
FIRST SOUTH UTILITY CONSTRUCTION, INC.
STATEMENT OF INCOME AND RETAINED EARNINGS
Year Ended December 28, 2002
Contract Revenue $ 81,608,311
Cost of Contracts 75,098,109
----------------------
Gross Profit 6,510,202
General and Administrative Expenses 4,271,511
----------------------
Income from Operations before Bad Debt Expense 2,238,691
Bad Debt Expense (19,521,978)
----------------------
Loss from Operations (17,283,287)
----------------------
Other Income [Expense]
Interest income 143,940
Loss on disposal of fixed assets (547,366)
Miscellaneous 111,696
Interest expense (2,450,525)
----------------------
Total Other Income [Expense] (2,742,255)
----------------------
Net Loss (20,025,542)
Retained Earnings, beginning (as restated) 24,491,433
Distributions Paid -
----------------------
Retained Earnings, ending $ 4,465,891
======================
The accompanying notes are an integral part of these financial statements.
17
FIRST SOUTH UTILITY CONSTRUCTION, INC.
STATEMENT OF COMPREHENSIVE INCOME
Year Ended December 28, 2002
Net Loss $ (20,025,542)
Other Comprehensive Loss
Unrealized holding loss (94,319) $ (94,319)
-----------------
Comprehensive Loss $ (20,119,861)
=================
Accumulated Other Comprehensive Income, beginning 332,682
----------------
Accumulated Other Comprehensive Income, ending $ 238,363
================
Disclosure of Recognition of Prior Period Unrealized Holding Gains
Recognition of unrealized holding gains accumulated since 1999 for
stock received by the Company in 1999 $ 332,682
================
Disclosure of reclassification amounts:
Unrealized holding losses arising during the year $ (94,319)
Less: reclassification adjustment for gains included in net income 0
----------------
Net unrealized losses on securities $ (94,319)
================
The accompanying notes are an integral part of these financial statements.
18
FIRST SOUTH UTILITY CONSTRUCTION, INC.
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY AND
ACCUMULATED OTHER COMPREHENSIVE LOSS
Year Ended December 28, 2002
Accumulated
Additional Other
Paid-In Retained Comprehensive
Common Stock Capital Earnings Loss Total
------------- ------------- -------------- --------------- --------------
Balance, as restated,
December 29, 2001 $ 200,000 $ 272,095 $ 24,491,433 $ 332,682 $ 25,296,210
Net loss - - (20,025,542) - (20,025,542)
Other comprehensive loss - - - (94,319) (94,319)
Stock dividend - - - - -
Contributed capital - 7,500,000 - - 7,500,000
Distribution to - - - - -
------------- ------------- -------------- --------------- --------------
stockholders
Balance, December 28, 2002
$ 200,000 $ 7,772,095 $ 4,465,891 $ 238,363 $ 12,676,349
============= ============= ============== =============== ==============
The accompanying notes are an integral part of these financial statements.
19
FIRST SOUTH UTILITY CONSTRUCTION, INC.
STATEMENT OF CASH FLOWS
Year Ended December 28, 2002
Cash Flows from Operating Activities
Net loss $ (20,025,542)
Adjustments to reconcile net loss to net cash provided
by operating activities:
Depreciation and amortization 3,657,173
Gain on disposal of fixed assets 547,366
Investments 147,633
[Increase] decrease in operating assets:
Accounts receivable 5,836,125
Cash surrender value of life insurance (200,599)
Inventory 485,665
Accrued sales 15,291,006
Prepaid expenses 94,686
Refundable deposits 14,365
Increase [decrease] in operating liabilities:
Accounts payable (994,736)
Accrued expenses (712,855)
------------------
Net Cash Provided by Operating Activities 4,140,287
------------------
Cash Flows from Investing Activities
Purchase of fixed assets including construction in progress (117,991)
Proceeds from disposal of fixed assets 2,414,946
Payments received on related party receivable (107,832)
Payments received on note receivable 10,226
------------------
Net Cash Provided by Investing Activities 2,199,349
------------------
Cash Flows from Financing Activities
Proceeds from short-term debt 148,399
Proceeds on long term debt 159,973
Payments on employee note payable (1,795,723)
Payments on long-term debt (6,793,784)
------------------
Net Cash Used by Financing Activities (8,281,135)
------------------
Net Decrease in Cash and Cash Equivalents (1,941,499)
Cash, beginning 2,566,197
------------------
Cash, ending $ 624,698
==================
The accompanying notes are an integral part of these financial statements.
20
FIRST SOUTH UTILITY CONSTRUCTION, INC.
STATEMENT OF CASH FLOWS
Year Ended December 28, 2002
Supplemental Disclosures of Cash Flow Information
Cash paid during the year for interest $ 2,474,108
===============
Supplemental Schedule of Noncash Investing and Financing Activities
Prior period adjustment $ 297,863
===============
Increase in officer receivables due to equity transaction $ 7,500,000
===============
Reduction of accounts receivable-related party and employee note payable $ 750,000
===============
Accrued interest on related party receivable $ 143,062
===============
Accrued interest on employee note payable $ 35,727
===============
The accompanying notes are an integral part of these financial statements.
21
FIRST SOUTH UTILITY CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS
December 28, 2002
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
First South Utility Construction, Inc. (the Company), was organized for
the purpose of providing contracting services to utility companies. The Company
primarily performs design, right of way and construction services for major
telecommunications and electrical utility companies; in addition, the Company is
a distributor of highway repair material. Construction contracts include both
master contracts covering specific geographical areas as well as bid contracts.
The Company uses a 52-53 week year which ends on the last Saturday in
December.
Revenue and Expense Recognition
The financial statements of the Company have been prepared on the
accrual basis of accounting and, accordingly, reflect all significant
receivables, payables, and other liabilities. Revenues are recognized when
earned and expenses are recognized when incurred.
Master contract costs include all direct material and labor costs and
those indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation. General and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
The Company recognizes revenues from fixed price contracts on the
percentage-of-completion method, measured by the percentage of cost incurred to
date to estimated total cost for each contract. That method is used because
management considers total cost to be the best available measure of progress on
these contracts. Changes in estimated job profitability resulting from job
performance, job conditions, contract penalty provisions, claims, change orders,
and settlements are accounted for as changes in estimates in the current period.
The Company recognizes revenue from unit based contracts on the accrual method
based on units completed to date. The asset, "costs and estimated earnings in
excess of billings on uncompleted contracts," represents revenues recognized in
excess of amounts billed. The liability, "billings in excess of costs and
estimated earnings on uncompleted contracts," represents billings in excess of
revenues recognized.
22
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates.
In the current year, there was a significant change in an estimate from
the prior year. The Company uses specific identification of those accounts
receivable that should be applied to the bad debt allowance account. The bad
debt allowance account increased to 8% in the current year from 4% in the prior
year due to bankruptcy of two major customers and pursuit of litigation against
a third major customer for non-payment of completed work. Accounts receivable
balance used for calculation was composed of accounts receivable-trade, accounts
receivable-retainage and customer subsequent payments.
Accounts Receivable
Accounts receivable are recorded at net realizable value. Bad debts are
recorded on the allowance method under generally accepted accounting principles.
For the current year, bad debt expense was $19,521,978.
As of December 28, 2002, $363,595 of retainage was included in accounts
receivable-trade.
Inventory
The initial supply of small tools has been accounted for as inventory,
stated at cost. Future replacements will be reported as expense in the period
incurred.
Poles are accounted for as inventory, stated at cost, and charged to
job cost, as used, on a first-in, first-out basis.
Fixed Assets
Fixed assets are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of 3 to 10 years.
Amortization of leased equipment under capital leases is included in
depreciation expense. Depreciation and amortization expense for the fiscal year
2002 was $3,396,571.
Intangibles
Intangibles are recorded net of amortization. The deferred charges are
being amortized using the straight-line method over 5 years. Amortization
expense for the fiscal year 2002 was $260,602.
23
Income Taxes
The Company elected, by consent of its stockholders, to be taxed under
the provisions of Subchapter S of the Internal Revenue Code. Taxable income or
losses of the Company are passed through to the stockholders for income tax
purposes.
Fair Value of Financial Instruments
The carrying value of cash, receivables, investments and accounts
payable approximates fair value due to the short maturity of these instruments.
The carrying value of short and long-term debt approximates fair value based on
discounting the projected cash flows using market rates available for similar
maturities. None of the financial instruments are held for trading purposes.
Fair value of securities held at December 28, 2002, is $536,226.
Unrealized loss from the securities held at year end is ($94,319).
Advertising
Advertising costs are expensed as incurred. Advertising expense for the
fiscal year 2002 was $4,544.
2. RELATED PARTY TRANSACTIONS
The Company has entered into transactions with stockholders and other
companies related by common ownership. Certain of these transactions were made
in the ordinary course of business on substantially the same terms and
conditions as those prevailing at the same time for comparable transactions with
other customers and vendors.
The accounts receivable-related party consists of an amount from a
company related by common ownership. Interest income recognized is the average
applicable federal rate issued by the Internal Revenue Service for fiscal year
2002.
In addition to the above and amounts disclosed on the face of the
balance sheet, the Company had the following significant transactions and
balances with related parties for the year ended December 28, 2002:
24
Management fees paid to related companies for management and
administrative services $757,597
Building rental expense paid to a stockholder for corporate offices
leased on a month-to-month basis 137,400
Building rental expense paid to related companies for spaces
leased on a month-to-month basis 224,400
Equipment rental expense paid to a related company for
business equipment leased on a month-to-month basis 441,268
See Notes 6 and 7 also.
3. SELF-FUNDED HEALTH INSURANCE PLAN
The Company utilizes a self-funded health insurance plan in which
substantially all employees participate. The Company has excess reinsurance
coverage of costs exceeding $50,000 per person per year. As of December 28,
2002, $148,330 is included as a liability in accounts payable for unpaid claims
incurred and potential unpaid claims incurred but not yet filed.
4. PROFIT SHARING PLAN
The Company has a profit sharing plan (the Plan) that covers
substantially all of the employees who have completed one year of service and
attained the age of 21. Contributions to the Plan are at the discretion of the
board of directors. An employee is 100% vested in the Plan after seven years of
service. The Plan was amended to comply with EGTTRA in plan year 2002. Further
administrative amendments were made to the Plan effective beginning in plan
years 2000 and 2001.
The Company also has a 401(k) retirement plan that covers substantially
all full time employees. Employees who are 21 years of age or older are eligible
to participate in this plan after a year of service with the Company. An
employee may contribute up to the IRS maximum of their compensation, with a
matching Company contribution on behalf of each participant equal to one-fourth
on the first 4% of the participant's compensation contributed. An employee is
100% vested after seven years of service.
25
The Company's contribution for both plans for the fiscal year 2002 was
$62,708.
5. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation (FDIC) up
to $100,000. At various times during the year ended December 28, 2002, the
Company exceeded the maximum amount insured by the FDIC. In addition, the
Company is pursuing legal action against a customer that accounts for 15% of the
accounts receivable-trade and retainage balance. A bad debt allowance has been
set up for a portion of the 15%.
6. LONG-TERM DEBT
The following is a summary of long-term debt as of December 28, 2002:
Note payable to a financial institution in monthly principal
installments of $4,875, plus interest at 7.675% secured by
equipment. The note matures December 2009. $ 409,500
Notes payable to a related party in annual installments of
$75,691, including interest at 6.73% per annum; unsecured.
Matures August 2012. 505,171
Swingline Loan payable to a financial institution on or
before December 2004. The Swingline Loan requires the
payment of interest only through the Loan's maturity date
of December 2004. The loan bears interest at the financial
institution's prime rate, .25% below the federal funds rate,
or the London Interbank Offered Rate. At December 28,
2002, the effective rte applied to the note was the prime
rate of 4.25%. The loan is secured by all real and personal
proeprty of the Company. The loan is further secured by a
personal guarantee of the major stockholder. 4,330,000
Revolving Credit Loan payable to a financial institution
on or before December 2004. The Revolving Credit Loan
requires the payment of interest only throgh the loan's
maturity date of Decemebr 2004. The loan bears interest]
at the financial institution's prime rate, or .25% below the
federal funds rate, or the Loan Interbank Offered Rate.
The loan is secured by all reall and personal property of
the Company. The loan is further secured by a personal
guarantee of the major stockholder. 19,490,672
Bank note payable, $3,041 per month, includes principal
and interest at 5.00%, matures December 2006; secured
by real property. 363,405
Bank note payable, $1,032 per month, includes principal
and interest at 5.00%, matures December 2006; secured
by real property. 118,469
Bank note payable, $1,316 per month, includes principal
and interest at 4.25%, matures December 2006; secured
by real property. $ 159,973
-----------
Total long-term debt 25,377,190
Less: current maturities 135,692
-----------
$25,241,498
===========
26
The following is a summary of the combined aggregate maturities of long-term
debt for each of the succeeding five years:
2003 $ 135,962
2004 23,960,936
2005 144,817
2006 149,636
2007 156,337
Thereafter 829,502
--------------
Total $ 25,377,190
==============
The terms of the Swingline Loan and the Revolving Credit Loan contain
restrictive covenants. At December 28, 2002, the Company was not in compliance
with the restrictive covenants. However, by written communication from the bank,
the bank has agreed to waive the Company's violation of the restrictive
covenants.
7. OPERATING LEASES
The Company leases several of its business locations and some equipment
under operating leases expiring in various years through 2007. Rental expense
under these leases was $874,483 for the fiscal year 2002.
As of December 28, 2002, future minimum lease payments under these
noncancelable operating leases for each of the next five years are as follows:
2003 $ 356,849
2004 295,887
2005 273,000
2006 273,000
2007 1,373,450
Total ---------------
2,572,186
As described in Note 2, payments to related parties for both office
space and equipment are included in rental expense amounts noted above.
27
8. CONCENTRATIONS
Customers
The Company has two customers that account for a significant portion of
total revenues for the fiscal year 2002 as follows:
Customer A 25%
Customer B 20%
9. CONTINGENCIES
The Company is party to several ongoing legal actions normally
associated with construction contractors as a defendant. The Company intends to
vigorously defend and pursue these actions if necessary. In addition, the
Company is pursuing legal action against other parties associated with
construction work performed by the Company. The Company intends to vigorously
pursue these actions as is necessary. The ultimate resolution of these matters
is not ascertainable at this time. The Company is also involved in an Internal
Revenue Service audit for its 1997 and 2000 tax years. Management intends to
vigorously defend the various reporting positions taken on its tax returns, and
the ultimate outcome of this matter is not presently known. No provision has
been made in the financial statements related to these claims. The Company has
referred these matters to its legal counsel and believes that the claims which
have been asserted will result in no material financial loss to the Company.
10. RESTATEMENT OF DECEMBER 29, 2001 NET INCOME
Retained earnings for year ended December 29, 2001, has been restated
to account for the receipt of stock due to mutualization of a mutual life
insurance company in September 1999 in the amount of $297,863. Restated retained
earnings for year ended December 29, 2001, is $24,491,433. The receipt of stock
should have been recognized as income from operations during the year ended
December 25, 1999.
11. SUBSEQUENT EVENTS
Profit Sharing Plan
The Company has executed a change to the Profit Sharing and 401(K)
Retirement Plans whereas the Profit Sharing Plan shall be merged with and into
the First South Utility Construction 401(K) Retirement Plan. The merger will
take effect January 1, 2003.
In addition, the Company has executed a change in trustees under the
new plan effective January 1, 2003.
28
Debt Terms and Consolidation
Subsequent to year end, the Company entered into a new debt agreement
with Wachovia Bank.
Pledge of Assets and Debt Reduction
During the year ended December 28, 2002, an account receivable in the
amount of $7,500,000 was set up to reflect the refund of income taxes due to the
shareholders as a result of the net loss sustained by the Company. Subsequent to
the year end, the shareholders of the Company entered into an agreement to
contribute the tax refunds to the capital of the corporation. Subsequent to the
contribution to capital of the Company and in compliance with the debt agreement
stated in above note (Debt Terms and Consolidation), the Company has agreed with
the bank to immediately pay down the outstanding debt by the amount of tax
refunds received. In essence, the accounts receivable has been pledged to pay
down the debt when income tax refunds are received.
29
FIRST SOUTH UTILITY CONSTRUCTION, INC.
BALANCE SHEET
September 27,
2003
ASSETS ----------------
(Unaudited)
CURRENT ASSETS:
Cash $(1,151,809)
Investments 238,363
Accounts receivable, net 18,066,699
Costs and estimated earnings in excess of billings 5,771,898
Inventories 1,229,380
Other current assets 252,097
----------------
Total current assets 24,406,628
----------------
PROPERTY AND EQUIPMENT, net 11,010,408
----------------
OTHER ASSETS:
Goodwill 3,509,807
Intangible assets, net 214,063
Other 47,784
----------------
Total other assets 3,771,654
----------------
TOTAL $39,188,690
================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $3,718,219
Notes payable 9,746,423
Other accrued liabilities 1,952,087
----------------
Total current liabilities 15,416,729
----------------
NOTES PAYABLE 9,646,129
----------------
Total liabilities 25,062,858
----------------
COMMITMENTS AND CONTINGENCIES, Note 9
STOCKHOLDERS' EQUITY:
Common stock, no par value:
100,000 shares authorized: 20,000 shares issued and outstanding 200,000
Additional paid-in capital 7,772,095
Retained earnings 6,153,737
----------------
Total stockholders' equity 14,125,832
----------------
TOTAL $39,188,690
================
See notes to unaudited financial statements.
30
FIRST SOUTH UTILITY CONSTRUCTION, INC.
STATEMENTS OF OPERATIONS
For the Nine Months Ended
----------------------------------------------
September 27, September 28,
2003 2002
(Unaudited) (Unaudited)
----------------------- ---------------------
REVENUES:
Contract revenues earned $41,543,437 $69,786,532
----------------------- ---------------------
EXPENSES:
Costs of earned revenues, excluding depreciation 34,488,226 62,120,838
General and administrative 1,538,375 2,875,690
Bad debt expense - 19,521,978
Depreciation and amortization 1,901,508 2,995,109
----------------------- ---------------------
Total 37,928,109 87,513,615
----------------------- ---------------------
Interest income, net (1,201,007) (2,042,366)
Other income, net 2,654 (17,911)
----------------------- ---------------------
NET INCOME (LOSS) $2,416,975 $(19,787,360)
======================= =====================
31
FIRST SOUTH UTILITY CONSTRUCTION, INC.
STATEMENTS OF CASH FLOWS
For the Nine Months Ended
------------------------------------
September 27, September 28,
2003 2002
(Unaudited) (Unaudited)
------------------ ----------------
Increase (Decrease) in Cash and Equivalents from:
OPERATING ACTIVITIES:
Net Income (Loss) $2,416,975 $(19,787,360)
Adjustments to reconcile net cash provided by operating activities:
Depreciation and amortization 1,901,508 2,995,109
Provision for bad debts 19,521,978
Loss on disposal of assets 70,479 103,027
Investments 297,863 147,633
Change in operating assets and liabilities, net of acquisitions and
divestitures: Increase (decrease) in operating assets:
Accounts receivable, net 5,502,028 1,441,140
Unbilled revenues, net (5,542,375) 353,109
Other current assets 477,490 378,133
Other assets 65,138 (13,072)
Increase (decrease) in operating liabilities:
Accounts payable (2,994,332) (1,485,153)
Accrued liabilities 675,592 (3,177,057)
------------------ ----------------
Net cash inflow from operating activities 2,870,366 477,487
------------------ ----------------
INVESTING ACTIVITIES:
Capital expenditures (412,386) (109,430)
Proceeds from sale of assets (107,552) 645,298
Proceeds from related party and note receivable 2,973,594 -
------------------ ----------------
Net cash inflow from operating activities 2,453,656 535,868
------------------ ----------------
FINANCING ACTIVITIES:
Proceeds from debt - 1,008,286
Principal payments on notes payable and long-term debt (6,133,037) (5,756,293)
Dividend distributions (967,492) -
------------------ ----------------
Net cash outflow from financing activities (7,100,529) (4,748,007)
------------------ ----------------
NET CASH OUTFLOW FROM ALL ACTIVITIES (1,776,507) (3,734,652)
CASH AND EQUIVALENTS AT BEGINNING OF PERIOD 624,698 2,566,197
------------------ ----------------
CASH AND EQUIVALENTS AT END OF PERIOD $(1,151,809) $(1,168,455)
================== ================
See notes to unaudited financial statements.
32
LNDOCS01/348079.4 42
FIRST SOUTH UTILITY CONSTRUCTION, INC.
STATEMENTS OF CASH FLOWS (continued)
For the Nine Months Ended
------------------------------------
September 27, September 28,
2003 2002
(Unaudited) (Unaudited)
------------------ ----------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
AND NON-CASH INVESTING AND FINANCING ACTIVITIES:
Cash paid during the period for:
Interest $1,164,003 $2,018,163
Prior period adjustment $ - $ -
Increase in officer receivables due to equity transaction $ - $ -
Reduction of accounts receivable-related party and employee note payable $ - $ -
Accrued interest on related party receivable $ - $ -
Accrued interest on employee note payable $38,664 $25,982
See notes to unaudited financial statements
33
FIRST SOUTH UTILITY CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS
Nine Months Ended September 27, 2003 and September 28, 2002 (Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Business
First South Utility Construction, Inc. ("First South"), was organized for the
purpose of providing contracting services to utility companies. The Company
primarily performs design, right of way and construction services for major
telecommunications and electrical utility companies; in addition, the Company is
a distributor of highway repair material. Construction contracts include both
master contracts covering specific geographical areas as well as bid contracts.
The Company uses a 52-53 week year which ends on the last Saturday in December.
Revenue and Expense Recognition
The financial statements of the Company have been prepared on the accrual basis
of accounting and, accordingly, reflect all significant receivables, payables,
and other liabilities. Revenues are recognized when earned and expenses are
recognized when incurred.
Master contract costs include all direct material and labor costs and those
indirect costs related to contract performance, such as indirect labor,
supplies, tools, repairs and depreciation. General and administrative costs are
charged to expense as incurred. Provisions for estimated losses on uncompleted
contracts are made in the period in which such losses are determined.
The Company recognizes revenues from fixed price contracts on the
percentage-of-completion method, measured by the percentage of cost incurred to
date to estimated total costs for each contract. That method is used because
management considers total cost to be the best available measure of progress on
these contracts. Changes in estimated job profitability resulting from job
performance, job conditions, contract penalty provisions, claims, change orders,
and settlements are accounted for as changes in estimates in the current period.
The Company recognizes revenue from unit based contracts on the accrual method
based on units completed to date. The asset, "costs and estimated earnings in
excess of billings on uncompleted contracts," represents revenues recognized in
excess of amounts billed. The liability, "billings in excess of costs and
estimated earnings on uncompleted contracts," represents billings in excess of
revenues recognized.
34
FIRST SOUTH UTILITY CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the use of management's estimates.
Accounts Receivable
Accounts receivable are recorded at net realizable value. Bad debts are
recorded on the allowance method under generally accepted accounting principles.
Bad debt expense was not recorded for the nine months ended September 27, 2003.
For the nine months ended September 28, 2002, bad debt expense was $19,521,978.
As of September 27, 2003, retainage of $463,291 was included in
accounts receivable-trade.
Inventory
The initial supply of small tools has been accounted for as inventory,
stated at cost. Future replacements will be reported as expense in the period
incurred.
Poles are accounted for as inventory, stated at cost, and charged to
job cost, as used, on a first-in, first-out basis.
Fixed Assets
Fixed assets are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of 3 to 10 years.
Amortization of leased equipment under capital leases is included in
depreciation expense. Depreciation and amortization expense was $1,840,571 and
$2,750,769 for the nine months ended September 27, 2003 and September 28, 2002,
respectively.
Intangibles
Intangibles are recorded net of amortization. The deferred charges are
being amortized using the straight-line method over 5 years. Amortization
expense for the nine months ended September 27, 2003 and September 28, 2002 was
$60,937 and $244,340, respectively.
Income Taxes
The Company elected, by consent of its stockholders, to be taxed under
the provisions of Subchapter S of the Internal Revenue Code. Taxable income or
losses of the Company are passed through to the stockholders for income tax
purposes.
35
FIRST SOUTH UTILITY CONSTRUCTION, INC.
NOTES TO FINANCIAL STATEMENTS (Continued)
Fair Value of Financial Instruments
The carrying value of cash, receivables, investments and accounts
payable approximates fair value due to the short maturity of these instruments.
The carrying value of short and long-term debt approximates fair value based on
discounting the projected cash flows using market rates available for similar
maturities. None of the financial instruments are held for trading purposes.
Fair value of securities held at September 27, 2003 is $238,363.
Unrealized gain (loss) from the securities held for the nine months ended
September 27, 2003 and September 28, 2002 is xxx and xxx,, respectively.
Advertising
Advertising costs are expensed as incurred. Advertising expense for the
periods ended September 27, 2003 and September 28, 2002 was $1,032 and $3,466,
respectively.
2. RELATED PARTY TRANSACTIONS
The Company has entered into transactions with stockholders and other
companies related by common ownership. Certain of these transactions were made
in the ordinary course of business on substantially the same terms and
conditions as those prevailing at the same time for comparable transactions with
other customers and vendors.
The accounts receivable-related party consists of an amount from a company
related by common ownership. Interest income recognized is the average
applicable federal rate issued by the Internal Revenue Service for the
applicable periods.
In addition to the above and amounts disclosed on the face of the balance sheet,
the Company had the following significant transactions and balances with related
parties for the periods ended September 27, 2003 and September 28, 2003:
36
For the Nine Months Ended
----------------------------------
September 27, September 28,
2003 2002
---------------- -----------------
Management fees paid to related companies for management and administrative
services $585,500 $565,247
Building rental expense paid to a stockholder for corporate offices leased on a
month-to-month basis $103,776 $103,050
Building rental expense paid to related companies for spaces leased on a
month-to-month basis $123,600 $172,050
Equipment rental expense paid to a related company for business equipment
leased on a month-to-month basis $210,693 $317,894
See Notes 6 and 7 also.
3. SELF-FUNDED HEALTH INSURANCE PLAN
The Company utilizes a self-funded health insurance plan in which
substantially all employees participate. The Company has excess reinsurance
coverage of costs exceeding $50,000 per person per year. As of September 27,
2003, $200,000 is included as a liability in accounts payable for unpaid claims
incurred and potential unpaid claims incurred but not yet filed.
4. PROFIT SHARING PLAN
The Company has a profit sharing plan (the "Plan") that covers
substantially all of the employees who have completed one year of service and
attained the age of 21. Contributions to the Plan are at the discretion of the
board of directors. An employee is 100% vested in the Plan after seven years of
service. The Plan was amended to comply with EGTTRA in plan year 2002. Further
administrative amendments were made to the Plan effective beginning in plan
years 2000 and 2001.
The Company also has a 401(k) retirement plan that covers substantially
all full-time employees. Employees who are 21 years of age or older are eligible
to participate in this plan after a year of service with the Company. An
employee may contribute up to the IRS maximum of their compensation, with a
matching Company contribution on behalf of each participant equal to one-fourth
on the first 4% of the participant's compensation contributed. An employee is
100% vested after seven years of service.
37
The Company's contribution for both plans for the nine months ended
September 27, 2003 and September 28, 2002 was $39,752 and $42,219, respectively.
5. CONCENTRATION OF CREDIT RISK
The Company maintains cash balances at several banks. Accounts at each
institution are insured by the Federal Deposit Insurance Corporation (FDIC) up
to $100,000. At various times during the nine months ended September 27, 2003,
the Company exceeded the maximum amount insured by the FDIC.
6. LONG-TERM DEBT
The following is a summary of long-term debt as of September 27, 2003:
September 27,
2003
-----------------
Note secured by equipment; matures December 2009; interest at 7.675% $365,625
Note, unsecured; matures August 2012; interest at 6.73% 470,125
Swingline Loan secured by all real and personal property of the Company and
a personal guarantee of the major stockholder; matures December 2004;
interest at .25% below Federal Funds rate or LIBOR -
Revolving Credit Loan secured by all real and personal property of the
Company and a personal guarantee of the major stockholder; matures December
2005; interest at .25% below Federal Funds rate or LIBOR 12,000,000
Bank notes secured by real property; mature December 2006; interest at 5.00% 460,343
Bank note secured by real property; matures December 2006; interest at 4.25% 150,036
-----------------
Total long-term debt $13,446,129
Less current maturities 3,800,000
-----------------
$9,646,129
=================
38
The following is a summary of the combined aggregate maturities of
long-term debt for each of the succeeding five years, as of September 27, 2003:
September 27,
2003
---------------------
2004 $ 3,800,000
2005 8,665,286
2006 165,286
2007 100,618
2008 100,618
Thereafter 614,321
Total -------------------
13,446,129
The terms of the Swingline Loan and the Revolving Credit Loan contain
restrictive covenants.
7. OPERATING LEASES
The Company leases several of its business locations and some equipment
under operating leases expiring in various years through 2007. Rental expense
under these leases was $477,102 and $674,369, respectively, for the nine months
ended September 27, 2003 and September 28, 2002.
8. CONCENTRATIONS
Customers
The Company has several customers that account for a significant
portion of total revenues for the nine months ended September 27, 2003 and
September 28, 2002 as follows:
For the Nine Months Ended
----------------------------------------------
September 27, September 28,
2003 2002
----------------------- -------------------
Velocita 0% 33%
Bell South 32% 22%
AT&T 30% 7%
39
9. CONTINGENCIES
The Company is involved in an Internal Revenue Service audit for its 1997 and
2000 tax years. Management intends to vigorously defend the various reporting
positions taken on its tax returns, and the ultimate outcome of this matter is
not presently known. No provision has been made in the financial statements
related to these claims. The Company has referred these matters to its legal
counsel and believes that the claims which have been asserted will result in no
material financial loss to the Company.
40
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
DYCOM INDUSTRIES, INC.
Date: February 9, 2004 By: /s/ Steven Nielsen
-----------------------------------
Name: Steven Nielsen
Title: President and
Chief Executive Officer
41
EXHIBIT INDEX
Exhibit No. Description
------------- --------------
10.1 Asset Purchase Agreement, dated as of November
5, 2003, between Dycom Industries, Inc. and
First South Utility Construction, Inc.
23.1 Consent of Davenport, Marvin, Joyce & Co., L.L.P.
99.1 Press Release, dated November 25, 2003
(incorporated herein by reference to Exhibit
99.1 of the Current Report on Form 8-K filed by
Dycom on November 25, 2003, File No. 001-10613).
42